Finance charges and minimum credit card payments

Dear Experian,

I have a rather simple question. My wife and I disagree on whether a finance charge is already included in the minimum payment required. She says that we should pay both the minimum amount and the finance charge on time to maintain a good credit score. I say that you only need to pay the minimum amount on time to maintain a good credit score. Paying the finance charge is like paying more towards your balance that will shorten the life of your debt but it will not affect the credit score. Who do you think is correct?

- GMN

Dear GMN,

I don’t want to cause any marital strife, so I say listen to your wife. She’s giving you good advice, although you are technically correct.

A finance charge is the cost of credit including interest, cash transaction fees, late fees, and any additional charges that may be included under the terms of your contract. It is my understanding that lenders typically calculate a percentage of the amount you owe for purchases and add the finance charges to establish the minimum payment for that month.

You are correct that paying any amount more than the minimum due will reduce your debts faster. I hope you both will agree that paying only the minimum due will only reduce your debt minimally because a large part of it is going toward the finance charges and not toward the debt.

It can take many years to pay off even a moderate balance if you only make the minimum payment due. That’s where most people get caught.

If you pay the minimum due, you can eventually pay off your debt, but only if you don’t make any more charges. Your balance will continue to increase if you make charges and only pay the minimum due because you are continuing to pay only a percentage of the debt.

How does that affect your credit scores? A higher balance as compared to your credit limit is a sign of credit risk, so it will hurt your credit scores.

So, my advice is to take your wife’s counsel and pay more than the minimum due, even if you aren’t actually paying finance charges with the additional funds. It will get rid of your debt faster and help your credit scores in the long run.

Thanks for asking.

- The "Ask Experian" team