Anytime you can spend less than you have to feels like a major win. But this doesn’t hold true when it comes to your line of credit bill. It’s one of the rare times when you should pay as much as you can. Otherwise, you could be in for a big loss if you rely on the minimum payment each billing cycle.
What is a Minimum Payment?
A minimum payment is a tempting option when it comes to a line of credit or credit card. As either a flat fee or percentage of your balance, it’s cheaper than paying off the total owing, and it keeps your account in good standing.
Each line of credit may have different conditions relating to how the minimum payment works, including online line of credit loans. To understand how online loans work with minimum payment, check in with your online line of credit agreement or ask your financial institution for more information, as there may be some variance between institutions.
For the most part, it ends up being the least amount of money you have to pay to avoid late fees on your bill, so it can come in handy if you’re spread thin. By making the minimum payment, you can prioritize where your money goes, making it easier to handle multiple bills in an unexpected emergency.
But during a normal week when you have the cash to spare, always try to pay off your balance in full.
It Helps Reduce Interest & Other Charges
If you think there has to be a catch, you’re right. There are consequences to paying less than your full bill.
In exchange for a smaller bill, you agree to paying more interest and finance charges down the road. Every time you make a minimum payment, these charges roll over to the next bill and will be subject to additional interest.
The result? You’ll add on debt until you pay it off, even if you don’t charge another purchase onto your line of credit.
It Frees up Your Line of Credit Limit & Pays Down Debt
Making the minimum payment stalls your account, making it impossible to pay down your balance in a meaningful way.
But by paying more than your minimum payment, you’ll deliver a one-two punch to your account.
- You’ll pay down your debt faster
- You’ll free up more of your available limit
This second point is important in case you need to rely on your line of credit in an unexpected emergency. If you pay off your balance regularly you won’t have to worry about whether you have enough credit available to help cover a bill.
It May Build Positive Credit History
Paying bills on time and in full looks good on your financial record. Free of delinquencies and other bad payment history, your record shows you’re committed to good money management habits.
This also manages your credit utilization ratio. This ratio informs reporting agencies how much of your available credit you actually use. Generally, the lower this ratio is, the better. Paying your full bill means you won’t carry over a balance that bumps up your ratio.
Pay More When You Can
If you have the cash, always put as much as you can towards your balance. Although it may be tempting to keep some of it for something else, it’s not worth it. The minimum payment comes with financial drawbacks that may impact your finances and credit history negatively.