If your funds are running low and your bills are stacking up, you might be wondering whether it is OK to make minimum payments on your credit cards. The minimum payment is the smallest amount your credit card issuer will accept toward your balance each month to keep your account in good standing.
However, simply paying the minimum — and not a dime more — is rarely a good idea. That is especially true if you make only minimum payments for a long period.
“Making more than the minimum payment — and ideally the full payment — lets you enjoy the benefits of credit cards without the pitfalls,” says Karen Carlson, vice president of education and digital marketing for InCharge Debt Solutions, a nonprofit credit counseling organization.
On the other hand, habitually making minimum payments and carrying a balance is like “paying a 15% to 30% markup on everything you purchase,” Carlson says.
[Read: Best Low-Interest Credit Cards.]
How Are Credit Card Minimum Payments Calculated?
Generally, a minimum payment is based on your monthly balance.
Some issuers set the minimum payment as a percentage of your balance and then add interest charges and fees. Others charge a flat percentage of your card balance.
Your issuer may also set a floor for the lowest minimum payment you’ll be charged. If your balance is less than that floor, you will owe the entire balance. For example, if your card has a $15 balance and a $25 floor, you will pay $15.
You’ll find more information about your minimum payment and other credit card terms on your monthly credit card statement, which you should receive by mail or online.
What Happens if You Don’t Make the Minimum Card Payment?
You’ll risk hurting your credit score — and your wallet — if you fail to make minimum payments. Here’s what to expect:
First, your credit card company may notify you by phone, mail or email of your missed payment. Messages may include a phone number or instructions to help you get your account on track.
You also might be charged a late fee, even if you miss your payment by one day.
“This fee will continue to be charged each month the minimum payment amount is not paid or if the payment continues to be late,” says Tom Quinn, vice president of FICO scores.
Once your payment is 60 days late, your lender might increase your interest rate, Quinn says. A penalty rate can be as high as 29.99%, and it applies to your balance and future purchases.
“So it might extend the amount of time needed to pay off the balance,” he says.
Ultimately, your credit score could dip. “Once the late payment is reported, it can last on your credit report for up to seven years,” Quinn says.
If you don’t pay on time, you could even lose your ability to use the credit card until your account is current. An account that goes 180 days, or six months, without payment will be closed and charged off by the issuer.
How Does Missing a Minimum Payment Affect Your Credit Score?
Even a single missed payment can cause your credit score to drop.
That’s because “Your payment history is the most significant factor in your FICO score, making up 35% of the calculation,” Quinn says. “Missing a payment can have a substantial impact on your FICO score.”
The precise effect of a late payment can depend partly on your credit history. The information reported to the credit bureaus about your missed payment will also play a role in how much your credit score drops, Quinn says.
But the first missed payment from someone with no history of missed payments will likely have a larger effect on a credit score than subsequent missed payments, he adds.
Factors that determine how damaging a missed payment will be to a credit score include:
— How recent is the missed payment?
— How late did you pay?
— How frequently do you miss payments?
The later you are, the more damage caused. “Generally, consumers will see a more substantial loss of points when they fall further behind on a payment,” Quinn says.
The good news is that, over time, your credit score should heal if your financial behavior improves. “FICO scores are dynamic, and they change as your credit behaviors reported to the credit bureaus change,” Quinn says.
[Read: Best 0% APR Credit Cards.]
Reasons to Make More Than the Minimum Payment
Making more than the minimum payment on your credit card can help you save money, pay off debt faster and improve your credit.
Save money. Your issuer will charge you interest on any balance you carry to the next billing period. This can become quite expensive over time.
Improve your credit. Paying more than the minimum can help your credit utilization ratio, or the percentage of your total available credit you’re using. As a rule of thumb, many credit experts recommend keeping your credit utilization ratio to less than 30% for a good credit score.
Pay off debt faster. If you have a balance on your card, you can pay it off faster if you make more than the minimum payment. You’ll also save on interest when you speed up your payoff.
For all of these reasons, making more the minimum payment is typically the best strategy for card users. “You get the purchase protections, travel points and cash back without having to pay interest and fees on your purchases,” Carlson says.
She acknowledges that paying more than the minimum can seem like a high bar to clear. About one-third of Americans carry a balance on their credit cards every month. “That may sound like a lot, but that means that two-thirds of Americans don’t,” Carlson says.
[Read: Best Cash Back Credit Cards.]
Tips for Making Your Minimum Payment
If you cannot make your minimum payment, do not simply ignore the situation. Instead, reach out to your card issuer. The Consumer Financial Protection Bureau notes that many issuers will work with you, especially if you face a financial emergency.
Explain to your issuer why you cannot make the minimum payment, and be ready to state how much you think you can afford to pay. Estimate when you can return to making normal minimum payments.
You can also look at your budget and identify cuts that could help you make your minimum payment. If your budget has no wiggle room, you could consider ways to earn more money through a side hustle or new job.
Another alternative is to explore a debt management plan from a nonprofit credit counseling organization if you are struggling to meet your obligations. “Don’t go it alone,” Carlson says. “Get professional help.”
These plans can lower the interest rate on your debt, she says, to help you pay it off within five years. Many people have achieved this, she says, by creating a payoff plan and seeing it through.
If you are in debt, you can be one of these success stories, Carlson says. “The first step is believing you can,” she says.
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Is It OK to Make Minimum Payments on Credit Cards?
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