Should you pay a credit card in full every month or revolve a balance (pay less than the entire amount)? Less debt is always best. So is not paying interest!
However, the devil is in the details.
Transactors pay in full every month using the statement balance (not current), enjoy an interest-free grace period on purchases, and may help their score.
Revolvers make the minimum payment (or less than the amount owed), pay hefty interest rates, may hurt their utilization ratio, and need to be careful with promotional offers.
Paying Off Credit Card Every Month
Paying off credit cards every month on time is the best way to avoid paying interest. Buy only what you can afford. Leave enough money in your checking account to fund the entire amount. Stay current at all times.
Focus on the statement balance, take advantage of the interest-free grace period, and watch your score improve – perhaps.
You need to pay the statement balance in full and on time and not the current balance in order to avoid paying interest. Your cardholder agreement references the statement amount. Keep your life simple and work with this number.
- The statement balance is the amount owed at the end of each billing cycle. It remains fixed for each 30-day cycle. You do not incur interest charges when you remit this static amount on or before the due date for the second consecutive month.
- The current balance is the amount owed at any point in time. It fluctuates over each 30-day cycle. Payments cause it to shrink. Purchases and fees make it grow. It is hard to hit a moving target.
The grace period helps you beat credit card interest when you pay the balance in full and on time each month. The grace period allows for up to 51 days of interest-free float on purchases.
Follow this grace period example to see how this works. Suppose you make a large purchase on the first day of your billing period.
- 30 days before the billing period ends on the statement date
- 21 days to pay in full on the due date without interest charges
Keep in mind that the grace period applies to purchases only when you make full payment in the previous and current billing cycles – and you do not transfer a balance from another bank. You must be consistent.
Score Go Up
Your score may go up after you pay your credit card in full. The amount of improvement (number of points) varies by the consumer because each person has a unique profile – plus, ongoing usage plays a big role in the amount the banks report to the bureaus.
- Scores rise most for people without a delinquent history (35% of rating). Those with a clean record benefit the most by reducing debt levels (30% of rating).
- Banks update the statement balance at the end of each billing cycle – not the percentage paid or zero. If you continue spending on the account, you will still show a positive amount owed at the end of the billing period.
Revolving a Credit Card Balance
Revolving a credit card balance means that you pay less than the full amount due in any month. One dictionary definition for revolving sums up how these accounts work for consumers: cause to move around in circles.
You go around in circles by making only the minimum payment, incurring interest and making money for the bank. You also wind up hurting your utilization ratio, which affects your score. Also, watch out for the expiration date on promotional offers.
People who make the minimum payment on time each month are revolving their credit card. The minimum payment is often the greater of $25 or 1% to 2% of the amount owed each period.
Paying 2% of the outstanding balance leaves 98% unpaid. You are using the bank’s money and paying dearly for the privilege with interest charges, which swells the amount owed further. On average, it takes 7 years to pay off a credit card when making only the minimum payment.
You incur interest charges when you revolve the balance on your credit card account. The grace period on purchases no longer applies because you did not pay the entire debt by the due date. The bank calculates the interest owed each period as follows.
Periodic Rate X Average Daily Balance
Therefore, keeping the average low will save you money.
Paying multiple times each month is the easiest way to lower the average. Reduce your obligations modestly without contributing extra money.
Your revolving utilization tends to be poorer when you incur interest charges because the outstanding amount is often higher. The scoring equations calculate this ratio as follows.
Revolving balance/credit limit
The score factor code “revolving utilization on credit cards is too high” means that the ratio is above the percentage it considers good. Typically, this number is about 30%.
You do not have to revolve your balance (pay less than the full amount, incur interest) to have a utilization ratio that is too high. The amount reported for transactors (pay in full, no interest) reflects what they spend on the account each month.
Be aware of promotional to revolving balance charges if you open a new credit card to finance a large purchase such as jewelry, appliances, or dental care. The issuing banks make attractive zero or very low-interest rate offers that apply during an introductory or promotional period only.
Read your cardholder agreement and monthly statement carefully to understand how these offers work. You must repay the entire debt in full by the end of the promotional period.
The promotional to revolving interest charge surprised people who do not read the clear disclosure language. Often, a hefty 29% interest charge applies to the original balance for people who fail to repay the entire amount in time.