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Does Making Minimum Payments Affects your Credit Score?

Does Making Minimum Payments Affects your Credit Score?

July 9, 2022
5 min read
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Does Making Minimum Payments Affects your Credit Score?
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The minimum or least amount that your credit card issuer will accept toward your credit card balance each month for the expenses you have made using the card is known as a minimum payment. Minimum payment policies differ from company to company, it's critical to understand your credit card provider’s minimum payment regulations. It is critical to pay at least the minimum amount due each month to avoid late fees and maintain your credit score.

Making the minimum payment on a credit card month after month may be easier for you in the short-term as it allows you to spread your payments over months rather than paying out all upfront. On the other hand, minimum payments have major long-term financial ramifications, potentially putting you in debt and lowering your credit score. 

What is the Minimum Amount Due on a Credit Card?

Credit cards are designed to offer flexibility in repayment. Hence, there is a total amount that must be paid as well as a minimum amount that must be paid. The total amount due is the sum of all your expenses in the current billing cycle, including any other outstanding balances from past billing cycles. 

While the minimum amount due is the least payment amount that your credit card issuer will accept toward your statement debt. The minimum payment due is normally 5% of the total outstanding amount. 

How Making only Minimum Payments on your Card Affects your Credit Score?

You will not be charged a late payment fee if you pay only the minimum amount due before the payment due date; however, the interest rate shown on your credit card will apply to the remaining balance. If you have a pattern of paying only the minimum amount due over time, your credit utilisation will increase, negatively impacting your credit score.

Credit utilisation ratio of more than 30% has a negative impact on your credit score. As a result, even if you are only able to pay the minimal amount due owning to a financial emergency, you must ensure that your credit utilisation ratio does not exceed 30% to prevent hurting your credit score.

The credit repayment behaviour is the most essential aspect of a customer's credit score since it affect their repayment history and credit utilisation ratio, or how much of their credit limit is used. Your credit card issuer will consider your payment on time if you pay only the minimum amount required, and this will appear on your credit record as well. As a result, while the DPD in your credit report will not be hurt, the outstanding amount and credit utilisation ratio will be prominently displayed on your credit report.

How you Pay More by Making Only Minimum Payments on your Credit Card?

You may have more money each month to pay towards your credit card debt, however, you choose to make the minimum payment only. By the time you pay the entire debt off, you will have paid significantly more than the original amount you had spent using the credit card. Plus, merely paying the bare minimum will keep you in debt for a long time. Reason? Only a small portion of the minimum payment goes toward the total outstanding balance of the credit card; the rest is used to cover interest and fees.

Making minimum payments may seem easier on your pockets for the short-term, however, you will have to pay more in interest and fees over the long-term. To get the total outstanding balance down, pay as much as you can easily afford. This enables you to get out of debt more quickly and free up your finances to pursue other financial objectives. 

Do you find it difficult to come up with enough money each month to pay more than the minimum on your credit cards? Making a budget might assist you in gaining complete control over your personal finances. Reduce unnecessary expenses and use the extra money to pay down your credit card debt.