Chris Bridges, Founder and CEO, VITAL Card Inc.
Just as you may have guessed, a minimum payment on a credit card is the least amount that you can pay on your monthly credit balance.
This is the monthly amount that a credit card owner must pay to stay in good standing with the credit card company or issuer. In exchange, the credit card issuer charges interest on the balance.
The APR is issued along with the time, and varies from company to company. Usually the APR on a credit card is over 10%.
How Does the Minimum Payment Work?
That means, whatever has been charged to the credit card and has not yet been paid will be hit with that additional APR fee.
In most cases, the interest fees are charged each month, once the minimum payment has been made.
Of course, due to the added fees, paying the minimum can mean an increase on the overall credit card balance, and more fees spent overall. This is something to consider when making purchases on a credit card.
Including when the balance can be paid off, and how much extra may be paid in interest or APR fees.
What Do Credit Card Issuers Charge in Minimum Fees?
The amount due each month by the card balance holder varies from card to card, based on the user’s credit limit and how much they have on the card.
In most cases, having a larger balance calls for a larger minimum payment to the credit card company.
In total, the minimum payment may be around or less than 10% of the balance on the card.
Some credit card issuers charge a flat rate per month, regardless of the amount due on the account itself.
For instance, sending a monthly bill for $35 for users. This is a small gesture that shows the card balance, yet brings in minimum dollars to access the card.
Other cards have higher fees, even up to hundreds of dollars each month. This is likely for those with a more substantial credit card balance.
Again, minimum fees depend on the card itself, as well as your individual circumstances.
Does Minimum Payment Affect Credit Score?
This is a common question among credit card users sticking to minimum payments. However, the answer can be complicated. Only paying the minimum balance on your credit card can lead to mounting fees.
While that in and of itself may not hurt your credit (so long as the payments are received on time), maxing out your card can.
The ratio of how much is charged vs. how much credit you have available can make a big difference on your credit score. And ultimately it can cause it to drop.
To combat this, there are a number of steps you can take. You can pay more than the minimum amount to help get your fees dropped.
You can talk to the credit card issuer about getting your limit increased, you can utilize deals like lowered interest rates (some credit card issuers offer this; it’s not a standard feature).
At the end of the day, there are far more factors that go into your credit score than just minimum payment amounts:
- Age of credit
- Late payments (and on-time payments)
- Age of accounts
- Number of accounts
- Size of credit limits
- Available credit ratio
Luckily, credit transparency has become easier than ever to manage.
With free resources at your disposal, and transparency from your credit card issuer, there’s much you can learn about credit and how minimum payments could affect it in the future.
Many people with new or almost nonexistent credit actually use their credit card balance to grow their credit score.
By paying the minimum balance, and on time, users can increase their credit score one payment at a time.
If you don’t have credit or are new to holding accounts, talk to a banker, credit card issuer, or another financial professional about taking this route.
They can likely give you the best tips for how to grow your credit.
What is a Credit Score?
A credit score is a culmination of factors. Ultimately, it’s a number that lets lenders know how trustworthy you are as a customer.
Those with better credit scores can be more desirable to lenders. Because on paper, they are more likely to pay their bills on time.
Credit scores are determined through a number of factors, such as open accounts. How much you borrowed, from whom, if you paid on time, and how long you’ve had these accounts.
For younger customers, especially, they are likely to have “bad credit.”
But in actuality, their low score may be simply from lack of credit. Without accounts to pay back or a history of borrowing, there is nothing to score them off of.
In some cases, this deters credit card issuers from dolling out funds or increasing spend limits.
This is why it’s an attractive option for new users to grow their own credit scores by methods like credit card debt; keeping a credit card balance can actually help grow a credit score.
There are perks to improving your credit score, however.
Those with better credit scores may also be more likely to get approved for accounts, earn lower interest rates, and more.
Keep this into consideration when making minimum payment schedules that may ultimately affect your credit score.
What’s Your Card Balance?
A credit card balance changes monthly. If you spend more on your credit card, obviously its balance increases. If you pay the minimum balance and are hit with APR, the balance will once again increase.
If you fail to make your payment on time, even a minimum payment, you can also be hit with late fees or additional interest charges.
Doing so could also lock up the credit card, preventing you from making any further charges.
Besides, if your credit card balance is too high, you may not be able to make emergency or important charges when they become necessary.
Keeping your credit line open is more than just to avoid interest charges, it can also be a way to keep funds available for when you need them most.
What Are the Downsides to Paying a Minimum Credit Card Payment?
There are times in life when a user might need to make the minimum payment.
Due to changes in a career or unexpected life charges that have arisen, they simply have to take a step back and pay the minimum charges on a credit card.
However, it’s a move that can cause your credit card balance to rise in a hurry. In most cases, APR rates, any late fees, etc. add up to far more than what’s paid in minimum fees.
Therefore, the fees are racking up way faster than you’re paying them off. Over time, this can lead to paying far more in APR charges than in goods themselves.
If you are making important life spending habits, it’s a necessary step. But if you’re buying things you don’t really want or need, you may question if the extra fees were worth the effort.
Take this into account when signing on to your interest rate, or before making any frivolous purchases.
There is much to consider when making minimum monthly payments. Before taking this route, determine what your APR is, how much extra you’ll pay in late fees and interest charges.
You can also find your maximum borrow rate: how much can you charge to your card balance before maxing it out.
How might your credit score be affected by paying the minimum balance on your credit card?
Take a look at each of these factors, and more, when signing up for your next credit card.
Consider additional fees that add up as well as tying up that line of credit in case it’s needed in the future.
All of these factors, and more, play into your decision to get a credit card (or to get an additional credit card), as well as how you plan use it and schedule payments well into the future.
Learning each of these impacts is a great way to set yourself up for financial success.
To learn more about the best way to use your credit card and spending access, as well as the factors of making a minimum payment, check back in for ongoing content.
VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.