Like everyone, you love a good deal, so you’re probably intrigued by your line of credit’s minimum payment. As a cheap way to keep your account in good standing, the minimum can seem like you’re spending less in the moment. But there’s a good chance you’ll be wasting a lot of money in the future if you rely on it long term.

What is a Minimum Payment & Why Would You Use it?

With many lines of credit, the minimum is often a flat fee or percentage of your outstanding balance. However, your unique minimum payment will depend on your financial institution’s policies. 

For example, if you’re approved for a line of credit through MoneyKey, your minimum will consist of a mandatory principal contribution (MPC) and a billing cycle charge (BCC). 

• MPC: This portion goes towards paying your outstanding principal balance
• BCC: This number will reflect your line of credit usage, so it may vary from month to month. 

No matter how your lender calculates the minimum, it’s usually the smallest amount you have to pay to avoid late fines. 

As a result, it’s the cheapest way to keep your account in good standing and still continue to use it, provided you still have credit available. 

This can come in handy if you’re having a rough financial month; you can pay the minimum instead of your full balance and use yourremaining cash on other priorities. 

Why You Shouldn’t Rely on the Minimum Payment Every Month

Although it may be tempting to spend less any time you can, you’ll want to pay as much of your balance as possible whenever you have the cash. 

Here’s why:

The Minimum Costs Money

Your lender likely applies interest and finance charges to your account every time you rely on the minimum.These fees increase what you owe on the next billing statement, even if you don’t charge another cent to the account. 

In extenuating circumstances, these charges may be worth it if you can handle other emergencies by paying the minimum.

However, it’s easy to fall into a cycle of paying the minimum, and you’ll add interest to your account every time. Before you know it, you can wind up paying more in these fees than the original charges. 

The Minimum Ties Up Your Limit

Paying the minimum is a stalling technique. While it may keep your account in good standing, it isn’t a meaningful way to pay off debt. Since the minimum is a small portion of your total amount owing, it could take you several rounds of the minimum before you pay off what you owe. 

In the meantime, not only are you adding to your balance with interest and fees, but you’re also keeping your limit tied up. Each month, you’ll have less space on your line of credit should another unexpected expense come your way. 

By paying more than the minimum, you’ll pay down your balance faster and increase your available credit. 

The Answer: Pay What You Owe

Although it may seem like a deal, the minimum payment can wind up costing you money. If you have the funds available, pay off your balance whenever you can. And if you don’t, sit down with your budget to see how you can make it happen.