The Pros and Cons of Paying Off Credit Cards In Full

There are many different options for how much you should repay when you have a credit card ranging from the minimum payment to paying off credit cards in full but do you really know the pros and cons of making full payments?

Paying off credit cards in full completely clears the balance and reduces interest costs. Paying in full is generally the best way to manage credit cards and your credit score but some credit cards offer more value if you make lower payments.

To find out when you should pay in full, when you shouldn't, and how it impacts your finances and credit score, read our full guide below.

How do you pay off a credit card in full?

There are two ways of paying a credit card off in full - you can either set up a direct debit which will automatically make the full statement balance every month or you can repay in full manually through your online account or by making a faster payment from your bank.

There are two slightly different ways of paying in full that have an important difference. You can either pay the full statement balance from the previous statement or pay the full current balance, which will be higher if you've spent any more after the last statement date.

If you repay in full every month, there is no real difference as to whether you pay the statement balance or the current balance. In both cases you will not be charged any interest on purchases.

If you have other types of balance on your credit card such as cash or balance transfers, then paying the full current balance will reduce the amount of interest you will have to pay on those balances on the next statement.

If you don't usually repay in full, then repaying only the last statement balance will mean your interest charges on the next statement will be higher than if you pay the entire balance so if you've had a balance on your card for a few months and want to save on cost, then check what your current full balance is and pay that rather than just the amount requested on your statement.

The pros and cons of paying off credit cards in full?

In most cases paying off your credit cards in full is a good idea. You're going to save money by not paying interest, it's better for your credit score and it gets you into sound financial habits.

Here's a rundown of the different pros and cons of making full payments on your credit card rather than just partial payments or only paying the minimum.

Pro or ConDescription
ProStop paying interest on your balance
ProReduce your outstanding debt
ProReduce your monthly debt repayments
ProImprove your credit score
ConReduces your bank account balance
ConLoses benefit of long-term 0% deals
ProLess need to actively manage your credit card account

Does carrying a balance improve your credit score?

There is a common myth that carrying a balance on your credit card by not repaying it in full is good for your credit score.

This myth is quite simply not true and it originates from people misinterpreting a few things that do affect your credit score.

The first is the fact that having inactive credit cards that you do not use is not great for your credit score, although it's not a huge deal if you don't have too many of these.

When lenders assess your risk, if you have many credit cards that have large limits and no balance, it makes it easier for you to spiral out of control if you go into a spending spree across all your cards.

As your total available balance is high, this makes it more likely and so you shouldn't have too many cards that are lying in a drawer and not used.

Another reason people give is that carrying a balance shows that you are able to manage your repayments and manage your debt by showing that you can cope with having a credit card balance.

The fact is that even if you repay your credit card in full, the credit card company will still report data to the credit bureaus showing that you used the card. Even if your balance at the end of the month is zero, things like your spend, your statement balance and your payments will all be reported so you will still get the benefit of other lenders knowing that you can manage your credit.

If you regularly use your credit card for purchases and repay it in full, your credit score will be better than if you carry the balance.

This is because your outstanding revolving balance will be lower and factors such as the total outstanding debt and the utilisation of your credit cards (ratio of your total balances to your credit limits) are some of the most important in almost all scorecards used by lenders.

How much do you save by paying in full?

Paying off your credit card in full is not only good for your credit score, but will also save you money. If you only make purchases on your credit card, then repaying it in full every month will guarantee that you never have to pay any interest.

If you've not previously been paying in full, doing so will stop you having to pay interest every month. It's important to remember that if you do this, your next statement will still charge some trailing interest but interest charges will stop from the following statement if you make two full payments in a row.

If you carry other types of balance on your credit card, you will have to pay interest even if you do pay in full - things like balance transfers and cash withdrawals will charge interest daily from the day you make the transaction. In these cases, the sooner you repay them in full, the sooner the interest charges will stop.

On a typical credit card at an interest rate of 18.9%, the effective monthly interest rate will be 1.45% - the calculation is not quite as simple as dividing by 12.

This means that for every £100 of balance, you will save £1.45 per month in interest if you go ahead an repay the balance in full. It may not sound like a lot, but if your balance is a few thousand pounds and you calculate this over several months, that will be a significant saving.

Should you repay all your credit cards in full?

Although for most regular credit cards repaying in full is the best way to manage them, there are some cases where you're better off only making the minimum payment instead.

If you have taken out a long-term 0% balance transfer or a 0% purchase credit card, there is no point in repaying that balance in full in the first month.

To make the most of the offer and given that you've already made the transfer or those purchases, you're better off making use of the long 0% term and repaying the balance at the end of it.

If you have spare cash burning a hole in your current account, you can pay off another debt that is incurring interest instead or use it in some form of an investment to generate some income instead.

If you have a few different kinds of debt and some of your other debts have a higher interest rate than the credit card you are thinking about paying off, you should pay off the higher interest debt first.

Credit cards have much more flexibility when it comes to payments and if you start by paying off higher interest debt first, you will be able to pay down your debt more quickly overall.

You can pay off your credit card in full when you've repaid all higher interest credit first. Sometimes, even in this case you might be better off transferring the balance to a long-term 0% credit card instead and then paying off the next most expensive debt as that can save you money overall.

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