Should I pay off my credit card in full? An interest-saving secret

When used responsibly, credit cards can be helpful financial tools. They offer valuable perks and rewards you can use to get freebies and other orders. Plus, if you have inconsistent income throughout the month, they allow you to purchase items now, then pay it later in the month after you’ve gotten paid. 

You may hear some people saying they pay off their credit cards in full every month and you may wonder, “Should I pay off my credit card in full, too?” Below, we cover the topic of paying your credit card bill off in full every month, the benefits of doing so, and other helpful credit card tips. 

How does credit card interest work?

Before you decide whether to pay off your credit card every month, it’s best to firmly understand credit card interest and how it works. As you carry over a balance on your credit card from the previous month, your credit card company calculates daily interest and compounds it, meaning it charges you more interest on the interest it charged you in the preceding days of that billing cycle. 

However, the credit card company doesn’t immediately add these interest charges to your balance. Instead, it charges you the accrued interest on the statement balance after you make your monthly payment. 

You can avoid paying accrued interest if you pay off your full statement balance within the interest grace period — the time between the end of the billing cycle and your due date — if your credit card company offers this period. 

Keep in mind, you must have no balance at the start of the statement period to take advantage of the interest grace period. If you have a balance on the credit card, your new purchases during that period will immediately earn interest. 

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For example, if you have a credit card with a 19.99% annual percentage rate (APR), you divide that APR by 365 days (0.1999 / 365) to get your daily interest rate. That would come out to 0.000547. If you maintain $1,000 in credit card debt in a month with a 30-day billing cycle, you will accrue 54.7 cents of interest on the first day, then 54.73 cents on the next day ($1,000.547 x 0.000547 = 0.5473), and so on. 

By the end of the month, you will have accrued a total of $16.54 in interest. If you pay your balance in full, that accrued interest goes away. If you pay anything less than the full balance, the credit card company will apply some or all of this interest to your account. 

Should I pay off my credit card in full every month?

The rule of thumb for credit card balances is to always pay as much as you can afford every month. This allows you to keep your interest charges as low as possible. With that rule in mind, yes, you should pay off your credit card in full monthly. 

Paying off your credit card in full has several benefits. First, as mentioned above, it avoids interest charges. The other reason paying your credit card in full monthly is a great idea is your credit utilization ratio. 

Your credit utilization ratio or credit utilization rate is the percentage of your credit limit you’re using. So, if you have a $1,000 credit card limit and charge $500, you have a 50% credit utilization rate. Credit utilization is one of the five factors that make up the amounts owed variable in the FICO credit scoring model. The amounts owed variable accounts for 30% of your credit score. 

Experts say keeping your credit utilization under 30% may help you get a good credit score, and the closer this rate is to 0%, the more positively it impacts your credit history and score.

Won’t keeping a $0 balance on my credit card slow my credit-building goals?

Yes, it's true that you must use credit to build credit. But this fact has led to a common myth that you need to carry over a balance from month to month in order to "show" that you're using your credit card.

In reality, in order to build good credit, you should use your card for budgeted purchases and then pay it off in full each month by the due date. This will show the credit bureaus that you're able to responsibly use credit.

If you have a credit card you're not using, you may think it's best to just close the account. However, the credit limit and age of that card could be helping your credit score. Instead of closing the account, keep an unused card secure to prevent it from falling into the wrong hands.

How much should I charge on my card monthly?

So, we’ve answered your question of, “Should I pay off my credit card in full?” but you probably still have other questions. One common one is how much you should charge on your credit card each month.

The first rule is not to spend any more than you can afford to pay off by the credit card due date. The best bet is to just pay your normal daily expenses on the credit card and leave your cash in the bank. Once the due date rolls around, use that saved cash to pay it in full. This is where you must make a clear-cut budget and stick to it. 

Secondly, keep your spending within 30% of your credit limit. Since your credit card company can report your balance any time it likes, keeping it under the 30% threshold ensures your credit report and score remain in good shape. 

So, if you have a credit card with a $1,000 limit, you want to keep your credit card use at just $300 each month and pay all your other monthly expenses from your debit card or with cash.

Will I still get my credit card rewards if I pay my balance in full? 

A common question when paying a credit card in full and skipping out on the interest charges is, “Will I still get my credit card rewards?” It seems logical that if you take away the credit card company’s ability to profit from interest, the company would also take away your rewards, points, or cash back. Fortunately, that’s not the case. 

Your credit card points and other rewards and perks are not attached to your interest charges. So, even though the credit card company may not profit from your interest, it will still give you all the points you earned. This is because credit card issuers profit in many other ways than just interest, such as annual fees, balance transfer fees, and the fees they charge merchants for accepting your credit card. 

So, rest assured, you can pay that balance in full, pay no interest, and still earn all your points. 

Can’t I just make the minimum monthly payments?

You can make the minimum monthly payments on your credit card and avoid late payments and late fees while building a strong payment history. However, this can cost you a lot in interest charges over the years. 

For example, let’s say you have a $5,000 credit card balance on a card with a 19.99% APR. That credit card offers you a minimum payment of 3% or $25, whichever is higher. That means your monthly payment would be $90. If you made that minimum monthly payment, it’ll take you 158 months to pay off. That’s over 13 years!

Even worse, over those 13 years, you’d pay $9,144 in interest on that $5,000 balance. That’s nearly double the cost in interest alone. This makes it very clear why paying as much as you can afford on your credit cards is important — preferably the entire statement balance. 

Is there ever a time when it’s OK not to pay off my credit card balance?

Sometimes, you can get away with paying less than the statement balance and still avoid interest. This is when the credit card company offers you special financing terms, such as an introductory APR of 0% for a certain number of months or a 0% APR balance transfer credit card for a certain number of months. 

As long as you can arrange your payments to pay off the entire balance within the promotional period, you can get away with not paying off the balance monthly. 

For example, if you use a balance transfer offer to move $2,000 to a credit card with 0% APR for 18 months, you’ll need to make 18 monthly payments of $111.11 to pay it off in time. You’ll also want to consider if there’s a balance transfer fee — typically 3% to 5% — and add that to your calculations. So, if there was a 5% fee, your balance would be $2,100, and your 18 monthly payments would need to be $116.67 to pay it off within the promotion. 

Pay off your credit card in full and enjoy interest-free credit card use

The best rule of thumb is to always pay your total credit card statement balance off monthly. This allows you to reap all the rewards, such as perks, points, and cash back, without paying a penny in interest. Also, keep in mind to keep that credit utilization at or below 30% to avoid it negatively impacting your credit score.