When financial times are tough and money is tight, paying only the minimum payment on your credit card is tempting. You may be shocked to find out how impactful the benefits of doing just that can be. Here are our top 3 reasons to budget in paying more than the minimum on your credit cards:
- You can save a ton. Interest has a compounding effect that makes balances quickly increase. Depending on the interest rate and how much more you pay monthly, you could save hundreds – even thousands – by paying more than the minimum. Even paying an extra $1,000 (around $80/month) in a year will bring you ahead by between $150-$300 (depending on interest rate). That is real money back in your pocket.
- You will keep your credit healthy. According to Experian, 30% of how your credit score is calculated depends on card utilization. Your utilization is how much of your credit limit you are using (a ratio of your balance to your limit). Because so much of your minimum payment goes to interest, you will not make a swift dent to the balance. Paying more than the minimum can help you reduce the balance faster, thus reducing your overall utilization and positivity impacting your credit. This, along with other good financial habits (like making your payments on time) will contribute heavily to your good credit.
- Emergencies happen. It is best to pay for them with cash savings if you have it. But situations may not always allow for that. Having the maximum amount of available credit waiting in the event of an emergency is always a safe bet. Paying more than the minimum is a great way to ensure this over time. Not only will it help your credit, but paying down your balance consistently will add to the amount you have available to spend on surprise repairs and other emergencies.
Managing your credit cards can be challenging at times, but being financially responsible mitigates stress. The outcome is absolutely worth the challenge.