Should You Repay Your Credit Card Each Month? What to Consider
Editorial Note: Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone
Paying your credit card off every month sounds like a great idea. But when the bill comes, it’s so easy to pay less than the total balance — or to just pay the minimum. The problem is, the balance adds up quickly, and next month, paying off the full card will be even harder. This is how so many Americans find themselves regularly carrying balances, and even accepting it as a sad fact of life.
Of course, many people do manage to pay their credit card balances off every month. In fact, 61% of U.S. adults say their household does not carry credit card debt from month to month, according to the National Foundation for Credit Counseling (NFCC).
Why you should pay off your credit cards in full each month
Households that don’t carry credit card debt from month to month avoid a lot of financial hardships. Here’s why:
1. Credit card interest rates are generally high. Credit card debt may carry some of the highest interest rates you’ll ever have to pay. The average interest rate on credit cards was 14% in 2017, according to the Federal Reserve. Many credit cards carry rates of 18% or higher.
Your credit card statement should show you how much — and how long — it will take to pay off your current balance if you only make the minimum payments every month. Sure, the minimum payments are low. But you’ll see that over time, you could end up paying twice as much or more for your purchases than they actually cost.
2. New consumer debt keeps you from reaching your financial goals. One of the things that makes credit card debt so difficult to climb out of is compound interest. Compound interest is what happens when you are getting charged interest not just on your original balance, but on the interest that gets added to that balance every month. This is why, if you just pay the minimum amount due every month, you could end up paying $1,600 for an $800 television. “The advantage of long-term savings is the ability to let compound interest work for you over time,” said Harris Nydick, a certified financial planner based in Totowa, N.J., and author of “Common Financial Sense.” “If you have credit card debt, compound interest is working against you.”
Compare your credit card interest rates to the amount you’re receiving on your savings account at the bank. The average bank savings account rate is .09%, according to the Federal Deposit Insurance Corp. It’s hard to get ahead when you’re earning minuscule interest on your savings at the same time that you’re paying high interest rates on your credit card debt.
3. Low balances mean a higher credit score. One of the more common credit myths is that carrying a balance on your credit card helps build up your credit score. In fact, the lower your balance when the bank reports to the credit bureau, which could be any time during the billing cycle, the better it is for your score.
The amount of debt you carry determines 30% of your FICO credit score. For the highest possible credit score, aim to use a low percentage of your available credit — around 30% or less — and don’t carry a balance on too many accounts at once.
4. The money is already spent. When you pay your balances in full every month, you see the cash come out of your checking account soon after making your purchase. The connection between that cute pair of shoes and the price you’re paying is more immediate in your mind.
When credit card balances build up, you no longer think of it as paying for new shoes and dinner. After several months, who knows what you spent that money on? The balance simply takes on a life of its own.
Try to think of your money as already spent when you put something on the card — not when you pay the credit card bill. If you can’t afford to pay cash for something now, you probably can’t really afford to put it on your card, either.
When you may not want to pay off your credit card in full
Every rule has exceptions. You may choose to not pay off your credit card debt in situations such as these:
1. You have higher interest debt. If you have balances on other cards or loans with higher interest than this card, you may want to pay down the debt with the highest interest rate first.
2. Your card has a 0% introductory rate. If you took out an introductory rate card with a very low or 0% rate for the promotional period, you may want to use your money elsewhere now, and pay down that credit card later. This can be a good strategy — but only if you make a plan and stick to it.
3. You are facing a real, temporary emergency. If your car breaks down in a snowstorm, or you have a major health crisis, you may not have much choice but to spend more than you can pay off during the next billing cycle. Pick yourself up and pay that balance as quickly as you can, before it gets out of hand.
You can usually tell if something is a real emergency by asking yourself how often you have an emergency, and what you would do if you didn’t have the credit available. If you find you have these emergencies regularly, try to build more room in your monthly budget to allow for them. At the end of the day, emergencies will always be a fact of life. But carrying a credit card balance doesn’t have to be.