You may be prompted to pay off your credit card each month if you calculate the interest and other fees you're paying to reveal the true cost of your card. People who do pay off their balances may think they're good customers, but credit card companies may not see it that way. Companies make less money on credit card accounts that are paid off each month. As a result, some card issuers have resorted to charging customers who pay off their balances.
Read your credit card company's terms carefully. You may discover that it costs you money to pay off your credit card balance each month. A "USA Today" article notes that in 2009, Citigroup started charging customers based on how they used their cards. The article titled "Latest Bank Fee is for Paying off Credit Card on Time Every Month" says Citigroup charges annual fees to credit card customers who don't charge more than $2,400 on their cards each year. Your card issuer also may charge you a fee if you use your card infrequently for small charges that you pay off each billing period. Still, you should continue to pay off your whole balance because the cost of annual fees usually don't exceed the interest charges that cardholders pay for carrying a balance from month to month.
Check the interest rate you're paying on credit card purchases because it could be costing you a bundle to carry a balance from month to month. It's not unusual for interest rates to be set at 20 percent or higher. A consumer who has a card with a 20 percent interest rate and a $2,000 balance would need four years to pay the card if he made monthly payments of $70. The total interest charges over four years would amount to $870.05. Online calculators such as CNN Money's debt-reduction calculator can help you figure out how much your card is costing you if you carry a balance each month. In any case, it's best to pay off your credit card balances to avoid accumulating interest charges that make it difficult to get out of debt.
The balance on your credit cards affects your credit score. Your score is particularly important if you intend to apply for a mortgage, car loan or credit card. You can get better credit and loan terms if you maintain a high credit score, which can range from 300 to 850. Credit scoring methods vary, but as much as 30 percent of your score may be based on the amount of debt you owe. Low and paid-off credit card balances help boost your score because it doesn't appear to creditors and lenders that you're taking on more debt than you can handle. Therefore, you're better off paying off, or at least reducing, your credit card balances if you're shopping for a loan.
Use only a small percentage of your credit card limit if you can't pay off the balance each month. A CNN Money article titled "Credit: Know Your Limits" says financial advisers recommend that consumers use less than 30 percent of the available credit on their cards. Therefore, someone who has a card with a $5,000 credit limit should keep the balance under $1,500. Your credit score may drop if you keep your credit cards close to their limits.
- "USA Today"; Latest Bank Fee is for Paying off Credit Card on Time Every Month; Sandra Block; Oct. 23, 2009
- CNN Money; Credit: Know Your Limits; Jessica Dickler; Sept. 25, 2008
- The Associated Press; Five Mid-Career Money Myths That Can Trip You Up; David Pitt; April 2, 2011
- My Fico: What’s in Your FICO Score
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