The Impact of Minimum Payments on Your Credit Score
Your credit card issuer only requires you to pay a small portion of your balance each month. This minimum payment is the lowest amount you can pay toward your credit card balance and keep your account in good standing.
You may already know that payment history is one of the most important factors of your credit score, accounting for 35% of your FICO score. But does the payment amount matter? And more specifically, do minimum payments hurt your credit score?
How Minimum Payments Impact Your Credit Score
Your credit report, which is the basis for your credit score, lists the amount of your last payment. Credit scoring calculations don’t consider the amount of your credit card (or loan) payments in your credit score. As long as you’re making at least the minimum payment on time each month, you’re actually helping your credit score by building a consistent, positive payment history.
Your monthly payment amount doesn't directly impact your credit score, but it does influence the amount of credit you're using—your credit utilization. Using more of your credit limit can cost you several credit score points. The point loss is only temporary; reducing your balance quickly would help your credit score rebound.
The amount of debt you're carrying is 30% of your FICO score. For credit cards, the credit scoring calculation considers the balances on individual credit cards and your aggregate balance across all your credit cards.
When you only pay the minimum, your balance only reduces by a small amount each month and a high credit utilization will continue to hurt your credit score. And if you're paying only the minimum and making additional purchases on your card each month, your credit score is likely to suffer because your balance grows rather than shrinks. On the other hand, if you have a low balance—say 30% of your credit limit or less—and you pay only the minimum, your credit score is probably safe as far as credit utilization goes.
Paying your full balance rather than making the minimum payment can help your credit score, but it's not necessarily the payment amount that helps. Paying your full balance and have a zero balance reflected on your credit report lowers your credit utilization and can boost your credit score.
The Benefit of Paying More Than the Minimum
Even though making the minimum payment may not hurt your credit score, there are benefits to paying more--like reducing your balance faster and saving money on interest. As often as you can, put more towards your balance.
Paying the minimum is generally ok as part of a get out of debt plan or when you're experiencing financial hardship and can't afford to pay more.
Since your last payment is included on your credit report, some creditors and lenders may consider that when they're reviewing your application. Generally speaking, a person who pays just the minimum, especially on a high balance, could be considered a risky borrower and may be turned down.
How to Avoid the Minimum Payment Trap
It's easy to fall into a habit of making minimum only payments, but breaking this pattern is important for your credit score and your finances. Here are some tips to help you pay more.
Cut back spending in other areas.
Examine your typical monthly spending to find areas where you can eliminate or reduce spending. Creating a household budget can help you better allocate your income and prioritize reducing your credit card balance.
Contact your credit card issuer or a consumer credit counseling agency if you're experiencing hardship and need leniency with your interest rate or monthly payment.
Earn extra income.
Working overtime, picking up a part-time job, or starting a new side hustle can bring in extra income that you can use to knock out your credit card balance sooner.
Limit your credit card purchases.
Once you've paid down your credit card balance, get in the habit of charging only what you can afford to pay in a single month. Then, pay your full balance off each month. You'll avoid paying interest and protect your credit score.