Your monthly credit card statement always includes a minimum payment you need to make for the month. Typically, the minimum payment is a fixed amount. Or, if your balance is above a certain limit, a percentage of your balance, usually between 2% to 4%. You always need to make the minimum payment by the deadline to keep your account in good standing.
But only paying the minimum every month isn’t a great financial strategy. By paying above the minimum payment, you can save money, positively impact your credit scores and reduce debt faster. Here’s how.
1. Save Money on Interest
If you keep a balance on your card month to month, this could indicate that you’re spending more money on your card than your budget can afford to pay back. And while you can at least stay current by making the minimum payment every month, this is an expensive way to use a credit card.
That’s because carrying a balance from month to month can cause your balance to accrue interest. You can end up owing much more than your purchases are worth in the first place. This causes your balance to rise and your minimum payments to increase in turn.
By paying above the minimum payment, you’re shrinking the size of your balance by a greater amount and reducing the amount of interest you are charged. Of course, the best way to manage a credit card is to pay your balance off in full every month to avoid owing interest at all.
2. Positively Impact Your Credit Score
Paying more than your minimum payment can help reduce your credit utilization, or the amount of available credit you are currently using. This is one aspect of the “Amounts Owed” factor on your credit report, which makes up 30% of your FICO® Score. After a certain limit, having a high credit utilization ratio can be damaging to your credit score because it indicates that you have a tough time managing your credit.
Paying above the minimum can help lower your utilization. By how much depends on how much you’re paying and your current balance. If you maintain a balance from month to month and only pay the minimum, it’s possible that your balance can eventually creep up to a utilization rate that negatively impacts your credit, if it isn’t there already.
3. Reducing Your Debt
Paying down your credit card balance – or paying it off entirely) – can be difficult or impossible when you only make the minimum payment. When interest hits your account, especially when the balance is high, it can erase much of the progress you made with your minimum payment. If you can’t pay your balance in full, paying above the minimum, in combination with watching your credit card spending, can help you pay down your debt much faster.