What you need to know about minimum credit card payments
Paying more than the minimum can help you save on interest, pay down your balance faster and potentially improve your credit score.
CIBC
Mar. 23, 2022
4-minute read
One of the first things you may notice on your credit card statement is the minimum payment. It may be a flat rate, a percentage of your balance or a combination of both. No matter how it’s calculated, the minimum payment is the lowest amount you have to pay to keep your credit card in good standing. The amount is usually fairly low compared to your total credit card statement, so it can be tempting to pay just the minimum monthly payment, especially when money is tight. However, paying even a small amount more than the monthly payment can help you pay off your balance faster, saving you money on interest payments and potentially improving your credit score.
An extra $15 each month can go a long way
Let’s say you have a current credit card balance of $5,000 with an interest rate of 21% and a minimum monthly payment of $105. If you make the minimum payments, it would take about 9 years to pay off the total outstanding balance. However, if you increase your monthly payments to $120, it would take a little over 6 years to pay it off. By increasing your monthly payments by just $15, you could pay off your balance 3 years sooner. If you continue to increase your monthly payment over time, you could pay off your balance even faster.
Keep your credit score in mind
Paying only the minimum amount doesn’t get factored into your credit score directly, but it does have an impact. This is due to credit utilization, which is the ratio of your credit card balance to your credit limit. If your credit utilization is high — in other words, if you’re using a lot of your credit card limit — it can lower your credit score.
Making the minimum payment can lower your credit card balance, but only in small increments because a large portion of the payment goes towards monthly interest charges. So if you have a high credit utilization ratio while you’re paying down your balance, your credit score will drop over time. On the flip side, though, you can gradually improve your credit score by paying more than the minimum and lowering your credit utilization ratio faster.
Tips to pay off your credit card balance
Paying off credit card debt can be challenging, but it’s not impossible. With a solid plan and some dedication, you can pay off your card debt and reach your financial goals faster. Here are strategies that can help you pay off your balance.
Start by taking an inventory of your credit cards and loans, your outstanding balances and the interest rates you’re paying on each. This will help you make a plan to pay off your balances. Paying off your balance with the highest interest rate first, while still making the minimum monthly payments on your other balances, can help you pay less interest and get out of debt faster.
Consolidate your debt
If you have multiple credit card balances or loans, you may want to consider converting them to a single loan by consolidating your debt. Having just one loan to focus on can make things easier, and it could help you save on interest too.
Set up a payment plan
Schedule automatic payments from your chequing account to your credit card each month through online banking to help you make your payments on time.
Follow a budget
Having a clear picture of how much money you have coming in — income — and where you’re spending your money — expenses — can help you avoid building a higher balance. It can also help you uncover opportunities to save more so you can increase your payments and pay off your balance sooner.
Get professional advice
Your advisor can help you understand your options and build a personalized action plan to manage your debt and meet your financial goals.
Take control of your finances with our solutions
If you’re having trouble making your minimum payments on your CIBC products, getting in touch with our credit counsellors early can go a long way to prevent your existing debt from growing.
Whenever possible, the best approach is to pay your balance in full. Sometimes unexpected events can put a strain on your finances, though. In these situations, making the minimum payment may be all that’s possible. However, when you have more money available, it’s a good idea to make incremental payments towards paying off your balance in full.
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