If you have a line of credit or credit card under your name, you’re familiar with the minimum payment. It represents the least amount of money you have to pay to keep these accounts in good standing. 

The minimum payment is an alluring idea for sure. By paying a fraction of your balance, you’ll avoid late fines, and you’ll have more cash left over to cover other necessary expenses. 

With perks like that, why would you ever pay more than the minimum? Keep scrolling to find out!

Check Your Online Loan Contract First

When it comes to online loans like a cash advance or installment loan for bad credit, you’ll want to check your loan contract. That’s according to the installment loan experts at MoneyKey. While MoneyKey encourages you to pay down your debt at fast as possible, some online loan lenders don’t. 

These online direct lenders may charge you for making additional payments outside your usual schedule. 

3 Benefits of Paying More as Often as You Can

Once you get the all-clear from your lender, pay as much as you can. Here’s why:

1. You’ll Have More Credit Available

Perhaps the most immediate advantage to paying more than the minimum is how it frees up your available credit. If you pay your entire balance, you’ll have your full limit to use on a big purchase or an emergency. 

2. You May Accrue Less Interest

Nearly every single financial institution in the world applies interest and finance charges any time you borrow money — whether it’s with a credit card or installment loan for bad credit.

When it comes to a line of credit, these fees are calculated on your outstanding balance. Any time you carryover a balance, you’ll accrue more interest and charges on this amount. This cost rolls into the next billing statement, where it will be subject to these fees again.

That means you’ll be adding to your balance every time you pay the minimum and carry over a balance — even if you never use your account again!

The same idea may apply to your online loan if your payments go towards your principal. By lowering your principal, you may accrue less interest if your lender charges interest on your outstanding balance. 

3. You Could Improve Your Credit Score

If your lender reports your payments to a credit bureau, your payment activity may have an impact on your overall score. Paying only the minimum keeps the account in good standing, but it does nothing to reduce your balance.

This results in a higher utilization ratio, a factor in your score that compares how much of your available limits you use. Here, a high ratio isn’t something you want. It can damage your credit. 

Bringing down your balance will result in a lower ratio, which may help improve your score. 

Bottom Line

The minimum has its perks when you’ve hit a rough patch and don’t have a lot of cash to go around. But you’ll want to pay as much of your balance as possible whenever you can. You’ll free up your limits, pay less in interest, and possibly improve your credit.