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Posted by Dennis Jao

Is There Any Advantage to Paying More Than the Minimum Due on Your Credit Card?

Is There Any Advantage to Paying More Than the Minimum Due on Your Credit Card?

Credit cards are a must-have item in America, but they come at a price. These cards give you instant purchasing power. However, you need to pay your debt in smaller monthly portions, called the minimum due amount. 

Unknown to many people, however, the creditor ensures the minimum due amount is set to favor the company and keeps you at a disadvantage. 

What's a Minimum Payment?

The minimum due payment on your credit card is the minimum acceptable amount to upset your borrowed balance to avoid penalties and fees. However, this payment changes according to the month, making it harder to have a budget. Essentially, you have to wiggle up a room to pay off the credit. 

Generally, the credit provider uses 2 to 5% of your balance to calculate your minimum due. So, you can use this estimation to plan your payment. 

However, here are some advantages to paying more than the minimum due on your credit card:

  1. You'll Save Money on Interest.

You save more on interest when you overpay your minimum due on your credit card. Paying only the minimum due will leave you with a higher interest rate on your balance leading to bigger payments. But paying more will save you hundreds or thousands of dollars in interest. 

For example, suppose your card has a balance of $2000 with an annual interest rate of 14%; retaining the minimum monthly payment of $43.33 will give you an interest cost of $1833, and it will take 14 years to finalize the debt. However, if you decide to pay $100 a month, you'll have no future charges, and the interest will cost $291, leaving you with over $1500.

  1. Pay off the Balance.

Remitting the minimum due to the creditor will take longer to pay off the balance. As stated above, it will take 14 years to remit back $2000 while costing you a 14% interest rate. In reality, hardly any consumable items or services have a 14 years lifespan. 

For instance, suppose you bought a computer for $2000 that lasted for 10 years; you would still keep paying after it is gone. But if you upset your due with $100, you could pay the balance within two years. 

  1. You Can Improve Your Credit Score.

The credit score might be at risk if you pay only the least due on your credit card. Credit cards are scrutinized by three agencies using different factors, such as Equifax, Transunion, and Experian. These agencies determine and reduce your credit score if you owe much credit.

The agencies determine the credit utilization rate on your card by using a 30% rate to determine your credit balance from your credit limit. They will likely reduce your score if you have a higher credit card balance above your credit limit. Sadly, you can't qualify for many things with a low credit score, such as loans. 

Paying the minimum due will rescue your credit at a time, and the creditor will keep applying your monthly payment to monthly interest. In essence, if you have a high credit score to the credit card limit, you'll pay more. Furthermore, if you often use your card and depend on the minimum due to pay off your debt, reducing your utilization ratio will take longer. 

Here is a simple calculation:

Total Debt ÷ Total Available Credit = Utilization Rate

  1. You Might Qualify for Better Loan Terms

Creditors create opportunities for customers to pay their debts on time. Paying on time will qualify you for bigger loans. Before you can get a new loan, you must pay off the initial loan, thus permitting you for a large loan or competitive interest rate. Remitting the minimum payment will not lower your credit balance quickly, thus exempting you from mortgage loans.  



Dennis Jao
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