How Important Is It To Pay Off My Credit Card Balance Every Month?
Very important!! This is a very complex consideration that many consumers are not aware of. My goal is to explain to you what happens when you make purchases on a credit card and what happens in regards to interest when you carry a balance from month to month.
Paying your credit card statement to zero every month entitles you to significant privilege which is not paying interest. This may sound simple but the long-term considerations are important to understand so let me explain how your billing cycle works on a credit card and how that influences the interest you can pay.
Let’s assume you have a new credit card so we have a starting point of zero. During your first month with the card you incur multiple purchases which total $500. At the end of your billing cycle you will receive a bill indicating that you owe a total of $500 and can make a minimum payment of less, usually 3% of the balance, in this case $15. Please always ignore the minimum payment offer as this is just setting you up for a lifetime of interest payments. So you get your bill of $500 and typically you have a 20-25 day grace period to pay it. If you pay the $500 you will incur no interest at all. And any purchases made after your billing date of the first cycle will also not be incurring any interest as long as you do the same with your next bill; pay it in full. And if you continue to use and pay your card in this fashion you will not pay any interest indefinitely.
Now that’s all well and good but let’s discuss what happens when you don’t pay the balance and how that will affect you going forward. So let’s work with the same numbers; $500 in purchases in the first billing cycle. When the bill arrives you only pay $400 and carry a balance of $100 into the next billing cycle. Now the calculation changes drastically! You now pay interest on the $100 you are carrying and more importantly any purchases made after the billing date are now accruing interest the instant you put the charge on the card. The grace period is completely gone. So on your next bill you owe $100 plus interest plus any new purchases plus interest. Now here’s where is gets really complicated, there is no grace period even if you pay the new bill in full because you will still have interest accruing from the point it was printed and mailed so you still have lost your grace period through the next billing cycle and on and on this cycle goes. You are now in the interest trap.
How do I get out of this trap? Once you have lost your grace period you can in fact get it back but it is a bit tricky. When you receive your next bill you want to know the actual total amount owing on the day you want to pay the bill. You can either check online or call the credit card company to get that balance. You then need to pay that balance in full. But keep in mind if you carry even $1 you still lose your grace period so to allow for the interest accruing between the time you pay the bill and they process your payment I recommend overpaying the bill by at least $10 to ensure you don’t carry a balance forward. Once you’ve managed to reset your billing cycles and grace period always pay your statement balance to zero!
Here is some further clarification: To keep your grace period you need to pay the statement balance to zero, not necessarily the current balance. If you always pay your statement balance to zero purchases made after the statement date and on the next billing cycle will be at zero interest as well, again as long as you pay them to zero on the next statement. One interesting note is that some credit card companies actually do a retro-active interest calculation if you don’t pay your statement balance to zero which then adds interest to the prior purchases. Obviously this makes it even worse and more difficult to get out of the interest trap!
Ultimately many people find they have fallen into this trap and are simply unable to get ahead. Sometimes balance transfers to a new card at lower interest can help but often they simply don’t have the resources to pay the balance in full and thus are paying interest forever. If this is you please feel free to contact me to help get you out of this situation. I have been helping individuals and families get out of debt in Whitby, Oshawa, Clarington, Port Hope and Cobourg for 10 years. You can reach me at 905-243-8765 and we can discuss strategies to get you out of the interest trap.
About the Author:
Trevor Glasser owns the 4 Pillars Consulting Oshawa, On Office helping people get out of debt every day. If you need a free consultation to understand your options please feel free to contact Trevor at 905-243-8765 or www.goodbyedebt.ca.
