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If I’m Making Minimum Payments on My Credit Cards, I Have Good Credit, Right?

There are so many myths and half-truths when it comes to credit reports and credit scores, and minimum payments represent one of the most detrimental. So many people believe that if they’re making minimum payments, on time, each and every month, they should be in great financial standing. Unfortunately, this isn’t necessarily the case.

Why? Your overall credit represents your level of financial risk where lenders are concerned. Your credit report and credit score illustrate your borrowing behaviour and are used by lenders to calculate how likely you are to pay back funding they lend to you. Making minimum payments only is not considered promising credit behaviour as far as lenders are concerned.

This is because, in most cases, if you’re only making minimum payments, it is most likely because you owe so much you can’t afford to pay any more than that. Often on credit cards, minimum payments barely cover interest and so the total debt decreases at a snail’s pace.

Even if you’re making minimum payments, if credit cards are maxed out or you are carrying a lot of debt, you may not have good credit and may find that lenders start saying no when and if you apply for new credit.

Good credit means:

  • You don’t apply for credit on a regular basis (this demonstrates you are living within your financial means)
  • You don’t have too many different credit products
  • You owe less on credit cards than the available limits (like 75% or less)
  • You make your monthly payments on time, all the time

Just because you’re making minimum payments, that doesn’t mean that your credit is good. It can actually have the opposite effect, signaling to lenders that you can’t afford the debt you’re currently carrying, thus resulting in the aforementioned rejection when it comes to obtaining new credit.

If this is news to you, but you’re not actually in a position to make more than the minimum monthly payments on your credit cards, it may be time to consider other options. You may want to think about developing a financial plan that may include looking at strategies to clear the debt and start fresh. Perhaps this means a personal loan to consolidate or even unlocking some of your home equity.

Want to find out how you can move away from the practice of only making minimum payments?

Please contact Jill Stern for a financial consultation to look at the whole picture and find out what options may get you back on the path to financial success: 1-416.223-9300 ext 224.

 

 

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