When you charge expenses on a credit card, you don't necessarily have to finish paying for them by the time your bill comes due. You're allowed to carry a balance forward as long as you make your minimum payment on your credit card each month.
Credit card companies want you to carry a balance forward because that way, they get to make money off of you in the form of interest. And so it's not so surprising to learn that only 38% of U.S. consumers pay off their credit cards in full every month, according to a recent survey by First Tech Federal Credit Union.
But carrying a balance forward on your credit cards could have serious consequences. So it's best to do what you can to pay your bills in full.
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The problem with carrying a credit card balance
Credit card companies generally do not let you carry a balance forward without it accruing interest. The only exception is if you have a 0% interest rate credit card, but that 0% APR will only be in effect for a limited period. This means that for every month you don't pay your bills in full, interest can accrue against you.
So, let's say you carry a $2,000 credit card balance for 24 months until it's paid off completely. If your card has a 20% APR, it means you'll end up spending about $400 on interest in the course of paying off your debt. That's a lot of money to part with.
What's also problematic about carrying a credit card balance forward is that it has the potential to lower your credit score. One factor that goes into calculating your credit score is your credit utilization, or the amount of credit you're using at one time relative to your total credit limit. Once your credit utilization exceeds the 30% mark, your credit score has the potential to dive.
So, let's say you owe $2,000 on your credit cards but your total spending limit is $5,000. Even if you make your minimum payments on time every month and aren't considered late or delinquent, 40% credit utilization is apt to drag your score down.
How to pay off your credit cards in full every month
Many people hate the idea of budgeting. But if you want to make it more likely that you'll be able to pay off your credit cards in full regularly, then you may need to take the time to set one up -- and then stick to it.
If you set up a budget that maps out your ongoing expenses, you'll know what you can afford to spend in each expense category. That means you may be less likely to overspend and wind up with a credit card balance you can't pay in full.
There are several budgeting apps you can use that will sync up with your credit cards to help you track your spending. It's worth playing around with different ones to see which you feel most comfortable using.
Another good bet is to check your credit card balances weekly. If you see them starting to creep upward, you can scale back your spending so you're not left with a giant tab you can't cover in full.
Carrying a credit card balance is a pretty common thing to do, but it's not ideal for your finances. Sticking to a budget and being vigilant about checking your spending could make it so you're more likely to be able to pay your bills in full going forward.
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