Credit cards give you the convenience of paying just a small percentage of your balance each month. While the minimum payment is easier to make, it typically costs much more in the long run. Here are a few reasons you should pay more than the minimum on your credit card.
When you make the minimum payment, you end up paying more money in finance charges. You could save hundreds, possibly even thousands, in interest by increasing your monthy credit card payments.
For example, if you have a $2,000 balance at 14% APR, paying the minimum will cost $1,833.24 in interest. If you instead send $100 a month and make no future charges, you'll only pay $290.77 in interest. (Based on Bankrate.com's Minimum Payment Calculator and minimum payment calculated at interest+1% of balance)
2. Pay The Balance Off SoonerNot only do you pay more in interest, you also end up paying the credit card balance over a longer period of time. Fro example, it would take more than 14 years to pay off a $2,000 credit card balance (at 14% APR) when you only make minimum payments. On the other hand, sending $100 a month would allow you to pay the balance in just under 2 years (again, assuming you make no future charges on the card and your APR doesn't change).
- the ratio of your credit card balance to your credit limit - is 30% of your credit score. If your credit card balance is high relative to your credit limit, it costs precious credit score points. Minimum payments only decrease your balance a little at a time. You'll typically see a credit score increase when you bring your balance down sooner with higher payments.
If you plan to make a home or other large credit purchase in the near future, you'll probably need to pay off some debt to qualify for a loan. Unless your balance is already very low, minimum payments won't get you there fast enough. Raise your payments to pay off credit card balances before you make an application for a large loan.
5. Increase Your Available CreditYour credit cards are useless if you don't have any available credit. And if your balance is slowly decreasing because you're only paying the minimum, it will be awhile before you can use your credit cards again. Pay your balance down quickly to keep your credit limit accessible.