Does Making Interest Only Payments Impact My Credit Score?

Your credit scores are partly based on your level of debt as a percentage of your available credit. Generally, having high balances leads to lower credit scores. Therefore, making interest-only payments each month can have a negative effect on your credit score because your credit utilization level remains consistently high.

Credit Utilization

Credit utilization accounts for about 30 percent of your credit score. Typically, if you only utilize about 30 percent of your available credit card balance you get the highest score. Credit bureaus view people who have consistently high balances as credit risks because the failure to pay down the debt may indicate that the borrower has limited income. However, if you have a small balance on your credit card and choose to make interest-only payments it should not have a negative impact on your score.

Expense

Credit card companies send you a monthly statement requiring a minimum payment sufficient to cover the monthly interest. You can keep your monthly expenses low by only paying the interest each month, but if you pay more than the interest due, the surplus funds reduce your principal. This reduces your interest charge for the following month. Even paying a small amount to principal each month can save you a significant amount of money in the long run.

Missed Payments

When you miss a debt payment or only manage to make a partial payment, your creditor reports the delinquency to the credit bureaus. Payment history has an even bigger impact on your score than credit utilization, as it accounts for 35 percent of your total score. Missed payments can stay on your credit file for up to seven years and are more harmful to your score than high balances. Ideally, you would pay more than the minimum due every month, but you should not over-stretch yourself financially by paying extra one month if you run the risk of missing your next payment.

Other Considerations

Several other factors impact your credit score in addition to payment history and credit utilization. The average length of account history accounts for 15 percent of your score, while the number of new accounts and credit inquiries account for 10 percent. You receive high scores for having long established credit accounts and low scores when you open large numbers of new accounts at one time. Credit bureaus also reward you for diversity, as the type of accounts you currently use accounts for 10 percent of your total score.