When Making Minimum Payment Can Make Sense
Making Minimum Payment Vs Full Payment
What does it mean to make a credit card minimum payment? If you have balance on your credit card, your card issuer will expect that you pay the balance at the end of the month. However, it is good to note that credit card issuers are not too strict about this. If you are not in the position to make full payment at the end of your billing cycle, your card issuer allows you to just pay certain lowest amount on your credit card. This lowest amount that you can pay on your credit card without incurring any penalty is known as minimum payment.
There has been series of controversies on whether it is good to make minimum payment or not. On the other hand, people want to know which one is better between making full payment or minimum payment on their credit card. When it comes to personal financial planning, everything should be personal. There is no general answer to any question. No “one size fits all” approach. The concept of “what is good for goose is good for gander” may not hold in this case. Even, what is good for you today may not be good next month as your financial situation cannot remain static. As long as your financial situation keeps changing, so also should you tailor your approach or strategy to suit your prevailing situation.
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Personally, I usually encourage people to make full payment on their credit cards. But there are situations when making minimum payment can be the ideal thing to do. Below are some of the instances when it may be good to go for the option of making minimum payment.
You have other debts: If you have other high interest debts that you need to pay and you have another debt with zero or low interest rate, it will be better to make as much payment on the high interest debts. You can just make minimum payment on the zero or low interest credit cards. Focusing on your high interest debts will help you pay them off them faster thereby preventing you from paying too much interest expense on the debts. There are certain credit cards that charge zero interest rate at their introductory period. If you have this type of credit cards, you can take advantage of the 0% apr introductory period and just make minimum payment. However, you need to be careful about this. If you carry any balance beyond the 0% apr introductory period, you may end up paying higher interest on the balance. The interest rates on 0% apr credit cards are usually higher than that of regular credit cards after the 0% apr introductory period has expired.
Low credit utilization ratio: Your credit utilization ratio is one of those criteria that credit bureaus usually consider when calculating your credit score. If your credit utilization ratio is already high, making minimum payment may hurt your credit score. But if you have a very low credit utilization ratio, you can make minimum payment just to maintain good credit history. Your card provider will not report the amount you pay. It will only report whether you make your payment promptly or not. You should try as much as possible to keep your credit utilization low so that you can appear good in the eyes of the credit bureaus. A good utilization ratio usually falls below 30%. Therefore, you should try as much as possible to keep it below 30%. For clarity, your credit utilization ratio is your credit balance expressed as a percentage of your credit limit. If your credit limit is $2,000 while you have a credit card balance of $400, your credit utilization ratio will be 20%.
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Financial Emergency: At times, you may be faced with emergency that will require that you make immediate payment. For instance, if you have medical bills to settle, you may need to prioritize your spending. If you don’t have enough money to pay your credit card balance in full and at the same time be able to pay the medical bills, you may need to pay your medical bills first. In such situation, making minimum payment on your credit card may be a good decision. As I mentioned earlier that there is no “one size fits all” approach in financial strategy. The fact that you make minimum payment during this month because of the financial emergency may not mean that you should do the same thing the next month. Therefore, you need to be flexible in your approach. At the same time, you need to know the implication of making minimum payment. If you don’t make full payment on your credit card balance at the end of the month, you will need to pay interest on the balance you left unpaid except your credit card is 0% apr credit cards and it is still at its 0% apr introductory period.