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For some people, carrying a credit card balance isn’t always a choice—it’s the only way to handle a financial emergency or cover expenses during a period of unemployment. Other people choose to carry the occasional balance to fund a large purchase, take advantage of a 0 percent intro APR offer or temporarily cover an expense that they plan to pay off later.
If this is the first time you’ve ever carried a balance on a credit card, you might be feeling embarrassed or anxious—but it isn’t the end of the world. As long as you can avoid falling into unmanageable credit card debt, you’re doing fine. And if you do find yourself with a higher balance than you can handle, there are strategies to help you pay off credit card debt.
Let’s take a look at what happens when you carry a balance on your credit card and how to pay it off as quickly as possible.
What happens when you carry a balance on your credit card?
When you carry a balance, you are essentially borrowing money from your credit card issuer. You need to make at least the minimum payment on your balance every month to remain in good standing with your creditors. You’ll also need to pay back your balance in full at some point, otherwise, you risk turning it into long-term credit card debt.
How does credit card interest work when you carry a balance? In most cases, your credit card issuer offers a grace period during which you can pay off your balance before it accrues interest. This grace period is generally the same length as your credit card billing cycle, which means that if you pay off your balance in full every billing cycle, you can borrow money without having to pay interest. If you don’t pay off your balance in full before your grace period expires, your credit card issuer will begin to charge interest not only on your current balance but also on any new purchases you make on the card.
If you are carrying a balance for the first time, expect to lose your grace period and begin accruing interest on both your current balance and your new purchases. You should also keep an eye on your credit score because it might drop by a few points. However, you can rebuild your score and start to earn back your grace period by paying off your balance in full.
Are there good reasons to carry a balance on your credit card?
If you plan ahead and choose the right credit card, you might not even have to pay interest on your balance. Many credit cards come with introductory 0 percent APR offers on new purchases, and the best 0 percent intro APR credit cards give you a year or more to pay off your purchases before the regular interest rates kick in. If you pay off your balance in full before the 0 percent intro APR expires, you’ve essentially given yourself a zero-interest loan.
How much interest will you pay on your credit card balance?
If you are carrying a balance for the first time, you probably want to know how much it’s going to cost you in interest charges. It all depends on the interest rate your credit card issuer offers you and how that interest is calculated.
When you carry a balance beyond your credit card grace period, your credit card issuer begins to charge interest according to the terms in your credit card agreement. If your credit card offers 0 percent APR on purchases for the first year, for example, you get 12 months of zero interest on any balances associated with new purchases.
If you are not under a 0 percent intro APR offer, then it’s likely that your credit card interest will be calculated to compound daily. Let’s say that your credit card issuer is charging you the average credit card interest rate—as of this writing, it’s well above 17 percent. Your daily interest rate can be calculated by dividing your annual percentage rate by 365. With a 17 percent APR, that comes out to roughly 0.05 percent interest per day.
So if you carry a $1,000 balance on your credit card, you’ll be charged 0.05 percent interest the first day your balance passes your credit card grace period, which comes out to 50 cents. Since interest compounds, the next day’s interest will be 0.04 percent of $1,000.50, and so on.
Don’t expect to watch your balance increase by a few pennies every day, though. Even though credit card interest is calculated daily, you’ll only see the final tally when you receive your credit card statement. That’s why some people are surprised to see just how much interest can accrue over a single billing cycle and why it’s important to pay off your balances as quickly as possible.
Does carrying a balance on your credit card affect your credit score?
Yes, it can hurt your credit score. That’s because 30 percent of your FICO credit score is based on the amount of money you owe your creditors. This is often called a credit utilization ratio, and it’s based on the amount of credit you’re currently using compared to the amount of credit currently available to you.
This means that carrying even a small balance on a credit card could temporarily lower your credit score. If you notice your credit score has gone down a few points after carrying a balance on a credit card, don’t worry—once you pay it off, your credit score should go up again.
What is the best way to pay off a credit card balance?
The best way is to make a credit card payment that clears out your balance in full. If you can’t pay it off immediately, consider making multiple small payments until your balance is cleared out. If your balance can’t be taken care of in a few small payments, consider applying for a balance transfer credit card that offers 0 percent intro APR on transferred balances.
When it comes to credit card payments, faster is nearly always better. You don’t have to wait until your next credit card payment due date. You can make a payment whenever you want and you can even make more than one credit card payment during a single billing cycle. Since credit card interest compounds daily, paying off your balance even a few days sooner could save you money in interest charges.
Many people who pay off or transfer an outstanding credit card balance don’t realize that they may still owe interest on that balance—and that those outstanding interest charges won’t appear until their next credit card statement. So don’t assume that you can ignore your future credit card statements just because your current balance is $0. Your next bill may include interest charges on the balance you just paid, so you’ll want to make sure you pay your interest off in full, too.
The bottom line
If you are carrying a credit card balance for the first time, there’s no need to feel embarrassed or anxious—many people do it at some point in their lives. Simply do your best to pay off your balance as quickly as possible. Remember that you don’t have to wait until your next payment is due; you can make a payment at any time, and you can make multiple small payments during a single billing cycle. The faster you pay off your credit card balance, the less interest you’ll pay, and the sooner you can enjoy the benefits of living without credit card debt.