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Is this correct that paying off minimum instead of the full balance improves the credit score?
What is the most common minimum payment amount?
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.
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What is the best practice?
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.
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