It can be difficult to determine how much you should pay on your credit card each month.
Not paying enough can lead to interest charges and other penalties, while overpaying can mean that you’re not taking advantage of the many benefits that a credit card can offer.
This article will explore how much you should pay on your credit card each month and the factors that might impact your decision.
How Does a Credit Card Payment Cycle Work?
Most credit cards have a grace period of between 21 and 25 days. You’ll need to check to with your credit card issuer to find the exact grace period. During this time, you will not be charged any interest on your balance during this period.
If you pay more than the minimum amount due, it is best to apply the excess towards the principal rather than letting it compound as extra interest charges. For example, if you have a balance of $3,000 and a 25% APR (annual percentage rate) on your credit card, you would pay $715 toward interest if you chose to pay the minimum payment of 2.5% of your balance (i.e., $75).
If, instead, you chose to apply an additional $150 towards the principal, then you would avoid paying almost $200 in interest.
Generally, it is best to focus on paying down the principal on your credit card each month.
How Credit Card Companies Determine Minimum Payment
Credit card companies do not disclose how they calculate their minimum payments, but there are several ways this can be done.
Credit card companies can use a flat rate across the board. For example, they may consider a minimum payment of 2% of your balance or $10 for most cards. This approach requires less administrative work and ensures that everyone pays at least some interest each month.
However, this calculation would require you to pay more than the minimum amount due if you had a large credit card balance. To avoid this, companies can instead use an average percentage of their overall credit card debt to determine the minimum payment each month.
For example, they might set it at around 4% of your total balance or $20 per month on most cards so that you would not have to pay more than the minimum each month.
A percentage of your overall balance may be easier for you to estimate, but it means that if the company uses this method, you will likely end up paying less interest over time.
Paying Off Your Balance In Full If Possible
It is possible to avoid credit card debt, but you have to pay off your balance in full every month.
Credit cards offer many benefits that other payment methods do not, including rewards points, credit scores for credit management and security measures. However, credit cards also come with high-interest rates if you fail to pay the entire balance each month.
In fact, credit card interest rates are nearly double the average credit card rate at 23%. Even some lower interest rate credit cards are at least 12%.
To avoid credit card debt and credit card interest, you should pay off your credit card balance in full each month to avoid having to pay extra charges.
Pay At Least the Minimum Payment
While paying off your credit card balance in full each month negates the need to pay credit card interest, it is recommended that you pay at least the minimum payment amount on time every month. This ensures that your credit score does not take a major hit and preserves some of the benefits of using credit cards.
If you can pay more than the minimum payment, try to pay the statement balance. This way you’ll reduce the interest payment you would be on the hook for.
For example, if you fail to pay at least the minimum credit card payment in a month, your credit card company will likely charge you late fees and report this missed credit card payment to credit agencies.
This could cause your credit score to decrease significantly or even file for bankruptcy if this occurs multiple times.
It is recommended that you pay at least 1-2% of your credit card balance each month if you cannot pay the entire credit card balance at once. This ensures that you do not accrue credit card debt and allows you to avoid most credit card fees.
To reduce credit card interest charges even more, focus on paying down your credit card principal each month with this excess money.
You should aim to pay credit card interest and credit card fees as infrequently as possible. For example, if you only require $100 in credit more for this upcoming month, prioritize paying it off on time and avoid late credit card charges.
This way, your credit score will not take a hit and you can limit how much credit card interest you pay.
Typical Mistakes You Should Avoid When Using Your Credit Card
It important to be in good standing on your credit card account. Below are some typical mistakes you’ll want to avoid:
Carrying outstanding balance over: If you carry credit card debt over from one billing cycle to the next, your credit score could decrease and you may also accrue credit card credit.
Missing Payments: If you miss credit card payments, your credit score could decrease and you could pay credit card late charges. Consider setting up an automatic payment each month to ensure you do not miss any payments.
Getting credit cards with too high credit limits: If you have a credit line that is too high, then this may tempt you to spend more than you can afford. In addition, this could also cause your credit score to decrease due to credit credit usage.
Not making credit card payments on time: Missing credit card payments or making credit card payments past the due date can hurt your credit score and cause you to pay credit costs. Once you receive your credit card statement, make your payment as soon as possible.
Financing larger purchases: Using your credit card for larger purchases often results in credit debt, which can have a negative impact on your credit score.
Canceling credit cards: When you cancel credit cards, you lower your credit credit available to use. This can cause a decrease in your credit score if done too often.
Not understanding how credit cards work: If you do not know the terms and conditions of credit card usage, this is an indication that you should not have a credit card or do more research on credit cards.
Using a credit card for a cash advance: Using your credit card to withdraw credit is expensive, as you pay credit costs every time that you use it for this purpose.
Purchasing unnecessary items with a credit card: If you are using your credit card to make purchases that are not within the budget that you set, then this is an indication that you should rethink credit usage.
Frequent balance transfers: A balance transfer card is a good financial product to help with reducing your forward interest rate, but it’s only a temporary solution. You’ll need to eventually pay your balance down.
How Much Does Credit Card Debt Impact your Credit Score?
One of the larger factors that impacts your credit score is the amount of debt owed. Factoring 30%, this is the second-largest factor in determining your credit score. By simply pulling a credit report, you’ll be able to easily see the correlation of your credit card debt and your credit score.
Carrying balances on credit cards from month to month can cause your score to decrease because you are not paying off the full balance as your credit utilization ratio will be higher.
In addition, making a late payment will have a negative effect on your credit score and will impact your credit history. Even if you have a great credit score, missing payments by one day can decrease your credit score by 100 points or more as the missed payment will be reported to the credit bureaus.
While credit cards have several benefits, it’s important to exercise responsibility to ensure that you do not damage your credit score.
What Can I Do If I Can’t Pay My Credit Card Bill?
If you are having difficulty paying your credit card bill, then there are several things that you can do. Most importantly, make sure to pay the minimum required payment each month.
In addition, you can call the credit card company to discuss payment options. For example, some companies will allow a repayment holiday where they withhold interest charges for a period of time.
Others offer reduced interest rates. While these options might make your monthly payments higher, it is better than not paying your bill at all and getting behind on your payments.
When determining how much you should pay on your credit card per month, it’s important to consider how you plan to use the credit card and whether or not you can afford it. Using your credit card responsibly will help you avoid hurting your credit score.
If you cannot pay off your credit card debt, then there are several ways that you can make more manageable payments. If needed, don’t be afraid to contact your lender for repayment options.
Paying late will hurt your credit score and could result in you paying high-interest rates. It is always better to only take out a credit card if you plan to use it responsibly.