Your Credit Score Suffers
You might think “I make my minimal payment every month, and I am in good standing with my credit card. Why would making a minimal payment each month cause my credit score to suffer?”
Did you know that 30 percent of your credit score comes from the amount of debt you carry each month? This means the more debt load that you carry, the lower your credit score will drop. Although you stay in good standing with your credit card company, and you do not suffer the negative impact it can have to miss a payment, your credit score is still dropping due to your debt.
Now that you understand the dangers of making minimum credit card payments, do you know what to do to avoid this situation or get out of the cycle you have created?
If the answer is no, then follow the steps below.
How Do You Calculate Your Credit Card Payoff Date
In order to calculator your payoff date, youll need to figure out how much your balance is each day by adding transactions plus interest, add up all your daily balances to get your monthly balance, subtract the payments you will be making, then calculate your new daily balances for each day until your bill becomes 0, then count how many days that took. As this math can be quite complicated, its much easier to use the Discover credit card interest calculator.
Credit Card Mistakes You Don’t Even Know You’re Making
Learn how to change these common credit card behaviors to help prevent serious financial consequences.
Katie is a Writer at CNET, covering all things how-to. When she’s not writing, she enjoys playing in golf scrambles, practicing yoga and spending time on the lake.
Using a credit card while shopping can have its benefits — you can earn rewards, build your credit and double down on travel points and perks. But while a credit card can be convenient, there are certain risks you should know about.
If you pay a card late or don’t pay your balance in full, you can incur fees and extra interest charges that make your purchases more expensive in the long run, especially considering today’s rising interest rates, fueled by skyrocketing inflation. You could also wind up jeopardizing your , which could make it harder to buy a house or get a loan.
So what are the biggest mistakes well-meaning people commonly make with their credit cards — and what can you do to avoid financial pitfalls? I spoke with experts for their suggestions, and identified some of the most dangerous credit card behaviors. For more, learn how to get out of credit card debt and why now is the right time to pay off your credit cards.
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Pay Your Bill Multiple Times Per Month To Boost Your Credit Score
An effective for raising your score is to pay your credit card bill throughout the month, including before your closing date, so your credit utilization is reported as low. This is the rationale behind the 15/3 credit hack, which is a guideline thats meant to help you remember when to pay your credit card bill.
Again, this isnt required to avoid late fees and other penalties, but paying early is a good habit to get into, not just for the sake of your credit but for your overall financial management.
Takeaways: Your credit card closing date is the last day of your current billing cycle.
- Your statement closing date is the last day of your billing cycle. On this day, your statement for the 2831 day cycle is calculated.
- 21 or more days after your closing date is your payment due date. You need to make the minimum monthly payment by then to avoid late fees and penalties.
- If you pay your entire statement balance by the due date, you wont be charged interest.
- If you pay your balance before the closing date, your debts will be reported as lower, which may improve your credit score.
The Dangers Of Minimum Credit Card Payments
Unfortunately, too many American’s fall into the trap of charging for items they can’t immediately afford, and then instead of finding a way to pay off the balance they only make minimum payments. Although you may think that by making a minimum payment you are handling your debt, you are putting yourself in a dangerous financial situation.
Are you asking yourself “how could it possibly be a bad for me to make the minimal amount payments on my credit card bills?” It is a confusing concept when so many credit card companies advertise the many benefits of using their money while only needing to make small monthly payments. However, the choice to make minimal payments comes with dangers. Check out these three negative consequences that come from not immediately paying off your balance and only making minimal payments each month.
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Many Months Many Calculations
You know how to calculate the payment and interest charges for a single month, but how can you calculate over longer periods?
Its easiest to use a spreadsheet or a hand-built table to see the entire process of paying off your debt. The idea is the same as making an amortization table for a home or auto loan: Each row represents one payment.
It may take a small amount of spreadsheet wizardry, but you can take it slow or start with a template, and youll have a valuable tool. With each new row, look back at the loan balance at the end of the previous month . For a sample of how your spreadsheet might look, copy the images in this tutorial.
Understanding Your Bill And How To Pay It Can Cut Your Credit Costs
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A Tea Reader: Living Life One Cup at a Time
Having a credit card is practically a necessity in todays world. If you’re just starting out, making regular, monthly payments on a credit card is a good way to build a credit history and establish a strong . Here is what you need to know about how credit card payments work.
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Disclaimer: Whilst every effort has been made in building these credit card repayment calculators, we are not to be held liable for any special, incidental, indirect or consequential damages or monetary losses of any kind arising out of or in connection with the use of them. Full disclaimer. These tools are here purely as a service to you, please use them at your own risk.
How Credit Card Issuers Calculate Minimum Payments
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When you tend to carry a large, fluctuating credit card balance, figuring out your minimum payment feels like a guessing game you can’t win: How much is it going to be this month?
In general, the way your card issuer calculates your minimum payment depends on how much you owe. Typically, the minimum payment is a small calculated amount of your balance or a fixed dollar value whichever’s greater. As a rule of thumb:
If you owe a lot : Your minimum will be calculated based on your balance. Its usually about 2% of the balance, says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. The exact formula varies by card. More on that later.
If you owe some : Your minimum will probably be a fixed dollar amount, often $25, but it can vary by card. Every card has a fixed floor rate for minimum payments. If the calculation used to determine your minimum comes out to be less than that floor rate, you pay the fixed amount.
If you owe very little : Your minimum will be the full balance. For instance, if you owe $10, and the fixed floor rate is $25, your minimum payment will likely be $10.
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How Is Your Credit Card Minimum Payment Calculated
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If you’ve ever carried a balance on a credit card, you’ve probably seen the minimum payment option offered by your card issuer. Your credit card minimum payment is calculated based on your interest rate and your current balance and can fluctuate month to month based on how your balance changes.
A minimum payment is essentially the lowest amount the bank will accept as payment toward your balance each month. Paying the minimum allows you to keep your card in good standing, and also buys you time until you can pay more toward your overall balance. But if you carry a balance, paying only the minimum each month could cost you in interest charges and even hurt your credit score.
Percent Of The Balance + Finance Charge
Some issuers calculate the minimum payment as a percentage of the balance at the end of the billing cycle, plus a monthly finance charge. So, for example, 1% of your balance plus the interest that has accrued. Lets say your balance is $1,000 and your annual percentage rate is 24%. Your minimum payment would be 1%$10plus your monthly finance charge$20for a total minimum payment of $30.
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Types Of Credit Cards
Different types of credit cards suit the needs of different types of spenders. For simplicity, it would be wise to find one that aligns best with the user’s financial intentions for instance, a person who is not an extravagant spender and not interested in anything except getting the best bang for their buck can probably live with just a no-fee cash back card. However, it is very possible for people to carry multiple credit cards for their different advantages, even if it requires a bit of management. What’s important is that they are all paid off in a timely manner.
Cashback: These offer cashback on all purchases, usually 1%, 1.5%, or 2%. Another type may have up to 5% cashback on selected categories of merchandise or services, which normally rotate quarterly.
Rewards: These make up the bulk of most credit cards. The types of rewards usually range between airline miles, hotel bookings, and dining benefits. Credit cards that offer more rewards or miles will generally require annual fees, and it is up to each spender to evaluate their spending habits to decide whether a no- or low-fee card with low rewards is preferable to a high-fee card with high rewards.
Should I Borrow On A Credit Card
Whilst there are often some very good deals out there on credit card interest rates , you should always check the small print on each offer to find out how long the deal lasts.
As an example, a 0% interest deal may last for 6 months, at which point the interest rate might rise to 15%. Get caught up in that and you’ll suddenly find yourself paying high interest on your credit loan at the end of the first 6 months.
Most financial advisors would agree that although credit cards are convenient, they are often a very expensive way of borrowing money and should be avoided if possible. Borrowing money long term on a credit card does not make good financial sense. If you already have a large credit card bill, shop around and see if you can move the balance across to a credit card with a lower rate. It’s well worth the effort.
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Your Credit Card Costs Go Through The Roof
There are many reasons why it is dangerous only to make a minimum amount credit card payment, but the biggest reason is the amount of money you will spend over time. On average credit card, companies charge between 15 and 20 percent on all balances that carry over and are not paid off. That 15 to 20 percent is not a one-time fee per charge, it is an ongoing charge for the balance each month.
So if you were to charge $2,500 to your credit card and only pay the minimum payment of $50, at 15 percent interest it would take you six and a half years to pay this debt off. Additionally, in that six and half years you will have paid $1,450 in interest. Another way to look at it as you are taking six and a half years to pay 60 percent more than the sale price of the object you didn’t want to wait to buy.
Financially speaking, your credit card costs go through the roof by making minimal payments each month, and you are simply wasting your money.
How Much Will Making Only Minimum Payments Cost You
This credit card minimum payment calculator figures how much interest you will…show more instructions
- The calculator assumes you stop charging more so the balance stops rising due to spending.
- Make sure to notice how it’s not just the interest charges you pay that cost you so much, but it’s also the interest you could be earning on those charges if you were investing them rather than paying them to the credit card company that hurts so bad.
If you’re not sure what your minimum payment is just check the credit card disclosure statement and there should be language similar to your minimum payment will be 2% of the balance or $10, whichever is higher.
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Know Your Payment Policies
Missing payments will not make you popular with card companies, but it doesnt mean you should be a target for abuse or harassment. The , was passed to give consumers some protection in both of those areas.
If you decide to put your card away while trying to catch up, the card company cant penalize you by assessing an inactivity fee.
Why Does My Credit Card Say $0 Minimum Payment Due
It depends. Have you already paid off last month’s credit card charges? If so, then you may not owe another credit card payment, even if you technically still have debt leftover on your card. That’s because your current credit card balance isn’t necessarily the same as your statement balance. Your statement balance is made up of charges that you made during your most recent billing cycle, and these charges won’t be due until the close of the billing cycle. Another possibility: Some lenders offer rare opportunities to skip making a minimum payment, without getting hit with a delinquency . A lender might also offer a payment free period for other various reasons.
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Paying Before The Due Date
You don’t have to wait until the due date to make your payment. In fact, you should make your credit card payment before the due date, as paying your bill early can improve your credit score. It also gives you time to confirm your payment has posted to your account. If there’s an issue with your credit card payment, you’ll have time to make it up and avoid late payment penalties.
What Happens With A Lower Credit Card Balance
If you have a low balance, your minimum payment amount could be much smaller. Still, unless it’s really tiny, it will likely reflect your lenders minimum payment floor, rather than 1% to 3% of your balance.
For example, if youve whittled your balance down to $1,000, then your lender may charge you based on whichever amount is higher:
- $1,000 x 2% + interest = $1,000 x .02 + $0 = $20
- $1,000 x 3% = $1,000 x .03 = $30
In this scenario, the lenders $35 minimum payment floor is higher than 2% of your balance, plus interest it’s also higher than a flat 3% of your balance.
If, however, your lender had a smaller minimum payment floor, such as $25, then your minimum payment would equal $30.
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Whats The Difference Between A Closing Date And A Payment Due Date
Your credit cards payment due date is the date by which you must make at least the minimum monthly payment determined by your statement balance, otherwise that payment is considered late.
You do not need to pay any part of your credit card bill before the closing date. Rather, the closing date determines how much you owe for that billing cycle, and how much you must pay by the due date.