When the credit card bill comes in, you may see the minimum payment amount and think that’s all you’re required to pay.
While true in part, the reality is much more nuanced, said Kurt Brucker, credit score expert for oXYGen Financial and host of the national podcast “They Don’t Teach You This,” which provides personal finance and career guidance for millennials.
“When paying only the minimum, you continue to rack up interest on principal,” he explained. “That amount continues to grow exponentially larger and becomes daunting to pay off down the line.”
Here’s how only making minimum payments on your credit cards can impact your credit — for better and worse.
Payment history is the largest driver of your credit score, said Brucker, so ensuring your payments are being made on time each month is critical to your overall financial health.
“You want to make at least your minimum payments because otherwise you will be considered late on the loan,” he said. “Making the minimum payment can help keep you on track and tend to hold a decent credit score because you are making your payments on time.”
While making timely minimum payments may have a positive impact on your credit score at first, keeping a balance on your card can have longer-lasting negative repercussions.
“Credit utilization is one area where the minimum payment will certainly hurt you — especially if you continue to add on to whatever the balance is,” he explained. “The minimum payment rarely covers the interest and doesn’t even touch the principal, so the amount you owe continues to compound over time.”
This balance-to-limit ratio is a high-ranking factor in how your credit score is calculated, so the more of the available credit you are using, the greater the negative impact on your score.
When calculating your credit score, credit bureaus examine the age of your various accounts. By making only the minimum payment, you will spread out your card balance over a longer period, which will indicate you have experience managing debt.
But again, this positive bump to your credit score comes at a high price, Brucker said. Minimum payments are a very slow way to pay off your debt, and you’ll end up paying much more in interest over time.
The total outstanding debt you are currently making payments on is referred to as “overall capacity,” and is another factor credit agencies look at when calculating your score.
“Making the minimum payments will certainly affect this area,” said Brucker. “You want to be careful because your actual capacity could be impacted as a result of your amount of credit card debt.”
While credit can be a great tool when utilized correctly, paying off a growing debt can quickly become a challenge.
Brucker’s advice: “Work to only put something on a credit card that you can pay off every month, and don’t get into the habit of falling behind, or that will put you in a bad place over time.”