When Should I Pay Off My Credit Card?
One of the reasons to use a credit card is to spend money now and pay it off later. For some spenders, this means carrying a balance from month to month and usually paying interest. There are several instances, though, when you may want to consider paying off your card in full; namely, if your goal is to save money.
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If You’re Paying a Lot of Interest
Carrying a balance on a credit card almost always means accruing interest. Accrued interest is added to your balance — along with any other new expenses and fees — which, in turn, increases the amount of interest that’s added the following month. Paying off your balance in full is the only true way to avoid paying interest and save money.
That said, there are a couple of ways to avoid paying interest: paying off the balance and transferring your balance to a 0% interest credit card.
Transferring a balance to a card that offers a promotional interest-free period can temporarily delay the accrual of interest, but you’ll still have to pay up eventually. In addition, on many credit cards, you may lose your grace period once you take the balance transfer so you will end up paying interest on your new purchases. The first option, paying off your balance in full, eliminates the balance on which interest accrues. No balance, no interest.
If a Credit Card is About to Start Charging Interest
In the event you’ve been using a credit card with a promotional APR, but that period is about to end, you may want to consider paying off the balance in full.
It’s easy to spend aimlessly on a promotional 0% APR card, forgetting that it will eventually start charging interest. Carelessness can convert to interest accrual. You can avoid this problem by reminding yourself when the card will start charging interest.
Setting a calendar reminder — right when you receive the card — for a few weeks before the interest-free period ends is a smart way to give your future self a head’s up to address the balance.
If You’re Applying for a Mortgage or Loan
When applying for a large line of credit like a mortgage or car loan, lenders will check your credit as part of the approval process. One important number they keep an eye out for is your credit utilization ratio. Having a lower ratio can improve your chances of getting approved for a mortgage or loan.
Your credit utilization ratio is calculated by dividing your credit in use by the amount of credit your have available. This figure is meant to assess your ability to take on and pay off new debt. If your credit utilization ratio is high, for example, your may be viewed as a risky borrower by a lender because you have so much outstanding debt.
While there is no specific standard for where your credit utilization ratio should be, experts recommend keeping it low. In reality, if you’re in a situation where your ratio will be scrutinized, try to keep it as low as possible.
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If you have no desire to carry a debt in the first place, most credit cards will let you set automated payments to cover your entire balance. If you can afford to do so, paying off your balance every month may be the best strategy for saving money and building wealth.