How Your Monthly Credit Card Minimum Payment Affects Your Credit Score

Learn how making minimum payments impacts you.

Each month, your credit card company provides you with a statement that includes a list of all charges and payments, your ending balance and the minimum payment you owe. As someone in debt, you might be paying only the minimum amount due each month in an effort to keep your credit score from tanking. You could be doing more harm than good, however, by not opening up your wallet a little wider.

Find out how your credit score and finances are impacted by the credit card mistakes you might be making.

What Happens to Your Credit Score If You Only Pay the Minimum

Your monthly minimum payment is a portion or a percentage of your total balance on your credit card that you are required to pay off each month. As a credit card user, you’ve likely been tempted to make the minimum payment listed on your statement instead of paying off the full amount and becoming debt-free. It sounds easy enough: Just pay the minimal amount your provider asks for — maybe $20 to $25 — pay it on time, and avoid a late fee or penalty APR — but this action doesn’t come without a price.

Although making timely minimum payments can keep you in a creditor’s good graces, take a look at how paying the least amount possible can also cause your score to plummet.

Positive Payment History

Whether you make the minimum payment or pay your balance in full, your credit history will show “paid as agreed,” which is good. In addition to racking up a positive payment history, paying the minimum also allows you to avoid late payment penalties, which can be as expensive as a high APR. For example, the average fee for a late payment is $27, and the maximum can be up to $38, according to Forbes.com.

Keep in mind, however, that although your credit report will reflect a positive payment history if you make on-time, minimum payments, other factors are involved in your credit score and how creditors evaluate your creditworthiness. Carrying a balance, for example, could hurt your score.

Find Out: How to Check Your Credit Score

Credit Usage

With a credit card, pay attention to your total balance in relationship to your credit limit. This is what is known as your credit utilization ratio — the amount of credit you use compared with the amount of credit available to you.

According to Experian — one of the three major credit bureaus — you should keep credit card balances below 30 percent of your available credit. A high credit utilization ratio indicates you are relying too much on credit, which can cause your credit score to fall. For example, a credit card with a limit of $3,000 should never have a current balance above $900.

Overall, the best practice is to pay off your debt each month because carrying a balance doesn’t help your credit score.

Learn: How to Calculate Your Debt-to-Income Ratio

Additional Interest Accrued on Unpaid Balances

Carrying a balance can also hurt your bottom line because the credit card company charges you interest on the unpaid portion. As of August 2017, the average annual percentage rate was over 13 percent, according to the Federal Reserve. At 13% APR on a $5,000 balance, you’ll pay around $54 in interest alone — and get nothing in return.

Interest charges could also increase if you forget to make the minimum payment due. Missing a payment could cause your credit card company to void your grace period on future billing periods until you’ve paid your balance in full.

Typically, the grace period allows you to avoid interest accruing on your credit card purchases between the date of your purchases and your payment due date. No grace period means interest starts accruing on the purchases from the date of the purchase making it more difficult for you to reduce your debt.

Check Your Reports

Checking your credit reports allows you to review and monitor your payment history, which can help you successfully manage your credit. You can request free copies of your credit reports once every 12 months — from each of the three credit bureaus — by visiting AnnualCreditReport.com.

When you review your credit report, you’ll see the notation “paid as agreed” for each payment if you’ve paid at least the minimum each month. You can also see the credit limit for each of your credit cards so you can calculate the percentage of your available credit you are using at any given time.

Use Credit in a Way That Benefits You and Your Credit Score

Only making a minimum payment on your credit card each month won’t improve your credit score, and you’ll pay interest on the remaining balance, which won’t help you get out of debt. As an alternative, create a plan to pay off your credit card balances and become debt-free, so you can grow your wealth and be more financially stable in the long run.

Up Next: 30 Ways to Dig Yourself Out of Debt

Natalie Campisi and Paul Sisolak contributed to the reporting for this article.