How Much Should I Pay Off My Credit Card Bill Each Month
Paying the absolute minimum on your credit card bill is great for your credit card company but bad for you.
Many credit cards charge a very large rate of interest on the money that you borrow and most state that you only need to make a minimum payment each month . Whilst this sounds really tempting, it can actually prove very costly in the long run. That is why many financial advisors advise not to borrow money on a credit card if you can possibly avoid it.
So, the simple answer to the question about how much you should pay off is as much as you can. Even paying off a small amount above the minimum required will help reduce the compounded interest in the months to come. To work out the minimum monthly payment required to pay off your credit card bill in a particular timescale, use our credit card payment calculator at the top of this page.
How Are Credit Scores Calculated
Getting a grip on credit score models and formulas can give financial consumers a better idea of how a credit card paydown impacts credit scores.
First, realize that credit reports and credit scores are different, said Freddie Huynh, vice president of credit risk analytics with Freedom Debt Relief and a former data scientist at FICO, the benchmark credit scoring organization. The three main credit bureaus use the information from credit reports to develop credit scores, so you will want to make sure the information on the reports is accurate.The credit score ranges that most lenders use generally fall between 300 and 850, with high credit scores representing better credit risk than lower scores.
Basically, there are five factors that make up credit scores.
Your payment history makes up 35% of your overall credit score making it the biggest factor in determining your score, followed by at 30%, said Randall Yates, founder and CEO of The Lenders NetworkBeyond that, the average age of your open accounts makes up 15% of your score. The remaining 20% are and having a mix of different credit types , Yates said.
Consequently, when a cardholder pays down a credit card to zero, the decline in credit utilization should boost that cardholders credit score. The increase can be significant considering credit utilization makes up 30% of your credit score, Yates said.
Only Paying The Minimum Balance
It’s tempting to send in minimum monthly paymentsoften $15 to $25when you’re under financial duress. Don’t do it. High-interest rates charged by credit card companies will keep the bill growing every month. Instead, send the highest payment you can afford and reduce spending in other areas to focus on paying off the debt. It might be worth going without extras like the newest smartphone or latest fashion if it means you’ll sleep easier at night, knowing you’ll soon be debt free.
It may not feel like you’re saving money when you increase credit card payments, but you are. Depending on the interest rate, you’ll save an average of 10% to 29% per year in interest on any balance you pay off. For example, if you pay off an extra $1,000 this year, you’ll come out $160 to $290 ahead, depending on the rate.
Money is probably already tight if you’re already in debt, so freeing up extra cash will give you some breathing room for the long haul. Whether you use this money to accelerate debt payments, start an emergency fund or invest in retirement. The power of compound interest will start working in your favor instead of against you.
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Is One Method Quicker
When it comes to the amount of time required to pay off your credit card balances, there isn’t a huge difference between the two methods. Paying in order of interest rate will typically allow you to pay off your accounts a few months earlier than paying in order of balance, and you’ll pay less in interest charges.
In the end, you don’t have to choose either of those two methods. You can pay off your credit cards in whatever order makes you happy. You can alphabetize them by credit card issuer or get rid of the balances on cards you’re not using anymore. The ultimate goal is to pay off your credit card balances by making a lump-sum payment to one credit card each month until that balance is repaid. In the meantime, be sure to make at least the minimum payments on all of your other credit cards.
If your ability to pay off a number of credit cards is more complicated, you should consider seeking assistance from or a debt-relief program. Pursuing debt settlement is a last resort, because it involves stopping payments and working with a firm that holds that money in escrow while negotiating with your creditors to reach a settlement, which can take up to four years. Withholding payments from your creditors can seriously damage your credit score.
Understand How The Debt Happened
Figuring out how you got into debt might help you avoid overspending in the future. Try going over your credit card statements from the past few months to find patterns in your habits. Are there places where you can make some changes to your daily or monthly spending?
For example, maybe you can cancel the gym membership and work out at home or you can cook more of your meals instead of dining out.
If your credit card debt was the result of a large, unexpected expense, you might make a plan to create an emergency fund. This can help you cover big bills in the future without going into debt.
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When Should I Pay My Credit Cards
My dad had always told me to get a credit card so I could start building my credit so I applied for my first one when I was 19 years old.
Unfortunately, I didnt take his other piece of advice: Pay off your card in full each month.
Instead, I quickly fell into the minimum payment trap, which meant I often carried large balances and only paid off what I could afford.
It was a dangerous cycle to be in, and by the time I broke it, I had paid thousands of dollars in interest.
It took two years to pay off every cent of that debt, and since then, I have learned a lot about how to use credit cards responsibly and still build up my credit score. Its a common myth that you have to carry a balance in order to boost your score.
Instead, a lot of it comes down to when you pay your credit card bills .
The Minimum Payment Is The Least You Should Pay
Unless you have a charge card, your credit card issuer won’t require you to pay your balance in full each month. Instead, you’ll have the option of making smaller, monthly payments each month until the balance is repaid in full.
At the very least, you should pay the minimum on your credit cards every month. The minimum payment is necessary to avoid paying a late fee on the card and to avoid a late payment on your credit report.
If you cant pay the minimum, you should contact your credit card issuer and make other arrangements. You may be able to delay your credit card payment with no penalties or enter a hardship agreement if you’re having financial troubles.
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Easier To Manage Repayments
You should avoid only making the minimum payment on your credit card when possible even if it may seem more affordable in the short-term. Issuers calculate these repayments at a very low rate typically between 2% and 5% of your outstanding balance. It could take you decades to pay off your full debt along with all the interest you will be accumulating.
Paying off your full balance makes your repayments much more straightforward. It can also encourage you to only borrow what you can afford to repay in the next month. If you cannot clear your entire credit card debt, repay as much as possible and calculate an ongoing repayment plan.
How Long After Paying Off Credit Cards Does Credit Score Improve
Some ways of boosting your credit can take months, or even years. Revolving debt repayment can be much faster. Given that your credit utilization ratio is the main factor impacted when you pay down credit card debt, you should see the results of those payments as soon as your credit card balances update on your credit reports.
Your credit card issuer typically sends an updated report to the once a month when your statement period ends. A new credit score is calculated every time your credit is pulled, and the new score uses the latest balance information.
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Think About Your Credit Score
While your credit card payment doesn’t directly impact your credit score, it can influence your score, and your recent payment amount may be reported to the credit bureaus. Your credit card payment does influence your , which is the ratio between your credit card balance and your credit limit. Credit utilization is an important factor when it comes to your credit score. The best credit scores belong to consumers with the lowest credit utilization, typically below 30%.
As you decide what credit card payment to make, think about how much is necessary to bring your credit card balance below 30% of the credit limit.
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A Potential Extension On Your Credit Limit
Clearing your balance each month will show your issuer that you can manage debt well. They may be more willing to approve requests to increase your or may even offer you an increase before you ask.
An increased credit limit gives you greater financial flexibility. Make sure you can afford the higher monthly repayments before making the request or accepting an offer from your issuer. Dont be tempted to spend more because you have the option, as this can make it more difficult to repay your balance in the future.
Fact: Your Balance Has More Than One Interest Rate
Your account may include balances with different interest rates . And that points to another good reason to pay more than the minimum due: When you do, your card issuer has to apply any amount above the minimum to the balance with the highest ratewhich can help you reduce that higher-rate debt more quickly, saving you money, according to Experian.
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How Much Of My Credit Card Should I Pay Off Each Month
Unlike personal loans, credit cards dont have set repayment plans, meaning you can enjoy the flexibility to pay back as much or as little of your debts as you prefer. While a certain level of credit card debt can help you manage your household finances and lifestyle expenses, its easy to end up with more credit card debt that you can easily afford to repay, if youre not careful.
To get an idea of how much you should pay off your credit card each month to avoid paying too much interest or ending up in financial stress, read on:
Saving Money On Interest Is More Important
If cost-saving is your priority, then pay off your credit cards starting with the highest interest rate balance first. That may take less time and allow you to save money on finance charges, especially if your highest interest rate credit cards also have higher balances.
Make a list of your credit cards, ranking them in order from highest to lowest interest rate. Then, pay off the credit card with the highest interest rate first by making high lump-sum payments to that card each month. Once you pay off the credit card with the highest interest rate, move on to the one with the next highest interest rate, and continue that pattern until all of the credit cards have been paid off.
Open a credit card offering a 0% APR balance transfer deal for new cardholders to save even more money on interest. If you’re interested, check out our top picks for balance-transfer cards to get started.
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How Debt Consolidation Works
A third method you can use to pay down credit card debt is known as debt consolidation. Debt consolidation is the process of using a new loan or credit card to pay off the existing balances you owe. The goal with debt consolidation is to secure new financing with a lower interest rate so that you pay off your debt faster and save money.
The three primary types of debt consolidation are as follows:
With any type of debt consolidation, its important to make sure you stop overspending on your credit cards. If you pay off your cards with a new financing, but run up a balance on the original accounts again, you could set yourself up for severe financial and credit problems later.
Also, if you plan to apply for new financing, its best if your credit score is either good or excellent. It is possible to qualify for debt consolidation financing with bad credit, but you might not be eligible for an interest rate that makes the process worth your while.
How Paying A Credit Card Before The Statement Closes Affects Interest
Paying your credit card bill in full before the statement closes means you shouldn’t have to pay any interest, unless you have been paying down a balance over several months. Most credit card issuers give you a grace period during which you’re not liable for paying interest, provided you pay your account in-full before the statement due date. If you pay your balance before the statement closes, you’ll see a “payments” line on your statement, reflecting the amount that’s been subtracted from your statement balance.
However, if you make a final balance payment early in a billing cycle, you may be surprised to find that you still owe interest in your next payment billing cycle.
“Residual” or “trailing” interest charges happen when interest is charged between the time when your statement is issued and when you pay your bill. Most credit card companies calculate interest payments based on the average daily balance of your credit card.
Finally, assuming you continue to use your card for the rest of the month, paying the balance before the statement closes will reduce the minimum payment that’s due at the end of the statement. However, banks calculate the minimum payment that’s due in a range of ways, so check out our minimum payment guide for information specific to your bank.
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How Do I Boost My Credit Score
I find credit scores to be a very polarizing topic. Polarizing might not be the right word, as it suggests that people either love or hate credit scores, and thats not really the sense I tend to get. I think everyone thinks theyre a pain and generally administered by companies e time per year. People are either
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What If There Was No Debt
There would still be financial institutions, but they would only issue debit cards, accept deposits for safekeeping, and facilitate money transfers. Savers would earn no interest. Businesses would become more reliant on investors and shareholders to generate more capital outside of their earnings to expand.
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How To Use This Calculator
For each credit card you have, enter the current balance, the annual percentage rate and your monthly payment. When you enter the balance and APR, an estimated minimum payment will automatically show up in the third field, but you can change it based on your actual payment amount.
When you click the Calculate button, youll see several things to help inform your debt payoff strategy, including:
- The month and year youll be debt-free
- The number of payments youll need to make
- Total interest youll pay
- Total payment amount, including interest and principal
You can also click on the Payment Schedule tab to see exactly how much of each payment will go toward interest and how much will go toward paying down your balance.
Remember, you can add multiple credit cards to the calculator. And as you define your strategy for eliminating credit card debt, you can enter different payment amounts to see how much time and money youll save.