Monday, February 6, 2023

How Making Minimum Payments Can Affect Your Credit Score?

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A credit score is a mark of your financial history and habits. Lenders refer to it to judge your financial capabilities. A higher credit score gives you better chances of getting discounts and offers from lenders. It also helps you in getting loan amounts at a lower interest rate. Many factors influence your credit score. One of them is your credit card bill. Let us see how making minimum credit card payment online affects your credit score.

Minimum Amount Due on a Credit Card

Credit cards let people have more repayment flexibility. The bank expects you to use your credit card every month. The minimum amount due is a set sum of money decided by the bank on a credit card. It is the minimum amount of money that you have to pay every month before the due date to avoid any late charges. The total amount due is the amount of money you have spent through the credit card in that month. The minimum amount due is usually 5% of this value. 

The minimum amount due is basically to give more flexibility to the customer in case they have other expenses and can’t pay the entire credit bill in that month. The rest of the bill gets added to the principal.

How does making a minimum payment affect your credit score?

The concept of minimum payments in a credit card is to give the customer more leeway concerning the credit bill. In the ideal state, you should be able to clear your credit card bill every month. It is only when some emergency expenses come up that you use the minimum payments option. It will help you avoid any late charges. 

But if you make minimum payments every month, it can lead to disastrous results. Primarily, you will be in a loop of financial mismanagement hindering your progress. You will also have rising amounts of credit card debt with added interest. Most importantly, your credit score will be negatively impacted. Credit card repayment behaviour is one of the most crucial factors affecting your credit score. It is because it affects your repayment history and the credit utilisation ratio.

Your goal should be to avoid using the minimum payment facility as much as possible. Moreover, keep your credit utilisation ratio lower than 30%. It will ensure that you don’t have a long credit bill every month. A lower credit bill will allow you to pay your entire credit bill.

Effects of making minimum payments a habit

If you make a habit of making minimum payments on your credit bill every month, you will end up facing disastrous consequences. Your debt will keep increasing, and you will have to pay more interest. At the outset, making minimum payments might seem like you are saving money for the month, but it is the exact opposite. You end up paying much more in interest and overall debt.

Also Read: Facts to Know About Loans Against Credit Cards

Moreover, you will also have the mental stress of outstanding payments. It will affect your other finances. Hence, you should be financially disciplined and make sure you pay all your bills regularly.

Advantages of Minimum Payments

Conceptually, minimum payments are a way of helping out customers with their credit bills. It gives them relaxation to pay their bills in peace. We have listed out some advantages of making minimum payments.

  • Gives repayment flexibility to customers.
  • Helps them avoid late charges.
  • Gives them leeway to manage their other expenses.
  • Helps them maintain their credit score.

How to Maintain a good Credit Score?

A good credit score has many advantages in the modern world. It helps you get discounts and offers from lenders. It is especially beneficial in the long run as it will help you get good deals in loans and interest rates. To maintain a good credit score, you should stay financially disciplined. Here are some tips to help you with that.

Make Payments on Time

A financially responsible person is prompt in the payment of bills and EMIs. You should ensure you never default on your loan repayments, credit bills, or other EMIs. Using the minimum payment option for a credit bill is better than avoiding the entire bill. This is the most basic factor that influences your good credit score.

Low Credit Utilisation 

A credit card allows you to spend almost three times your income every month. But it is in your best interests to only use 30% of this value. This not only keeps your finances in check but also helps you to avoid payment defaults. It builds your credit cibil score as it marks the fact that you can manage your finances well.

Avoid Multiple Credit Inquiries

A lender makes a credit inquiry whenever you apply for a loan or credit card. It is a report of your credit history and credit score. Having too many credit inquiries does not augur well for your credit score. This is because a lender does not want to give more loans to someone already in debt. Therefore, you should manage your finances in a manner that you don’t get multiple credit inquiries.

Following these tips can help you maintain a good credit score. Use the minimum payment option only when required, as making it a habit may do more harm than good to your financial health.

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