Should I Pay Off My Credit Card in Full or Leave a Small Balance? 

Understanding how credit works can be confusing, which is why many people ask, “Should I pay off my credit card in full each month?” It becomes even more confusing because some people recommend carrying a balance from month to month to boost your score. Making mistakes regarding how you use your credit cards can lower your score, raise your interest rates, and make it difficult to get a loan.

In this brief guide, we share the facts about paying off your balance in full and why it matters. In addition to learning how paying your balance affects your credit score, you’ll also learn the best ways to pay down your credit card debt. Once you have a better understanding of how credit scores are calculated, you can then use strategies to build credit with your credit card.

What Is the Advantage of Paying Your Credit Card Balance in Full Each Month?

There are far more advantages to paying your credit card balance in full than disadvantages. One of the biggest advantages of paying off your card each month is that you will no longer have that debt to worry about. Similar to mortgage APR, each credit card has an annual percentage rate, which is the interest you accrue while you hold a balance. If you don’t carry a balance, you won’t pay interest fees.

Carrying a balance on your credit card means that you didn’t pay your card’s debt in full on your last statement. Doing this can lead to higher interest rates, making debt more difficult to manage and risking a lower credit score. 

If you have a small balance on your credit card, it may not affect your score much. Those who are closer to their credit limit may see a decrease in their score due to their credit utilization. Sometimes, you can’t pay your balance in full, but if you understand credit utilization, you may be able to avoid harming your credit score.

How Does Credit Utilization Work?

Credit utilization, or your “amount owed,” is worth 30% of your FICO® credit score, making it the second most important factor next to your payment history. To avoid a low credit score, your credit utilization should be lower than 30 percent of your total credit limit. Your total credit limit is the sum of all of your credit card limits.

Imagine you have three credit cards with max limits of $500, $700 and $800. Your total credit limit would be $2,000. To maintain a good credit utilization ratio, you would want your total amount owed to be less than $600. You could reach your maximum credit limit on your $500 credit card and may still have a good or fair credit score.

Your credit score is an indicator of your creditworthiness and financial health. A high credit utilization ratio may mean you’re unable to pay your debts or spend too much. By paying off your balance each month, you can keep a low credit utilization ratio and have a better chance of achieving a good credit score.

When Should You Pay Your Credit Card to Increase Your Credit Score?

One of the best strategies to ensure you pay your card off in full each month is to set up automatic payments. Many credit card providers also offer this option when you set up your payments. Now, you may be wondering which day of the month is best to pay your bill, depending on your situation.

Here are some strategies and considerations before choosing a date: 

• Pay before your due date: Each credit card issuer reports to the major credit bureaus, Experian®, Equifax®, and TransUnion®. Ideally, you want to pay your balance before they report to the bureaus to ensure you have a low credit utilization. Unfortunately, each card issuer may report on different dates. By setting up automatic payments before the due date, you can avoid carrying a balance to maximize your chances of ensuring low credit utilization when the issuer reports to the bureaus.
• Pay when you can: Many people have irregular paydays or fluctuations in their income. If you’re in this scenario, it may be helpful to make multiple payments per month. Similar to paying before the due date, even if you pay in small amounts, your utilization will remain low if you pay the balance before the due date.

6 Ways to Pay Off Credit Card Debt

A great way to reach your goal of paying off your balance in full each month is to create a budget. You can create different budget categories so you know how much you can allocate to food, bills, and your credit cards. If you currently have credit card debt that you want to pay off, we have six of the best strategies to make it happen.

1. Debt Snowball Method

The debt snowball method is one of the most popular methods for paying down credit card debt. The idea behind this method is to build momentum with quick wins, which can motivate you to continue paying off your credit card debt. This method involves paying off your credit card with the smallest balance first, then the card with the next smallest balance, and so on, until you pay off the card with the most debt.

Disadvantages: You may pay more in credit card interest over time.

2. Debt Avalanche Method

The debt avalanche method is the opposite of the snowball method. Rather than starting with your smallest debt, you start with the largest one. You could also start with the card that has the highest interest rate and work your way down to the one with the lowest interest rate. The primary benefit of this method is that it helps reduce the total amount you’ll pay by reducing the interest fees.

Disadvantages: Getting your first win can take some time, so you don’t benefit from the momentum and motivation like you would with the snowball method.

3. Balance Transfer Cards

Balance transfer cards help pay off your debt by simplifying your payments and lowering your interest rate. These cards work by allowing you to transfer your debts from different credit cards to a single card. Ideally, the balance transfer card will have a better interest rate. If you struggle with remembering to pay each of your individual cards, having a single payment can help.

Disadvantages: There’s often a fee for transferring your debt, and if you don’t pay it off in the specified time, the interest rate may be higher than your original cards.

4. Debt Consolidation

A debt consolidation loan is similar to a balance transfer card, but it’s a personal loan. To get a debt consolidation loan, you’ll need to go to a bank and get a loan for the amount you owe on all of your credit cards. You can then make one monthly payment to the bank to pay off your loan rather than paying off multiple credit cards. You may have a lower interest rate as well.

Many people also use debt consolidation as an alternative to bankruptcy because it helps get their debts under control.

Disadvantages: You need good credit to qualify for a debt consolidation loan. 

5. Increase Your Income

If you don’t want to take out a debt consolidation loan or use a balance transfer card, increasing your income can help you pay off your debts. You can increase your income by asking for a raise at work or using your skills and resources to pick up a side hustle. There are many ways to make money online, and your extra income may cover your monthly credit card bills.

Disadvantages: You may not be able to get a raise, and side hustle income may be inconsistent.

6. Borrow From a Friend or Family Member

Sometimes, the best option is to turn to a friend or family member to pay off your debts. Borrowing from someone you know is similar to a debt consolidation loan. The primary benefit is that a friend or family member most likely won’t charge you fees or interest. 

Disadvantages: Borrowing from a loved one can harm the relationship if you can’t pay the money back.

Paying Off Credit Card in Full: FAQ

The following are some of the most common questions about paying off your credit card balance each month.

How Much Will My Credit Score Increase After Paying Off Credit Cards?

The amount of points you get for paying off your credit cards will vary. It primarily depends on your credit utilization. Paying off a larger balance if you’re close to your limit will boost your score more than if your utilization was already low. You can typically expect a three- to 10-point increase.

What’s the Best Way to Pay Off a Credit Card?

The best way to pay off a credit card is to pay it off in full each month, and there are different strategies you can use, like creating a budget and a personal spending limit. If you’re unable to pay off the balance in full, the goal should be to keep your credit utilization under 30%.

How Much Should I Pay on My Credit Card Each Month?

If possible, you should pay off your credit card’s entire balance each month. By only making minimum payments, you can accrue interest fees, which will cost you more money in the long run.

Check Your Credit Health for Free Today

Paying off your credit card in full each month is a great way to avoid debt and interest fees, and it helps boost your credit score. A good credit history and credit utilization ratio are primary factors in your credit score, but many people don’t know where their credit health stands.

If you want a breakdown of your credit score and credit health, sign up to get your free credit report card from Credit.com today.

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