In a perfect world, no one would ever carry a balance on their credit card at the end of the month. Everyone would only ever spend exactly what’s available in the bank and there would be no need for this article. But, obviously, that’s not reality. In the real world, sometimes you might ask yourself if it’s actually necessary to pay off your card balance. Sometimes you might think of your credit card as an easy ticket to buying an item or experience you wouldn’t otherwise be able to afford.
If you can, however, it’s always better to pay off your card at the end of the billing cycle. Here’s why and how to manage those payments like a pro.
How credit cards work
Credit cards offer you a line of credit and can be used to pay for purchases both online and in person. When you use a credit card to pay for something, the merchant’s bank requests authorization behind the scenes from your credit card issuer to approve the purchase. When the transaction is approved, payment is issued to the merchant and your card’s available credit is reduced by the amount you “paid” by card. You’ll owe that amount to the credit card company until you pay it back.
Credit card companies make money assuming you’ll not pay off the full amount come payment time. Credit card companies usually charge interest (commonly 20% APR or more) on any balances carried over at the end of the month. They charge fees when you use your card for balance transfers or cash advances, and if you’re more than 60 days late in paying your bill, they can even tack on a penalty APR that can go as high as 30% APR.
Why you should pay off your balance
Rather than paying your debt over time, it’s better to think of your credit card as a bank card whose balance you must pay off when the billing cycle closes.
Paying off your balance every month helps you build credit, giving you access to lower interest rates and loans in the future. Some credit users believe that paying credit card debt slowly actually builds their credit, but that’s not true – paying off the balance in full does.
Another perk to paying off your balance is building up points and miles. Every time you pay off your balance, rewards cards add points or miles to your rewards balance, which can later be used to pay for free groceries or gifts or travel. It’s a free reward for being responsible!
Best of all, paying off your balance means you’re giving yourself a full month to pay off that purchase (if you need it), permitting you some wiggle room if one week is tighter on the budget than the next. You’re outsmarting your card issuer, using your credit card for a free credit “loan” that, in the end, only benefits you.
How smart consumers can take advantage
The truth of the matter is: everyone should have at least one credit card. Credit cards help build credit – a crucial measure that opens opportunities – and offer you a slew of perks in exchange for your loyalty. Many card issuers even offer $0 fraud protection, so you aren’t liable for fraudulent charges made using your card.
If you can’t control your spending, have a credit card and only allow yourself to use it for gas or groceries. Compartmentalize that credit card and make it available for one thing and one thing only. Focus on maintaining a zero-annual-fee card that offers decent points or cashback for those categories, and stick to cash or your bank card to everything else.
You’ll need to pay off that credit card every month in order to build credit. It’s an admittedly-slow process that takes several years of on-time payments, but over time, you’ll be proving yourself capable of paying cyclical debt that can help you obtain a car or home loan when you need it.
One of the easiest ways to maintain consistent payments is to enroll yourself in autopay payments. You can set the date to whenever is convenient (like a regular payday or the 15th of every month) and select ‘statement balance’ for the payment amount. That way, other than ensuring you have the funds in your bank account to cover the balance, you can set it and forget it.
Bottom line
Carrying a credit card balance can prove dangerous, potentially snowballing into huge debt that weighs on you as time passes. Instead, spend smartly and pay off your card balance every month to improve your credit score, gain access to free financing and gift yourself a reward using points or miles. Put your payments on auto to ensure you always pay on time and put that credit card to good, responsible use.
