If you care about your financial life, protecting your credit score is one of the best things you can do. It allows you to easily get credit-based applications approved and helps you save money on interest and security deposits. Your payment history is one of the most significant factors of your credit score as it accounts for 35 percent of our FICO score. But let’s find out if the payment amount matter and more importantly, does your credit score get hurt if you do minimum payments?
One of the reasons why credit cards are attractive is that it doesn’t require you to pay off the entire balance at once. You are only required by the credit card issuer to pay a small portion of your monthly balance. Your monthly credit card statement will show the minimum payment amount which will vary depending on your credit card’s balance and any fees that are due. You may opt-in paying the minimum payment to keep your account in good standing if you don’t have a lot of money to put towards your credit card payment.
The good news, however, is that the amount of your last payment is shown on your credit report but the amount of your credit card payments in your credit score won’t be considered by credit scoring calculations. Making the minimum payment doesn’t hurt your credit score at all if we look at it from that standpoint. You’re actually helping your credit score by building a consistent and positive payment history as long as you’re making at least the minimum payment on time each month.
The bad news, on the other hand, is that part of your credit considers how much of your credit is being used which is called credit utilization. It can cost your several credit score points using more of your credit limit. Reducing your balance quickly would help your credit score rebound since the point loss is only temporary.
The amount of your debt is 30% of your FICO score. The credit scoring calculation considers the balance on individual credit cards, while your aggregate balance to all of your credit cards.
Your balance only reduces by a little when you only pay the minimum. Your high credit utilization will also continue hurting your credit score. If you’re making additional purchases on your card each month and only pays the minimum, you’ll likely find your credit score suffering because rather than shrinking, your balance grows instead. However, if for instance 30 percent of your credit limit or less is your lowest balance and you only pay the minimum, you’ll probably find your credit score safe when it comes to credit utilization.
Although your credit score benefits if you pay your full balance rather than making the minimum payment, the payment amount isn’t necessarily what helps. Your credit utilization will be lowered and your credit score is boosted if you pay your full balance and have a zero balance reflected on your credit report.
There are benefits to paying more even if making the minimum payment doesn’t hurt your credit score. For instance, you can save money on interest if you reduce your balance faster. Do the best you can to put more towards your balance. Only when you’re paying the minimum on some credit cards as apart of a get out of debt plan is the exception.
Some creditors and lenders may consider your last payment included on your credit score when they review your application. In general, if you pay only just the minimum especially when your balance is high, you can be considered as a risky borrower and may not be approved.
It may be best to pay the full statement balance but admit it, there are times you can only pay for the minimum payments. But that’s fine for as long as you avoid doing it long term. Pay your balance in full once you have the funds available to pay for it.
It can be a sign of a serious issue if you’re having trouble paying for your statement in full regularly. You may want to consider reviewing your cash flow and spending habits to see if there’s room to cut costs. Another tip is to change your bill’s due date to one that’s more convenient for you when you get paid. Remember, you financial life is at stake and without proper planning, it may affect you for the coming years. For advice, consider consulting a financial advisor who can help take a closer look at your financial standing and for more systematic financial planning.
Flynn Financial Group Inc