Credit Card Q&A: “Should you pay off your credit card in full?”
While this may sound like an absolute no-brainer, it’s clear that many people still don’t know the answer to this very fundamental question.
First a little background on how credit cards work.
When you apply and get approved for a credit card, it comes with a certain credit limit, which is essentially the most you can spend with it before it’s considered maxed out.
[Charge cards do no have a pre-set spending limit.]
I Pay My Credit Card In Full Each Month
Assuming you are a responsible cardholder who does NOT spend beyond your means, you shouldn’t have any difficulty paying your credit card in full each month.
If this is the case, you probably make a reasonable amount of purchases each month, and make the full payment before or on the payment due date, which is the last day of your credit card grace period.
As a result, you will not pay any interest because you’re allowed to carry a balance during your billing cycle if it’s paid within the grace period (unless there is a pre-existing balance). Pretty straightforward, right?
This is what you should strive for unless you are severely cash-strapped and/or have a really compelling reason not to be spending your cash.
I Don’t Pay My Credit Card In Full Each Month
Now let’s look at the other group, who doesn’t pay their credit card off in full each month, for whatever reason.
People in this category, which is nearly half of all credit cardholders by some estimates, carry a balance from month to month.
They may do so for a variety of reasons. It could be that they’ve got promotional 0% APR, so they’re essentially deferring the cost of present-day purchases.
Or perhaps they transferred a balance via a no fee balance transfer credit card, and are slowly paying off the debt without incurring finance charges. Again, with 0% APR on their side.
While the previous two examples are perfectly acceptable, the third is not. There is another large group that spends beyond their means, and then carries a balance from month to month because they are unable to pay off their credit card balance in full.
This is a huge problem for obvious reasons. Not only does it mean you’re overextended, it also means the situation is going to get worse before it gets better.
Why? Because you’ve got a balance you can’t pay off and you’re presumably going to continue making new purchases on top of the existing balance. That means a growing pile of debt, compounding interest, and lots of finance charges.
You Need to Make Changes
If you’re in this final category, you need to slow down on your spending and live within your means.
You’ll also need to set a budget and perhaps even cut up some credit cards if you’ve got quite a few open.
You don’t need to close the accounts just yet, but you do need to wrangle in your spending.
Additionally, it may be in your best interest to call your credit card issuers and ask that they lower your interest rates. A simple phone call may work like magic.
Just tell them you’re planning to transfer the balance to another card issuer unless they lower your APR first.
Or, instead of telling them that, actually transfer the balance to a 0% APR credit card and start attacking the debt.
A 0% APR balance transfer essentially gives you a nice little window to make payments interest-free, even if they aren’t full payments.
So be sure to utilize them if you’ve got more debt than you can manage.
Finally, as I mentioned in a prior post, carrying a balance does not help your credit score. In fact, it can hurt your score so do your best to make all credit card payments in full, each and every time.
Read more: A lesson in credit utilization.