Do I have to pay off my credit card debt in full every month?

There’s a question frequently asked among those newly initiated to the rank of credit card holder, and it goes like this: “Do I have to pay my credit card debt in full every month?” If life were simple, there’d be a single concrete answer to that question, and it would be “no” because unless you have a charge card then most credit cards allow you to pay off your credit card debt over time by making just the required minimum monthly payments.

However, as you can see by using our minimum payment credit card calculator or our lifetime credit card cost calculator or even our regular credit card payment calculator if you just make minimum payments every month on your credit card then you will end up paying a lot of money in interest charges.

As is stands, nothing is ever easy, and this article is meant to discuss just the most basic principles of sound money management as it relates to paying off your credit card debt and even better paying off your credit card balance in full every month so that your credit card can be used as tool for helping your build wealth (i.e. a rewards credit card) rather than decrease your wealth.

The “No” Camp: No need to pay off your credit card debt every month

You do not have to pay off your credit card debt every month. As long as you make the minimum payment and you do it on time, you will remain in good stead with your credit card company, the credit bureaus, future employers, landlords, and probably even potential spouses.

The second mention in the above list of accountability—the credit bureaus—is important because credit bureaus are the organizations that formulate your credit score. A credit score is a measure of your creditworthiness. It analyzes factors such as payment history, amount owed, how much credit is available to you, and how long you’ve had outstanding credit. Being in possession of a good credit score is the adult equivalent of a big, shiny star on your kindergarten behavior chart. It means you’re a good boy or girl. It means you’re reliable. It means people can count on you.

Unfortunately, a good credit score does not necessarily equal money in the bank. While you go about your business of making a minimum payment each month in a disciplined and timely manner, you are in fact racking up interest charges that will ultimately compound your debt to your credit card company.

An interest rate is the amount charged for the privilege of borrowing money. The interest rate varies widely from one credit card issuer to the next. This rate guarantees that, by making only a minimum payment each month, it will take you a significant chunk of time to get out of debt to your credit card company.

Say you have a $5,000 balance on your card. Say the minimum payment, which is determined by your credit card company, is $150 (3%). Now, most credit card companies apply a majority of that payment toward the principal (the original amount of the debt) and not toward the interest. If about $50 of this hypothetical $150 payment covers the interest, it will take you as many as 17 years to pay off your entire debt. That’s an additional $2,000 in interest over the life of the loan.

On the other hand, if you creditors offer you a higher line of credit, and give good reports to the credit bureaus then your FICO score (credit rating) will go up. As long as your credit to debt ratio remains high, so does your credit score.

The “Yes” Camp: Pay off your credit card debt every month

It may be better for your financial future if you can convince yourself that, yes, you absolutely must pay off your credit card debt in its entirety each and every month. By paying the full amount, you protect yourself from the fickle nature of credit card companies, which can raise interest rates, lower credit limits, and apply new fees at their leisure.

The impact of rising interest rates, with all its attendant financial consequences, was discussed above. The significance of lowered credit limits differs in that it will show up as a detriment to your credit score before it affects your bottom line.

A reduced credit limit can wreak havoc with your credit score because of the significant weight attached to it in the calculations used to determine your score. As mentioned above, this important calculation is termed the “debt to available credit” ratio. It compares the amount of money owed on all your credit cards (debt) to the amount you could use if you needed to (credit limit). A high level of debt is bad news for your credit score.

For this example, let’s say you have a credit card with a $5,000 limit. Your balance is $1,000. That means you have a “debt to credit” ratio of 20%, which is respectable enough as far as the credit bureaus are concerned. But then your credit card company decides it is going to lower your credit limit (which can happen based on a global financial picture that has little to do with your own habits and history). Suddenly you end up with a reduced credit limit of $2,500. Now your “debt to credit” ratio is 40%, which is a lot less desirable in the mathematical eyes of the credit bureaus.

Whether you pay off your credit card debt in full every month or not it’s important to find the best credit card for your circumstances. That depends on if your goal is to purchase items, have a card for emergency and travel use or to build credit. By using a convenient online tool to analyze the different elements outlined above—interest rates, credit limits, fees, etc.—you can pinpoint the best card for you. Compare credit cards today!

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