If you only pay the minimum due on your credit card, the remaining balance may accrue interest and increase your credit utilization, which could negatively affect your credit scores and make it harder to get out of debt. At Experian, one of our priorities is consumer credit and finance education.
Option a: One problem with the minimum payment towards the credit card balance every month is experiencing a lesser credit score. A lower monthly payment increases the utilization of credit ratio, which finally results in a lower credit score. The credit score is inversely related to the utilization of credit ratio.
Yes, you can keep your credit card active by paying just the Minimum Amount Due every month. But, you will have to pay high interest charges and also, there will be no interest free credit period. Just remember that the less you pay of the outstanding amount, you will be made to pay more in interest.
If you continue to pay only the minimum you may notice the Minimum Payment Plus amount increasing each month. This is because it's calculated to help you avoid or move out of long term debt over time and the amount is adjusted each month based on your previous repayments.
Paying only the minimum can result in significantly higher interest charges and a longer time to pay off debt.
Paying only the minimum repayment amount each month means you'll usually incur interest over time. This will significantly increase your costs, and will extend the time it takes to pay off your total. Most credit cards come with an interest free period on purchases.
The exact amount you pay doesn't factor into the payment history portion of your credit score. It's simply noted that you've made a payment on time. Although there's no direct connection, only paying the minimum amount due can increase your debt over time, which can put a strain on your finances.
Use the debt snowball method
In order to use this method, list all of your credit card debts from lowest balance to highest balance. Now start concentrating on wiping out the credit card with the lowest balance while still making the minimum payments on the other cards. The point of this strategy is to build momentum.
If you choose to pay your Outstanding Balance in full on or before the Payment Due Date, no finance charge will be imposed. However, if you choose to pay only the Minimum Payment or any amount less than the Outstanding Balance on or before the Payment Due Date, you will be treated as borrower or a “revolver”.
Fees and charges will incur from the date that each transaction is charged to your account until such amount is paid off. If you only pay the minimum payment, or less than that, by the due date, we will charge you fees, charges and taxes.
Payment history: The biggest factor in determining your credit score is payment history. Every time you pay a credit card bill, car payment, house payment, student loan payment, etc., it gets added to your history. It's important that all of your payments are paid before the due date listed on your statement.
If you pay only the minimum amount due, i.e., ₹500, your outstanding will be ₹9,500 (₹10,000 – ₹500). Interest charge will be levied on ₹9,500 which you need to pay in the next billing cycle.
Your balance will likely go up
Unpaid minimum payments add to your balance, increasing the total amount of interest you owe. Each month that passes, the balance continues to grow, making it harder to catch up.
Paying only the minimum means you're carrying balance and charged interest, increasing the total cost of your debt. Making timely minimum payments helps avoid late fees and damage to your credit score, but it's best to pay more than the minimum to reduce your debt faster and save on interest.
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
What's a reason to pay more than the minimum on your credit statement each month? You should pay more than the minimum on your credit card to save interest, pay off debt faster, and improve your credit score.
Option 1: The “high-interest first” strategy
Paying off high-interest debt first is commonly referred to as the avalanche method. This involves making the minimum monthly payments on all of your credit cards and loans, but putting every extra penny you can toward the card or loan with the highest interest rate.
When contactless payments are not an option, consider using a chip-and-PIN credit card, also called an EMV-enabled credit card. Instead of swiping your credit card to make a payment, you dip your card into the payment terminal instead. Sometimes, you may even be prompted to enter a PIN to verify card ownership.
Over time, only paying the minimum balance can negatively affect your credit score as the balance you carry affects your credit utilization ratio, which accounts for about 30% of your score.
FICO and VantageScore range
The two most widely used credit scoring models, FICO and VantageScore, range from 300 to 850, making 300 the lowest credit score possible.
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.
Making only minimum payments on your credit card can significantly extend the time it takes you to pay off debt while also increasing the amount of interest you pay.
Payment history — whether you pay on time or late — is the most important factor of your credit score making up a whopping 35% of your score. That's more than any one of the other four main factors, which range from 10% to 30%.
Let's say your credit card balance is ₹20,000, and your interest rate is 18% p.a. (1.5% per month). If you only pay a ₹800 minimum each month, it will take you 32 months to repay the debt. Further, you'll pay ₹5,411 in interest!