5 Benefits of Paying More Than the Minimum On Your Credit Card
Making more than the minimum payment can eliminate debt faster, save money on interest and keep your credit healthy.
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Your credit card bill just hit your inbox or slid through the mail slot. How much are you going to pay? If you focus on the smallest number on the page — the minimum required payment — you’ll keep your account in good standing. But that's about it.
Paying the minimum by the due date avoids late fees. However, if you're carrying any meaningful amount of debt, making minimum payments won't get you much closer to paying it off. The optimal move, of course, is to pay your bill in full every month. When that's not doable, at least strive to pay more than the minimum. Here are five good reasons why.
1. You'll pay less interest
The minimum payment on your credit card typically includes all the interest and fees that have accrued during the statement period, plus a small portion of the principal balance — maybe only 1% or 2%. The exact calculation varies by issuer, but with any card, if you pay only the minimum every month, you won't really reduce your outstanding debt that much. You'll just be rolling it over, month after month, racking up more interest on the whole amount.
Every dollar you pay over the minimum reduces your actual debt, which reduces the amount of interest charged. So even if you can't pay off your balance in full, it's to your benefit to pay more than the minimum.
2. You'll reduce your credit utilization ratio
Your credit utilization ratio — the amount you owe on your card as a percentage of your credit limit — is an important component of your credit scores. If you need your scores to be shipshape because you'll be applying for new credit, such as another credit card, a mortgage or a car loan, you want your utilization as low as possible, preferably under 30%. Landlords and potential employers have also been known to check credit, so having your credit scores squared away can benefit you in other ways.
Paying more than the minimum on your credit card bills helps you chip away at your overall balance, which improves your credit utilization. Also, if you’re still using your cards for new purchases, paying more than the minimum is important because you're not letting the debt pile up. If possible, you should pay at least as much as you’ve charged in that particular month and as much as you can afford on top of that so your overall debt will continue to drop.
» MORE: How to pay off debt
3. You'll avoid maxing out your card
Maxing out your card not only damages your credit, but also may damage your credibility.
As previously discussed, maxing out a credit card hurts your score because it drives up your credit utilization ratio. Having a maxed-out card also makes you look bad if you’re applying for another loan. It says you’re not handling your available credit carefully enough. So if you go to apply for other types of credit while one of your cards is maxed out, you should expect to have trouble getting it, even if your credit score is within an acceptable range.
4. You'll stay on your issuer's good side
The bank that issued your credit card did so because it considered you a good risk. Based on your credit history, it felt confident that you would pay back your debts. But maxing out a card is very damaging to your credit. If this has caused your score to drop substantially since your application, your issuer might decide to close your account.
Don’t worry about this too much — it is unlikely to close your account if you pay on time, use the card regularly and generally keep up your part of the agreement. But if you have slipped recently and made a late payment, it wouldn’t hurt to send a message to the issuer that you’re still a good customer. Paying more than the minimum amount due on your account demonstrates that you’re committed to reducing your debt.
5. You could kick off a grace period
When you pay your credit card bill in full every month — meaning you pay the entire statement balance by the due date — the card's grace period kicks in. When a credit card grace period is active, you aren't charged interest on new purchases until after the next due date. See where this is going? If you always pay in full by the due date, you will never be charged interest, since you never carry a balance past that due date.
Is it possible to pay too much on a credit card? Yes, in the sense that you can pay more than your current balance. If that happens, you'll have a "negative balance," meaning the card issuer essentially owes you money. There are no penalties for overpaying a credit card. The amount you overpaid will be applied as a credit toward future purchases — or, if you let it sit long enough, will be refunded to you by your issuer.
With credit cards, setting priorities is key. First, always make your minimum payment on time. Then, pay more than that minimum. Ideally, you'll get to the point where you don’t need to carry a credit card balance at all. This will be good for both your credit score and your overall financial health.
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