When Should I Pay Off My Credit Card?

It would be nice to just leave it until you turned 60, wouldn’t it?! Imagine that … decades of repayment free time, to wallow about in, sipping pina coladas and listening to island music. Unfortunately, if you have a credit card, it is much more likely that your banker is doing this, than you!

When To Pay The Credit Card Off?

Of course, the simple answer to ‘When should I pay off my credit card?’, is when you can afford it. The reason that people lend you money is that they get something in return – interest – and the less time you owe them money, the more money you’ll find in your pocket at the end of the year.

But that’s where the simplicity stops! We look at several different credit card scenarios, and the ideal time to pay off your debt in each case.

The Hard and Fast Rule

One golden rule of credit card payments is to always make the minimum monthly payment, before the due date. If you don’t do this, you’ll get hit with substantial late fees as well as the substantial interest that you probably already pay. That’s your beer and skittle money going to ‘da man’!

If it is within your means, take your minimum monthly repayment from when the card is close to the limit (if you aren’t sure, ask your bank), and set up an automatic debit from your everyday account. This ensures you won’t forget – and will probably mean that you pay off slightly more than the minimum repayment every month (a figure which is set to benefit banks).

Interest-Free Period Cards

If you have a card with an interest-free period, and then a slightly higher rate of interest after that, the best idea is to pay off your balance in full at the end of the interest free period. If you have 30 days interest free, pay it off every 30 days.

One sneaky, slimy, squirmy, icky trick that banks play on people with interest free periods (and those who tend to use their card for cash advances, also), is that any payments you make do not necessarily come off your oldest debt. So, if you bought a $50 item one week, another the next, another the next and another the next (for a total of $200 for the month), if you them pay $50 off in the fifth week, that repayment may be used to cover one of your newer $50 debts, rather than the oldest one. This means that your $50 debt is accumulating interest at the higher rate. Bingo – but not for you.

If you have a cash advance facility on your card, it probably comes at a higher rate than general purchases. The same theory applies – any repayments you make may go to the purchases first, while the cash advance debt sits there, with a higher than usual interest charge.

Non-Interest Free Period Cards

For cards without an interest-free period, the advice is simple. Pay it off as soon as you can. You may have heard some financial rumour and innuendo about how keeping a balance on your credit card improves your credit score. That is not precisely true – actually, regularly taking out credit, and then paying it off gets you a good credit score. You can do this by charging your credit card, and then paying it off as soon as possible, completely … which will also net you a lot more money than paying unnecessary interest to the bank.

For example, if you have a $5000 credit card debt, which you let revolve from month to month, paying off $200 each time. Incidentally, although circumstances vary, this is usually more than the minimum. Even without charging anything else, your credit card provider will have made $855 in interest from you, over the two and a half years it will take to pay off the card. Can’t you think of anything you’d like to spend $855 on?!

Photo source: SqueakyMarmot