For many people, paying the minimum on a credit card bill is common practice. But there’s often confusion associated with it, too. Is the minimum payment just an arbitrary number? Can it really make a dent in your balance?
The CARD Act of 2009 helped to solve some of the confusion by requiring credit card issuers to be more upfront with consumers. Issuers now have to alert you how long it will take to pay off your balance with just the minimum. And while banks and issuers vary in how they determine minimum payments, most formulate it as a small percentage of your balance plus interest and fees. With this information, you can figure out your approximate monthly minimum and how long before you reach a zero balance.
But that still leaves one unanswered question: how does paying the monthly minimum help or hurt your credit?
Boost your credit with a positive payment history
If you make a credit card payment every month, you’re building a positive payment history, which is a huge plus.
Payment history is the biggest factor in your credit score, accounting for 35 percent. That means if you can make all your payments as expected, you’ll earn big points on your credit score.
But if you’re worried that paying the minimum is all you can afford, think about this: credit scoring models don’t take into account the amount of the credit card payments you make. Whether it’s $25 or $250, as long as you’re paying at least the minimum every month — on time, every time — then you’ll keep your payment history on track.
Watch your credit utilization ratio
That’s not to say that making the minimum payments while continuing to rack up credit card debt is a good idea.
The second-largest percentage of your credit score is attributed to your credit utilization ratio. This ratio is calculated based on how much of your total available credit you’re using. The closer you get to reaching your credit limit, the higher the ratio, and the more it negatively affects your credit score. Minimum payments won’t reduce your ratio or your balance enough if you’re just canceling them out with more spending.
The idea is to pay down your balance as quickly as you can to keep your credit utilization ratio low. Even better, aim for a zero balance by paying off your bill in full every month.
Pay more if you can
Paying the minimum every month means it might take years, or even decades, to pay down your balance — especially if the bill was high to begin with.
For some, due to financial hardship, this may be the only option for awhile. But, if you can afford it, there is a faster way to pay down your balance.
Instead of the minimum set by the credit card issuers, set your own, higher minimum. For example, if your issuer’s minimum is roughly $25, aim for double or triple that amount. Then continue to pay that same, higher amount every month.
Not only will you substantially subtract from the time it would otherwise take to pay off your balance, you’ll also save money on interest. Just be sure you don’t continue to make multiple, expensive purchases that would undo the progress you have made.
Care for your credit
While you’re paying down your balance, make sure your credit report is in a good place too. Past errors and inaccuracies can affect your credit score and hinder your debt-relief goals. Consider using a professional credit repair company which will uncover and remedy credit errors. The first step toward establishing a healthy credit history is making sure all items are listed fairly and accurately — professional credit repair is an easy, effective way to get your credit score back on track and start tackling credit card payments in earnest.