One thing that makes credit cards attractive is the flexibility they give to pay off your balance over time with small monthly payments. However, taking advantage of this option isn’t usually the best way to manage credit card debt.
It's a good rule of thumb to pay your credit card balances in full each month to avoid interest and to lower your credit card costs over the long term. Find out why paying off your balance all at once beats the convenience of paying over time.
- Paying your full balance monthly on revolving credit card accounts allows you to avoid paying high interest rates on purchases.
- Any interest paid on your credit card balance can offset or even negate the card rewards you've earned.
- Your credit score can benefit from consistently paying off your credit card balances.
What Is the Rule of Thumb About Paying Your Credit Card Balances?
While your credit card issuer gives you the option of paying just a portion of your outstanding balance, as a rule of thumb, you should pay your full credit card balance each month.
This is because if you pay your balance slowly, for example, making minimum payments only, it could take years to pay it off. Over that time, you might pay hundreds of dollars in interest.
How Does This Rule of Thumb Work?
Most credit cards come with a grace period—a period during which you can pay the cost of new purchases in full to avoid paying any interest on them. Carrying a balance on your credit card beyond the grace period leaves you subject to a finance charge, calculated based on your interest rate and card balance.
Some credit card transactions, such as cash advances, won't have a grace period.
But not only do you avoid paying interest by paying cards off each month, you also get the full benefit of any rewards you've earned. Otherwise, paying interest can offset or even completely negate the value of your rewards.
For example, if you earned 2% cash back on $1,000 in spending, you'll earn $20 in rewards. However, if it takes you more than three months to pay off the balance at the current average annual percentage rate (APR) of 20.28%, the interest you pay will likely outweigh the rewards you earn. In this instance, if you pay $275 per month, over four months, you’ll pay $24 in interest.
While you may be tempted to charge more than usual to maximize rewards, limiting credit card purchases to what you can afford to pay off each month allows you to keep the rewards you earn.
Why Paying Off Your Balances Every Month Generally Works
Following the rule of thumb that advocates paying off your balance each month provides additional benefits beyond earning credit card rewards and avoiding interest.
Credit Score Impact
Committing to paying your full balance also can boost your credit score by lowering your credit utilization ratio, which is the percentage of your credit card debt relative to your overall credit limit. Credit card issuers may also be more willing to raise your credit limit after you demonstrate you can handle your credit responsibly.
You don't need to carry a balance on your credit card to raise your credit score. That score benefits the most when you have active accounts with timely payment history and credit cards with balances below 30% of their credit limits.
Carrying a balance from month to month makes it harder to keep a low credit-utilization profile, particularly if you're making new charges before paying off your balance.
No-Cost Access to Credit Card Benefits
Using your credit card for everyday purchases gives you more protection than using your debit card or cash. For instance, you may benefit from extended warranty coverage, purchase protection, lost luggage reimbursement, travel insurance, and more, depending on the credit card you choose. Paying your full balance allows you to enjoy these benefits at no cost (beyond the annual fee, if your credit card charges one).
Maintain Available Credit
Keeping your credit card paid off also means that you'll have access to available credit when you need it. By comparison, carrying a balance limits your available credit, which may effectively make your card off-limits for unexpected expenses or emergencies.
Grain of Salt
This rule of thumb makes sense for most situations. However, you might want to make an exception to the rule and pay your balance off over time if you've made purchases under a 0% APR promotion. When you do this, be sure to pay your balance in full before the promotional period ends to avoid interest charges.
You might also need to make minimum payments as part of a debt payoff strategy that focuses on paying off one balance at a time. But once you've eliminated your credit card debt and are starting with zero balances on all your accounts, stick to this rule of thumb to avoid getting into debt again.