Does Paying the Minimum Hurt Your Credit Score

Credit card bills can be confusing. If everything was straightforward and clear, credit card debt wouldn’t be such a big issue. But it’s not clear, and debt is a massive issue for millions of consumers. 

One of the most confusing aspects is the minimum payment, with few consumers understanding how this works, how much damage (if any) it does to their credit score, and why it’s important to pay more than the minimum.

We’ll address all of those things and more in this guide, looking at how minimum credit card payments can impact your FICO score and your credit report.

What is a Credit Card Minimum Payment?

The minimum payment is the lowest amount you need to pay during any given month. It’s often fixed as a fraction of your total balance and includes fees and interest.  

If you fail to make this minimum payment, you may be hit with late fees and if you still haven’t paid after 30 days, your creditor will report your activity to the major credit bureaus and your credit score will take a hit.

When this happens, you could lose up to 100 points and gain a derogatory mark that remains on your credit report for up to 7 years. Making minimum payments will not result in a derogatory mark, but it can indirectly affect your credit score and we’ll discuss that a little later.

Firstly, it’s important to understand why you’re being asked to pay a minimum amount and how you can avoid it.

How Much is a Minimum Credit Card Payment?

Prior to 2004, monthly payments could be as low as 2% of the balance. This caused all kinds of problems as most of your monthly payment is interest and will, therefore, inflate every month so that every time you reduce the balance it grows back. 

Regulators forced a change when they realized that some users were being locked into a cycle of credit card debt, one that could see them repaying thousands more than the balance and taking many years to repay in full.

These days, a minimum payment must be at least 1% of the balance plus all interest and fees that have accumulated during that month, ensuring the balance decreases by at least 1% if only the minimum payment is met.

Do I Need to Make the Minimum Payment?

If you have a rolling balance, you need to make the minimum monthly payment to avoid derogatory marks. If you fail to do so and keep missing those payments, your account will eventually default and cause all kinds of issues.

However, you can avoid the minimum payment by clearing your balance in full.

Let’s assume that you have a brand-new credit card and you spend $2,000 in the first billing cycle. In the next cycle, you will be required to pay this balance in full. However, you will also be offered a minimum payment, which will likely be anywhere from $30 to $100. If this is all that you pay, the issuer will start charging you interest on your balance and your problems will begin.

If you spend $2,000 in the next billing cycle, you have just doubled your debt (minus whatever principal the minimum payment cleared) and your problems.

This is a cycle that many consumers get locked into. They do what they can to pay off their balance in full, but then they have a difficult month and that minimum payment begins to look very tempting. They convince themselves that one month won’t hurt and they’ll repay the balance in full next month, but by that point they’ve spent more, it has grown more, and they just don’t have the funds.

To avoid falling into this trap, try the following tips:

  • Only Spend What You Have: A credit card should be used to spend money you have now or will have in the future. Don’t spend in the hope you’ll somehow come into some money before the billing period ends and the credit card balance rolls over.
  • Get an Introductory Interest Rate: Many credit card issuers offer a 0% intro APR for a fixed period of time, allowing you to accumulate debt without interest. This can help if you need to make some essential purchases, but it’s important not to abuse this as you’ll still need to clear the full balance before the intro period ends.
  • Use a Balance Transfer: If you’re in too deep and the intro rate is coming to an end, consider a balance transfer credit card. These cards allow you to move your full balance from one card (or cards) to another, taking advantage of yet another 0% APR and essentially extending the one you have.
  • Pay the Minimum: If you can’t pay the balance in full, make sure you at least pay the minimum. A missed payment or late payment can incur fees and may hurt your credit score. 

Why Pay More Than the Minimum?

You may have heard experts recommending that you pay more than the minimum every month, but why? If you’re locked into a cycle of credit card debt, it can seem counterproductive. After all, if you have a debt of $10,000 that’s costing you $400 a month, what’s the point of taking an extra $100 out of your budget?

Your interest and fees are covered by your minimum payment and account for a sizeable percentage of that minimum payment. By adding just 50% more, you could be doubling and even tripling the amount of the principal that you repay every month.

What’s more, your interest accumulates every single day and this interest compounds. Imagine, for instance, that you have a balance of $10,000 today and with interest, this grows to $10,040. The next day, the interest will be calculated based on that $10,040 figure, which means it could grow to $10,081, which will then become the new balance for the next day. 

This continues every single day, and the larger your balance is, the more interest will compound and the greater the amount will be due over the term. By paying more than your minimum payment when you can, you’re reducing the balance and slowing things down.

Does Paying the Minimum Hurt My Credit Score?

Paying the minimum amount every month ensures you are doing the bare minimum to avoid hurting your credit history or accumulating fees. However, it can indirectly reduce your score via your credit utilization ratio.

Your credit utilization ratio is a score that compares the credit limit of all available credit cards to the total debt on those cards. It accounts for 30% of your credit score and is, therefore, a very important aspect of the credit scoring process.

The more credit card debt you accumulate, the lower your credit utilization rate will be and the more your score will be impacted. If you only pay the minimum, this rate will become stagnant and may take years to improve. By increasing the payment amount, however, you can bring that ratio down and improve your credit score.

You can calculate your credit utilization score by adding together the total amount of credit limits and debts and then comparing the latter to the former. A combined credit limit of $10,000 and a balance of $5,000, for instance, would equate to a 50% ratio, which is on the high side.

Can Credit Card Fees Hurt My Credit Score?

As with interest charges, credit card fees will not directly reduce your score but may have an indirect effect. Cash advance fees, for instance, can be substantial, with many credit card companies (including Capital One) charging 3% with a $10 minimum charge. This means that every time you withdraw cash, you’re paying at least $10, even if you’re only withdrawing $10.

What many consumers don’t realize is that these fees are also charged every time you buy casino chips or pay for some other form of gambling, and every time you purchase money orders and other cash products. 

Along with foreign transaction fees and penalty fees, these can increase your balance and your minimum payment, making it harder to make on time payments and thus increasing the risk of a late payment.

Does Paying the Minimum Hurt Your Credit Score is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

How Removing Your Name from a Shared Credit Card Affects Your Credit Score

Credit cards exceptional financial instruments. They allow you to buy without any cash and earn rewards while at it. Another interesting feature is the option of adding another person as an authorized user to your card. However, credit card usage does have a huge impact on your creditworthiness. So, does removing your name from a […]

The post How Removing Your Name from a Shared Credit Card Affects Your Credit Score appeared first on Credit Absolute.

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Does having many credit card hurt your credit score? – The Points Guy

Editor’s note: This post has been updated with new information. We talk about travel credit cards quite a bit here at TPG. Applying for and utilizing these cards strategically can unlock incredible travel experiences like premium class flights or luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to …

Source: thepointsguy.com

A complete guide to airline companion passes

Flying can be a hefty expense – especially when you’re buying more than one airline ticket at a time. If you frequently fly with a companion, whether it be your child, spouse or friend, a companion pass can drastically reduce your travel costs.

While the terms vary depending on the airline and credit card, generally, companion passes allow a second passenger to fly with you for free or at a significantly discounted rate. Some credit cards automatically offer a companion pass when you are approved for the card or each year on your account anniversary. Others require you to charge a certain amount within a given time frame to earn the pass.

For more details on some of the most common companion passes, including what they offer and how to earn them, read on.

Which airlines offer companion passes?

  • Southwest Airlines
  • American Airlines
  • British Airways
  • Delta Air Lines
  • Hawaiian Air
  • Alaska Airlines
  • Lufthansa Airlines

Southwest Rapid Rewards® Plus Credit Card
  • Southwest Rapid Rewards® Premier Credit Card
  • Southwest Rapid Rewards® Priority Credit Card
  • CitiBusiness®/AAdvantage® Platinum Select® Mastercard®
  • AAdvantage® Aviator® Silver World Elite Mastercard®
  • British Airways Visa Signature® Card within a 12-month period, starting on Jan. 1 and ending on Dec. 31. For example, if you opened your card account in June 2020, you have until Dec. 31, 2020 to reach the spend requirement for that year.

    How long is the Travel Together Ticket valid?

    The Travel Together ticket is valid for 24 months from the date of issue.

    Which cards help you qualify?
    British Airways Visa Signature® Card

    Delta SkyMiles Reserve® American Express Card

    Hawaiian Airlines® World Elite Mastercard® (50 percent and $100 discounts)
  • Hawaiian Airlines® Bank of Hawaii World Elite Mastercard® (50 percent and $100 discount)
  • Hawaiian Airlines® Business Mastercard® (50 percent discount)
  • Alaska Airlines Visa Signature® or Alaska Airlines Visa® Business cardholder. As part of the introductory offer, you much spend $2,000 in the first 90 days to receive a companion fare. You will automatically receive the companion fare each year on your account anniversary.

    Travel must be booked on alaskaair.com.

    How long is the fare valid?

    The Famous Companion Fare is valid from the date of issue until your next account anniversary.

    Which cards help you qualify?
    • Alaska Airlines Visa Signature® credit card
    • Alaska Airlines Visa® Business

    How to get the Southwest Companion Pass, Earn sign-up bonus miles with the Southwest Rapid Rewards cards

    The Bank of America content of this post was last updated on March 20, 2020.

    Source: creditcards.com

    Should You Sign the Back of Your Credit Card?

    Should You Sign the Back of Your Credit Card?

    Signing the back of your credit card is an important security step for protecting your card’s information if it should fall into the wrong hands. Merchants are supposed to check that the signature on the card matches the signature on the sales receipt as a security precaution. If a card has no signature on the back, they aren’t required to process the ensuing payment.

    Should You Sign the Back of Your Credit Card?

    Signing the back of your credit card is always better than not, without exception. It’s another step provided by your credit card company to try and keep your personal information as safe as possible. When used in conjunction with the card verification value (CVV) on your card, it creates a line of defense should a fraudster try to swipe your plastic.

    While the signature itself doesn’t protect you, the ability for a salesman to match it to your existing official signatures is where its value lies. This is done most commonly with your driver’s license, or if you’re abroad, your passport is a fine stand-in. In other words, taking a few seconds to sign that little black or white strip could be the difference between your identity being stolen and not.

    Here’s a look at how the major credit payment networks handle unsigned cards:

    Mastercard

    Mastercard urges merchants in its payment network not to accept charges from customers with unsigned credit cards. On the back of every Mastercard, it even says “not valid unless signed.”

    The company tries to instill in merchants that they should not process customer transactions unless the customer’s signature appears in the signature space on the back of the card.

    If the card has no signature, merchants are to request the customer sign the card. A merchant also will need to see a confirming form of identification.

    Visa

    Should You Sign the Back of Your Credit Card?

    At Visa, merchants must verify that the signature on the back of any card matches the customer’s signature on the transaction receipt and any identification. They want to know you are who you say you are and recreating the same signature on demand when you sign for a credit card transaction is one way to do it.

    Visa considers an unsigned credit card to be invalid. The words “Not Valid Without Signature” appear above, below or beside the signature panel on all Visa cards. Turn over the card and you’ll see it. And like Mastercard, Visa urges merchants not to accept unsigned credit cards.

    When a customer presents an unsigned Visa card to a merchant for payment, Visa requires a merchant to check the customer’s identification by requesting a government-issued form of ID.

    Where permissible by state law, the Visa merchant may also write the customer’s ID serial number and expiration date on the sales receipt. (Beginning in California in 1971, the recording of personal information during credit card transactions has become illegal, with the passage of the Song-Beverly Credit Card Act.)

    Visa also instructs merchants to ask the customer to sign the card, within full view of the merchant. They then check that the customer’s newly written signature on the credit card matches the signature on the customer’s ID. If a customer refuses to sign a Visa card, the card is considered invalid and cannot be processed. Merchants will then be forced to ask the customer for another form of payment.

    Discover

    Discover keeps things very simple. The company urges its cardholders to sign the backs of their Discover cards as soon as they activate them.  This is because the signature makes the card valid and a cashier may decline the transaction if the card is not signed. 

    American Express

    American Express also urges retailers to compare a customer’s signature on the back of an American Express card with the transaction sales receipt. And if an American Express card is presented unsigned, the clerk is to request a photo ID of the customer with a signature. Following this, they must request the customer sign the back of the American Express card and the sales receipt while the clerk is holding on to the customer’s photo ID.

    Writing “See ID” on a Credit Card

    Should You Sign the Back of Your Credit Card?

    Writing “see ID” or “check ID” on a credit card might seem like a great way to protect from fraud. But it actually may invalidate the card. This is because only your valid signature that a merchant can match with a signature on a sales receipt is acceptable. In some cases, the merchant may ask you for another card to make your purchase. To save yourself from a slower-than-needed transaction at the cash register, sign your credit card as intended.

    Tips for Protecting Against Credit Card Fraud

    • Only carry the credit cards you need. When you travel, keep a list of the credit cards that you have with you. Make note of their full account numbers and expiration dates, as well as contact numbers for the issuers. It will come in handy if something should happen to your wallet, phone or both when traveling.
    • Go paperless and start checking your credit card statements online to avoid having to keep and shred your paper statements. Just be sure to keep your online passwords in a safe place and to update them from time to time.
    • Check your credit card transactions each month to check for errors or suspicious activity. Quickly report any transaction you don’t recognize to your card issuer.

    Find the Top 3 Financial Advisors for You

    • Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

    Photo credit: Â©iStock.com/PeopleImages, Â©iStock.com/hsyncoban, Â©iStock.com/RichLegg

    The post Should You Sign the Back of Your Credit Card? appeared first on SmartAsset Blog.

    Source: smartasset.com

    The Negative Domino Effect Of Running Up Your Credit

    Have you ever had a situation where you had to utilize a great deal of your credit limit?  If so, did you find yourself in a negative spiral of repercussions for utilizing credit? Here are some things that can happen when your balance starts to rise.

    The post The Negative Domino Effect Of Running Up Your Credit appeared first on Bible Money Matters and was written by Melissa. Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.

    Source: biblemoneymatters.com

    How to Get Approved for Credit in a Financial Downturn

    In a recession it’s common for many people to rely on credit cards and loans to balance their finances. It’s the ultimate catch-22 since, during a recession, these financial products can be even harder to qualify for.

    This holds true, according to historical data from the Federal Reserve Bank of St. Louis. It found that during the 2007 recession, loan growth at traditional banks decreased and remained deflated over the next four years. 

    Credit can be a powerful tool to help you make ends meet and keep moving forward financially. Here’s what you can do if you’re struggling to access credit during a weak economy.

    Lending becomes riskier in a weak economy. Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

    How Does a Financial Downturn Affect Lending?

    Giving someone a loan or approving them for a credit card carries a certain amount of risk for a lender. After all, there’s a chance you could stop making payments and the lender could lose all the funds you borrowed, especially with unsecured loans. 

    For lenders, this concept is called, “delinquency”. They’re constantly trying to get their delinquency rate lower; in a booming economy, the delinquency rate at commercial banks is usually under 2%. 

    Lending becomes riskier in a weak economy. There are all sorts of reasons a person might stop paying their loan or credit card bills. You might lose your job, or unexpected medical bills might demand more of your budget. Because lenders know the chances of anyone becoming delinquent are much higher in a weak economy, they tend to restrict their lending criteria so they’re only serving the lowest-risk borrowers. That can leave people with poor credit in a tough financial position.

    Before approving you for a loan, lenders typically look at criteria such as:

    • Income stability 
    • Debt-to-income ratio
    • Credit score
    • Co-signers, if applicable
    • Down payment size (for loans, like a mortgage)

    Does this mean you’re completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.

    5 Ways to Help Get Your Credit Application Approved 

    Although every lender has different approval criteria, these strategies speak to typical commonalities across most lenders.

    1. Pay Off Debt 

    Paying off some of your debt might feel bold, but it can be helpful when it comes to an application for credit. Repaying your debt reduces your debt-to-income ratio, typically an important metric lenders look at for loans such as a mortgage. Also, paying off debt could help improve your credit utilization ratio, which is a measure of how much available credit you’re currently using right now. If you’re using most of the credit that’s available to you, that could indicate you don’t have enough cash on hand. 

    Not sure what debt-to-income ratio to aim for? The Consumer Financial Protection Bureau suggests keeping yours no higher than 43%. 

    2. Find a Cosigner

    For those with poor credit, a trusted cosigner can make the difference between getting approved for credit or starting back at square one. 

    When someone cosigns for your loan they’ll need to provide information on their income, employment and credit score — as if they were applying for the loan on their own. Ideally, their credit score and income should be higher than yours. This gives your lender enough confidence to write the loan knowing that, if you can’t make your payments, your cosigner is liable for the bill. 

    Since your cosigner is legally responsible for your debt, their credit is negatively impacted if you stop making payments. For this reason, many people are wary of cosigning.

    In a recession, it might be difficult to find someone with enough financial stability to cosign for you. If you go this route, have a candid conversation with your prospective cosigner in advance about expectations in the worst-case scenario. 

    3. Raise Your Credit Score 

    If your credit score just isn’t high enough to qualify for conventional credit you could take some time to focus on improving it. Raising your credit score might sound daunting, but it’s definitely possible. 

    Here are some strategies you can pursue:

    • Report your rent payments. Rent payments aren’t typically included as part of the equation when calculating your credit score, but they can be. Some companies, like Rental Kharma, will report your timely rent payments to credit reporting agencies. Showing a history of positive payment can help improve your credit score. 
    • Make sure your credit report is updated. It’s not uncommon for your credit report to have mistakes in it that can artificially deflate your credit score. Request a free copy of your credit report every year, which you can do online through Experian Free Credit Report. If you find inaccuracies, disputing them could help improve your credit score. 
    • Bring all of your payments current. If you’ve fallen behind on any payments, bringing everything current is an important part of improving your credit score. If your lender or credit card company is reporting late payments a long history of this can damage your credit score. When possible speak to your creditor to work out a solution, before you anticipate being late on a payment.
    • Use a credit repair agency. If tackling your credit score is overwhelming you could opt to work with a reputable credit repair agency to help you get back on track. Be sure to compare credit repair agencies before moving forward with one. Companies that offer a free consultation and have a strong track record are ideal to work with.

    Raising your credit isn’t an immediate solution — it’s not going to help you get a loan or qualify for a credit card tomorrow. However, making these changes now can start to add up over time. 

    4. Find an Online Lender or Credit Union

    Although traditional banks can be strict with their lending policies, some smaller lenders or credit unions offer some flexibility. For example, credit unions are authorized to provide Payday Loan Alternatives (PALs). These are small-dollar, short-term loans available to borrowers who’ve been a member of qualifying credit unions for at least a month.

    Some online lenders might also have more relaxed criteria for writing loans in a weak economy. However, you should remember that if you have bad credit you’re likely considered a riskier applicant, which means a higher interest rate. Before signing for a line of credit, compare several lenders on the basis of your quoted APR — which includes any fees like an origination fee, your loan’s term, and any additional fees, such as late fees. 

    5. Increase Your Down Payment

    If you’re trying to apply for a mortgage or auto loan, increasing your down payment could help if you’re having a tough time getting approved. 

    When you increase your down payment, you essentially decrease the size of your loan, and lower the lender’s risk. If you don’t have enough cash on hand to increase your down payment, this might mean opting for a less expensive car or home so that the lump sum down payment that you have covers a greater proportion of the purchase cost. 

    Loans vs. Credit Cards: Differences in Credit Approval

    Not all types of credit are created equal. Personal loans are considered installment credit and are repaid in fixed payments over a set period of time. Credit cards are considered revolving credit, you can keep borrowing to your approved limit as long as you make your minimum payments. 

    When it comes to credit approvals, one benefit loans have over credit cards is that you might be able to get a secured loan. A secured loan means the lender has some piece of collateral they can recover from you should you stop making payments. 

    The collateral could be your home, car or other valuable asset, like jewelry or equipment. Having that security might give the lender more flexibility in some situations because they know that, in the worst case scenario, they could sell the collateral item to recover their loss. 

    The Bottom Line

    Borrowing during a financial downturn can be difficult and it might not always be the answer to your situation. Adding to your debt load in a weak economy is a risk. For example, you could unexpectedly lose your job and not be able to pay your bills. Having an added monthly debt payment in your budget can add another challenge to your financial situation.

    However, if you can afford to borrow funds during an economic recession, reduced interest rates in these situations can lessen the overall cost of borrowing.

    These tips can help tidy your finances so you’re a more attractive borrower to lenders. There’s no guarantee your application will be accepted, but improving your finances now gives you a greater borrowing advantage in the future.

    The post How to Get Approved for Credit in a Financial Downturn appeared first on Good Financial Cents®.

    Source: goodfinancialcents.com

    What’s a Good Credit Score?

    Whats a good credit score?

    Your credit score is incredibly important. In fact, this number is so influential on various financial aspects of life that it can determine your eligibility to be approved for credit cards, car loans, home mortgages, apartment rentals, and even certain jobs. Knowing what your credit score is, and what range it falls under, is important so you can decide what loans you can to apply for, and if necessary, if steps need to be taken to improve your score.

    So what constitutes a good credit score?

    The Credit Score Range Scale

    The most common credit score used by lenders and other business entities is the FICO score, which ranges from 300 to 850. The bigger the number, the better. To create credit scores, FICO uses information from one of the three major credit bureau agencies – Equifax, Experian or TransUnion. Knowing this range is important because it will help you understand where your specific number fits in.

    Know what factors influence a good credit score to help improve your own credit health.

    As far as lenders are concerned, the lower a consumer’s number on this scale, the higher the risk. Lenders will often deny a loan application for those with a lower credit score because of this risk. If they do approve a loan application, they’ll make consumers pay for such risk by means of a much higher interest rate.

    Understand Your Credit Score

    Within the credit score range are different categories, ranging from bad to excellent. Here is how credit score ranges are broken down:

    Bad credit: 630 or Lower

    Lenders generally consider a credit score of 630 or lower as bad credit. A number of past activities could have landed you in this category, including a string of late or missed credit card payments, maxed out credit cards, or even bankruptcy. Younger people who have no credit history will probably find themselves in this category until they have had time to develop their credit. If you’re in this bracket, you’ll be faced with higher interest rates and fees, and your selection of credit cards will be restricted.

    Whats a good credit score?

    Fair Credit: 630-689

    This is considered an average score. Lingering within this range is most likely the result of having too much “bad” debt, such as high credit card debt that’s grazing the limit. Within this bracket, lenders will have a harder time trusting you with their loan.

    Good Credit: 690-719

    Having a credit score within this range will afford you more choices when it comes to credit cards, an easier time getting approved for various loans, and being charged much lower interest rates on such loans.

    Excellent Credit: 720-850

    Consider your credit score excellent if your number falls within this bracket. You’ll be able to take advantage of all the fringe benefits that come with credit cards, and will almost certainly be approved for loans at the lowest interest rates possible.

    Understand the factors that make up a good credit score.

    Whats a good credit score?

    What’s Your Credit Score?

    Federal law allows consumers to check their credit score for free once every 12 months. But if you want to check more often than this, a fee is typically charged. Luckily, there are other avenues to take to check your credit score.

    Mint has recently launched an online tool that allows you to check your credit score for free without the need for a credit card. Here you’ll be able to learn the different components that affect your score, and how you can improve it.

    You’ll be able to see your score with your other accounts to give you a complete picture of your finances. Knowing what your credit score is can help determine if you need to improve it to help you get the things you need or want. Visit Mint.com to find out more about how you can access your credit score – for free.

    Lisa Simonelli Rennie is a freelance web content creator who enjoys writing on all sorts of topics, including personal finance, investing in stocks, mortgages, real estate investments, and anything else to do with the world of economics.

    The post What’s a Good Credit Score? appeared first on MintLife Blog.

    Source: mint.intuit.com