Should You Pay Off Your Credit Card Balance Every Month?
Americans rely on credit cards for many reasons, whether it’s to build credit, be prepared in case of emergencies, accumulate travel perks or help with large purchases.
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But when it comes to paying balances – the total amount of debt accumulated – there is one clear consensus among experts: Whatever your reason for using a credit card, you should absolutely pay it off every month.
Unfortunately, only 35% of cardholders are paying their full balance, according to a November 2022 survey by LendingTree. With U.S. consumer credit card debt at an all-time high – a whopping $986 billion – it’s clear that credit card balances are piling up. Here are some reasons paying off your balance every month is a good idea.
Paying Off Your Balance Will Boost Your Credit Score
Your payment history – that is, whether or not you make your payments on time – is the most important factor in your FICO credit score. Because credit cards are relatively easy to acquire, they can be a great way to establish your payment history – just make at least one small purchase every month and pay it off.
If you already have a credit history, paying your balance in full will keep that history going and raise your credit score over time. Making payments consistently shows lenders you’re a responsible user of debt, making them more likely to approve you for other forms of lending like a mortgage or car loan.
Another benefit of building your credit score this way is that lenders may extend better borrowing terms or increase your credit card limit.
A credit card limit is the maximum amount you can spend on your credit card. It can start at a few hundred dollars and go to tens of thousands of dollars, depending on criteria such as payment history, current accounts, account history, debt and income.
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Paying Off Your Balance Will Save You Money on Interest & Fees
This sentiment is echoed across the industry. With inflation hitting a four-decade high in May of last year, the Federal Reserve has raised interest rates multiple times, and experts say consumers should be even more cautious about their balances – and their increasing interest fees.
According to data from the Federal Reserve, the average annual percentage rate (APR) for current credit card accounts was 20.09% – the highest it’s been since the Fed began tracking rates in 1994.
Bobbi Rebell, a personal finance expert, noted that with average credit card interest rates at all-time highs, carrying debt is increasingly expensive.
“If you pay your balance slowly – for example, making minimum payments only – it could take years to pay off,” Rebell said, adding that you might pay hundreds or thousands of dollars in interest over time, money that could be going toward an emergency fund or savings.
Rebell added, “Don’t forget, too: Paying interest can offset or even completely negate the value of any rewards you’ve earned making purchases with your credit card.”
Paying Off Your Balance Will Keep Your Credit Utilization Down
It’s a common misconception that leaving a small balance when making your credit card payment after each billing cycle will help your credit score, the logic behind this being that having no balance will result in your credit card issuer reporting a net-zero balance and not reporting your on-time payment.
But that simply isn’t true. In fact, carrying a balance increases your credit utilization — how much of your available credit you’re currently using — which is an important factor in calculating your score.
“In general, the lower your utilization is, the better it is for your score. Aim to keep your utilization rate below 30% if you can,” said Margaret Poe, Consumer Content Strategy Advisor at TransUnion.
Travis Forman, a portfolio manager at Harbourfront Wealth Management, agreed, saying that carrying a high balance can affect your credit utilization rate.
“A high credit utilization rate indicates your inability and/or choice to make scheduled payments, which in turn may lower your score,” Forman said. “While failing to pay off your full credit card balance every month may not change your credit score too much, especially if you leave a small balance, it is still better to pay your credit card balance in full.”
There is another important point regarding your credit utilization ratio, which is usually reported on your statement date: Even if you pay in full, you might have a high utilization ratio if you use the card a lot.
A good fix is to make an extra mid-month payment or two to knock the statement balance down before it even comes out. You could also request a higher credit limit. Either way, carrying a balance will cost you money in interest fees.
Are There Any Cons To Paying Your Balance?
Experts clearly agree that it’s best not to carry a balance – but are there any negative consequences to paying off your credit card every month?
According to Vadim Verdyan, the Director of Operations at Albert, the only thing that can come close to a negative is the potential loss of liquidity if your credit card balance has become really high.
“If you have to pull from savings or draw down your checking to pay it off, this could significantly bring down your liquid assets,” Verdyan said, “Still, this far outweighs the interest costs you’d pay each month if you carried that big balance.”
TransUnion’s Poe agreed, saying there are no downsides to paying your credit card balance in full each month. On the contrary, Poe said, “Doing so is a smart financial and credit-building habit.”
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