Paying minimum on credit card credit score

One of the first things you may notice on your credit card statement is the minimum payment. It may be a flat rate, a percentage of your balance or a combination of both. No matter how it’s calculated, the minimum payment is the lowest amount you have to pay to keep your credit card in good standing. The amount is usually fairly low compared to your total credit card statement, so it can be tempting to pay just the minimum monthly payment, especially when money is tight. However, paying even a small amount more than the monthly payment can help you pay off your balance faster, saving you money on interest payments and potentially improving your credit score.

An extra $15 each month can go a long way

Let’s say you have a current credit card balance of $5,000 with an interest rate of 21% and a minimum monthly payment of $105. If you make the minimum payments, it would take about 9 years to pay off the total outstanding balance. However, if you increase your monthly payments to $120, it would take a little over 6 years to pay it off. By increasing your monthly payments by just $15, you could pay off your balance 3 years sooner. If you continue to increase your monthly payment over time, you could pay off your balance even faster.

Keep your credit score in mind

Paying only the minimum amount doesn’t get factored into your credit score directly, but it does have an impact. This is due to credit utilization, which is the ratio of your credit card balance to your credit limit. If your credit utilization is high — in other words, if you’re using a lot of your credit card limit — it can lower your credit score.

Making the minimum payment can lower your credit card balance, but only in small increments because a large portion of the payment goes towards monthly interest charges. So if you have a high credit utilization ratio while you’re paying down your balance, your credit score will drop over time. On the flip side, though, you can gradually improve your credit score by paying more than the minimum and lowering your credit utilization ratio faster.

Tips to pay off your credit card balance

Paying off credit card debt can be challenging, but it’s not impossible. With a solid plan and some dedication, you can pay off your card debt and reach your financial goals faster. Here are strategies that can help you pay off your balance.

Get organized

Start by taking an inventory of your credit cards and loans, your outstanding balances and the interest rates you’re paying on each. This will help you make a plan to pay off your balances. Paying off your balance with the highest interest rate first, while still making the minimum monthly payments on your other balances, can help you pay less interest and get out of debt faster.

Consolidate your debt

If you have multiple credit card balances or loans, you may want to consider converting them to a single loan by consolidating your debt. Having just one loan to focus on can make things easier, and it could help you save on interest too.

Set up a payment plan

Schedule automatic payments from your chequing account to your credit card each month through online banking to help you make your payments on time.

Follow a budget

Having a clear picture of how much money you have coming in — income — and where you’re spending your money — expenses — can help you avoid building a higher balance. It can also help you uncover opportunities to save more so you can increase your payments and pay off your balance sooner.

Get professional advice 

Your advisor can help you understand your options and build a personalized action plan to manage your debt and meet your financial goals.

Take control of your finances with our solutions 

If you’re having trouble making your minimum payments on your CIBC products, getting in touch with our credit counsellors early can go a long way to prevent your existing debt from growing.

Whenever possible, the best approach is to pay your balance in full. Sometimes unexpected events can put a strain on your finances, though. In these situations, making the minimum payment may be all that’s possible. However, when you have more money available, it’s a good idea to make incremental payments towards paying off your balance in full.

At a Glance

There is over $756 billion in outstanding credit card debt in the U.S. Among credit card carriers, 75% have a balance greater than $0, and the average balance held is more than $5,000.

When it comes to paying off this balance, making a full payment may sometimes feel overwhelming. To help, credit card issuers typically set minimum payment requirements for their cards. This payment, either a fixed amount or a percentage of your total balance (whichever is greater), is the minimum you can pay on your card each billing cycle to keep the account’s status as “current” rather than “late.” Paying at least this minimum will help you avoid defaulting on the card.

There may be months where paying the minimum on your credit card is your only option, and occasionally, that may be ok. However, as a long-term strategy, it will likely do your budget and credit score more harm than good.

In this article, learn more about:

• What is a minimum payment?
• Paying the minimum on a credit card
• When it makes sense to only pay the minimum payment
• If a paying the minimum on a credit card hurts your credit score
• What is the Credit CARD Act of 2009?

What is a minimum payment?

Not all credit card companies calculate the minimum payment the same. There are primarily three ways a credit card company will calculate the minimum payment:

• A flat percentage of your balance
• A percentage of your balance, plus interest or fees from prior billing periods
• A flat rate

For some companies, the minimum monthly payment may be as little as $20-$30. Other companies may charge a certain percentage of your total balance, such as 1%-3%, so the minimum would change each month. If you have a high annual percentage rate (APR), you may be asked to pay more.

Check your card’s terms to learn about how your particular lender calculates their minimum payment, and look at your credit card billing statement each month to see your own minimum payment and payment due date.

The primary downside to making only the minimum payment on your card is that the rest of the balance will continue to carry over to the next month, and this will happen each month until the full balance is paid off.

Paying the minimum payment on a credit card

By paying at the minimum on your credit card balance, you’re avoiding:

• Late fees
• Delinquency
• Penalty APR
• Damage to your credit score for making late payments

However, it’s not recommended to make paying only the minimum a common practice.

Say your card balance is $500, and the minimum is $40. Also say your card has a 13.99% monthly APR. It will take you 14 payments, or two years, to pay off this debt. You’ll also have to pay an additional $40.22 in interest, making your total $540.22.

Now, imagine your credit card balance is $5,000, with a minimum monthly payment of $105. It will take you 68 months, or six years, to pay off the full balance if you only make the $105/month minimum payment. You’ll have paid $2,069.02 in interest, bringing your total to $7,069.02.

If you have a higher APR, or a greater balance, you may end up paying thousands of dollars in interest and it could take years, even decades, to repay. You can use a credit card payoff calculator to help you figure out how long it will take you to pay off your debt, and how much interest it will cost you.

In these examples, you can see how quickly your debt will add up over the course of time. By paying the minimum balance, it’s quick and easy to accumulate credit card debt that can become very difficult to pay off, making reaching your financial and savings goals more difficult.

Even if you can’t pay off the full balance each month, you should try to pay off as much as you can. Paying more than the minimum payment, even if you continue to carry a balance, can save you hundreds or thousands of dollars in interest. The more you can pay toward your balance the faster you can pay it off, and the more you’ll save.

When does it make sense to only pay the minimum?

In order to keep your account in good standing, you must pay at least that minimum payment. If you pay less than the minimum, your lender will likely consider it a non-payment and you could default on your card.

However, there may be some situations where you can only pay the minimum on your credit card and you’re unable to pay off the full balance. There are only a few situations when you should do this:

• If you paid off the full balance, you wouldn’t be able to pay other bills that month.
• If you have a 0% APR card and need some extra cash.

The key to this is remaining disciplined, and confident in your ability to bounce back and after a month or two, resume making the full payments. If you do this, you should also try to pay off the card completely as soon as possible to avoid the debt getting out of control.

Does paying the minimum hurt my credit score?

While paying only the minimum doesn’t directly hurt your credit score, allowing your balance to grow without paying it down may increase your credit utilization rate, which is an important factor for your credit score, as well as affect your debt-to-income ratio (DTI).

Your credit utilization rate measures the total amount of debt you owe compared to how much credit you have. A high utilization rate can negatively affect your score. Experts recommend keeping your utilization rate low, but to avoid reaching 30% or higher.

Having a high DTI, or how much debt you have compared to your income, can also negatively affect your score and your ability to get loans, credit cards, and low interest rates in the future. Experts recommend having a DTI of 36% or less. This is because lenders may feel nervous that you have more debt than your income will allow you to pay back.

What is the Credit CARD Act?

The Credit CARD Act of 2009 was designed to protect consumers from unfair practices by credit card companies. The act requires credit card lenders to be transparent with their card terms and conditions, as well as adding limits to charges and interest rates.

For example, companies can’t increase your interest rate unless your account is at least one year old, and they must give you at least 45 days notice before making an increase. Issuers also can’t charge interest on balances outside of the most recent billing period, and fees must be “reasonable and proportional.”

This law also requires that your credit card billing statement include:

• The amount of time it will take you to pay off your credit card if you only make the minimum payment.
• The monthly payment you should make to pay off your balance in three years.

Commonly asked questions

Is it better to pay the minimum on credit cards?

To keep your credit card account in good standing and avoid defaulting on your card, you must make at least the minimum payment each month. However, depending on how much your balance is and your card’s APR, only paying the minimum could allow your debt to increase significantly over time, and you may have to pay hundreds or even thousands of dollars in accrued interest.

Do I get charged if I pay the minimum credit card payment?

You won’t get charged any fees by paying the minimum credit card payment, but if you have APR on your card, your balance will continue to be charged interest. However, if you miss your minimum payment, you may be charged a fee from your lender.

Do I pay interest if I pay the minimum credit card payment?

Unless your card has 0% APR, you will have to pay interest on your balance even if you pay the minimum payment.

Should you pay the minimum payment on credit card, or full balance?

You must make at least the minimum payment, but if you can pay more, you should. If you can’t pay off the full balance, pay as much as you can to avoid having to pay more in interest. Best practice is to pay off your card in full each month. To do this, be sure you’re not spending more than you can pay off.

Does it hurt my credit score if I pay the minimum?

What happens if you pay the minimum on your credit card?