It’s the end of the month, and your credit card bill just hit your inbox or slid through the mail slot. Where do you look first? If you focus on the smallest number on there — the minimum payment — you’re off to a good start. Making your minimum payment on time is absolutely crucial to keeping your FICO score intact and avoiding late fees.
But there are also good reasons for paying more than the minimum whenever you can.
1. You'll reduce your credit utilization ratio
Your credit utilization ratio — the amount you owe on your card compared to your credit limit — is an important component of your credit score. If your total credit card balance is more than 30% of your available credit, your score will likely drop. That will make it harder to get approved for credit in the future, and you’ll probably pay a higher interest rate on loans, such as mortgages and car loans. Because landlords also make decisions about prospective tenants based on credit history, you may also be unable to score a lease on the apartment you want.
But paying more than the minimum on your credit card bills helps you chip away at your overall balance, which improves your credit utilization and raises your score. 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.
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2. 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.
3. 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.
The bottom line: 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.