Why Only Paying the Minimum Hurts Your Credit

Many people think that making minimum payments is enough to keep up a good credit score. However, if you don’t take the time to ask, “What is the problem with paying only the minimum?” then you could find yourself in trouble later on. 

Here’s what you should know about the downsides of paying only the minimum on debt.

Why only paying the minimum hurts your credit

What is the problem with consistently paying the smallest amount your credit card issuer requires? After all, as long as you pay the minimum every month, you can avoid the impact of a late payment on your credit. 

However, this financial choice keeps credit utilization high. It can also hurt you financially, keeping you in debt that impacts your credit score and prevents you from building your savings.

Does paying the minimum hurt credit? While it’s better than missing a payment, it’s not the best way to deal with debt. 

Your balance on any revolving debt, such as credit cards, is one of the top factors considered in your credit score. If your credit card balance is close to your limit, that can weigh down your score, even if you’re keeping up with your payments.

This effect is worsened by the way that credit bureaus rely on snapshots of your balance at a specific moment. If that snapshot is taken before you make a payment, it could show a higher utilization ratio. That’s the number that lenders will see when you apply for credit.

Only paying the minimum vs. on-time payments

Making a minimum payment on time each month prevents your card issuer from reporting a late payment to the credit bureaus. A late payment can seriously impact your credit. 

However, on-time payment status and credit utilization are two separate factors. When you’re trying to build credit, on-time payments may not be enough, especially if you’re in significant debt.

Understanding the costs of only paying the minimum payment

Only making minimum payments can carry hidden costs over time. The minimum payment is calculated by your credit issuer to just barely keep your account afloat. This means that a large percentage of the payment will go straight to interest. Very little is used to pay down what you actually owe. 

When you make minimum payments, you continue carrying a high credit balance. This means that you’ll pay more in interest over the life of your debt. 

Even if the monthly payment seems reasonable, you will be paying down the debt for much longer. You may be shocked by how much that additional interest will add up to, compared to your original balance.

If you’re making only the minimum payments, that also reduces your financial flexibility. Interest eats away at your budget, and you’ll have less credit available in case of emergencies. You’re standing close to the edge, and making higher payments to reduce your principal is the best way to step back.

Does paying the minimum hurt credit? While it may not have a direct impact, it puts you in a position where even minor setbacks can lead to worsening debt and a spiraling credit score.

How to stop relying on paying the minimum payment

You can take some simple steps to stop relying on minimum payments each month. Start by setting a base target that exceeds the minimum payment, even if it’s only a little more. Consider this amount nonnegotiable, as if it were the minimum set by the card issuer itself.

If you have multiple cards that you’re making minimum payments on, target the one with the highest interest rate first. That will have the biggest impact. At the same time, continue to make minimum payments on your other debts. When you’ve paid one card down, start paying extra on the debt with the next highest interest rate.

If high utilization is impacting your credit, there are other steps you can take. Looking to establish better credit? Kikoff can help you get started with reported, on-time activity while you work on reducing revolving balances.

Plan to move beyond minimum payments

You may be able to keep your head above water for now by only making minimum payments, but it’s not an effective long-term strategy. It keeps your utilization high and costs you much more in interest. To strengthen your credit and your finances, take practical steps toward making higher payments and reducing your debt.