Debt from credit cards is on the rise across the country. Recent statistics from CNBC reveal that U.S. credit card debt has reached a staggering $930 billion, the highest it has ever been. While debt statistics differ from one state to another, there’s a clear trend: credit card debt is climbing.
Navigating credit card bills can be challenging for many cardholders. If you’re facing a significant balance, these bills can be a source of stress and worry.
This guide aims to assist you whether you’re trying to determine how much to pay on your credit card bill or seeking strategies to reduce your credit card debt. Understanding how to manage and pay your credit card bill effectively can greatly impact your financial situation. Here’s what you need to know about the optimal ways to settle your credit card bills each month.
How to pay your credit card bill
Most credit card companies offer four methods for paying your monthly bill. Here’s an overview of each option.
Minimum payment due
Making the minimum payment is crucial for keeping your account in good standing. This should be the baseline amount you pay each month whenever possible. Although it helps you dodge late fees or higher penalty interest rates, be aware that interest will still accrue on your remaining balance.
If you consistently only pay the minimum, your balance could still rise, especially if the interest rate exceeds the rate at which you’re paying down the debt. For instance, if your interest rate is 15% and you only pay 10% of the bill each month, your debt may grow. Thus, try to pay more than the minimum whenever possible.
Related: 5 mistakes to avoid when you get your first credit card
Statement balance
The statement balance represents the total of your expenditures from the previous billing cycle. Paying off the entire statement balance each month enables you to avoid any interest charges.
It’s ideal to settle your statement balance by the due date each month. If cash flow permits, establishing autopay for your credit cards can simplify this process and ensure timely payments.
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Pay the current balance
Your current balance indicates the total amount due, which includes any outstanding amounts from prior billing cycles as well as current charges. Essentially, this gives you the latest picture of your debt.
While paying the current balance may not be necessary for avoiding interest and fees, it can enhance your credit utilization ratio—a helpful strategy if you’re aiming to improve your credit score.
Custom amount
Most card issuers offer the option to pay a custom amount, which can be beneficial if you’re unable to pay the full statement balance but still wish to pay more than the minimum. However, remember that if you pay less than the statement balance, interest will accrue, and if you pay less than the minimum, penalties will apply. Ideally, aim for the full statement balance whenever possible.
What is the best way to pay your credit card bill?
The best approach for paying your credit card bill is to clear the statement balance by the due date each month. This method helps you avoid any interest or fees.
It’s important to note that simply having a credit card does not mean you will incur interest. Interest applies only if you fail to pay the total bill on time. Paying your statement balance prevents any interest from accruing.
Alternatively, you can choose to pay your current balance, which reflects any new charges since your last statement. Although this isn’t a requirement for avoiding interest, it could help reduce your credit utilization ratio, beneficial if you’re trying to elevate your credit score.
Related: How to earn points and miles with a low credit score
Are you supposed to pay your credit card bill in full?
Yes, it is advisable to pay your credit card bill in full whenever possible. Doing so means you are paying the statement balance and steering clear of interest charges or late fees.
There’s a myth that maintaining a small balance on your credit cards enhances your credit score, but this is untrue. By carrying a balance, you merely accrue interest without gaining any advantages.
Methods for paying off credit card debt
If you’re grappling with substantial credit card debt, you’re likely aware of the myriad reasons to address it. Paying down your debt can lead to financial savings, lower stress levels, and an improved credit score.
However, there isn’t a universal solution for clearing credit card debt. Instead, there are various strategies to consider, and selecting the one that aligns best with your circumstances is crucial. Here are four effective approaches for debt elimination.
Snowball method
If you’re dealing with debts on multiple credit cards, the “snowball method” could be an effective way to start tackling them. This strategy involves paying off your debts in a specific sequence—from the smallest balance to the largest.
Start by listing all your credit cards with outstanding balances, arranged from smallest to largest. Your list might look something like this:
- Capital One: $5,000 balance
- Chase: $3,000 balance
- Citi: $2,000 balance
- Retail store credit card: $500 balance
Continue to make minimum payments on all your cards to keep them in good standing and avoid late fees. Direct any extra funds towards the card with the smallest balance, focusing on wiping it out completely. For example, you’d continue minimum payments for your Capital One, Citi, and Chase cards but channel all additional money toward eliminating the retail store credit card balance.
Once the lowest balance card is paid off, move up to the next one on your list. This building momentum allows you to allocate more resources to each subsequent card, eventually leading you to eliminate all debts.
Why use the snowball method?
Paying off balances one at a time not only results in savings from not having to pay interest on eliminated cards but also provides a psychological boost for each card paid off completely. Fewer accounts with outstanding balances can positively impact your credit score, as credit scoring models consider the number of accounts reporting balances.
Related: From debt to over 20 credit cards: the story of my personal finance journey
Avalanche method
While the snowball method is effective for quick wins, if some of your cards have high-interest rates, you might prefer the “avalanche method.”
This method directs payments toward the highest-interest cards first and then progresses down to the lower-interest ones.
To implement the avalanche method, create a list of your credit cards with their respective balances and interest rates. Organize the list from highest interest rate to lowest. It could look like this:
- Chase: $3,000 balance with a 23.99% interest rate
- Capital One: $5,000 balance with a 21.49% interest rate
- Retail store credit card: $500 balance with a 15.49% interest rate
- Citi: $2,000 balance with a 13.99% interest rate
Just like with the snowball method, ensure you’re making minimum payments on all cards. For the card with the highest interest rate—Chase in this example—focus all extra funds to pay it off as swiftly as possible.
Once it’s paid down, move to the Capital One card and repeat the process until all cards are paid off.
Why use the avalanche method?
This method can save you the most money in interest by addressing the highest-interest cards first. However, many still suggest the snowball method due to its motivational benefits from quickly clearing smaller debts.
Related: Here are 3 reliable ways to pay off credit card debt
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Balance transfer credit card
Some credit cards offer enticing promotional rates for balance transfers, including 0% introductory APR deals. This allows you to transfer balances from existing accounts to consolidate them under a new credit card account, with the potential for no annual fee.
Keep in mind that many issuers will charge a balance transfer fee, which typically adds a percentage of your transferred total as a one-time charge. For example, a 3% fee on a $10,000 transfer would amount to $300. Nevertheless, this cost may be less than the interest you would incur if retaining your existing credit card debt.
Here are a couple of examples illustrating how balance transfer offers work:
- Citi Double Cash® Card (check rates and fees): 0% introductory APR for 18 months on balance transfers; after this period, the variable APR will range from 18.49% to 28.49% based on creditworthiness. Balance transfers should be made within four months after account opening, with a fee of 3% of the amount transferred (minimum $5). Post four months, it increases to 5% per transfer (minimum $5).
- Citi Rewards+® Card (check rates and fees): 0% introductory APR on purchases and balance transfers for 15 months from the first transfer, followed by a variable APR of 17.99% to 27.99% based on creditworthiness. The balance transfer fee is either $5 or 3% of the transfer amount, whichever is greater, with the same transfer timelines as above.
Some of your current credit card issuers might also provide low-rate balance transfer promotions. You can log into your account or contact customer service to see what options are available.
Why use a balance transfer credit card?
A 0% or low-rate balance transfer can translate to significant interest savings while you work towards paying off your debt. Often, the balance transfer fees will cost less than the interest that would accrue had you retained the debt on your prior card. Just be sure to pay off the full balance before the promotional rate expires and avoid incurring new debts.
However, transferring a balance doesn’t mean you should rack up more debt on your old card again. Also, opening a new credit card could result in accumulating another balance if you’re not careful about monthly payments.
In some instances, acquiring a new balance transfer card can positively influence your credit score by reducing the total number of accounts carrying balances and lowering your credit utilization ratio. However, a new card could also bring about a hard credit inquiry and add another account to your report, potentially lowering your score. It’s essential to weigh all factors to determine if a balance transfer is the right step for you.
Related reading: The best balance transfer credit cards
Personal loan
Another option to expedite your debt payoff journey is to consider a personal loan to consolidate your credit card balances. Similar to balance transfers, this method involves utilizing a new account to settle existing debt.
Unfortunately, securing a personal loan typically won’t yield a 0% APR as often found with balance transfers. Therefore, if you’re in a position to pay off your credit card debt swiftly, a balance transfer may be the more appealing option. Conversely, if you anticipate needing a longer timeframe to pay off your balances, a personal loan could be more suitable.
Why use a personal loan?
If your credit score is good, you may qualify for personal loans with lower interest rates than your existing credit cards. This can lead to reduced interest payments overall.
Consolidating credit card debt through a personal loan can also enhance your credit score. Paying off revolving credit card debt can lower your credit utilization ratio to 0%, and since a personal loan is an installment account, it won’t impact this ratio.
Consolidating your credit card debt into an installment loan can also bolster your credit in another way. When you eliminate multiple card debts, it lowers the number of accounts with balances reported to credit agencies, which is generally favorable for your credit score.
Bear in mind that securing a personal loan does come with the implications of a hard credit inquiry and a new account on your credit report, potentially impacting your credit score negatively. However, achieving a 0% credit utilization ratio may outweigh these temporary effects in many circumstances.
The ultimate goal in managing your credit cards should be to pay the full balance each month, so assess whether taking on a loan aligns with achieving that objective.
Related reading: Can you pay your student loans with a credit card?
Bottom line
Credit card debt can incur high costs, with the average APR for interest-accruing credit cards currently at 23.37%, as reported by the Federal Reserve. For example, if you pay this rate on a $1,000 balance, it translates to about $19 monthly, which quickly adds up over months and years.
However, by managing your credit responsibly—specifically by aiming to pay the statement balance in full each month—you can reap multiple benefits. Properly handled credit cards not only help in building a better credit score but also protect against fraud and offer rewarding perks. For more insights on managing credit card payments responsibly while maximizing rewards for travel, check out our beginner’s guide.
