The way you use your credit card can significantly impact your credit score. Whether it is paying credit card bills on time or maintaining a minimum balance on the credit card, all these aspects can directly impact your credit score.
Lenders can easily access information about your credit behaviour and patterns by keeping a close eye on your credit card bill payments. In this case, consistency is key and if you are consistent in making monthly credit card bill payments on time, it reflects on your ability to manage your credit card debt responsibly. This, in turn, increases your creditworthiness among lenders.
Credit card issuers send regular reports on your credit behaviour and details about credit limits used along with bill payment information to credit agencies. All this data will reflect on your credit report. If you have the habit of paying your bills on time and in full every month, then it’s advantageous for your credit score and can help in boosting it.
However, if you have been consistently exhausting your credit limit, it will reflect a higher liability towards the lender on the credit report. In case you miss any payment or your credit utilisation rate rises, your credit score can be significantly impacted.
Now, let’s come to the pressing question,
“Will my credit score be impacted if I make minimum monthly payments?”
Impact of Making Minimum Credit Card Payments
Minimum monthly payments are the minimum amount you can pay every month to the credit card company without being charged late fees and other penalties. For example, let’s say you owe your card issuer Rs. 50,000. If the minimum amount on the card is Rs. 5000, you can pay just Rs. 5000 every month, without being charged late penalties and other fees.
If you are a credit card user, ensure to pay your credit card bills in full and on time for maintaining a good credit score. Credit scores can be impacted if a customer makes it a habit to pay only minimum payments and continues to spend as well, thereby increasing the credit card balance.
Credit utilisation ratio plays a crucial role in determining your credit score. When you pay only the minimum monthly balance on your credit card, the credit utilisation ratio goes up which in turn brings down your credit score. To avoid hurting your credit score, you need to keep the credit utilisation ratio low. This is why it makes sense to maintain credit utilisation rate below 30% at all times.
Let’s illustrate this point with an example. Let’s say that the credit limit on your credit card is Rs. 1 lakh. If you maintain a balance of Rs. 60,000 on it, your utilisation ratio is 60%. When you pay only the minimum amount every month, you maintain a high balance on the card, even though you may have stopped purchases on it. This keeps your credit utilisation ratio high, which in turn, brings down your credit score.
To lower the utilisation ratio, you need to increase the monthly payment on your credit card.
What if you can’t pay dues in full?
To avoid late fees, credit card users must make sure to pay the minimum amount each month. Failure to do so may attract penalties and your credit rating can have an impact too. As far as possible, you should aim to pay the balance in full. This will keep the utilization low and a significant amount of interest can be saved.
What if you are facing a cash crunch and are unable to pay the entire bill in full?
- First, you can pay as much as you can afford to bring the balance down. This will help in bringing down the debt burden. If you are unable to manage to pay the minimum amount on your dues, you can start by setting up a budget. Better management of expenses can go a long way in creating savings over time. Minimize your expenses as much as possible and set aside the extra amount towards repayment of credit card dues. Parallelly, you can explore other ways of earning extra income to boost your financial situation.
- Adopting a credit card repayment strategy allows you to prioritize the repayment of multiple credit cards. For instance, the avalanche method of repayment on your cards lets you prioritise the accounts which have the highest interest rates. The snowball method, on the other hand, lets you target those cards which have the lowest balance.
- If your financial situation is tough and you are continuing to struggle to keep up with the minimum bill payments, you can reach out to your credit card issuer for discussing your situation. They could offer you a bill payment plan if your situation is unmanageable. Some issuers even offer extra support for financially distressed credit cardholders.
- One last option for taking charge of your minimum bill payments is to opt for credit counselling. This service is available through organizations which offer sound money management tips to struggling individuals. They can also assist in creating a debt management plan for paying your credit card balances and other pending loans. The credit counselling agency will negotiate favourable account terms for the borrower, such as lower interest rates, waivers or payment extensions.
How to maintain a good credit score?
If you are looking to regain a good credit score, here are some of the methods you can use:
- Timely Repayments: Whether it is EMIs on loans or payment of the minimum amount on credit card bills, you should always ensure to pay the dues on time. Missing your EMI payments and credit card bill payments can result in additional charges and also have an impact on credit score. If you tend to miss reminders for payments, you can set up automatic payment arrangements(ECS) via your bank account.
- Limit the Amount of Credit: You should restrict the number of loans and purchases made using credit cards for a certain period. A fresh loan or purchases using a credit card should only be done once you settle all the previously outstanding amounts. Too much credit in a short duration can bring down your credit score. On the other hand, timely repayment can help you to maintain a good score.
- Use a Balanced Credit Combination: The amount you owe should be a combination of both unsecured and secured loans. For example, instead of availing multiple personal loans, go for a single unsecured personal loan combined with a secured home loan. Another combination is a vehicle loan and a credit card.
- Say No to Multiple Cards: Multiple credit cards can be a gateway towards debt trap, which may result in continued payment defaults. Aim to reduce your credit consumption by opting for a single credit card.
- Use Longer Tenure Loans: If you have loans with longer tenures, you can ease your EMI burden. This, in turn, will ensure timely repayments and thereby a good credit score.
- Monitor Credit Score Periodically: Sometimes, credit agencies may mistake your credit situation and therefore your credit report may not be an appropriate reflection of the same. Always monitor your report regularly to point out any flaws and get them corrected.
If you can pay more than the minimum due payment on your credit card, you can save substantially on the interest payments and your credit rating will remain unaffected. Better still, aim to pay your balance in full to avoid any interest payments and maintain a low utilization ratio at all times.