How to Decide Your Monthly Credit Card Payment
When you make a credit card purchase, you do it with the understanding that you’ll repay that purchase. Depending on your credit card agreement and the type of credit card you're using, you can either pay the balance back all at once or over time.
Each month, when you sit down to pay your bills, you have to decide the best amount to send your credit card issuer - whether it's the minimum payment, the full balance or something in between. It's important to put some serious thought into how much you're paying rather than come up with an arbitrary number.
Paying the Full Balance is the Best
Ideally, you should pay your balance in full every month and there are a few benefits to doing it this way. First, you can take advantage of your credit card’s grace period and avoid paying interest on the balance. Second, you never have to deal with credit card debt. Lastly, paying your balance in full leaves your credit limit open and available for new purchases.
When you don’t pay your full balance, you’ll have a finance charge on your next billing statement representing the cost of carrying a credit card balance. The longer it takes to pay off your balance, the more you’ll pay in interest.
The Minimum Payment is the Least You Should Pay
Unless you have a charge card, your credit card issuer won't require you to pay your balance in full each month. Instead, you'll have the option of making smaller, monthly payments each month until the balance is repaid in full.
At the very least, you should pay the minimum on your credit cards every month. The minimum payment is necessary to avoid paying a late fee on the card and to avoid a late payment on your credit report.
It’s a widespread myth that it’s ok to simply pay whatever you can, even if it’s less than the minimum payment. That's simply not true. You can’t just send a $10 payment to your creditor and expect them to understand that you’re having trouble this month. If you can’t pay the minimum, you should contact your credit card issuer and make other arrangements. You may be able to delay your credit card payment with no penalties or enter a hardship agreement if you're having financial trouble.
When You Can’t Pay in Full
In between the most (full balance) and least ideal (minimum) credit card payment amounts is the amount you can afford to pay toward your balance. Review your income and expenses and decide how much you can realistically put toward your balance without straining yourself financially. Anything above the minimum will help reduce your balance, allow you to pay less interest, and help you pay off your balance faster. The more you can pay toward your credit card balance, the better.
When You’re Paying Off Debt
When you’re paying off several credit cards at one time, combine these strategies by paying as much as you can on one credit card and the minimum on all the other credit cards. This is the most effective way to get rid of your credit card debt. You’ll eliminate your balances one at a time, but it’s better than paying just a little toward your debts each month and much better than paying just the minimum on all your accounts.
You can also use a credit card repayment calculator to help you decide what credit card payment you need to make to pay off your debt. Most calculators will show you a monthly payment schedule based on either the total payment you can afford to make or a deadline by which you want to be debt-free.
Think About Your Credit Score
While your credit card payment doesn't directly impact your credit score, it can influence your score (and your recent payment amount is reported to the credit bureaus). Your credit card payment does influence your credit utilization, the ratio between your credit card balance and your credit limit, a factor that significantly influences your credit score. The best credit scores belong to consumers with the lowest credit utilization, typically below 30% utilization.
As you decide what credit card payment to make, think about how much is necessary to bring your credit card balance below 30% of the credit limit.
Here’s the rule of thumb for deciding your credit card payment: pay the full balance or as much of the balance as you can afford. If you’re trying to pay off several credit cards, pay as much as you can toward one credit card and the minimum on all the others. But, if you’re struggling and can’t afford to pay much, make at least the minimum.