After you begin using your credit card, you will have to make payments towards your credit card balance by the end of your billing cycle. While the bank requires a minimum balance payment to avoid any additional fees, it is highly recommended to pay off your full credit balance each month.
Best Practice = Paid in Full
By paying your balance in full every month, you are avoiding interest from accruing on your rollover balance. If it becomes difficult to pay off a large credit balance at one time, making regular payments will assist you in not having to face a situation of being stuck in debt. Having no existing balance will also mean that you will have more credit to use for your next billing cycle in case you need to fully use your line of credit.
Okay Practice = Minimum Balance Payment
Making a minimum balance payment is certainly better than making no payment at all. By making a minimum balance payment, you will still be building a positive credit history. Eventually, you will want to make larger payments towards your balance because carrying a large balance at the end of every month will have interest accrue which will make it more difficult to pay off your balance.
Avoid Carrying A Large Balance Each Month
Using too much of your line of credit can negatively affect your credit score. A high credit utilization rate will lead to a higher interest rate in obtaining future credit, and thus, you will be paying extra to borrow money. In general, it is recommended that you use up to 20% of your credit limit. Having a lower credit utilization rate implies that you are not likely to default on your credit payments.
When it comes to paying off your credit card, try to pay the most you can; otherwise, make at least a minimum payment. A lingering balance will accrue interest and make it harder for you to pay your full bill. If you want to save more money to pay off your balance, you should learn How to Create a Budget to maximize your savings.
Managing your credit card can be made even easier by setting up automatic payment. In the next lesson, learn How to Set Up Automatic Payment.