This article discusses how paying only the minimum amount required on credit cards each month eventually can have an adverse effect on credit history.
While paying only the minimum payment due on your credit cards each month is an option allowed by credit card companies, it isn’t always your best financial move. While doing so will keep you in good standing with credit card companies and won’t necessarily harm your credit, this practice could have other more long-term implications. If possible, try to pay more than the minimum to help you get out of debt faster and reduce the amount of additional interest you end up paying.
Reducing Limits
During tough economic times, such as those experienced during the recession of 2008 and 2009, credit card companies may decide to cut back on the amount of credit they extend to new and existing customers. If you are a cardholder who habitually makes only the minimum payment, the company may begin to question your ability to weather an economic downturn. As a result, it may choose to reduce your available credit line.
Higher Interest Rates
Unless you have a new credit card with a fixed introductory interest rate lasting for six months or a year, it is likely that your interest rate is not set in stone. If you are paying only the minimum monthly amount, the company may feel that it is not receiving an adequate return on its investment. As a result, it may choose to raise your interest rate if your card agreement permits it to do so.
Outstanding Balance
Another major contributing factor in determining your credit score is the amount you still owe on your credit cards. By making only the minimum monthly payments, you are slowing the process of reducing your outstanding balances. If you are looking to improve your score, a better approach is to pay more than the minimum payment to make your outstanding balance decrease faster. The lower your balance in relation to the amount of available credit, the higher your credit score will be.
Getting Additional Credit
If you pay only the minimum on your credit card balances, it could impact your ability to obtain new credit. If prospective lenders see that you only pay the least amount possible, they may view it as a sign that you are struggling to pay your bills. If you want to take out a loan to purchase a home or car, a lender may have doubts about your ability to repay. The lender may agree to give you the loan only if you agree to a higher interest rate.
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