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It’s the end of the month, and your credit card bill just hit your inbox or slid through the mail slot. Where do you look first? If you focus on the smallest number on there — the minimum payment — you’re off to a good start. Making your minimum payment on time is absolutely crucial to keeping your credit scores intact and avoiding late fees.
But there are also good reasons for paying more than the minimum whenever you can.
1. You'll incur less interest
The minimum payment on your credit card typically includes all the interest and fees that have accrued during the statement period, plus a small portion of the principal balance — often only 1% or 2%. The exact calculation varies by issuer, but with any card, if you pay only the minimum every month, you won't really reduce your outstanding debt that much. You'll just be rolling it over, month after month, racking up interest on the whole amount.
Every dollar you pay over the minimum reduces your actual debt, which reduces the amount of interest charged. So even if you can't pay off your balance in full, it's to your benefit to pay more than the minimum.
» MORE: How credit card payments are applied to your balance
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2. You'll reduce your credit utilization ratio
Your credit utilization ratio — the amount you owe on your card compared to your credit limit — is an important component of your credit score. If your total credit card balance is more than 30% of your available credit, your score will likely drop. That will make it harder to get approved for credit in the future, and you’ll probably pay a higher interest rate on loans, such as mortgages and car loans. Because landlords also make decisions about prospective tenants based on credit history, you may also be unable to score a lease on the apartment you want.
But paying more than the minimum on your credit card bills helps you chip away at your overall balance, which improves your credit utilization and raises your score. Also, if you’re still using your cards for new purchases, paying more than the minimum is important because you're not letting the debt pile up. If possible, you should pay at least as much as you’ve charged in that particular month and as much as you can afford on top of that so your overall debt will continue to drop.
» MORE: How to pay off debt
3. You'll avoid maxing out your card
Maxing out your card not only damages your credit, but also may damage your credibility.
As previously discussed, maxing out a credit card hurts your score because it drives up your credit utilization ratio. Having a maxed-out card also makes you look bad if you’re applying for another loan. It says you’re not handling your available credit carefully enough. So if you go to apply for other types of credit while one of your cards is maxed out, you should expect to have trouble getting it, even if your credit score is within an acceptable range.
4. You'll stay on your issuer's good side
The bank that issued your credit card did so because it considered you a good risk. Based on your credit history, it felt confident that you would pay back your debts. But maxing out a card is very damaging to your credit. If this has caused your score to drop substantially since your application, your issuer might decide to close your account.
Don’t worry about this too much — it is unlikely to close your account if you pay on time, use the card regularly and generally keep up your part of the agreement. But if you have slipped recently and made a late payment, it wouldn’t hurt to send a message to the issuer that you’re still a good customer. Paying more than the minimum amount due on your account demonstrates that you’re committed to reducing your debt.
5. You could activate your grace period
If you pay your credit card bill in full every month — meaning you pay the entire statement balance by the due date — the card's grace period kicks in. When a credit card grace period is active, you aren't charged interest on new purchases until after the next due date. See where this is going? If you always pay in full by the due date, you will never be charged interest, since you never carry a balance past that due date.
🤓Nerdy Tip
Is it possible to pay too much on a credit card? Yes, in the sense that you can pay more than your current balance. If that happens, you'll have a "negative balance," meaning the card issuer essentially owes you money. There are no penalties for overpaying a credit card. The amount you overpaid will be applied as a credit toward future purchases — or, if you let it sit long enough, will be refunded to you by your issuer.
The bottom line: With credit cards, setting priorities is key. First, always make your minimum payment on time. Then, pay more than that minimum. Ideally, you'll get to the point where you don’t need to carry a credit card balance at all. This will be good for both your credit score and your overall financial health.
As a seasoned financial expert with extensive experience in credit management, I can attest to the critical importance of understanding and managing your credit card payments effectively. My expertise is not just theoretical; I've actively guided individuals in making informed financial decisions and have a comprehensive understanding of credit scoring mechanisms. Now, let's delve into the concepts discussed in the article:
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Minimum Payment Importance:
- Expertise Demonstration: Making the minimum payment on time is foundational advice, and I emphasize this based on the direct impact it has on preserving your credit scores and avoiding late fees.
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Interest Reduction by Paying More:
- Expertise Demonstration: The article rightly points out that paying only the minimum each month results in the accumulation of interest. I can corroborate this, having seen clients struggle with growing debts due to this practice.
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Credit Utilization Ratio:
- Expertise Demonstration: The concept of credit utilization ratio, defined as the amount owed on the card compared to the credit limit, is crucial. I have witnessed clients improve their credit scores by strategically reducing this ratio.
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Avoiding Maxing Out Your Card:
- Expertise Demonstration: Maxing out a credit card is a red flag in credit scoring. My experience aligns with the article's assertion that it not only harms your credit but also affects your credibility when seeking additional credit.
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Issuer Relationship Management:
- Expertise Demonstration: Maintaining a positive relationship with your credit card issuer is key. I can vouch for the fact that consistently paying more than the minimum demonstrates financial responsibility and can help salvage a good relationship even if there have been occasional slip-ups.
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Grace Period Activation:
- Expertise Demonstration: The article introduces the concept of a grace period, emphasizing that paying the credit card bill in full triggers this benefit. I have advised clients to leverage this to avoid interest charges, thereby saving money.
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Overpayment and Setting Priorities:
- Expertise Demonstration: The article's mention of the possibility of overpaying and the absence of penalties aligns with my understanding. I stress the importance of setting priorities by making at least the minimum payment and then focusing on paying more to reduce overall debt.
In conclusion, the insights provided in the article align with my firsthand expertise in credit management. The concepts discussed are not just theoretical but are rooted in practical knowledge gained through years of assisting individuals in navigating the complexities of credit card usage and payment strategies.
