Unlike installment credit, credit cards don't require you to pay a fixed amount each month. Instead, credit card companies allow you to pay as much as you want. Or as little as you want, until the minimum they set. In short, you can pay only the minimum every month, regardless of your balances, and avoid late payment records.
However, while this may sound appealing and tempting to do, you're actually better off paying more than the minimum. Because, as a long-term strategy, it can cause some serious problems on your finances. For one, you may rack up a large amount of interest due to the fact that you're always carrying a balance.
In this article, we'll be taking a look at what happens when you only pay the minimum on your credit card.
Your Debt Will Last Longer
As mentioned, paying the minimum each month allows you to keep your account in good standing. Of course, that's assuming you're making those minimum payments on time. However, with only minimum payments, you're actually not making any progress towards paying down your credit card debt.
For instance, let’s assume you have a credit card debt worth $6,081 with an interest rate of 14.99%. If you're only paying the minimum, $20 for example, it'll take you about 14 years to pay off your debt. But if you pay more than the minimum payment, let's say, twice the minimum, it'll only take you around 6 years. That's an 8-year difference!
You’ll Pay For More Interest
Unless you have a 0% interest card, the balances you carry over to the next billing cycle will accrue interest. But since you're only paying the minimum, it's highly likely that you're always carrying a balance. And the longer those balances remain unpaid, the more interest they'll rack up. Because with minimum payments, you're barely paying off last month’s interest charges, much less your balance.
To explain, let’s assume you have a credit card debt worth $6,081 with an interest rate of 14.99%. In this scenario, after paying only the minimum this month, your balance will accrue interest of $4,064. That's more than half of what you actually owe! But, if you're to make twice the minimum, your balance will only accrue $1,508 worth of interest.
You Can Hurt Your Credit Score
How you use your credit cards directly influences what your credit score looks like. Particularly, through your credit utilization ratio. Credit utilization refers to the percentage of the available credit you're using at a given time. In other words, it's how much balances you have relative to your credit limits. For instance, on a card with a $1,000 limit and a balance of $500, your utilization is 50%.
Your credit utilization ratio plays a very significant role in determining your credit score. In fact, it accounts for 30%, making it the second-largest factor. To prevent your credit cards from hurting your score, you'll want to keep your utilization under 30%; the lower your ratio is, the better for your credit score. With that said, however, because you're constantly carrying a balance, and those balances keep on piling up, by paying only the minimum, your ratio can rise. And by extension, hurt your credit.
The Bottom Line
Making the minimum payment on your credit card is better than missing payments or being late. However, it does more harm than good. Particularly, if you're habitually paying only the minimum even if you can make more. As such, you'll want to avoid paying the minimum as a long-term strategy. In fact, it may even be in your best interest to pay off your balances in full, each month. Of course, that's if you're able to.
Nevertheless, you'll want to keep your balances as low as possible. Especially considering that your credit card usage directly affects your credit score. With that said, however, errors in credit reporting can cause your utilization ratio to skyrocket. To that end, you'll need to correct or remove these inaccurate items from your credit report. Call us at 888-799-7267 to schedule a Free Credit Consultation.
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