Paying less than your monthly bill on an auto loan or a mortgage will hurt your credit score. This is because your payment history is the most important factor affecting it. On credit cards, however, the ability to pay less than your balance is a feature.

Paying only the minimum on a credit card can be tempting. Unfortunately, you may want to hold back on doing so. This is considering the fact that paying only the minimum on a credit card can hurt your credit score and is expensive.

How Credit Card Minimum Payments Work

The “minimum” on a credit card refers to the smallest amount a credit card issuer will accept as payment towards your credit card balance. Usually, the minimum is a percentage of your outstanding balance.

If you pay the minimum on a credit card, your payment is considered “on time”. In other words, doing so lets you avoid late fees and other penalties despite paying less than your current credit card balance.

The biggest advantage of paying only the minimum is that you’ll avoid late payment records on your credit report, which can bring your credit score down by as much as a hundred points- sometimes, even more.

Downsides Of Only Paying The Minimum

Yes, the option to pay only the minimum on a credit card gives you more financial flexibility. However, it’s actually more expensive in the long run than paying your credit card balance in full each month.

To explain, let’s assume you have a credit card with a 21% interest rate and an outstanding balance of $4,000. If the minimum is 1% of your balance and you only pay the minimum, you’ll pay more than $6,000 in interest alone.

If you only pay the minimum on a credit card, you’ll also affect your credit score. This is because credit utilization is a major factor credit-scoring companies like FICO consider when calculating scores.

Credit utilization refers to the ratio between your outstanding balance and your credit limit. You need to keep your credit utilization ratio under 30% or $300 for every $1,000 limit in order to minimize the damage to your credit score.

What If You Can’t Pay In Full Each Month?

Only paying the minimum does have its fair share of disadvantages. However, it does allow you to avoid late fees and hurt your credit score. With that said, paying your credit card balance in full every month may not always be an option.

To reduce accrued interest, you need to pay as much as you can comfortably afford. This allows you to get out of debt much faster and save on interest payments. For instance, let’s say you have an $800 balance on a credit card with a 16% interest rate. 

Paying $25 over the minimum($4) will allow you to be debt-free in 3 years rather than 4. Doing so also saves you $57 each month on interest. This is where creating a budget and choosing a repayment strategy comes in handy.

If paying more than the minimum is too much for your financial situation, try talking to your credit card issuer to discuss your options. Alternatively, you can seek help from a credit counselor who may devise a debt management plan you can follow.

The Bottom Line

If you only pay the minimum on a credit card, you’re setting yourself up to pay for more interest and for longer. For this reason, you’ll want to pay your balance in full each month, even if the option to pay less is available.

If you’re strapped for cash, you also have the option of paying more than the minimum or asking for help from your issuer or a credit counselor. You can also reduce your card’s interest rate by improving your credit score with credit repair.

Call us at 888-799-7267 to schedule a Free Credit Consultation.