Minimum payments towards credit debts are often relieving. It gives you a sense of financial security, which is not really as good as it seems. The truth is; paying the small minimum due on your card debt hurts your finances in more ways than you imagine. Ultimately, minimum payment is not one of the best credit card debt relief options and will have a negative impact on your credit utilization and credit and credit card payment history. On this post, we’ll shade more light on the details on what happens to your credit score and credit utilization ratio when you only pay the minimum.
Minimum payments helps you build a credit history, if you are consistent
Debtors usually expect you to pay a certain amount towards your credit card balance every month. This amount can be fixed or a given percentage of your balance and is often listed by your credit card issuer on a statement they send to you at specified intervals of time. The amount you have to pay depends on factors like how much you owe them, fees due and interest rates among other considerations which vary from one issue to another.
Your commitment and consistency towards paying the balance has a direct bearing on your credit card score. As long as you are consistent, the amount you pay does not affect your credit card history; you just have to ensure that you are making the payment on time. From that point of view, you will actually be building a good history and almost every credit card issuer would be keen to note that you are a reliable debtor; a low risk.
Minimum payment hurts your credit card score
However, there’s another aspect to it, credit utilization. Credit utilization is basically how much of your available credit you are using. If you use the card often when you already owe the issuer money, you are bad debt—and the debt accumulates, so does the interest. This is a factor which all credit card issuers consider when calculating your credit score. On the other hand, when you pay your balance fast your credit card score will rise because you are a reliable debtor and any issuer would love to do business with you; so they encourage you to use your card more.
You’re probably paying off the interest charges not the balance
Credit card balances are loans which are paid with interest. The interests which accrue on the loans depends with issuers and credit card histories. If you are paying the minimum payment each month, you could be paying off the interest on the loan and not the actual amount you owe the creditor. For instance, say your balance is $1000 and your issuer recommends a minimum monthly payment of 3% which translates to $30 each month, in a year you’ll have paid $360. So, if your balance attracts an interest rate of 18%, you owe the issuer $180 in interest charges. This means that for the whole year you’ll have paid just $180 of your balance.
Your card will attract bigger interest rates
Credit cards have a way of keeping you on the debt treadmill longer than you’d wish to stay. If you pay the minimum payment you will hardly wipe out a month’s interest rate. It’s a mark time; movement without progress. With time, your utilization ratio may rise and that will come with a new set challenges. When your debt utilization ratio rises, you become a risk and the issuer would like to recover as much money as they can from you. The best way they can get the most out of you is rack up bigger interest fee on your subsequent loans.
Keep in mind: Minimum payment is tempting
Credit card debts are tempting, especially if you can pay a minimum monthly payment which you can live with. Even if you are already on a tight budget, there’s a good chance you can manage the minimum payment within the agreed timelines every month. It really never seems that much until you calculate how much it amounts to in the long run. Besides, emergencies pop up and credit cards are a convenient money cards that sort them out efficiently. The idea that you can pay a minimum is very tempting. Don’t let the minimum payment lure you into a long term debt, use the card only when you have to.
The bottom line
While making the minimum payment may seem like a lucrative offer that’s easy on your finances now, it only keeps you in debt long and gives your creditor and edge to make more money from you in interest charges. If you can, pay more than the allowed minimum monthly payments and keep your credit utilization ratio low.