When it comes to paying off your credit card balances, you have multiple options. It can be tempting to only pay the minimum. Why pay more if you don’t have to? If times are tough and you’ve been relying on your credit cards to help you pay other bills, it’s understandable if you feel you can only afford the minimum payment temporarily. Paying the balance in full, however, is best when you’re able. It may help prevent your credit score from lowering and can save you money long-term.
Paying the minimum on a credit card
While it may seem like only a small thing, it’s good for you to at least make the minimum payment. Doing so can help you avoid late fees and having your lender report a missed payment to the credit reporting agencies. This is vital to your credit health because on-time payments are one of the important credit score factors.
The minimum payment for credit card accounts can vary from month-to-month. It’s typically calculated in one of two ways: As a percentage of your outstanding balance plus new interest and fees or as a fixed amount, whichever is greater. For example, say a lender charges either 1% of your balance plus interest or $25. If your balance for a statement period is lower than $25, you’d simply need to pay the entire balance. It’s important to check your statements to understand the policy for your specific card and issuer.
When you make the minimum payment, that small percentage you’re paying goes toward your original or principal balance. The rest is interest and any fees you may or may not have that are added on. Because of this, it can take a while to pay off the debt in its entirety, and during that time you’ll continue to pay interest charges. This is how even a modest balance can become quite expensive and take a long time to pay off.
Here’s an example:
Paying the credit card balance in full
If you can, paying the balance in full each statement period is the better option. If you pay off the balance in its entirety, it can help you save some serious money by helping you avoid costly interest payments. Paying in full may also help your credit score. In addition to consistently making on-time payments, you’ll be in the good habit of keeping your balances low across your credit card accounts. Your credit utilization, how much of your available credit you’re using, is an important factor in calculating your credit score. In general, the lower your utilization is, the better it is for your score.
If your available limit across your credit card accounts is $5,000 and you have combined balances of $4,000, your credit utilization is at 80%. You’d want to get that down as low as possible—a good benchmark to start is below 30%. For continued healthy credit, it’s best to try to not let balances get too high at any point. When credit card balances grow close to the limit each month, you may see your score fluctuate as well.
Small steps lead to healthy habits
If you’ve recently paid a credit card balance down to zero, you should be proud! Know that your reports are not updated immediately with each payment and you may not see a change in your score until the account is reported by your lender, which typically happens once a month.
But don’t feel defeated even if you’re only able to make the minimum payment each month—you’re still ensuring your credit remains in good standing. Continue to keep track of your payment schedules and credit limit and, when you can, slowly work to pay down that balance. Even if you have to chip away at it, you’re establishing a consistent, healthy habit which will serve you well for your long-term financial goals.