Maintaining a good credit score is crucial for financial well-being. It impacts various aspects of personal finance, including obtaining loans, credit cards, and favourable interest rates. One factor that significantly affects your credit score is how you make payments toward your credit card bills. Even making minimum payments affects credit scores. Shriram Finance understands the importance of creditworthiness and offers a range of credit solutions to help individuals manage their finances responsibly and improve their credit scores.
In this ultimate guide, we will learn how making a minimum payment affects the credit score . We will also learn the impacts and solutions to avoid the situation of making minimum payments.
What happens if I pay only the minimum amount due?
When you receive your credit card statement, it includes a minimum amount due. This is the minimum payment required to keep your account in good standing. If you choose to pay only this minimum amount, it has consequences for your overall outstanding balance. By paying just the minimum payment, credit scores can be affected .
Paying minimum due affects credit score and can lead to higher interest charges over time. The remaining balance accumulates interest, increasing the total repayment amount significantly.
For example, let's say you have a credit card balance of ₹50,000 with an annual interest rate of 18%. If you pay only the minimum amount due, let's say 5% of the outstanding balance (₹2,500), it would take approximately 7 years to repay the entire debt, with a total interest payment of over ₹34,000.
How Can Making Minimum Payments Affect Your Credit Score?
1. Impact on Repayment History
Your repayment history plays a significant role in determining your credit score. Making at least the minimum payment consistently indicates that you are meeting your financial obligations. However, making minimum payments can affect your credit score.
While consistently paying the minimum due will affect your credit score and may not significantly improve your credit score, it can prevent it from dropping further. It is essential to make timely payments to maintain a positive repayment history and avoid damaging your credit score.
2. Effect on Credit Utilisation Rate
Credit utilisation rate refers to the percentage of available credit you are using. Carrying high balances relative to your credit limit can negatively impact your credit score. Making only minimum payments while continually using your card can increase your credit utilisation rate, potentially lowering your score. Paying the minimum due on a credit card affects your credit score, and you may not get better finance options in the future.
For example, if you have a credit limit of ₹1,00,000 and a balance of ₹80,000, your credit utilisation rate is 80%. By consistently making minimum payments without reducing the balance, your utilisation rate remains high, hurting your credit score.
How do you Pay More by Making Only Minimum Payments on your Credit Card?
1. High-Interest Charges
One of the significant drawbacks of paying only the minimum amount due is the higher interest charges incurred over time for your credit card balance. By extending the repayment period, you end up paying significantly more in interest charges. Let's compare two scenarios:
Scenario 1: Paying only the minimum amount due
Credit card balance: ₹50,000
Annual interest rate: 18%
Minimum payment: 5% of the outstanding balance (₹2,500)
Time to repay debt: Approximately 7 years
Total interest paid: Over ₹34,000
Scenario 2: Paying a fixed monthly amount
Credit card balance: ₹50,000
Fixed monthly payment: ₹5,000
Time to repay debt: Approximately 12 months
Total interest paid: Around ₹8,500
As you can see from this comparison table, by making only minimum payments, you end up paying more than four times the total interest compared to paying a fixed amount each month.
2. Longer Debt Burden
Paying only the minimum amount due keeps you in debt for a longer period. The longer you carry a balance on your credit card, the more challenging it becomes to get out of debt. It is crucial to pay off your credit card debt as soon as possible to free up financial resources and reduce the burden of interest charges.
3. Potential Negative Impact on Future Credit Applications
Consistently making only minimum payments may raise concerns for future lenders. Lenders prefer borrowers who demonstrate responsible credit management by paying off their balances in full or at least significantly reducing their outstanding balances. By consistently making minimum payments, you may be viewed as a higher-risk borrower, potentially impacting your chances of obtaining credit in the future. These details will be displayed on your credit report while applying for financial options in the future.
Conclusion
Making minimum payments on your credit card can have an impact on your credit score and overall financial health. While it is important to meet your financial obligations and make timely payments, paying only the minimum amount due may not offer significant benefits in terms of improving your credit score. To maintain a good credit score, it is crucial to pay off your balances in full whenever possible and maintain a low credit utilisation rate.
Regularly checking your credit report and taking steps to improve your credit score, if necessary, is essential. Shriram Finance understands the importance of good credit health and provides a range of credit solutions to help individuals manage their finances responsibly. Whether it's loans for commercial vehicles, two-wheelers, cars, homes, or personal finances, Shriram Finance offers options to suit various needs. Apply for a commercial vehicle loan today and cruise through your business journey.
By utilising these solutions effectively, individuals can work towards improving their creditworthiness and achieving their financial goals.
Take control of your credit score today and explore the offerings provided by Shriram Finance to manage your finances efficiently. Remember, responsible financial behaviour leads to better opportunities and enhanced financial well-being.
Key Highlights
- Making only minimum payments can result in higher interest charges over time and prolong your debt burden.
- Consistently paying only the minimum amount due can negatively impact your credit utilisation rate and potentially lower your credit score.
- Lenders prefer borrowers who demonstrate responsible credit management by paying off their balances in full.
- Regularly checking your credit report and taking steps to improve your credit score are essential for maintaining good financial health.
Frequently Asked Questions
1. Does it hurt my credit score if I pay the minimum?
Making only the minimum payment on your credit card can impact your credit score. While it may not immediately hurt your score, consistently paying only the minimum amount due can negatively affect your credit utilisation rate and potentially lower your credit score over time.
2. Does the minimum monthly payment affect your credit score?
Yes, the minimum monthly payment you make towards your credit card bill can affect your credit score. Lenders prefer borrowers who demonstrate responsible credit management by paying off their balances in full. Consistently making only the minimum payments can result in higher interest charges over time and prolong your debt burden.
3. What happens if I pay only the minimum amount due?
Paying only the minimum amount due on your credit card bills can lead to higher interest charges and an extended repayment period. It may also negatively impact your credit utilisation rate, which is the amount of credit you have used compared to your total available credit limit. This, in turn, can potentially lower your credit score.
4. Is it better to pay in full or monthly?
It is generally recommended to pay off your credit card balance in full each month to maintain a good credit score. Paying in full showcases responsible financial behaviour and helps you avoid accumulating high-interest charges. However, if you are unable to pay in full, making more than the minimum payment can help reduce interest costs and decrease your overall debt burden.
5. What has the biggest impact on your credit score?
Several factors influence your credit score, but two key factors that have a significant impact are payment history and credit utilisation rate. Consistently making timely payments towards your debts positively affects your payment history, while maintaining a low balance in comparison with your total credit limit improves your credit utilisation rate.
