If you’ve read or heard horror stories about people wrecking their financial futures with excess credit card debt, you may wonder why anybody would want a credit card. Handled wisely, a credit card is not only a convenience; it is a powerful and inexpensive tool for building and maintaining a top-notch credit rating. You should pay credit cards in full every month whenever possible to maximize the benefits and avoid potential problems.
One of the key determinants of your credit rating or credit score is your credit utilization ratio. This ratio is the percentage of your available credit lines that you carry as a balance on your credit cards. For example, if you have a card with a credit limit of $5,000 and you carry a balance of $3,500, your credit utilization ratio is $3,500 divided by $5,000, or 70 percent. That’s high. Bankrate.com says you need a credit utilization ratio of less than 30 percent. If you pay your credit cards in full every month, your credit utilization ratio will be very low, and that really helps your credit score.
When you pay credit cards in full each month, you are charged little or no interest. Making some purchases each month with credit cards and then paying for them in full is good. This puts activity on your cards and allows you to make regular payments and build your credit. If you make only the minimum required payment from month to month, it can get very expensive. For example, if you carry a balance of $3,000 on cards with interest charges of 18 percent, you pay $45 per month in interest, or $540 per year.
Paying your bills on time is the single most important element that goes into determining your credit score, according to MyFICO.com. Paying credit cards in full each month takes care of that and provides a valuable financial safety margin. If you run into unexpected money problems, keeping payments current is much easier with low balances. If you are paid in full and don’t use a card, you won’t even need to make a payment.
If you have a lot charged on your credit cards and you simply don’t have the cash to pay them in full, the thing to do is start to pay down the balances in an organized way. Begin with the card that has the highest interest rate. Pay the minimum on the other cards and put everything you can toward paying off the high-interest card. Once you have paid this card in full, start on the next highest interest card. Keep doing this until you’ve paid off all of your cards and then commit to paying them in full every month.