Minimum Payments – What They Don’t Want You To Know
Credit card issuers charge cardholders a minimum monthly payment against any balances accrued. The way minimum payments are calculated can vary from issuer to issuer, but a few common methods are used among the largest issuers. Making the minimum payment is enough to get by, but cardholders should always pay off the full balance each month to avoid accruing interest.
What Is a Minimum Payment?
The minimum monthly payment is the lowest amount a credit card issuer will accept as payment on a credit card balance to keep a cardholder in good standing each month. A cardholder is not required to pay off a balance every month, but it’s always a good idea to pay a balance in full before it accrues interest.
Making a minimum payment gives cardholders time to pay off a balance, but interest will start to accrue and make the balance larger. Cardholders who carry a balance should stop charging to a card and focus on paying off the current balance to avoid falling deeper into debt. If the cardholder has a zero balance, there will not be a minimum payment on monthly statements.
How paying only the credit card minimum payment costs you more
Keep in mind that if you pay only the minimum payment each month, it’ll take much longer to pay off your credit card balance.
That’s because a lot of cards come with high interest rates. Paying only the minimum will cause you to pay more in interest and extend the term of your debt, according to Bruce McClary at National Federation for Credit Counseling (NFCC).
For example, if you have a credit card balance of $7,800 with an interest rate of 15% and you make a 3% minimum payment of $234 each month, it would take 44 months to repay the debt entirely – plus you’d pay a staggering $2,353 in interest.
Does making only the minimum payment affect my credit?
As long as you’re paying your credit card minimum payment on time, it reflects positively on your payment history. But your credit scores may still be influenced when you pay only the minimum each month.
It might hurt some aspects of credit scoring analytics, such as credit utilization. If you only pay the minimum, you’re going to take longer to pay off outstanding balances.
Outstanding balances play a part in your credit utilization, which is the percentage of credit you’re using out of the total amount of credit available to you.
For example, if you have two cards with limits totaling $7,000 and you’ve used $500 of your total credit, your credit utilization is 7%. Total debt is “highly influential” in determining a VantageScore credit score.
Trying various Credit Score Simulator’s like Credit Karma’s gives you an idea of how increasing or decreasing your balances might affect your credit utilization and your credit score. Just keep in mind that this is an educational tool and not a predictor of future score changes.
Lastly, whether only paying the minimum payment has an impact on your credit utilization depends on how the lender establishes the minimum payment and your use of the credit card or line of credit.
