Could Making Minimum Payments Hurt Your Credit Score?

How you use your credit card can have a big effect on your credit score. Paying your bills on time and keeping your balance low relative to your credit limit has a direct impact on your score, but there’s a lot lenders can learn from the way you pay your credit card bills, too.

Credit card issuers are increasingly reporting to credit bureaus how much of your monthly bill you pay. Whether you pay the minimum, the full balance or something in between, that data is starting to show up on credit reports a lot more often.

That data hasn’t been included in credit scoring models yet, but that doesn’t mean lenders aren’t considering it when reviewing your credit report. If you go from consistently paying in full to only paying a portion of your bill, your credit score may not shift, but the payment data could indicate a change in your finances that makes you a greater credit risk.

“You’re making all your payments, but something is causing you to make lower and lower payments,” said Trevor Carone, senior vice president of decision analytics for Experian. “Your actual payment can be an indicator, ahead of any actual delinquency that may occur.”

Only once you start driving up your credit utilization rate or miss a payment will your credit score start to suffer. If you want to monitor how late payments and your credit utilization are affecting your credit, you can see two of your credit scores for free every month on Credit.com.

What Issuers Report

If you look at your most recent credit report and your revolving accounts, you may notice fields like balance, amount due, amount paid, past due and rating. The balance and rating are driving factors of your credit scores, because they contribute to your credit utilization rate (how much of your credit limit you use) and payment history, respectively. The information about amount paid and amount due will show that you pay your entire balance each billing cycle, pay the minimum or pay another amount.

Issuers have had the option of reporting that data for several years, but Carone said they’re submitting those numbers more than ever. He estimates about 70% of issuers report balances and payment amounts.

That inconsistency is part of the reason the data isn’t factored into credit scoring at the moment.

“It’s something that is fairly new in terms of creditors reporting it to credit bureaus,” said Anthony Sprauve, senior consumer credit specialist for FICO. “We don’t have sufficient data to analyze to see if it’s predictive.”

Consequences of Minimum Payments

Making payments is crucial to having a decent credit standing. Even if you’re only making the minimum payment each month, doing so consistently will have a great impact on your credit. Conversely, someone who pays more than the minimum but misses a payment every once in a while will watch their credit score suffer as a result.

Don’t let that confuse you: Amount matters, just not directly. Making minimum payments while continuing to spend and drive up your credit card balances will have an adverse affect on your credit utilization rate, which has considerable bearing on your scores. FICO recommends keeping your utilization below 30%, Sprauve said, and lower is even better.

Additionally, if lenders review your credit report and see you making only minimum payments, they’ll have a very important question: “Why?”

“Top issuers that have a lot of analysts that are able to look at this stuff and factor it into their decisions,” Carone said.

It’s not so much the amount you’re paying each month as the consistency of the payment. Experian has aggressively analyzed payment behavior, and Carone said it’s very predictive. Here are some of the numbers:

Because so many people pay the minimum, they drive average behavior among credit card users. Looking at users with different payment behaviors, Experian found significantly different levels of risk. People who paid in full (he referred to them as transactors) were 63% less likely than average to default six months later, while people making a little bit more than the minimum payment were 86% more likely than average to default within six months.

“If you’re constantly erratic, it indicates something is going on behind the scenes,” Carone said. Based on that deduction, a lender may consider you a greater risk than your credit score indicates.

Credit scoring companies constantly evaluate a variety of data that may be predictive and worth including in future models. While your monthly credit card bill may not impact your scores right now, you should know what does.