Paying off your entire credit card balance by the due date every month is a worthwhile goal. After all, if you don’t pay it off, you’ll end up paying interest on the remaining balance. But believe it or not, there are actually a few circumstances when paying the balance in full might not be your best bet.
Generally speaking, there are three instances where it’s appropriate for you to consider not fully paying off your credit card debt:
1. You have a cash flow problem. If you can barely make ends meet, you might be tempted to dip into your savings to pay off your entire credit card balance. This may only be a good idea if you have an emergency fund that’s substantial enough to cover your expenses for a minimum of three to four months. Depending on your circumstances—if you have an unstable work environment or several children to support, for example—you might need an even bigger cushion.
Before you pay off your credit card using your savings, decide how big of an emergency fund you need to have. Once you identify that amount, you can decide if it makes sense to use the extra money you’ve saved to pay down your balance.
2. You have a credit card with an extremely low APR. It might be a good idea to have a low-interest credit card in your back pocket. There are some emergencies or big expenses that can put a major dent in your rainy day fund, and sometimes you’re better off carrying a balance for a month or two vs. draining your fund and leaving yourself financially vulnerable.
For example, if your car needs $3,500 in repairs, you might decide to put the amount on your 9.99 percent APR credit card for two or three months rather than pull the entire amount out of your savings account at once.
3. You have several major expenses coming up. In addition to your car that needs $3,500 in repairs, what if you also find out that your child needs braces and that your fridge needs to be replaced? If you know that you will have so many expenses in the near future, you might decide to be conservative with your cash and not pay your credit card balance in full this month. Keep in mind that if you don’t have a low-interest credit card, it may be best not to carry the balance for very long if you can help it.
(Read more: Should I Save Money or Pay Off Debt?)
What to do if you think you’re getting into serious debt?
While there are circumstances under which paying off your balance in full might not make sense, if you regularly find yourself unable to pay off your balance, you need to take action.
Paying interest every month is not good for your financial health, and it’s not good for your mental health, either. If you want to get out of credit card debt, consider taking the following three steps:
1. Figure out why you have a balance. It’s very important to get to the root of why you’re in debt. Do you have a problem with impulsive purchases? Do you spend too much dining out or going to the movies? Did you have a financial emergency?
If you don’t get to the bottom of the issue, you might be destined to repeat it. Sometimes, just setting up a budget and tracking your spending can solve the problem. It’s tough to rein in your spending if you don’t know where you spent money or how much you spent.
2. Create a plan to pay off your debt. If you have more than one credit card with a balance, make a list of your cards. Write down the balance amounts and the APRs of each card. Start by first paying off the balance on the card with the highest APR. After that one is paid off, start working on the card with the second-highest APR, and so on.
If possible you should consider transferring the balance with the highest APR to a credit card with a low or even 0 percent APR. Typically this low or 0 percent APR will only last for the introductory period, which can vary between cards, but it will give you time to pay off the debt (or at least pay it down) without paying interest, which could save you quite a bit of money.
3. Build up your emergency fund. Life is unpredictable, and having a rainy day fund will help you survive the financial emergencies that will pop up occasionally. When you have the security of an ample emergency fund, you don’t have to choose between having cash and paying off your credit cards. When you do have to use your emergency fund, make it a priority to refill the coffers as soon as you can.
There are certainly times when paying off your credit card balance in full might not make sense for you, but you may want to strive to do so as often as possible. By not spending more than you can pay off in a given month, you’ll help keep your finances healthy.
Beverly Harzog is a nationally recognized credit card expert, consumer advocate, and the author of Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She runs a popular credit card blog on her website, www.BeverlyHarzog.com.
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