March 14th, 2011
CK FAQ: What’s the best way to pay my credit card bill?
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Q: Is it better to pay off a credit card every month or make payments toward the balance every month?
To pay or not to pay off a credit card; that’s a very good question.
When I got my first credit card back in college, I caught this contagious misconception that consumers should leave a small balance on their credit card each month because it “looks good” to lenders.
I didn’t understand credit very well back then, and like many consumers, I ended up hurting my credit when I was trying to help it.
Here’s the only rule of thumb you need: Pay off your credit card in full, every single month.
This will most effectively build your credit and save you money. Your credit health and your money don’t benefit from keeping a balance on your card if you don’t have to.
You save money when you pay off your credit card because you never have to worry about paying interest. Essentially, you will never spend extra just to use your credit card.
Paying off your credit card in full also builds credit. Your credit use over the entire month is what contributes to your credit score, even though your balance will return to zero the next month. Just remember to keep your credit utilization under 30% of your total available credit over the entire month. If you max out your credit card yet pay it off in full, it may negatively impact your credit score because your credit utilization over the month will be very high.
If you can’t afford to pay off your credit card in full, make the biggest contribution possible towards your balance each month.
It’s not wise to keep a large balance, waiting for a big payday to pay it off or letting it sit there to “build your credit”. First of all, you want to keep hacking away at your balance so you can also hack away at how much interest you are paying. Second, a large balance contributes to your total debt and makes you susceptible to maxing out your card and hurting your credit.
It’s not your credit card balance that builds your credit; it’s your credit card use. Demonstrate you are responsible in three simple steps: buy things within your means, pay it off in full and on time, and do this consistently for every card, every time. It’s the cornerstone of your credit health.
Check out more Credit Karma questions, or ask your own, at the Credit Advice Center.