It is easy to see why some people assume that you need to carry a balance on your credit cards and payback interest on that credit card in order to improve your credit score. This is simply not the case as you do not need to pay interest in order to build your credit. In fact it is better to pay off your credit card balance in full, resulting in a zero balance with no interest accumulated. This is the easiest way to actually build credit. Below you will find some tips for paying off your credit card payment each month and working with interest.
- In order to pay off your credit card every month to obtain no interest charges, you will want to spend an amount you know you will be able to pay off. This means no splurging on items that are just not in the budget. Instead, you will want to stick with items like groceries, gas bill, phone bill, etc. Since you are going to use your money on these items monthly anyway, use your credit card to pay for a monthly charge, therefore you already have the money allocated toward that bill. Now instead of using your paycheck to make an electricity payment, you can use your credit card, then make the payment on your credit card.
- Make sure that you remember to actually pay the credit card on time. Paying a credit card a couple days late might not immediately hit your credit report, but it will usually come with a hefty late fee on top of interest charges.
- Paying off the full balance means no interest charges, and it also means a low credit card utilization ratio. This ratio will show up on your credit report and is high on the scale of things credit companies look at when determining your credit score.
- Because there are no interest charges when paying off your credit card balance in full, you will end up paying less over time. If you are constantly only making the minimum monthly payment on your credit card, you are accumulating more interest, raising the total amount you will end up owing.
- Be wise when using your credit card. Again, it is best to use your card for items or bills that are already set in your monthly budget. Emergencies can arise when you might not be able to pay back a credit card in full, which is okay. If you have to use your card for an emergency, make sure you do not use it again until the full balance is paid back, even if it takes a couple months to do.
Interest rates are important to look at when applying for and using a credit card. You will still build credit, even if you choose not to max out your card, and stay smart by paying off your balance in full every month.