Why Pay More Than the Minimum?

3 reasons to pay extra each month

Turning It Around
••• Gary Waters/Ikon Images/Getty Images

It’s tempting to pay only the minimum on your credit card each month. Those small payments are easy to afford, so you feel like you’re in control of your finances (unless you have a ton of debt, and the minimum is ​all you can afford). You might even wonder why anybody would pay more than the minimum required payment.

Lenders typically calculate minimum payments as a percentage of your total balance, and an amount of 2%to 4% is common. 

Because those payments are so small, paying that amount can result in several problems, and it’s better to pay extra when you have funds available. Paying more than the minimum can help you minimize interest costs, shorten your borrowing time, and improve your credit.

1. You Pay Interest

The first problem is that you pay a substantial amount of interest on your loan balance. Credit cards can be expensive tools for borrowing, and you don’t want to keep a balance on a credit card for long. If you only pay the minimum, most of your monthly payment goes toward interest costs, and you only reduce your balance by a small amount.

For an example of how payments work, including how much goes toward your balance each month, see how to calculate credit card payments

To run specific numbers with your current debt and payments, you can use this online calculator to learn more about your situation. Run some what-if calculations to see how paying slightly more can reduce your interest costs and borrowing time.

2. You Pay For a Long Time

With minimum payments, paying off a card can easily take ten years (or more). Again, you only make a small dent in your debt when you make small payments. You need to pay extra to accelerate the process.

Wouldn’t it be nice to be debt-free someday? Instead of making required payments that don’t do anything for you (except maintain a debt and help you avoid default), you might appreciate putting money toward more rewarding goals instead. For example, you can work on retirement savings, build up a down payment for a house, or pay for a wedding with cash.

3. It’s Harder to Borrow

If you want to get another loan, you’re making things hard on yourself when you leave credit card debt lingering around. For example, you might want to borrow to buy property or a new car. When you apply for a loan, lenders evaluate your ability to repay by pulling your credit, and it’s easy for them to see that you’re just barely keeping up with your debt.

Income ratios: To get approved car or home loan, you need to prove that you have income available to repay the loan. Lenders review your existing debt burden (how much you currently pay toward your debts each month) and evaluate if you’re able to afford additional payments. If you only pay the minimum required, you’ll have more debt, leaving you with less money available each month to pay off new loans (according to lender calculations). The result? You might not obtain the loan you want.

Credit scores: ​You’ll most likely have lower credit scores if you don’t pay off your cards. Credit scoring models don’t like to see high balances on revolving accounts, and 30% of your FICO credit score weighting comes from the “amounts owed” category. Lenders measure how much total debt you have and how much of that available amount you’re currently using. If you don’t pay down your debts, it looks like you’re maxing out your cards, and additional debt could put you over the edge. 

Keep your balances below 30 percent of your credit limit to avoid serious damage to your credit.

How to Pay off the Debt

If you’re ready to move beyond paying just the minimum, make a plan to get out of debt:

  • Spend less (yes, it’s easier said than done).
  • Pay more than the minimum—even $10 or $20 per month makes a difference, but more is better, especially if you have an emergency fund in place for surprises.
  • Consolidate debts if you can save on interest costs (consider signature loans, or use a promotional balance transfer offer if you can pay it all off within six to twelve months).
  • Avoid the temptation to rack up debt (again) after you pay down your debts.
  • Try a strategy like a debt snowball if you want motivation, or a debt avalanche if you want to focus on interest costs.

    Credit cards aren’t necessarily bad. But bad things happen if you only pay the minimum each month. Credit cards are excellent tools for everyday spending, and they’re often safer to use than debit cards. But it’s essential to pay off your entire balance every month. Credit card issuers are still happy to have you as a customer if you spend and pay off your balance in full.