Paying off your credit card balance in full each month is typically the ideal scenario for several reasons:
1. Save on Interest:
Credit card interest rates, known as Annual Percentage Rates (APR), can be quite high compared to other types of loans. If you pay your balance in full every month, you can avoid paying this interest entirely. For example, let’s say you have a credit card with an APR of 18% and a balance of $1,000. If you only make the minimum payment each month, you could end up paying hundreds of dollars in interest over time. However, by paying the full $1,000 when it’s due, you’ll avoid these interest charges.
2. Improve Your Credit Score:
Your credit utilization ratio, which is the percentage of your total available credit that you’re using, plays a significant role in calculating your credit score. Maintaining a low credit utilization ratio can help improve your score. So, if you have a credit card with a $5,000 limit and you’ve charged $2,500 on it, your credit utilization ratio is 50%. Paying off your balance in full will reduce this ratio back to 0%.
3. Avoid Debt:
By paying off your credit card in full each month, you’ll avoid falling into the potentially harmful cycle of credit card debt. Credit card debt can snowball quickly because of the high interest rates. For example, if you have a $2,000 balance and only make the minimum payments, it could take you several years and cost you a significant amount in interest to fully pay off the debt.
4. Earn Rewards:
If you have a rewards credit card, you’ll earn points, miles, or cash back on your purchases. However, the value of these rewards can be quickly outweighed by interest charges if you carry a balance. By paying off your card in full each month, you’ll maximize the benefits of these rewards.
Remember, the key to healthy credit card use is treating it like an extension of your bank account. Only charge what you can afford to repay in full each month. If you’re unable to do this, it could be a sign that you’re living beyond your means and may need to adjust your budget.
Cons of Paying Off Your Credit Card Every Month:
While the cons are significantly fewer (and paying your balance in full is generally recommended), there can be a few potential drawbacks to consider:
1. Potential for Overspending: If you see that you have a zero balance each month, you might be tempted to spend more. Remember, a credit card isn’t free money. You should continue to spend within your means.
2. Cash Flow Issues: If you’re using most of your cash to pay off your credit card each month, you might not have enough for other expenses or savings. It’s important to maintain a balance between paying off debt and meeting your other financial needs and goals.
3. No Improvement in Credit Mix: Credit scoring models like to see a mix of different types of credit, including revolving credit (like a credit card) and installment credit (like a mortgage or auto loan). If you only have credit cards and you pay them off in full every month, your credit mix might be lacking. However, this is a minor factor in your credit score and not a strong argument against paying off your credit cards each month.
1. Should I pay off my credit card balance in full every month? Yes, paying off your credit card balance in full each month is generally recommended as it helps you avoid interest charges, maintain a lower credit utilization ratio, and could positively impact your credit score.
2. What happens if I can’t pay off my credit card balance in full? If you can’t pay your balance in full, it’s crucial to at least make the minimum payment to avoid late fees and potential damage to your credit score. Any balance carried over to the next month will be subject to interest charges.
3. Will paying off my credit card in full each month improve my credit score? Yes, paying off your credit card in full can help improve your credit score. A significant part of your score is based on your credit utilization ratio (the percentage of your available credit that you’re using). By paying off your balance in full, you keep this ratio low which is generally good for your credit score.
4. Can paying off my credit card in full lead to overspending? It’s possible. Seeing a zero balance each month might tempt you to spend more. It’s important to remember that a credit card isn’t free money. Always spend within your means and budget.
5. Can I still earn rewards if I don’t pay off my credit card in full? Yes, you’ll still earn rewards on eligible purchases regardless of whether you pay off your balance in full. However, carrying a balance could mean paying more in interest than you’re earning in rewards, negating their benefit.
Remember, credit cards are financial tools.
The average credit card balance in the United States was around $5,300 per individual according to Experian’s 2020 Consumer Credit Review.