Have you ever wondered what credit card minimum payments are? Is that the amount you should be paying? Does it benefit you to use that number in any way? Let’s answer all your questions!
What are Credit Card Minimum Payments?
Credit card minimum payments are the minimum payments required for your credit card company to consider your account in good standing. Making this payment keeps you in good standing and avoids any late fees however you will incur interest on your balance owing. To avoid fees and additional charges, avoid paying only the credit card minimum payments.
The minimum payments are a viable short-term financial solution if you are in any emergency however, this does not work as a long term strategy as you will continue to accumulate debt if you are only making the minimum required payments.
3 Benefits to Paying More
If you have the financial means to continue paying more than your minimum payment amount, here are 3 major benefits that you receive for paying more than the minimum amount on your credit card, or your entire balance, in full.
Great Credit Score
By maintaining a low balance on your credit card by paying more than the minimum payments or the entire balance each month, you are on a good path to a great credit score. When you pay only the minimum payment, you increase your credit utilization which is the ratio of amount of credit used versus provided. By increasing your credit utilization, you risk impacting your credit score severely. Check out our Personal Finance Guides if you are looking to learn more about credit and debit.
When you pay only the minimum payments, you incur interest on the balance remaining. For example, your credit card balance is $1000 and your minimum payment is $10. If you pay only $10, you will incur interest on the $990. If you would like to learn more about credit card interest rate calculations, check out our blog post where we simplify the calculations. Avoid spending your money on interest charges on credit cards by paying more than the minimum payments.
This benefit ties into both of the above however it is critical to note that credit card debt is some of the hardest debt to recover from. Use your credit card wisely to build credit history and take advantage of your interest-free grace period. However, by paying more than your minimum payments, you limit the amount of debt you have. By having limited debt, you can create a solid plan on how to tackle your debt through savings.
Credit card minimum payments are a safety net if you are in a financial emergency and are unable to make your credit card payments. However, whenever possible it is always better to pay off your credit card balance in full.
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