Credit Card Balance: Make Payments or Pay in Full?

What to Do with That Credit Card Balance

What should you do with that balance?

What’s your opinion about credit card debt?

Just the other day someone searched for the following phrase in Google and found my site: “is it best to pay off my credit card balance in full or make minimum payments?

Hopefully this searcher found some good information here. But I doubt he/she was able to find a quick answer to this question.

In an effort to appease this reader I thought I’d answer this question best I can in a quick post. I’m going to take some liberties with this question and assume the person was asking whether they should pay off the full balance on their card or make minimum payments.

Here are the factors to consider when answering this question as every situation is different.

1. The Interest Rate on the Card

The first thing you should do is find out what type of interest charges you will be incurring if you do not pay off the credit card balance by the end of the billing term. You can find this amount on your credit card bill.

Keep in mind there are usually different interest rates associated with different types of balances. Be sure and pay attention to what type of balance you have. In other words, if you simply purchased something with this card (i.e. food, clothes) then look for the interest rate that applies to purchases.

If it’s a transferred balance, then it’s going to have a different rate. The same goes for cash advances.

If the interest rate is above 10% then you should try and pay off the complete balance. You will be paying a great deal in interest charges to keep this balance.

Another way to think about it: that new outfit or flat screen tv you bought will end up costing you well over the purchase price, likely double, if you pay off the card with minimum payments.

If you’re card’s interest rate is 0-1% due to some special promotion, then it’s probably okay to make the minimums as long as you are fully aware of the promotional rate terms (i.e. when it ends, promotional balance vs regular balance).

The reason the minimum is acceptable in this situation is because the money you would use to pay off the full balance is better used elsewhere. For instance, it could be in an online savings account and be earning interest, or you could invest it in a Roth IRA.

Lastly, if the interest rate is somewhere in between, 2-10% (a rarity), then you should let the following other factors influence your decision, as interest rate is somewhat of a non-factor at these levels.

2. Total Balance of the Card vs. Your Short-Term Savings

The second factor I would consider is the balance on the card compared to your short-term savings balance. Again, look at your statement and find your total balance of your credit card debt.

Assuming this is your only debt, compare that number to your short-term savings balance. Your short-term savings will be any savings you have not earmarked for retirement or your kid’s education.

These funds are normally tax sheltered and are therefore, off limits when it comes to using for debt payoff.

As a general rule, if you have a decent amount of savings, say $500-$1,000, and your credit card balance is less than half that amount, $250-$500, then you should pay off the credit card in full.

If your short-term savings is smaller than $500, then I would consider getting it to that level prior to making any extra debt payments. My advice would be to make the minimum payment on your debt until you build up a decent level of savings. Then, every dollar over that amount would be put towards paying off the debt.

As an extra step, if you find yourself unable to pay off the full amount of credit card debt due to a low savings balance, consider transferring your debt to one of the best 0% balance transfer credit cards available today.

3. Your Risk Tolerance

Lastly, let’s look at your level of risk tolerance. The numbers above do have some meaning for your decision, but they aren’t everything. And they can be trumped by how you feel about your debt.

For example, let’s say you have a credit card balance of $500, but it’s at a special promotion interest rate of 0%. Also, you have $2,000 in savings. It would then make sense, strictly from a numbers standpoint, to make the minimum payments on your credit card balance and continue funding your savings account.

However, if that $500 balance is keeping you up at night or making you feel uneasy about your financial situation or if you don’t trust yourself to remember to make the minimums (you’re scared of missing a payment), then it would probably be best to just wipe it out and pay it all off.

A Few Examples

I’ve put together a few examples in graphical format to serve as an easy guide for making this decision.

Credit Card Debt Examples

Final Thoughts

Keep in mind these are just a few simple scenarios. Each situation is unique and should be analyzed separately. Please use the above information only as a guide or framework for deciding how best to pay off your debt.

I know some could probably do a better job of breaking down all the numbers in more detail and include tax and time value of money implications, but this is just my take on how to handle credit card balance decisions. Best of luck getting out of debt.

Do you have some thoughts on this question? Please use the comment box below to share your thoughts.

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Last Edited: May 4, 2013 @ 9:57 am
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

52 comments
rubydoo123
rubydoo123

hi i have spent 240 on a 250 credit limit, i have paid the dbet of £240 and my on line statement has said it has recieved payment but is saying only £10 available to spend, the bill was paid before the end date, do you know why

Sexyblue213
Sexyblue213

So I'm trying to understand how credit works.. What does it mean when you mean to pay the card off in full? For ex. Say I have a credit card with 500$ and say I go shopping and spend 300$ when the bill comes should I pay 400$ towards the card before the due date to prove I can make efficient payments and to build my credit? Or should I pay 350$ towards the card?.. So then would that mean i could only use the card for the last 200$ and then when the bill comes in the mail I should just pay the full leftover balance of 250 or something like that? Or would it b best to just use the card for small purchases and pay the full amount overtime? I'm trying to build my credit accurately which way is best??? Help please :)

merchant account
merchant account

It is almost always better to pay off your credit card completely if you have the financial means to do so. From a financial perspective, unless you have a special rate on your credit card balance (say 3.00% or lower), you are generally better off paying the monthly balance in full. An exception could be to have cash for emergencies. In today’s economic environment, having cash can be very useful should you lose your job or run into another financial emergency.

merchant account
merchant account

It is almost always better to pay off your credit card completely if you have the financial means to do so. From a financial perspective, unless you have a special rate on your credit card balance (say 3.00% or lower), you are generally better off paying the monthly balance in full.

merchant account
merchant account

It is almost always better to pay off your credit card completely if you have the financial means to do so. From a financial perspective, unless you have a special rate on your credit card balance (say 3.00% or lower), you are generally better off paying the monthly balance in full. An exception could be to have cash for emergencies. In today’s economic environment, having cash can be very useful should you lose your job or run into another financial emergency.

ff
ff

No matter what, the best way is to pay credit card every month in full, period. Then the credit card companies will be the loser since you will have an outstanding credit report and rake up the rewards for using the card. I do this everytime because I don't like to carry change. Takes a lot of discipline, but you get used to it if you are conscious of what you're spending it on.

nvannello
nvannello

My beef with using credit is that most of us weren't taught early on how credit cards work. The concepts of balances, minimum payments, posting dates, etc sound like foreign terms that can make people put their fingers in their ears and sing, "LA LA LA! I CAN'T HEAR YOU!"

 

I believed this fairytale lie: I have $500 available on a credit card. I can go out and spend $500. It's OK. I'll pay it back over time.

When I maxed out that card, I got another. And another. Then I had to get another job just to pay the minimum balances on my cards. When a new credit card came in, I would think, "I will just put this one on the side in case of an emergency," but within a few weeks, that card was being used and before long, I maxed it out, too.

 

Before I changed my career and habits, I was $42,000 in credit card debt. Seem unimaginable? It was so staggering that I couldn't sleep at night. I lied about money to my partner and my friends. At my lowest point, I contemplated killing myself just to make the debt go away.

That's behind me now. I paid all of that off in full. I changed my life. Changed my career. Educated myself and I will never go back there again. When I want something now, I pause. "Do I want it or do I need it?" If it's just a "want", it stays on the rack/shelf and I go back to other things I already own and enjoy. I use my credit responsibly now and owe no one.

 

Debt is slavery. If you owe someone (including a bank), you are enslaved.

Kris
Kris

In a perfect world everyone would pay their balances in full each month. But many people don't for one reason or another. And of course that makes the banks very happy! So if you can't pay the balances in full, pay as much extra as you can to keep the balance from growing out of control.

Adaptu
Adaptu

Minus a medical emergency in Greece, I've always paid my credit card off in full at the end of each month.  Going into debt is scary to me and not something I want to get into the habit of.

mdmurr
mdmurr

I am a college student in a Personal Finance class with an extremely rigid instructor.  My question is:  If you double the payments on a credit card, does it ALWAYS pay off in less than half the time?  It was a question on a quiz, that was worded as follows: 

15.

If you double the monthly payments for a credit card, the loan will be paid off in:

a) Not enough information to answer

b) Half the time

c) The additional payment will have no impact

d) More than half the time

e) Less than half the time

 

Thank you in advance for any help with this question.

 

Sincerely,

Marya

mdmurr@mail.com

Samantha
Samantha

I did a balance transfer last year .. paid the transfer fee and had 0% interest all year. Now my time is up and I'm wondering whether the interest I didnt have to pay all year is going to ZOOM and show up now or whether Chase will simply charge me the typical monthly interest on the amount that is still remaining. Last month they only charged me $1.50 in interest so if they are going to only charge me that much again, then I will use that info to prioritize where my money goes. I don't want to ask them in case that was an error LOL Thanks!

BabBabson
BabBabson

Chase doesn't appear to be interested in helping their credit card customers pay off their credit cards. They offer only two choices under their auto pay system: pay the minimum or pay the full balance. All of my other credit cards let me set up an auto pay for: the minimum, a set amount or the minimum plus a set amount, or the full balance every month. The only way to make a payment of more than the minimum is to log in every month and manually send them money. It seems an obstructive stance.

808love
808love

I have a credit card from my bank a limit of $500 and last week and i only have a balance of $42.00. i messed up! Can I pay a little bit more added to my monthy payment to get that money back up again. I am not going to use it like i did. I just read the do's and don'ts!! can you please tell me what to do? I can even just put the $500 back in there, what do you think i should do:(

Doris Zuessman
Doris Zuessman

If you have a credit card and want to pay off the balance of the credit card in full. and you do not need the credit card anymore you want to close out the credit card. Tear it up and do not use it anymore, wil they still charge me extra fees like interest etc. after I close the account out and do not use it anymore..

nsx04
nsx04

well what about this....i heard that credit cards charges interests in full even of you pay off part of the debt. if that is the case, wouldn't then it be smart to just pay minimum until i have the means to pay it in full? i'm asking that because i'm a few hundred short of the full balance at the moment before my due date. I will have funds the next month to cover it all though. so am i right to just pay minimum for this month?

PT
PT

@Bob - because you are paying interest, and typically things purchased with credit cards are things you should just buy with cash you have. if you don't have the money to pay for it now, or pay it all off when your cc bill arrives then don't use credit cards. you're just making the cc companies rich.

PT
PT

@Misty - It's always more beneficial for you to pay off the entire credit card balance every month. This improves your available balance ratio (credit used / credit available), and still shows you can make consistent payments.

There is no reward in the credit scoring system for carrying a balance. Carrying a balance only means you're paying interest charges.

Misty
Misty

I just read this article, and I really appreciate it, it is very helpful in terms of savings versus debt. But my question is about credit. I have a bad credit score because I have no credit, so now I have a credit card and I am trying to establish good credit. Would it be better to make smaller payments or pay entire balance every month in establishing my credit?

PT
PT

@Aaron - Just pay it off. Get rid of that debt.

Paying it off in full or over several chunks will not matter for credit score. In fact, it should improve your score faster by increasing your available balance.

Have you been making regular payments? If so, you've already established a solid record of making payments.

Paying it all off will improve your score by improving your available credit balance.

Please also consult http://www.nfcc.org/. They my have more info for your specific situation.

Aaron
Aaron

I have been fortunate enough to come across a some of money that will enable me to pay off my credit cards completely. Since I carry a large balance on my card, I was hoping to pay it off in one payment. Some people are telling me it would be wise to pay it off, and others are telling me it would have a negative effect on my credit score to not pay it off with multiple medium size payments. Which is really better, or does it even matter?

PT
PT

@Pors - You are quite welcome. I have enjoyed seeing this post do so well with Google visitors really looking for answers.

Pors
Pors

I would like to thank the author for writing such an informative article and others for participating and addressing some of the questions. I know the article is from last year, but its content still very informative. Thank you.

PT
PT

"should I use THAT as my way of deciding which one to pay off first…"

Yes! Definitely pay off the card that expires first, then move to the second.

If you can't pay it by the due date, look for a new 0% to transfer the balance to. Just make sure the transfer fee isn't more than the interest you would pay to pay to just pay it off a bit late.

denise
denise

I read about the plan that helps you become debt free by layin gour yoru credit card balances and putting most of your $ each month to the card with the highest interest rate, and minimums on the others. Then when the 1st card is paid off, you use that money to put toward the next card.. etc.

Ok.. I get that.

My question is this. I currently have 3 0% cards with hefty balances. I pay more than the minimum on each each month. The 0% promotion expires at different times this year... one in July, one in Sept.. you get the drift.. So.. should I use THAT as my way of deciding which one to pay off first... or should I prioritize it by balance amount? HELP!

Thanks in advance for any help you can offer with this.

PT
PT

@jen - you will have to pay $250 to get it all back.

jen
jen

Say i have a credit limit of 300.00 and spend 250.00 and the min. payment is 15.00 i pay the 15.00. Will all of the 300.00 go back on the card or will i have to pay the 250.00 to get it all back?

PT
PT

@ ray - Okay, so this must have been a store credit card, like from BestBuy, where you signed up for the card at the store, make a purchase, and weeks later receive the bill and the card. Correct?

If not, then I don't understand.

If so, and you paid off the entire balance then the credit card company should apply the payment when they receive it. Then they will adjust your credit to reflect the full amount. You should see it adjusted on your next statement. Call the number on the back of the card if you want to find out sooner.

ray
ray

ok let me elaborate i got a platinum mastercard in the mail not too long ago, when i received it had a credit balance of $277.00, but there were already finance charges on it so really the available on it was like $70.00, i charged the rest which wasnt a smart move on my behalf, so now i completely paid the balance , now my question is how long will it take for the available credit to show up on the card so that i may use it again....

PT
PT

@ray - I'm having trouble interpreting your question. Could you please elaborate?

ray
ray

got a silly question, when one pays off the balance on a credit card how long does it take for the credit to get back on the card?, for instance i jsut got a platinum mastercard there were already charges on it so i jsut charged a small amount on it , now how long will it take for the credit to get put back on the card????

Rosemary
Rosemary

If possible, make payment in full. If not, try getting a 0% credit card and pay in full when the introductory rate is done. I do this all of the time.

Esau
Esau

If you must carry a balance on the credit card for any reason, try paying off more than the minimum each month, or whenever you have the cash to make additional payments. Most credit card companies allow you to make several payments between statements. You do not have to wait for the statement to make a payment. Go ONLINE - that's the simplest and surest way to ensure that payments are on time and never missed or past due-date. The minimum is what you must pay each month, but there is no rule that you cannot pay more than that or more than once each month. Even $5, whenever possible, will help, but don’t stick to just $5! {How many different ways can I STRESS this point --- PAY MORE THAN THE MINIMUM ---}. Pay more whenever you have the extra spare cash, and a little less IF YOU MUST in the next month. Decipline is essential. Budget and make sure your PURCHASES on the card are LESS THAN the PAYMENTs each month – that’s a sure way to pay off the debt. Don’t spend what you don’t have…………[Avoid BUSH-enomic policies!!]. Simplest way. Hope somone benefits from all this chatter.

Ben
Ben

I have actually had it confirmed that I was right with what I said above by the credit bureau, so that we all know where we stand.

Ben
Ben

Matt, I dont think that it does effect your credit score by paying less , as long as you meet the minimum monthly payment due.

Great post, and very informative. Thanks.

Matt
Matt

How do the payment strategies you explained influence a credit score? Does paying less than the full balance negatively effect a credit score?

PT
PT

Thanks, Louise. MS Visio is my friend.

louise
louise

great post! I really like the diagram too, you have explained it really well,

Mike
Mike

 @rubydoo123 Sometimes it takes X number of business days to post to your account in full. Different companies may handle it differently. When I first owned my card, they credited me half of my payment before it fully cleared.

Mike
Mike

 @Sexyblue213 To pay off the card in full means that you pay your full balance on the card when your bill comes. In your scenario you describe having a card with a spending limit of $500. This is the maximum amount of money you can spend before they decline you any purchases, or perhaps fine you. If you were to go shopping and spend $300 during your billing cycle all you would have to pay is the $300. This is paying in full. It would make no sense pay extra. It does not improve your credit score.

 

People have credit cards for different reasons. To evaluate the best option for you is circumstantial. Personally, I don't need a credit card. I am using it only to build my credit. However, all my purchases are backed by cash that is currently in my accounts. I always pay off my balance in full, and on time. Simple way to build credit.

 

If all you can afford is small purchases, say groceries for the month, than it would be quite beneficial to get your feet wet in credit. Just make sure you don't see it as free money. In the end, nothing is free.

 

Regards,

Mike

ff
ff

 @mdmurr Realistically it would depend on interest rates and whether or not you're using the card after you made your payments. Usually the interest is charged on the amount outstanding after each payment if I'm not mistaken,  Even though it's an open end loan, there's also other variables to consider.

Philip Taylor
Philip Taylor moderator

It's my understanding that most credit card companies have terms that dictate that they ZOOM all those fees. I'd get on the phone quick with them and find out. Most likely you'll need to pay it off asap.

nvannello
nvannello

 @BabBabson You need to remember: They are lending you money. Repeat: They are lending you money. By making it easy to set your payments to only pay the minimum, you're doing yourself a disservice. Look at your balance daily. Make sure there is nothing out of whack. Get uncomfortable with the fact that you owe someone money instead of banking that cash for your future needs.

 

Chase was the only debtor who worked with me when I was significantly in debt and they were the first creditor to grant me credit after my financial burdens cleared. They're doing you a favor by making you log in.

Philip Taylor
Philip Taylor

That is incorrect. You are only charged interest on the amount of outstanding debt at the end of the month. Pay as much as possible.

Sexyblue213
Sexyblue213

@PT Im trying to understand how credit works ... What does it mean when you say to pay the balance off in full?? Say I have a credit card of 500$ on it. Say I go shopping and spend 300? Then I get my bill in the mail.. Would it be best to pay 400$ before the due date to build credit? Or is it best to just pay 300?.. And if so would that mean I could only use the card once again say for the rest of the 200$ left on the card and just pay 250$ on the card to close the card out completely? Or is it best to make small purchases here and their? I wanna build the best credit possible.. Help!!

MASK
MASK

I have balance of $4500 left on my card with an Interest rate of 29%, and my card is been closed also, i do make monthly payments of $200 an year. Will the CC company will let me payoff all this 4500 in once without any additional chargers, if they do charge extra, how much it can be.

cherrykawaii
cherrykawaii

@Philip Taylor

hi...i got a quick question about my  owe $500 credit card. if i will pay the full amount what's gonna happen & if after i paid can i use it again? what's gonna happen to my credit score? it is still the same credit score or this would helps to improve my credit score? please let me know sir...tnx