A credit card is a convenient way to finance incidental expenses, day-to-day purchases and travel costs, but credit cards tend to carry high interest rates that make them costly to use. It is usually wise to pay off your credit card in full each month, but situations can arise where it makes financial sense not to pay your credit card in full immediately.
Avoiding Interest and Fees
Credit cards usually carry high interest rates and fees that make it expensive to carry a balance. It is generally best to pay off all of your credit cards in full each month to avoid paying interest and reduce the chances of incurring fees like late payment penalties and over-the-limit fees. The longer you wait to pay off your full balance, the more interest you will owe, so delaying payment means you will have less money in your pocket in the long-term.
Avoiding Debt Accumulation
Another reason it is wise to pay your credit card in full each month is that it avoids the slippery slope of debt accumulation. If you don't pay your cards in full, your total balance may grow over time and the higher the balance gets, the more interest you owe each month. This can create a spiral of increasing debt that can be difficult to escape and damage your credit score.
Introductory Interest Rates
Some credit cards offer introductory periods where interest rates may be as low as zero percent. If your card is subject to a zero percent introductory rate, you can avoid paying interest by paying off the balance during the introductory period. You can also simply make the low minimum payments during that introductory period. Just keep in mind that credit card companies offer low intro rates to encourage spending and the accumulation of a high balance that will be costly later once the introductory rate period ends. It is safest to pay off a credit card in full, even if you have a low introductory rate, to avoid the pitfall of accumulating a balance that is eventually subject to a higher rate. If you can get approved for a low introductory rate, it can save you money to transfer an existing credit card balance onto the card with the low intro rate, as long as any balance transfer fees you incur are not greater than the amount you save on interest.
Other High Interest Debts
While it is almost always best to pay off your credit cards in full each month, you might benefit from making a minimum payment instead of a full payment if you have other high interest debts. For example, if you take out a short-term loan with a 20 percent interest rate and your credit card has a 12 percent interest rate, it is better to pay off the short-term loan in full before the credit card. In other words, it is best to pay off the debt with the highest interest rate first, which is often (but not always) a credit card.
If you're trying to establish credit or re-establish a good credit history if you've had credit problems in the past, regular activity and payment of a credit card can help boost your credit score. Paying off your card in full can help increase your borrowing capacity because it lowers you total debt load; however, if you're trying to build credit, you shouldn't let your card become inactive. In fact, a bank may cancel a credit card due to inactivity. Continuing to use your credit cards, but paying off the balances in full each month can help you build credit without paying interest.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.