Credit cards do not allow us to realize the expenditure as well as cash does. Expenditures easily cross the budget when we use credit cards. Carrying a balance on credit cards by paying off only the minimum becomes a habit quickly. Minimum payment is frequent among the young generation, especially college students. Some people leave balances on credit cards thinking that the balance will improve their credit score. Many people pay off the minimum monthly payment due to emergency situations. Regardless of the reasons, we need to understand how much we are hurting our financial situation with a balance on our credit cards.

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Is this correct that paying off minimum instead of the full balance improves the credit score?

Nope. Paying off less than the full balance will not benefit the credit rating. Paying off the full balance before the due date will keep the credit record in good standing and increase the credit score in the long run.

[stextbox id=”info2″ caption=”Credit score fact”]The key to good credit score is to pay off the full balance in the monthly statement before the due date.
Reference: Myth Busters: Do You Need to Carry a Balance on a Credit Card to Raise Your Score?
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What is the most common minimum payment amount?

The most common minimum payment amount is 2% to 5% of the credit card balance plus any interest.

How much will minimum monthly payments on a $5000 credit card balance hurt the wallet?

If someone has a credit card debt of $5,000 and the interest rate (APR) is 20%, then the monthly interest will be $83.83 in the first month. With 2% payment of the balance plus the interest, the minimum payment becomes $5,000×0.02+$83.83=$183.83 in the first month. Note that this payment of $183.83 will only reduce the balance by $100 (2% of $5,000).

With the monthly minimum payment, the credit card holder will pay $1,973.43 in a year with a starting balance of $5,000. The balance at the end of the year will be $4,003. That is, cumulative total monthly payments of $1,973.43 will reduce the balance by $997 only in a year. 🙁 Pay credit card debt as early as possible to save the extra payments.

What is the best practice?

The best practice is to consider a credit card as a debit card. That is, not to purchase using a credit card any more than we can pay off at the end of the month.

There had been times when I had to pay the minimum instead of a full balance payment but those were emergency situations. Unless I have emergency situations, I set up an automatic payment of the full statement balance before the due date.

Settle in El Paso team