Paying more than the minimum balance on your credit card each month is important for healthy credit card use. Credit cards can provide convenience and offer flexibility when paying for life’s expenses, but they must also be managed responsibly. Credit card use and credit card debt are a deep-rooted part of American spending: Americans have over 578 million credit card accounts and a total of over $1.2 trillion in credit card debt, according to a report by the Federal Reserve.
If you’ve ever struggled to pay your credit card bill in full each month, you aren’t alone. 47% of Americans have had to carry a balance on their credit cards for at least one month in the last year. Sometimes, paying your full credit card statement just isn’t feasible, and it can be tempting to make only the minimum payment. After all, paying the minimum on your credit card statement will keep your account open and in good standing while avoiding any late fees and penalties.
However, paying more than the minimum on your credit card could benefit you more in the long run. By paying more than the minimum, you will be able to save more money, reduce your debt more quickly, build your credit score, and move one step closer to financial well-being.
What Is A Minimum Payment on a Credit Card?
The minimum payment is the lowest amount you are required to pay on your credit card balance each month to keep your account in good standing and avoid fees and the possibility of an interest rate increase. The minimum payment is typically calculated as a percentage of your total statement balance plus applicable interest and fees, which is known as the annual percentage rate (APR).
What Happens When You Only Pay The Minimum?
There are times when some individuals can’t afford to pay more than the minimum amount needed to keep their account in good standing. Circumstances can change quickly. While the minimum payment amount can be much more manageable on your monthly expenses than paying the balance in full each month, only paying the minimum can result in some unpleasant consequences, including:
Longer repayment periods
If you only make the minimum payment on your credit card, it can take a long time to pay it off. This is because the interest on most credit cards compounds, or adds to itself, every month. If you pay the minimum amount due one month, interest is recalculated on the remaining balance, and the accrued interest is added to the amount you owe for the next month. This repeats every month for as long as you have a balance on your credit card.
Any time you make a payment on your credit card, that payment goes toward both the principal balance (the amount you spent) and the interest accrued on the balance. Making smaller payments means that you can only chip away at the principal in small increments, lengthening the amount of time you pay off your credit card.
Higher interest costs
Even though you may know the interest rate on your credit card, it’s easy to underestimate how much extra you’re paying in interest when you only make the minimum payment each month. With compound interest, the longer it takes you to pay down your credit card debt, the more you’ll pay in interest charges.
Consider this example: You have a balance of $5,000 on your credit card, which has an APR of 25%. If you make the minimum payment of $155 a month, you’ll pay off the full amount of your credit card balance in 55 months, and you’ll have paid a total of almost $8,400, of which almost $3,400 is interest over that period.
If you increase that payment to $300 a month, you’ll pay off your credit card in 21 months instead of 55 months, with a total of just over $6,200 paid in interest. Making a larger monthly payment means you’ll also save on interest charges. (This example assumes there are no other charges on your credit card aside from that initial balance.)
Potential credit score impacts
You may also risk a negative impact on your credit score when you only pay the minimum on your credit card. As part of calculating your credit score, the three national credit bureaus use credit scoring models to determine your credit utilization ratio, which is the percentage of available credit you’re using.
A good rule of thumb is to have a credit utilization rate of no higher than 30% to avoid hurting your credit score. The lower your credit utilization ratio, the better.
If the credit limit on your credit card is $10,000 and your balance is $5,000, your credit utilization ratio is 50% on that card. And if you only make the minimum payment on your credit card every month, you’ll maintain this high balance and high credit utilization rate longer. This can negatively impact your credit over time.
The Benefits of Paying More Than the Minimum on Your Credit Card
It makes good financial sense to pay more than the minimum on your credit card. Even if you don’t pay off the full balance, any amount over the minimum payment can help you accomplish the following:
- Reduce your debt and total interest paid
- Will save you money
- Help you pay off what you owe faster.
Also, if you’re still using your credit card for new purchases each month, it’s important to pay more than the minimum so your debt doesn’t continue to accumulate.
Paying more than the minimum, you can also lower your credit utilization ratio to a more desirable level, which could potentially help you improve your credit score and build up your credit history. Keeping your credit utilization ratio low can be a helpful indicator of your creditworthiness to potential lenders if you pursue other financing opportunities.
Strategies to Pay More Than the Minimum on Your Credit Card and Pay Off The Debt
It can be intimidating to try to pay more than the minimum on your credit card, but it is possible to reduce your credit card debt and work toward paying it off. As you embark on your debt payoff journey, try to limit the amount you’re using your credit card and adding to your debt.
First, consider creating a budget if you don’t have one already. By creating and sticking to a budget, you can figure out how much money you’re spending each month and where you can cut back. If you can spend a little less on non-essentials, you may be able to shift that extra money to pay more than the minimum on your credit card.
If you have more than one credit card, consider developing a debt payoff strategy that motivates you to keep going. Below are two common debt payoff strategies: the debt snowball method and the debt avalanche method.
Debt snowball method
The debt snowball method is one way to approach paying off your credit cards strategically while motivating you to keep going. Here’s how it works:
- List each of your credit card balances in order from smallest balance to largest balance.
- Continue to make the minimum payment on your other cards, but put any additional money you have toward paying extra on the credit card with the lowest balance.
- When the balance on this card is paid off, apply that payment to the card with the next lowest balance.
- Repeat this strategy until all the credit cards are paid off.
This strategy will help you gain headway in paying off your credit card balances in order from smallest to largest. By paying smaller balances off quickly, you’ll enjoy a “win” that motivates you to keep going.
Debt avalanche method
While the debt snowball method can certainly be motivating, it’s not the most powerful way to save money. If you’re motivated by saving more money, you might consider the debt avalanche approach. Here’s how the debt avalanche works:
- List each of your credit card accounts in order from smallest APR to largest APR.
- Continue to make the minimum payment on each of your other cards, but put any additional money you have toward the credit card that has the highest APR until the balance is paid off.
- When the balance on this card is paid off, apply that payment to the card with the next highest APR.
- Repeat this strategy until all the credit cards are paid off.
The best part of this strategy is that it saves you more money on interest over time because you’re paying down the most expensive debt first. However, since your most expensive debt may not necessarily be your lowest balance, you may not enjoy as many “quick wins” as you would with the debt snowball method, as it may take you longer to pay off individual cards.
Ultimately, choose the debt payoff method that’s right for your situation by considering which one will be the most motivating for you over the long term. Paying off debt is doable, but it’s not always easy. Find a debt resolution method that works best for you and your financial goals.