What is the benefit of paying off your credit card balance every month?
You should aim to clear your credit card balance every billing cycle. This is the best way to show lenders that you are a responsible borrower. It will also help you to manage debt by keeping your credit card costs to a minimum. It could also help you secure better borrowing terms.
No interest charges
Credit card issuers charge interest (APR) if you carry a balance over to the next payment period. This means you are paying interest on top of the unpaid principal you owe. This can quickly add up as the average credit card interest rate is around 17%.
You won’t owe any interest if you pay off your full credit card balance each month. You may have an interest-free introductory offer with a balance transfer card. Bear in mind, however, that the 0% interest rate is only available for a limited period. Interest will apply to your balance after that time.
A grace period on new purchases
Starting the billing cycle with a $0 balance will also mean you benefit from a grace period on new purchases. This period tends to last between 21 and 25 days, giving you a window of time to clear your new balance before your issuer charges any interest or additional fees.
Grace period will only apply to the purchases you make on your credit card. Other types of transactions, like cash advances, can start accruing interest and charges straight away.
Easier to manage repayments
You should avoid only making the minimum payment on your credit card when possible even if it may seem more affordable in the short-term. Issuers calculate these repayments at a very low rate – typically between 2% and 5% of your outstanding balance. It could take you decades to pay off your full debt along with all the interest you will be accumulating.
Paying off your full balance makes your repayments much more straightforward. It can also encourage you to only borrow what you can afford to repay in the next month. If you cannot clear your entire credit card debt, repay as much as possible and calculate an ongoing repayment plan.
A potential extension on your credit limit
Clearing your balance each month will show your issuer that you can manage debt well. They may be more willing to approve requests to increase your credit limit or may even offer you an increase before you ask.
An increased credit limit gives you greater financial flexibility. Make sure you can afford the higher monthly repayments before making the request or accepting an offer from your issuer. Don’t be tempted to spend more because you have the option, as this can make it more difficult to repay your balance in the future.
A better credit score
Making regular purchases on your credit card and repaying them will help you establish a good payment history. This is the single biggest influencer of your credit score. The second biggest is your credit utilization ratio, which measures your outstanding credit card balances against your total available credit.
When you pay your credit card balance in full, your credit score will improve. A higher score means lenders are more likely to accept your credit applications. They will also offer you preferential borrowing terms, like lower interest rates and higher limits.