Does Making the Minimum Payment Affect Credit Score?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

When your credit card bill rolls around each month, it can be tempting to only pay the minimum payment. This is especially true if you’re having financial hardship or if your credit card balance is high. While this may seem like a good option at first, you may be paying for this decision for a long time to come. This is because only paying the minimum on your credit card balance means you’ll be accruing interest on the remaining balance.

While making these smaller payments may not cause a direct hit to your credit, continuously failing to pay your credit card balance off each month can put a dent in your finances and credit health. Keep reading to learn more.

What are credit card minimum payments?

Minimum credit card payments are the lowest amount you can pay toward your card balance and keep your account in good standing. Failing to make this minimum payment could result in late payment fees and directly affect your credit.

In fact, your payment history accounts for up to 35 percent of your FICO® credit score. This means that if your credit card company reports your missed payment to any of the credit bureaus, it could have a big impact on your credit.

How are minimum credit card payments calculated?

Each credit card company sets its own rules and regulations for how it calculates minimum credit card payments. Typically, minimum card payments are based on your account balance. The two most common ways to make this calculation are the flat percentage method and the percentage plus interest and fees method.

Flat percentage

Many credit card companies choose the flat percentage method due to its simplicity. With this method, your minimum payment is a set percentage of your total balance due. For example, if minimum payments are 3 percent and your total balance is $1,000, your minimum payment would be $30.

However, some credit card companies set a minimum amount for this payment due. So, if you owe less than this amount, they could raise it to the smallest amount allowed. For instance, if the minimum payment allowed using the example above is $35, your minimum payment would be $35 instead of $30.

The one exception to this rule is if your total balance due is lower than the set amount. In this case, you’d need to pay the total amount on your credit card. For instance, if your credit card company sets a $25 minimum payment amount but you only have a $20 credit card balance, your payment due would be $20.

Percentage plus interest and fees

Other companies use the percentage method detailed above but add on any fees and interest you owe. For example, if your minimum balance is $35 but you also owe $70 in interest and a $40 late payment fee, your total amount due would be $145.

All credit card companies clearly note the minimum amount due on each billing statement. This lets you know exactly how much you must pay to keep your account in good standing. The Credit Card Accountability Responsibility and Disclosure (CARD) Act, requires credit card companies to list how long it will take you to pay your balance in full. They must also show how much you’ll pay in total if you only make minimum payments. Be sure to evaluate this information before choosing how much of your balance to pay.

Does paying minimum on credit card balance affect your credit score?

Paying the minimum on your credit card balance may not directly affect your credit—in fact, you may not notice a change in your credit score at all. On the other hand, depending on your specific financial situation, paying the minimum balance could impact your credit utilization ratio, which does affect your credit.

Your credit utilization ratio compares the total amount of revolving credit you have available to the amount of credit you’ve already used. This ratio accounts for 30 percent of your FICO credit score. If your ratio goes too high, it could damage your credit, so it’s recommended to keep a credit utilization ratio of 30 percent or lower.

More importantly, you’ll owe interest on any unpaid part of your credit card balance. For instance, if your credit card balance is $500 but you make the minimum payment of $35, your remaining balance of $465 is subject to interest. These interest costs can really start to add up and make it harder to pay off your credit card balance.

It’s always best to pay as much of your credit card balance as possible each billing cycle. The only exception to this rule is if your credit card comes with a 0 percent APR introductory rate. In this case, you won’t accrue interest on your balance due until the end of this introductory period. However, a high credit card balance can still impact your credit utilization rate.  

Making the minimum payment is better than not making any payment. Most credit card companies will report missed payments to the credit bureaus. Any missed payment can have a direct impact on your credit. Additionally, you may be required to pay a late payment fee to your credit card company, which will only increase your total amount due.

Tips for paying your credit card balance in full

Paying your balance in full at the end of each billing cycle offers a variety of benefits. First, it can help you save money by avoiding interest payments. Secondly, it can help you keep your credit utilization rate at an acceptable level. Finally, it allows you to have more revolving credit available for emergencies. 

If you’re struggling to pay your full credit card balance each month, here are some tips to help you tackle your debt effectively.

Create a budget

Having a budget in place is a key step to financial freedom. Without a budget, it can be difficult to know where your money is going or how much you have available to spend. Ultimately, this lack of planning can lead to overspending and leave you unable to pay your credit card balance in full. Fortunately, numerous free budgeting apps can make tracking your spending quick and easy.

Talk to the credit card company

If you’re going through an unexpected financial hardship, don’t wait until your bills pile up. Instead, reach out to your credit card company as soon as possible and explain your current situation. Your credit card company may be willing to reduce your interest rates or lower some added fees to make your monthly payments more affordable.

Consider a balance transfer

If you have a high-interest credit card and you’re struggling to pay your balance in full, now may be the time to consider transferring your balance to another card with lower interest rates. This step can be especially beneficial if you have a high balance that could take several months to pay off. Keep in mind that you may incur a one-time fee for transferring your balance to a new credit card.

Pay what you can

If you can’t pay off your entire credit card balance, you should always pay as much as you can. Even if you can only pay an extra $25 a month, it can help reduce your principal so you don’t owe as much in interest payments.

Make a plan

If you’re at the point where you can pay the full balance on your credit card, it’s time to make a plan. There are two popular debt repayment strategies to consider:

• Snowball method: This method encourages you to pay off your debt from the smallest to the largest balance. The idea is that as you pay off each account, you can use that money toward paying off your other accounts.
• Avalanche method: The avalanche method works to help you save money in the long run by paying off the debts with the highest interest rates first.

If you’re considering only paying the minimum on your credit card balance, you might want to think again. Not only will you end up spending more money to repay your debt, but you risk having your credit score negatively impacted. Instead, if you can, pay more than the minimum payment due and take control of your finances.

Another step toward taking control of your finances is regularly checking your credit report and score. Get your free credit assessment from Lexington Law today to take stock of how you’re doing and decide if you want to make any other changes to how you manage your credit.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.