Credit Card 101: Paying the Balance vs. Paying the Minimum

Blog Post10/22/2015
Debt Management

When dealing with credit card balances, it can be tempting to pay only the minimum due each month. After all, if that’s all the credit card company is asking for, why give more? On the other hand, some people prefer to pay their cards off in full each month. Here are some tips to help you take control of your credit.

The Balance on Your Card Makes a Difference 

Even if you’re paying your credit card off in full each month, you can potentially lower your credit score if you charge near or close to your limit before paying. Most consumer credit scores are partly based on the consumer’s card balance and how close it is to the limit. This called your credit utilization ratio and, usually, the lower it is the better.

Let’s look at an example. If you have a balance of $900 on a card with a limit of $1,000, your credit utilization ratio is 90 percent. Which means you have a 90 percent utilization of available credit.  Aim to keep your credit card utilization rate much lower than that, since lenders may interpret a high utilization rate as a sign you’re not able to repay your debts.

You Can Save Money on Interest

The more money you pay toward your credit cards each month, the less interest you’ll pay to the credit card company. Let’s say you have a card balance of $5,000, the minimum payment due is 2 percent of the balance owed and the interest rate is 12 percent. By always paying just the minimum of 2 percent, you’ll have paid over $4,500 in interest by the time the card is paid in full, which would take 21.5 years! That’s certainly a compelling reason for paying more than the minimum.

You Can Pay Your Cards Off Sooner

Continuing with the above example, doubling your payment each month from 2 to 4 percent of the balance due would zero your balance out after only 9.4 years. Triple the minimum payment to 6 percent of the balance due and the card would be paid off in just 6.3 years. In terms of interest savings, six years is better than 21.5 years in terms of how long you’ll owe your creditors, and you can rest easy, knowing that you don’t owe anyone at the end of each month.

The Bottom Line

Even if you’re only able to make the minimum payment each month, you’re still helping to ensure that your credit remains in good standing. By being aware of keeping your charges well below your credit limit and paying your balances in full each month — you can increase your chance of overall financial health.

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