These days, credit cards are handy financial tools that must be used responsibly. However, if you carry balances and only make minimum payments, interest charges can quickly spiral out of control. You have two main options for paying off your monthly credit card bill – paying the statement balance in full or making the minimum payment. A third option that more and more issuers provide is paying your bill in instalments or EMIs. Let’s compare these three approaches and see which makes the most financial sense.
Benefits of Paying in Full
Ideally, you should strive to pay your credit card statement balance in full each month after you apply for credit card before the due date. Doing so allows you to enjoy these benefits:
- Avoid interest charges: Credit card interest rates are high. So, paying in complete means you never pay interest or finance charges to the financial institution. This saves you lots of money over time.
- Improve credit score: Your credit utilisation rate (percentage of credit used) is one of the vital factors in your credit score. Keeping balances low helps increase your score. Paying in full keeps your utilisation at 0%.
- Pay no fees: Many credit card issuers charge fees for late payments or exceeding your credit limit. Paying in complete helps avoid these penalties.
- Simpler finances: You don’t have to track multiple minimum payments and interest charges each month by paying in full. Your finances stay simpler.
As you can see, striving to pay your credit card balances off in full each month has many advantages and should be your ultimate goal. But what if that isn’t possible for one month? You still have options.
The Drawbacks of Minimum Payments
Paying the minimum is better than paying late. However, minimum credit card bill payments have significant financial drawbacks, including:
- High-interest charges: When you carry a balance, interest is charged on your average daily balance until paid in full. Minimum payments stretch out the repayment period, increasing total interest costs.
- Small percentage of balance: Minimum payments are typically 2% to 3% of your total balance. When your balance is large, minimum payments barely dent what you owe.
- Long repayment timeframe: Making minimum payments can take years to pay off a large balance, and the debt can hang over your head for a very long time.
The “Middle Ground” of EMIs
Some credit card companies now offer cardholders the option to pay larger purchases or balances in instalments over a fixed timeframe, or EMIs. An interest charge is typically applied, but it is lower than the normal credit card interest rate.
Paying your bill in EMIs can offer some benefits compared to minimum payments, including:
- Lower interest rate than the normal credit card rate
- Fixed monthly payment amount through the end of the EMI term
- Disciplined repayment structure to pay off the balance by the end date
- It may be a more affordable monthly payment than paying in full
The most significant advantage of EMIs is that they force you to pay off the balance by a fixed date, compared to open-ended minimum payments. However, interest charges are still incurred, and paying only the minimum each month is still not the ideal financial path over the long term.
Conclusion
The first thing you should do when paying your credit card bill is to pay the statement balance, which prevents creditors from charging interest. EMIs create a specific payment system that replaces open-ended minimum payments while offering lower interest rates but serves customers who cannot pay their total statement balance. People should handle their monthly statement balance as their long-term financial goal, although minimum amount payments offer a temporary solution.