How does a monthly credit card payment affect your credit history?

Photo: depositphotos

By sharing the debt payment into the minimum payments offered by the system, you can harm your credit history more than it does good.

About how the system of minimum payments on credit cards, and how it affects the credit rating of the client, told the publication Go Banking Rates.

What is the monthly minimum payment?

This payment is the minimum amount or percentage of your total debt that you are required to pay each month. Credit card holders are generally inclined to pay this minimum amount, because this is not a violation of the loan agreement and does not greatly impact the wallet. However, many do not understand that by adhering to minimum payments, they are making one of the biggest mistakes in building their credit history, and thus can harm it rather than improve it.

How does the minimum payment affect your credit rating

A credit score is a score that is given for the use of a credit card, payments, terms, etc. In most cases, it is a key factor when lenders decide whether to lend money to a borrower or not.

In the popular FICO rating system, the maximum number of points that can be achieved is 850. The specific formula that would allow a maximum is kept secret, but its main criteria are known to specialists, ForumDaily wrote about them earlier.

Photo: depositphotos

Four reasons why minimum payments are not enough

1. Minimum payment does not reduce credit utilization

Cardholders should pay attention to the 2 amounts: the total credit limit available to them, and the amount of this limit that they use. These indicators determine the level of credit utilization.

For example, if your limit on the card is $ 9 thousand, and you used $ 3 thousand, then the level of credit utilization is 33%. If this level is too high, the credit rating is reduced, because it means that the user relies too much on borrowed money. And the minimum payment does not reduce this level, it just does not increase it.

2. The minimum payment makes a bad impression on lenders

Using credit very often, withdrawing large amounts can give the impression that you are living beyond your means. Combine that with making only the minimum payments each month, and it's no wonder the lender gets the impression that you're putting more effort into spending their money than paying it back. This impression will be reflected on your credit report and will therefore be reflected in your credit score.

3. Paying only the minimum payment, you always remain a debtor

If you make only the minimum payment every month and at the same time continue to use your card, you will never pay the debt, which, moreover, will be much more than what you actually spent, because of the interest on the loan.

4. This may affect your other expenses.

Paying only minimal monthly payments can trigger a domino effect: keep you in debt, while your accounts will all grow due to bad credit history and restrictions on the use of money from the lender.

For example, if you want to buy a house or a car and you need financial assistance from a bank, it can be very difficult to get it because of the low credit rating created by minimum payments. Even if you are not denied a loan, you will most likely receive a higher interest rate on this loan.

In order to avoid such problems, break the loan debt into several payments, but do not make only the minimum payment all the time, or better yet, pay off the loan debt every month.

Read also on ForumDaily:

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