One of the simplest and quickest ways to build credit is to get a credit card and use it regularly and responsibly. “Responsibly” means making reasonable purchases and paying them off, not running yourself into debt for things you don’t need and can’t afford.
Millions of Americans use their credit cards responsibly. But millions of others have been tempted by the siren song of the minimum payment due — the smallest amount you can pay without incurring a penalty from your credit card issuer.
Everyone has a tight month now and then. At such times, paying the total balance on your card can seem so optional, especially compared with other bills that don’t give you the option of paying less than the total amount you owe. (Having trouble figuring out how to stretch your paycheck to pay your bills? Read how to build a budget.)
But carrying a balance from one month to the next has some very real consequences, and those consequences get heavier with each month you slide by on the minimum. When you make a habit of paying only the minimum, you can soon find yourself under a mountain of debt.
» MORE: How to pay off debt
1. Your credit score will start to fall
Making minimum payments over the course of just a few months can really mess up your credit score. This is because 30% of your credit score is determined by how much debt you carry, particularly on revolving credit accounts, such as credit cards. Piling charges onto your card and failing to pay them off is like putting a dent in your credit score every month; over time, it can add up to a lot of damage.
The best thing to do is keep track of your spending and make sure you don’t charge more than you can comfortably pay off at the end of the month. Otherwise, you can expect a nasty surprise the next time you check your credit score.
Get Your Free Credit Score
- Get your free score every week.
- Set goals and see your progress.
- Signing up won't affect your score.
2. Your minimum will balloon
Credit card issuers use different formulas for calculating your minimum payment, but it usually comes out to a certain percentage of your total balance. A typical issuer might require a minimum of, say, 4% to 6%. If you pay only this amount every month and continue to make charges on the card, your total balance is going to rise substantially. In turn, that 4% to 6% that seemed so manageable when you had a $1,000 balance can easily get out of hand. You could find yourself struggling just to make the minimum — let alone start paying enough to really start whittling down your debt.
3. Your total credit card costs will skyrocket
All the while, interest will be accruing on your unpaid balance. When you carry a balance from month to month, you get no “grace period.” Interest starts accruing on your purchases immediately.
Plus, most credit cards charge a fee for exceeding your credit limit, which is easy to do when you’re paying so little of your bill every month, so be sure to avoid this mistake by making full-size payments on your card.
Credit cards are helpful tools for building good credit, but don’t give in to the temptation to only make minimum payments, no matter how convenient it might seem. There are serious and expensive consequences to not paying the full bill every month, so be sure keep a close watch on your spending to avoid this trap.
This article has been updated. It was originally published Oct. 4, 2014.