Should I Pay Off My Credit Card Every Month?

If you’re reading this article, chances are that you may have been told that keeping a balance on your credit card is a strategy for forming healthy credit. Unfortunately, this is a common credit card myth. The truth is that paying off your entire credit card balance by the due date every month is a better way of building credit. The key, however, is how you go about doing it.

In this article, we’ll explain the effects of how you pay your credit card balance each month, what credit utilization is (contrary to myth), and some reasons why you may not want to pay off your credit card in full after all.

4 Ways to Pay Your Credit Card Bill

1. Not Paying the Minimum Due

Obviously, this method is the most detrimental to your credit, but purchasing items and services with your credit card, only to not pay them back, can lead to a number of negative outcomes.

The result of not paying the minimum?

  • Your credit report will reflect that you didn’t pay on time
  • Your credit score will decrease
  • You will start paying interest on the outstanding balance due
  • Your interest rate may increase
  • Your line of credit may be frozen

2. Paying the Minimum Due

If you’ve ever read your credit card statement, either online or through the mail, you will see the total balance due as well as the minimum amount you must pay to avoid late fees. For instance, if you owe $100 at the end of the month, your minimum balance may only be $25.

The result of paying the minimum?

  • Your credit report will reflect that you paid on time
  • Your credit score won’t be affected
  • You will start paying interest on the outstanding balance due

3. “Pay As You Go”

If you purchase goods with your credit card, only to pay off the entire balance a few days or weeks later, your credit card balance will obviously be $0.

The result of paying as you go?

  • Your credit report will reflect that you paid on time
  • Your credit score may be adversely affected, as you are neglecting credit utilization (see below)
  • You won’t pay interest on the $0 balance

4. Paying the Entire Balance

Paying off your entire balance each month should be how you keep your finances in good standing. Once your statement comes in, you pay it in full.

The result?

  • Your credit report will reflect that you paid on time
  • Your credit score goes up
  • You pay no interest

Understanding Credit Utilization

To understand why “paying as you go” isn’t helpful to your credit limits, or why keeping a balance on your credit cards won’t necessarily help your credit, you must understand credit utilization.

Simply put, credit utilization is the ratio of your total credit card balances in comparison to your total credit limits. Your credit score is calculated as a percentage based on the amount of your credit limit that’s being used. If your balance is $200 and your credit limit is $1,000, then your credit utilization for that credit card is 20%. It’s simple math: divide your balance by your limit, then multiply by 100.

In the eyes of FICO, VantageScore, and credit issuers, the lower your credit utilization, the better. A high credit utilization percentage shows that your finances may not be in order, you may be a credit risk, and you’re more likely to default on your credit obligations. Low credit utilization shows you’re only using a small amount of the credit that’s been loaned to you. This is where some of the confusion comes in. A high credit utilization is detrimental your scores—for FICO, it makes up 30% of your score and for VantageScore, 23%.

To maintain a low credit utilization, keep a low credit card balance below 30% of your credit limit. On a similar note, you cannot trick FICO by paying your balance off each month while having a high credit utilization—if your balance is high when your credit card issuer send your info to the credit bureaus, you will lose points on your credit score.

As a rule of thumb, you want to demonstrate to credit issuers that you’re able to borrow money each month responsibly.

Origin of the Myth: Carrying a Balance vs. Receiving a Statement

The confusion that many people have about keeping a balance on their credit cards is misunderstanding the difference between carrying a credit card balance versus receiving a billing statement.

The truth is that you need to let your credit statement cycle so that it shows credit utilization on your bill each month. Paying off a purchase before it has time to appear on your statement is counterproductive.

The key is to wait until your statement cycles and then to pay your bill, not to keep a balance indefinitely. Typically, your credit card company will send a message that says your statement is available, you owe X amount, and your minimum payment is X. Once you’ve received that, pay your statement in full.

Reasons to Not Pay Off Your Credit Card Balance Monthly

While paying off your balance on time is a wise decision, there are a number of instances when you shouldn’t pay off your credit card every month. Here are a few:

1. Cash Flow Problems

If you’re having trouble paying your bills and making ends meet, dipping into your savings to pay off your credit cards could be detrimental to your day-to-day standard of living. For instance, you may have a completely paid-off credit card balance, but you may not be able to afford enough food or gas to get to work—this actually is counter-productive. The short-term gain of have a $0 balance may actually backfire, forcing you to reuse the same credit card you had just paid off, restarting the cycle of debt.

Instead, you may want to use a credit card with an extremely low APR (or best-case-scenario, a 0% APR introductory offer) to keep your expenses afloat during troubled times while not accumulating interest that may exacerbate your cash flow problems.

2. Rainy-Day Fund

If you have children or other dependents, you need enough cash on hand to be able to pay off unexpected medical bills, a vehicle breaking down, or any other intangible event in the future that may exceed your credit card limits. Draining your rainy-day fund leaves you exposed and possibly helpless should a disaster occur. Spreading out your expenses on your credit cards and cash can help you maintain your rainy-day fund until your financial outlook is sunnier.

3. Major Expenses in the Near-Future

If you are anticipating major expenses coming up, you may want to keep a balance to weather the financial setbacks. If you need to have surgery or repair your home, a credit card can be a lifesaver to keep your day-to-day expenses afloat while you recover financially. Even if you carry a balance for a while, you can eventually tackle it and repair any short-term setbacks to your credit.

4 thoughts on “Should I Pay Off My Credit Card Every Month?

  1. […] Making payments on time is the first step to building a high credit score and avoiding interest payments that bog down many credit card holders in debt. If you make your first five monthly payments on time while using the Journey® Student Rewards, Capital One typically raises your credit limit. A higher credit limit raises your credit score if you continue to pay it off in a responsible manner and use only a small portion of available credit (something called credit utilization). […]

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