How Do You Pay Your Credit Card Balance?
One of the advantages of using credit card over cash when it comes to making purchase is that, you will not need to pay for the item immediately. At the point of purchase, you are not spending your own money. You are actually borrowing money from your card issuer. This gives you opportunity to attend to your pressing needs even though you don’t have the money. It is a form of short term loan to you. However, you have the obligation to pay back the credit card balance to the card issuer.
So, it is good that cardholders put this at the back of their mind any time they use their cards to pay for goods or services. Unfortunately, the fact that the cash is not leaving their pockets immediately, a lot of credit card holders tend to overspend. They buy things beyond what they can pay for at the end of the month. This singular step may be the beginning of their journey into debt. That is a topic for another day. What we shall discuss today is the three ways by which you can pay your credit card balance.
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Ways to Pay Credit Card Balance
Credit card companies do not make it compulsory for cardholders to pay off their card balance at the end of the month. The truth is that, they don’t even want you to pay off the card balance. The reason is this, when you carry balance in your card, you will need to pay interest on the balance at the end of the month. This represents income to the credit card company. The amount of interest that you will pay will depend on the amount you are owing and the interest rate on the card. What is minimum payment on credit card? Minimum payment is the least amount that your card issuer expects you to pay on your card balance at the end of the month. It is usually calculated as a percentage of your card balance. Therefore, the higher your credit card balance, the higher the minimum payment that will be set for you. As you keep paying down your card balance, the amount you will pay as minimum payment will begin to reduce. That is if you don’t make new purchases with the card.
If you choose to be on minimum payment, you should understand that it has its own advantages and disadvantages. Among the advantages you will enjoy is the ability to spread the payment over a period of time. This makes it easier for you to pay back without you feeling too much pressure on your cash flow. Also, you will be able to use your money for other things that are more important to you. If you have more than one credit card balance, you may decide to make minimum payment on the card balance with less interest rate while you focus on paying off the one with higher interest rates.
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On the other hand, when you make minimum payment on your credit card balance, you will need to pay interest on the balance. The interest rates on credit cards are not usually friendly especially if you don’t have good or excellent credit score. Besides, it may surprise you that your credit card balance remains almost at the same level despite the payment you make every month. Minimum payment that you make will first be applied to the interest on the card balance while the remaining amount will be used to pay down the principal. This may increase your credit utilization ratio thereby making you to have less credit available to use. This can lower your credit score and creditors or lenders may not be willing to extend further credit to you. They will believe that your finance is already under pressure. Extending new credit to you may lead to late payments or default.
If you cannot pay off your credit card balance at once, you may choose to make partial payment. The amount you will pay in this case will be more than the set minimum payment. While the minimum payment is usually set by credit card companies, you are in the position to set the amount you want to make as partial payment each month. However, this amount cannot be less than the set minimum payment. It can be a fixed amount or any amount you are willing to pay in a particular month as long as the amount is not less than minimum payment. The main advantages are that the payments are at your own pace thereby making it possible for you to determine how you want to allocate your cash. Even though, you will still need to pay interest on the card balance, the interest will be lower than what you will pay under minimum payment option. Depending on your credit card balance and the amount you are willing to pay, making partial payment can still take a toll on your credit utilization ratio just as it applies to minimum payment. If your credit utilization is high, it will lower your credit score. You may not be able to apply for new credit.
If you have the money to pay off your entire credit card balance at the end of the month, this is the best thing to do. With this, you will not need to pay interest on your credit card. This is what some cardholders don’t know. They have conditioned their mind that they just need to pay interest on their cards. That is not the way credit cards work. Credit card will always allow you a grace period between twenty and thirty days before you make payment. It is when you don’t pay off the total balance on the card at the end of the month that you will be asked to pay interest. If you desire to make full payment on your credit card balance, it will be easy for you to do when you don’t charge too much amount to the card. Keeping your spending low will also lower your credit utilization ratio. The fact that your credit utilization ratio is low coupled with the timely payments of your credit card balance, your credit score will experience a boost. If you are sure of having enough money in your account at the end of every month, you can even decide to set auto payments for your card balance. Alternatively, you can set a reminder so that you will always know when you are due to make payment on your card every month. This will help whether you are making minimum payment, partial or full payment. In whatever option you choose, it is not good to make late payment. This can lead to penalty apr and it can even ding your credit score.