The monthly minimum payment on your line of credit or credit card is an ace in the hole when money’s tight. It’s the smallest amount of money you have to pay to keep your account in good standing. But no matter handy it may be for your business or personal finances, it’s always a good idea to pay more than this minimum whenever you can.
Here’s what happens when you go above and beyond minimum payment.
1. Save More Money
Minimum payment may seem like it will save you money upfront; you’ll be paying less than what you owe, after all.
But there’s a catch. Financial institution CreditFresh recommends you look beyond these initial gains to see the long-term effects of this decision, reminding its borrowers that a billing charge and interest may be applied to any balance you carry over. They suggest making additional payments any time you can afford it as a result.
While you may visit Creditfresh.com to see what charges they apply, it’s best to check your line of credit’s contract, as rates and terms may vary drastically. Use these rates to determine how much you could save by paying more of your balance.
2. Pay off Debt
It’s hard paying off your debt when you only use the minimum, partly due to its size and partly because of the interest you will accrue. A minimum payment will only shave off a fraction of what you owe from the balance at the same time interest and other charges add more to the balance you carry over.
If your interest rate is high enough, what it adds may even eclipse the payment you make, which means you’ll see your balance go up even if you don’t make another purchase using your line of credit (LoC).
A larger or full payment covers more than these charges and takes a bigger bite out of your principal.
3. Frees up Your Limit
Your LoC acts as a safety net when you encounter an unexpected emergency expense you can’t afford in the moment on your own.
How well it cushions you in an emergency is directly related to how big your Louis. The more money you have available, the bigger the unexpected expense you can cover.
Paying off your bill in full is crucial then as a preventative measure because you’ll free up your full line of the credit limit for the next emergency.
4. Manages Your Utilization Rate
Paying more than your minimum will do more than tamp down debt and free up your limit. It will also help you manage your utilization rate, a ratio of your outstanding balance to your overall limit.
This ratio is one of the five factors that affect your credit score. From a scoring standpoint, it looks good if you keep this ratio low, as it indicates you aren’t relying on an LoC to make ends meet and you’re paying all (if not most) of your balance when you do.
Try to aim for keeping your ratio under 30 percent. Anything above this may impact your credit history negatively.
Do More Than the Bare Minimum
Between saving money, paying off debt, freeing up your limit, and managing your utilization ratio, there are a lot of reasons to pay more than the minimum. So, keep this payment style for the backup that it is, using it only when you have no other choice.