When it comes to credit card payments, keeping a little more cash in your pocket now could mean less cash in your pocket later and a poor credit score. A minimum payment may keep your account current and in good standing with your creditor, and be reported as such. However, your outstanding balance factors into your credit score, too, and can pull your score down.
Effect on Balance
According to the website MyCreditUnion.gov, it could take years or even decades to pay off a credit card if you only pay the minimum payment due every month. The Better Business Bureau warns consumers that paying only the minimum balance each month can, in some cases, result in a credit balance that increases each month when only paying the minimum. Your balance or your credit utilization is used to calculate your credit score.
Credit Score Calculation
According to myFICO.com, your FICO score is determined by five factors. Payment history is the biggest factor, accounting for 35 percent of your score. However, the amounts owed accounts for 30 percent of your score. The amount owed is used to monitor for over-extension of credit. If you are close to maxing out a card, this may indicate future risk for the lender. Your VantageScore credit score is calculated a little differently. The score is determined by six factors. Payment history accounts for 32 percent of your score, and balances account for 15 percent of your score.
Effect on Credit Score
Owing a lot on one card might not have as significant of an impact on your credit score if you have other credit cards with low balances. Your score will be based on the total amount you owe on all credit cards, proportionate to the total amount of your credit card limits. Additionally, the amount owed or credit utilization can be a quick factor to improve your score, if you need to improve it fast. You might be able to pay off or pay down your balance to improve your score before seeking new credit.
When It Helps
Making the minimum payment, if this is all you can afford or if it is an occasional occurrence, is better than paying less than the minimum or not paying on time. Paying the minimum payment on time each month is enough to keep your credit card current and your payment history positive. Consequently, your on-time minimum payments can be the biggest factor in your score. However, paying more when you can to decrease your balance does your score the greatest favor.
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.