Credit Cards

Here's why you don't need to pay off your credit card every month

And what to do if you can't swing the balance

A woman paying her credit card balance Credit: Getty Images / RgStudio

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When you use your credit card, you have a choice to make at the end of the billing cycle: You can pay off some or all of your purchases, or make the minimum payment and roll the rest of your balance to the next month.

Whatever you do, it’s crucial to pay at least the minimum. This is the bare minimum you can pay each month to keep your account in good standing, and it's typically 1% to 3% of your statement total. Minimum payments can feel like a lifesaver if you’re in a financial pinch, but if you regularly resort to this, it will majorly cost you over time.

In short, it’s best to pay off the whole balance whenever possible. Here’s three reasons why you should try to always settle up, and a few instances when you might consider revolving a balance.

What are the benefits of paying your balance in full?

1. You can avoid credit card interest

Interest is the cost of borrowing money. When you don’t pay off the balance at the end of the billing cycle, the credit card issuer applies an annual percentage rate, or APR, to that balance.

“It can be very expensive to carry a balance from month to month,” says Nathalie Baez, associate director of programs at Neighborhood Trust Financial Partners. “The interest you pay is money you’re giving to the credit card companies that you’re not getting anything back for.”

The average APR on a credit card is around 16%, but can be as high as 25%. Depending on how much debt you have on your credit card, interest can stack up. Let’s say it takes you six months to pay off $5,000 on a credit card with an APR of 16%. You wind up paying an extra $235 in interest.

“That’s money you could be using for your long-term goals,” Baez says, pointing to retirement and emergency funds. It also means you have less money for fun stuff, like dining out.

2. You can keep your credit healthy

Part of your credit score is based on how much revolving credit you’re using at any given time. As a rule of thumb, keeping your credit card balance below 30% of its credit limit can help you maintain a good credit score. For example, if your credit limit is $1,000 then the balance would never stretch higher than $300. Paying off the whole balance puts your utilization ratio at 0%, which is even better for your credit.

As a rule of thumb, keeping your credit card balance below 30% of its credit limit can help you maintain a good credit score.

Credit card issuers usually report your balance to the credit bureaus on your statement closing date. But confirm that date with your card issuer so you can make sure the balance is paid down before it’s reported.

When it comes to maintaining our credit, we also often hear to keep our accounts open. There’s a common misconception that to prove you’re using an account, you should leave a balance on the card. This isn’t true, Baez says. Yes, an issuer may decide to close your account if you never use it, so it is a good idea to occasionally make purchases. But carrying a balance doesn't boost your score. Paying it off each month, however, keeps your credit utilization at 0%—and that does contribute to healthy credit.

3. You'll avoid late fees

Credit card issuers can charge this type of fee when your payment doesn’t arrive by the due date. So, whether you pay off the entire balance or just make the minimum payment, simply being on time will help you avoid this fee.

Check your card’s terms and conditions to find your late fee. By law, a card issuer can charge a late-payment fee up to $28 the first time you're late. If you’re late again within six billing cycles, the issuer can charge up to $39.

When might it make sense to only pay the minimum?

1. Paying off the balance would cause financial hardship

Life happens, and some months you might not have the funds to pay off your credit card. Maybe you earned less than expected, you want to use your extra money for something else, or you’re experiencing a financial emergency. Baez points out, for example, that millions of consumers are shifting to an emergency budget during the coronavirus pandemic.

“This COVID-19 situation throws a wrench in everything,” she says. “People are concerned about their rent and food. Now the funds they were using to aggressively pay down debt are put on hold.”

Make sure you have enough money to pay all your bills. If there’s anything left over, you can decide whether to use it to pay down your credit card.

2. You plan to tap your savings account

Many financial experts recommend keeping an emergency fund with three to six months’ worth of living expenses stashed away. This can help you survive financial emergencies such as a job loss.

If you have both a healthy savings account and credit card debt, it could be tempting to simply use your savings to pay off your cards. But doing so could leave you vulnerable to financial emergencies. Without savings, you might not have enough funds to weather an unexpected crisis.

Instead, Baez recommends paying the minimum until you can create a plan that allows you to keep your emergency fund and gradually pay down your credit card debt.

3. You have a 0% APR on purchases

Some credit cards come with a promotional 0% APR on purchases, usually lasting 12 to 15 months. These credit cards have a “deferred interest plan,” which means you won’t pay interest on purchases if you pay them off within the introductory period. Once that period expires, the regular APR kicks in. And if you have a balance on the credit card, you pay interest that accrued from the original purchase date.

It could make sense to make just the minimum payment during the promotional period. But make sure you have a plan to pay off the balance before that time frame ends.

Bottom Line

When faced with a credit card bill, you may decide to pay off the balance or pay the minimum. But it doesn’t have to be all or nothing. A good compromise? Pay the minimum plus a little more. To keep your credit healthy, aim to at least get the balance below the 30% utilization threshold. And remember, the ultimate goal is to use credit cards only for purchases you can afford to pay down each month—when possible.

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