Does making partial payments help decrease debt?
Dealing with debt can be a challenging and overwhelming experience for many people. Whether it’s student loans, credit card debt or a mortgage, finding strategies to manage and reduce debt is helpful for adopting healthy financial habits. If you’re struggling to make full payments toward your debt each month, you may be considering partial payments. But do they actually help decrease debt?
In this article, we’ll explore what partial payments are, if they actually decrease your debt, how they affect different types of loans and how they can impact your credit score.
What is a partial payment?
In the case of credit cards, a partial payment is a payment made on a loan or debt that is less than the full, regular installment amount required by the lender on a monthly basis. Partial payments are sometimes used when a borrower is able to negotiate with the lender for a smaller payment, either temporarily or permanently. It’s important to note that every loan and lender has different terms, so be sure to fully understand them and always communicate with your lender if you’re having trouble meeting those terms.
A partial payment means not paying your balance in full. Just bear in mind that you may accrue interest on the remaining balance. What’s more, if you don’t pay the minimum amount due, set by your credit card issuer, this can be considered a late payment.
Can you make partial payments on debt?
Yes, you can make partial payments on your debt. However, as stated above, this largely depends on the terms of the loan, your credit card agreement and the lender’s policies. While some lenders will accept partial payments and apply them to the principal balance, others may have restrictions or prefer to apply partial payments to future installments. Therefore, it’s crucial to consult with your lender to ensure that your partial payments are actually reducing your debt, especially your principal balance.
It's also important to note that some lenders may still report partial payments to credit bureaus as late or missed payments, which can remain on your credit report for seven years and have a negative effect on your credit score.
Aside from the flexibility of the loan terms, you should also take into consideration the fact that making partial payments means it will take longer to pay off the loan. In addition, only making partial payments can result in the accumulation of interest on the remaining balance, potentially leading to a higher total debt compared to if you make full monthly payments.
Effects of partial payments by loan type
The impact on loan repayments when you make partial payments can vary depending on the type of debt you have. Here are some insights into how partial payments affect different loan types.
Mortgages
For mortgages, partial payments can reduce the principal balance, if the loan terms allow. Mortgage loans are typically long-term commitments, so the impact on the reduction of debt may not be felt as quickly. In addition, some mortgage lenders may consider partial payments as defaults on the loan. This could have repercussions such as late fees and/or derogatory remarks on your credit report.
Personal loans or student loans
Similar to mortgages, you have agreed to the lenders’ terms of your personal loan repayment schedule up front, and any departure from that schedule could be considered a default and ultimately affect your credit score. If your payment is more than 30 days past due, it may be reported to all three credit bureaus, as happens with most debts.
Auto loans
If you’ve never missed a payment on your auto loan before but need to make a partial one from time to time, it’s possible that your lender would be willing to negotiate that. However, if you have two or three consecutive missed or partial payments without communicating with them, it could lead to a default on the loan and the potential repossession of your vehicle. This could damage your credit score (and leave you without a vehicle). You may want to work out a payment plan if you find you are no longer able to make full payments.
Credit cards
Credit cards typically come with minimum monthly payment requirements that fluctuate. You must pay at least the minimum payment, according to the terms of your credit card. If you only pay a portion of that minimum payment, you could incur late fees, or a penalty APR could be applied. Penalty APRs are typically higher than standard APRs and could increase the amount of interest that accrues.
How partial payments can affect your credit score
While making a partial payment may appear to be a step in the right direction compared to making no payment at all, you’ll want to understand how this strategy could potentially impact your credit score.
Certain creditors treat partial payments similarly to missed or late payments. Late payments have the potential to harm your credit score significantly, as your payment history holds the most substantial influence when determining your overall creditworthiness and can remain on your credit report for several years.
Moreover, a history of late, missed or partial payments may be interpreted by potential lenders as a sign of financial distress. This may result in higher interest rates on future lines of credit or even make it harder to get approved for credit.
You may want to consider discussing alternative solutions with your creditors if you’re facing financial hardship so you can mitigate potential negative impact to your credit score.
In summary
It’s important to recognize that making partial payments toward your debt may decrease it, but it could end up taking you longer to pay it off, and the interest you accrue over this longer period of time could get bigger than you intended. In addition, there could be a negative impact to your credit score. Whenever possible, it’s best to make full payments instead of partial ones. You may want to consider being proactive with your lender to explore alternative solutions to managing your debt.
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In addition, try the free credit planning feature powered by Experian™ — a user-friendly feature that will help you create a customized action plan with the goal of improving your credit score.
