The minimum amount is the smallest possible amount that your credit card company allows you to pay each month without incurring additional charges. If it’s indicated on your bill that the minimum amount to pay is $50, then you have to pay it otherwise you’ll be charged late fees. Continuous late payments can negatively affect your credit rating too. Promotions that offer 0% interest for a set period also require minimum payments to be made or else they start to charge the interest right away.
Contrary to popular belief, paying the minimum amount doesn’t keep you from paying interest. The only way to avoid paying interest is to regularly pay the total balance owing.
Now that you know why it’s important to pay at least the minimum, it’s time to learn about the benefits of paying more than the minimum.
Save Time and Money
Interest charges that are added to your original balance can reach hundreds or thousands of dollars over time if you only pay the minimum amount each month. Paying more than the minimum will lessen the total amount of interest that you pay. Not only that, the period it takes to pay off the debt is significantly shortened too (assuming that you don’t add any future debt).
For example, if your balance is $8,000 and your card has a 12% APR, paying the minimum amount takes a little less than 10 years with the interest amassing to more than $3,500. However, if you strive to pay $150 every month, you can lower the interest to $2,612.20 and it will only take you about 6 years to clear the debt.
Better Credit Score
Having a high credit score comes with plenty of perks—you can negotiate for lower interest rates on loans and credit cards, you can bypass security deposits, and it will also make you feel good about yourself, especially if you worked hard to improve it.
Your credit score is affected by several factors and one of the most important is called credit card utilization. In fact, this represents 30% of your total credit score. This is the ratio between your credit card’s balance and its limit. Aside from cutting back on spending using your card, you can also lower your utilization rate by paying more than the minimum required.
Prepare for Loan Applications
A credit report is required for large loan applications like a mortgage or car loan. As mentioned earlier, minimum payments can only do so little on bringing down the balance of a credit card with a high utilization rate. Raising your monthly payment can positively affect your credit utilization and credit history, equally increasing the chances of getting approved.
Increase Available Credit
One reason why people hold on to their credit cards is because it’s a good backup plan in case of emergency. However, you can’t really use a credit card for a big purchase when it’s almost maxed out. Pay more than the minimum amount to increase available credit.
When you think about the money you’re paying for interest, you can use it for many other things instead of handing it over to credit card companies. If you’re having a hard time paying off the balance each month, then look into your expenses and see what you could adjust. It’s definitely worth it to make sure that you’re paying as much as you can above the minimum amount each month.