There’s a myth that credit card minimum payments could boost your credit score. Some lecture each that you should “always carry a balance on your credit card”.
This is completely inaccurate. Not only will this mindset actually lower your credit score, you’ll also pay unnecessary interest rates.
Paying your credit card in full actually raises your credit score by lowering your credit exposure, and saves you money from unnecessary interest fees.
Why You Should Avoid Credit Card Minimum Payments
I have been paying off my credit cards in full for over 10 years. Let’s check out how that has effected my credit score, courtesy of Credit Karma.
806 is not a bad score. It’s in the top 13% of credit scores in the United States. I should be able to get the lowest mortgage interest rate available, and can keep churning credit cards for free travel.
What breaks down this 806 score? Thankfully, Credit Karma does the work for us.
Well look at that, there is a section for “credit card use”! It shows how much credit I’m using compared to my total limits. Let’s drill down on this further.
By only using 2% of my available credit, which will be paid off in full, I actually look better to a lender!
This is an interesting paradox in lending. People prefer lending money to those who need it the least. Imagine what would happen to my score if I used 90% of my credit. Would you want to lend to me?
That’s why you should pay off your credit cards in full every month. Doing so will eliminate any interest, and you’ll actually look better to a lender!
What if you Can’t Pay in Full?
Things happen. Maybe you spent more than your forecasted earnings, or an emergency expense came out of the blue. Regardless of why you can’t pay you need to make minimum payments on your credit card, it is essential that you pay it off as quickly as possible.
Redirect any cash from your hierarchy of savings to pay off your credit card balances. Credit cards charge 18% – 25% interest, which is light years ahead any return you’ll get from investing.
To prevent this from happening in the future, make sure you have 3 – 6 months of expenses in your savings account. This will cushion you if any surprise expenses or job losses arise.
Avoiding Credit Card Minimum Payments – The Bottom Line
Make sure you pay off your credit cards in full every month. Not only will you save a ton in interest, but you’ll actually raise your credit score by using less of the credit you need.
I’m not sure where the myth to “always carry a balance on your credit card” started, but it needs to die. Too much money is being wasted in interest payments due to this. Worst of all, this mindset is actually harming their credit scores!
Make sure to correct your friends and family if they bring up this myth. They may be turned off at first, but you’ll be saving them a lot in interest over the long run.