What Happens to My Credit Score if I Only Pay the Minimum?

Published on Aug 01, 2014 08:19 am

When it comes to your finances, seeing a small minimum payment due on your credit card statement can give you a false sense of security.  Paying only the minimum on your credit cards can affect two factors that help make up your credit score—your payment history and your credit utilization.

Positive Payment HistoryAs long as you’re paying on time, paying only the minimum still counts as paying your credit card as agreed. Your payment history measures how often you pay your bills on time, and it’s a major component of your credit score.

When a credit card company reports to the credit bureaus each month, it simply indicates whether you’ve paid as agreed or if you’ve fallen behind. Technically, if you’re making the minimum payment on your credit card, you’re meeting your contractual obligations, which is good news for your credit score. However, paying the minimum can have an adverse effect on your credit.

See Also: Credit Card Payoff Calculator

Credit UsageWhen you only make the minimum payment on your credit cards, you’re not doing much to lower your credit card debt.  Another major component of your credit score is your credit utilization ratio, which measures how much of your available credit you’re using. Carrying a balance that’s more than 30 percent of your credit limit may harm your score.

For example, if you have a $2000 credit limit, it may be helpful to keep your balance under $600. If you owe more than $600 but only make the minimum payment, chances are there’s not too much left over after interest payments to make a substantial dent in your debt.

Additional Interest Accrued on Unpaid BalancesYour credit score doesn’t penalize you for paying more in interest; however, when you only pay the minimum, funds paid in additional interest could be going toward lowering your balance. For example, at a 15% interest rate, carrying a $2,000 balance for a year costs you $300 in interest alone. While your credit score doesn’t take a hit for the interest paid on a balance, your score could improve if the $300 in interest fees were used to pay down your balance, subsequently improving your credit utilization ratio.

Check Your ReportChecking your credit report will give you an overview of your current balances, credit limits, as well as a record of your payments. If you see an error such as an unreported credit limit increase, having the creditor update that information could impact your credit score. For example, if your credit limit was increased from $1000 to $2000, a $500 balance goes from using 50 percent of your available credit to 25 percent. It may also help you understand your credit situation better for when you might need it most – like getting approved for a mortgage or taking out a school loan.

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About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

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