Credit cards can be a convenient and rewarding way to pay for your purchases, but they also come with a cost: interest. If you don’t pay off your credit card balance in full every month, you will have to pay interest on the remaining balance, which can add up quickly and eat into your savings. On the other hand, if you pay off your credit card balance in full every month, you can avoid paying interest, boost your credit score, and enjoy other benefits. Here are some reasons why you should pay off your credit card balance every month and how to do it.
Avoid Paying Interest
One of the main reasons to pay off your credit card balance every month is to avoid paying interest. Interest is the fee that the credit card issuer charges you for borrowing money. The interest rate, or annual percentage rate (APR), varies depending on your credit card and your creditworthiness, but it is usually much higher than other types of loans. The average APR on a credit card is around 16%, but it can be as high as 25% or more.
If you don’t pay off your credit card balance in full every month, you will have to pay interest on the remaining balance. This interest is calculated based on your average daily balance and the number of days in your billing cycle. For example, if you have a $1,000 balance on a credit card with a 16% APR and a 30-day billing cycle, and you only pay the minimum payment of $25, you will have to pay $13.33 in interest for that month. That means you will only reduce your balance by $11.67, and you will still owe $988.33.
However, if you pay off your credit card balance in full every month, you can avoid paying any interest at all. This is because most credit cards have a grace period, which is a period of time between the end of your billing cycle and the due date of your payment. If you pay off your balance in full by the due date, you will not be charged any interest on your purchases. For example, if you have a $1,000 balance on a credit card with a 16% APR and a 30-day billing cycle, and you pay off the entire balance by the due date, you will not have to pay any interest at all.
By avoiding paying interest, you can save money and use it for other purposes, such as saving, investing, or paying off other debts. You can also get the full benefit of any rewards or cash back that your credit card offers, without having them offset by interest charges.
Boost Your Credit Score
Another reason to pay off your credit card balance every month is to boost your credit score. Your credit score is a number that reflects your creditworthiness and how likely you are to repay your debts. It is based on several factors, such as your payment history, your credit utilization ratio, your credit mix, your credit age, and your credit inquiries.
One of the most important factors that affects your credit score is your credit utilization ratio, which is the percentage of your available credit that you are using. For example, if you have a $1,000 credit limit on a credit card and a $500 balance, your credit utilization ratio is 50%. Generally speaking, the lower your credit utilization ratio, the better for your credit score. A high credit utilization ratio can indicate that you are overextended and may have trouble paying back your debts.
By paying off your credit card balance every month, you can lower your credit utilization ratio and improve your credit score. Ideally, you should keep your credit utilization ratio below 30%, or even better, below 10%. This can show lenders that you are responsible with your credit and can manage it well.
A higher credit score can help you qualify for better interest rates and terms on loans and other financial products. It can also help you save money on insurance premiums, rent deposits, utility deposits, and other fees that may depend on your credit score.
Enjoy Other Benefits
Besides avoiding paying interest and boosting your credit score, paying off your credit card balance every month can also help you enjoy other benefits, such as:
- Avoiding late fees: If you don’t pay at least the minimum payment on your credit card by the due date, you will have to pay a late fee, which can range from $25 to $40 or more. This can add to your debt and hurt your credit score. By paying off your balance in full every month, you can avoid paying any late fees and keep your account in good standing.
- Avoiding penalty APR: Some credit cards may charge you a penalty APR if you miss a payment or make a late payment. A penalty APR is a higher interest rate that applies to your balance and future purchases until you make several consecutive on-time payments. A penalty APR can be as high as 29.99% or more and can cost you a lot of money in interest. By paying off your balance in full every month, you can avoid triggering a penalty APR and keep your regular interest rate.
- Building good financial habits: Paying off your credit card balance every month can help you build good financial habits that can benefit you in the long run. It can help you avoid overspending, stick to a budget, and live within your means. It can also help you avoid getting into debt, which can cause stress and affect your mental and physical health.
- Accrue reward points: Most credit cards offer some sort of reward program. Each and everyone of them are slightly different in terms of points per dollar, how much you can accrue per month… You need to read the terms and conditions for each card to understand their reward programs. You can take advantage of your credit card’s reward program to accrue reward points. These can be redeem for cash, gift cards or travel vouchers among other things.
How to Pay Off Your Credit Card Balance Every Month
Paying off your credit card balance every month may sound simple, but it can be challenging for some people, especially if they have a large balance or a low income. Here are some tips to help you pay off your credit card balance every month:
- Track your spending: The first step to paying off your credit card balance every month is to track your spending and know where your money is going. You can use an app, a spreadsheet, or a notebook to record all your expenses and categorize them by needs and wants. This can help you identify areas where you can cut back or save money.
- Make a budget: The next step is to make a budget and plan how much money you will spend on each category of expenses. You should also allocate some money for savings and debt repayment. Your budget should be realistic and based on your income and goals. You should review and adjust your budget regularly to reflect any changes in your situation.
- Pay off your balance as soon as possible: The sooner you pay off your credit card balance, the less interest you will pay and the more money you will save. You should try to pay off your balance as soon as you receive your statement or even before that if possible. You can also make multiple payments throughout the month to reduce your average daily balance and lower your interest charges.
- Use cash or debit cards for purchases: One way to avoid accumulating a credit card balance is to use cash or debit cards for most of your purchases. This can help you avoid overspending and limit your credit card usage to essential or planned expenses. You can also use cash or debit cards to pay for variable expenses, such as groceries, gas, or entertainment, and use credit cards only for fixed expenses, such as rent, utilities, or subscriptions.
- Pay more than the minimum: If you can’t pay off your credit card balance in full every month, you should at least pay more than the minimum payment. The minimum payment is usually a small percentage of your balance and barely covers the interest charges. By paying more than the minimum, you can reduce your balance faster, save money on interest, and improve your credit score.
Final Thoughts
Paying off your credit card balance every month is one of the best ways to use credit cards wisely and responsibly. It can help you avoid paying interest, boost your credit score, and enjoy other benefits. It can also help you save money, reduce stress, and achieve your financial goals faster. By following some simple tips, you can pay off your credit card balance every month and take charge of your finances.