How Finance Charges and Minimum Payments Affect Your Credit Score

Quick Answer

While paying finance charges won’t improve your credit score, it will bring down your credit card balances and help boost your credit score. It’s always better to pay more toward your balance than the minimum payment.

Couple window shopping together

At Experian, one of our priorities is consumer credit and finance education. This post may contain links and references to one or more of our partners, but we provide an objective view to help you make the best decisions. For more information, see our Editorial Policy.

Dear Experian,

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,

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. 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 no more than 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 make only 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 small percentage of the debt.

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.

How Does Utilization Rate Impact Scores?

Your credit utilization rate is the second most important factor in your credit scores, right behind payment history.

If your balance keeps accruing, your utilization rate will increase, and it can start to affect your credit scores.

Your utilization rate, also referred to as your balance-to-limit ratio, is calculated by taking the total of all your credit card balances and dividing that number by the total of all your credit card limits. A higher balance as compared to your credit limit will result in a higher utilization rate, which is a sign of credit risk, so it will hurt your credit scores.

The lower your utilization rate, the better for your scores. As a general rule, you should strive to keep your utilization below 30%, but below 10% is even better.

From a credit score perspective, you should 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.

How Can I Find Out What's Affecting My Scores?

If you are looking for ways to improve your credit scores and would like more insight into how the different elements of your credit history affect your scores, consider ordering your free credit score from Experian.

The score will come with a list of the risk factors that are having the most negative effect on your credit scores. You can use those risk factors to better understand how lenders might evaluate your risk and to identify actions you may take if you need to improve your risk position and get better scores, such as paying down balances on your revolving accounts.

Steps to Improve Your Credit Score

Knowing your risk factors is key to improving your credit score, but there are a few things that anyone can do to increase their scores:

  • Bring any past-due accounts current. Lenders want to see that you can manage the debt you have before taking on new credit. If you have an account that is past due, the first step is to bring that account current.
  • Make all payments on time going forward. Making payments on time is the most important factor in credit scores. Even one missed payment can cost you in the form of late fees, an increase in interest rates and a decrease in your credit score.
  • Enroll in Experian Boost®ø. This free feature allows you to get credit for your on-time utility, cellphone and streaming service payments. It's fast, easy and you'll get an updated FICO® Score once enrollment is complete.

Thanks for asking.

Rod Griffin, Senior Director of Public Education and Advocacy for Experian

The purpose of this question submission tool is to provide general education on credit reporting. The Ask Experian team cannot respond to each question individually. However, if your question is of interest to a wide audience of consumers, the Experian team may include it in a future post and may also share responses in its social media outreach. If you have a question, others likely have the same question, too. By sharing your questions and our answers, we can help others as well.

Personal credit report disputes cannot be submitted through Ask Experian. To dispute information in your personal credit report, simply follow the instructions provided with it. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.

To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through December 31, 2022 at AnnualCreditReport.