If you are looking to improve your credit score, which will come in handy in securing a cheap loan in the future, a credit card is a good place to start. In addition, a credit card is also the place where you could go wrong.
If you pay more than the minimum amount owed, it will help maintain a good rate of credit usage. The credit utilization rate is the amount of the credit card balance against the credit limit. When you pay only the minimum amount owed, the difference between your balance owed and the credit limit is reduced, which hurts your credit score. This is because it shows your indiscipline in paying off your debts in a timely manner and the banks see you as a potential default and will not be willing to take the risk.
Your inability to pay a little more than the minimum amount owed now could potentially hurt your mortgage plans in the future.
Moreover, a better credit score will also mean that the banks will give you a larger credit limit which will come in handy in times of crisis.
The debts will pile up
As you pay the minimum, your debts accumulate and at some point they will exceed the credit limit. This not only means you’ll have a bigger mess to clean up, but your credit card will be useless. Its features will cease to be useful once you exceed the spending limit. Not to mention the negative credit score. It is always better to act in advance by paying off the balance as much as possible.
The longer you take to pay your contributions, the more interest will accrue. You might save a little by paying the minimum amount owed, but you will suffer big losses in the long run.
A 2018 study by a U.S. personal finance site NerdWallet found that households in the United States that only pay the minimum amount owed on credit cards typically end up paying double the interest rates. This is because credit cards attract some of the highest interest rates among other debt instruments.