Recently, reports of credit card companies reducing minimum payments for their borrowers have been making the rounds online. According to these reports, many card issuers will now allow borrowers to pay just the minimum payment on their credit card bills, which can result in a savings of thousands of dollars per year, depending on the terms of the contract.
The statements, which seem to reflect the Wall Street consensus, highlight the substantial gap between borrowers and lenders. Some argue that these changes are a positive development for consumers. Others are concerned that these refinancing trends will lead to the fall of the US credit card market.
As we were reading about these changes, we started wondering how the finances of regular Americans compare to the richest and most affluent in the US. And while we are no credit counselors, we wondered how much money the best credit cardholders in the US are making annually. As we all know, credit scores are the foundation for good credit scores.
The Higher the Credit Score, the Better the Credit Rating
In our opinion, if your credit score is above 700, it should improve your FICO score, which is essentially a credit score. FICO scores, which are generated by TransUnion (TRU), are sometimes described as the credit score scale to have. According to Discover (DFS), FICO scores are typically used for:
- Interest Rate Analysis
- Payment Analysis
- Credit History Analysis
- Credit Collection History
- Lending Analysis
- Creditor Behavior Analysis
We are not going to bother going into the specific formulas used to calculate the credit scores, and will simply link to those explanations. However, we do want to reiterate that the only reason credit scores are so important is because they affect how much interest you’ll pay on your loans. So, obviously, if you can shave a few hundred bucks off your interest rate, it should make a pretty big difference in your wallet.
What About All Those Credit Card Company Reductions?
Now, if we had a credit card and were paying less than the minimum payment due on it, would that hurt my credit score? Unfortunately, it would likely hurt it a great deal because the higher your credit score, the less likely you are to be affected by these kinds of interest rate fluctuations. This is basically because lenders pay more attention to higher-scoring borrowers, and thus lend to higher-score borrowers.
But that’s where borrowers come in, right? Shouldn’t people who are savvy with their finances be able to increase their credit scores at a faster rate than the lower-scoring people in the country? Well, unfortunately, some would argue that this is unlikely to happen because people with high credit scores tend to be savvier with their money, and thus make better financial decisions.
While it’s true that having high credit scores can make you much more likely to pay your bills on time and keep track of your finances, it’s probably not the case that having high credit scores automatically translates into excellent financial habits.
How Much Can We Earn by Paying Less Than the Minimum?
To figure out how much money people with the best credit scores are making per year, we began looking at some credit card statements. The answer to how much money you could make by paying less than the minimum payment on your credit card is simple: lots and lots of money!
There is no minimum amount on these accounts. On average, consumers paid a little over 11 percent of their balances in the past 12 months. In other words, if you have $7,000 in credit card debt, and you paid at least $1,500, you would pay less than $7,000!
If you pay less than the minimum, then you’ll pay less interest, which can result in a lower balance.
Lenders Increase Your Credit Score Every Day
The average FICO score is 704. According to Experian, there are about 7.2 billion individuals with a FICO score. You’re probably going to want to lower your credit score at least slightly if you’re paying a lower minimum payment to a card. And we don’t need to tell you that credit card companies do everything they can to keep you in good standing with them. So, the faster you can reduce your credit card balances and start paying them off, the better off you’ll be.
In our experience, the good companies seem to reward you with higher credit scores the sooner you pay your bills on time. For example, Capital One has a couple of rewards programs that encourage credit card use. If you pay your balance on time and make your minimum payments, you’ll qualify for “guaranteed credit,” which can eventually be worth as much as 10 percent on your credit score.
The idea behind “guaranteed credit” is that the company will give you as much as 10 percent of your credit score for up to two years in exchange for maintaining an excellent credit score. They’ll also give you a bonus if you pay them back faster than they expect you to. In fact, Capital One, Bank of America, and Discover reward you with bonus points for paying off your credit card in the first 30 days.
There are only a few things to keep in mind when shopping for a credit card that will help you maximize your credit score.
- Take advantage of rewards that can help you get a higher credit score as quickly as possible.
- Take out the time to read all the terms and conditions.
- Use your credit card for small purchases.
- Don’t ever close a credit card!
Cut Your Credit Cards Down:
Having a bad credit score doesn’t just mean that you can’t get the car or house of your dreams; it also means that you’ll likely have a hard time borrowing money for any other financial purpose. For example, if you have bad credit, you’re much less likely to qualify for a personal loan to start a business. There are several ways to improve your credit score:
- Pay more than the minimum payment.
- If your goal is to improve your credit score, making the minimum payment each month is a pretty good way to start.
If you have a specific goal in mind, there are several things you can do to increase your credit score. We are a big fan of paying down debt as quickly as you can, so we’ll focus on that aspect of improving credit score. Must, do two things to get out of credit card debt faster.
- You can pay off your entire debt right away, or
You can start paying more than the minimum payment.
We’ll focus on the first option in this article.
Start by getting rid of the highest interest rate credit cards first. To do this, you can either pay off the whole card, or you can transfer all the money owed to the lowest rate card. For example, if you have two credit cards with a $10,000 balance, one has a 25 percent APR and one has a 21.99 percent APR, you can transfer all your money owed to the one with the lower interest rate. That’s called a “balance transfer.”
By transferring the amount owed to the lower interest rate credit card, you’ll pay less interest each month and get out of credit card debt faster. And you can always make extra payments on the balance transfer card until you get the balance paid off. We are always trying to pay off my credit card debts, so a balance transfer is a way we pay off a credit card every month. Once you get rid of a credit card, you can start the process all over again.
Put the minimum payment amount on one of your highest interest rate credit cards, and pay that amount every month. You can use a calendar to track your payments and keep track of how much you’ve paid.
- After 30 days, pay the minimum payment on the other card.
- After 60 days, pay the minimum payment on the first card.
- Afterward90 days, pay the minimum payment on the second card.
At this point, you should be out of credit card debt, which will improve your credit score. Of course, this will take a while. You’ll need to pay your cards off before you can start your payoff plan, so don’t think that your credit card debt is magically going to be paid off anytime soon. Once you pay off your credit cards, you should pay more than the minimum payment every month on a lower interest rate card.
You’re just not going to get a better return on your money paying the minimum payments each month. If you have a lower interest rate card, it can take a lot longer to get out of debt. You might have to make a huge payment to get out of debt faster.
Make Extra Payments Each Month
Once you’ve paid off your credit card debt, start paying more than the minimum payment on your next credit card. You can start doing this now so that you have a good start on getting out of debt. We recommend paying more than the minimum payment on your credit card if you have a credit card with a variable rate. If your credit card has a variable rate, you want to make sure to pay the minimum payment each month.
But make sure you pay more than the minimum if your credit card has a variable rate. If you have a good reason, you can pay more than the minimum on a variable rate credit card, such as if the rate is about to go up. That way you’re not going to lose money. At this point, your credit card balances should be close to the interest rate of your variable rate credit card, so pay this amount off.
But don’t stop there. Pay extra on each of your high-interest rate cards. After you pay off the highest interest rate credit card, you can start making extra payments on the other credit cards. You can do this by checking your online credit card bill, and looking for the line item for the “change to the minimum payment.” It might be the lowest rate you could get, so make the extra payment.
This way you’ll pay more than the minimum on each of your cards. At this point, your credit card balances should be close to the interest rate of your low-rate credit card. Pay extra on this credit card, if you can, so you’re getting the best interest rate. After you pay off your low-rate credit card, you can start making extra payments on your high-rate credit card.
This is a good time to make extra payments, as long as you have the extra money. If you don’t have extra money, you can take a chunk out of your savings, or make a large donation to charity. You don’t have to be sitting on extra cash.
You Can Use Extra Money to Pay Extra
At this point, you should have paid off all of your credit card debt and are on your way to financial peace of mind. You might want to check your credit report, to make sure you haven’t missed any payments. Make sure your credit score is as high as it can get.
Make sure you’re taking steps to improve your credit score and that it’s not going to go down. The most important part of your credit report is your FICO score, which should be around 800. If you have a score of around 800, you’ll have no problem getting a credit card. But a credit score of 800 is pretty rare.
Your credit score could be better, and you might be able to get a much better interest rate than 7. 9%. But you can also be in worse shape.
We are happy to share this post, as we are writing it to help someone.
It might be you!