If credit card companies want us to stay debt-free, they have a pretty odd way of showing it. With strategies that some view as dubious, banks defraud cardholders of additional funds at every opportunity and frequently without prior notice. A number of fees, including annual, late, over-the-limit, foreign exchange, and others, have been likened to anvils hanging around customers’ financial necks. The average American household’s credit card debt has skyrocketed to $7,430, and consumer advocates blame these dubious policies for it [source: Consumer Federation of America].
However, other people say its our own fault. We tie our own nooses by entering contracts that we dont take the time to understand. Naturally, a credit card company has a stake in ensuring that users maintain a minimum amount of balance. Using a combination of interest rates and minimum monthly payments, a bank can make a large profit.
But it seems a bit counterintuitive. If you get deep enough in debt, youll be unable to pay the credit card company at all. At this point, companies are often willing to negotiate. For example, they might consent to you making a one-time payment in exchange for the remaining debt being forgiven. So the answer is yes and no. Yes — they want you to keep an outstanding balance and be in debt to them. And no — they dont want you to be completely without funds to pay them at all.
Credit cards are popular because they play perfectly into the human desire for instant gratification. Theyre easy and allow us to spend money we dont have, but they can be used responsibly. You can beat a credit card company at its own game if you have a little discipline and are aware of its strategies.
Although the term “deadbeat” is sometimes used, it actually has positive connotations when it comes to credit cards. Let me explain.
Credit card companies, those sly foxes, actually prefer it when you pay your balance in full each month Why? Because it means they don’t get to charge you those juicy interest fees and late payment penalties They’d rather you carry a balance, slowly accruing debt and fattening their bottom line.
The best thing you can do for your credit score, though, is to pay off your balance in full. It demonstrates responsible credit management, maintains a low credit utilization rate, and generally presents you to lenders as a financially astute person.
Now let’s dive into the details:
Why Credit Card Companies “Hate” Deadbeats:
- Lost Interest Income: Interest charges are a major source of revenue for credit card companies. When you pay in full, they miss out on this income.
- Missed Late Fees: Late fees are another way credit card companies make money. When you pay on time, they can’t ding you with these charges.
- Lower Profits: The longer you carry a balance, the more interest you pay, and the more profit the credit card company makes.
Why Paying in Full is Awesome for You:
- Boosts Your Credit Score: Paying in full keeps your credit utilization low, which is a major factor in your credit score. A good credit score can save you money on loans, insurance, and even rent.
- Avoids Interest Charges: Interest rates on credit cards can be sky-high, so paying in full saves you money on interest.
- Builds Good Credit Habits: Paying in full on time every month shows responsible credit management, which can help you qualify for better credit terms in the future.
The “Deadbeat” Myth:
Contrary to popular belief, credit card companies want you to have a balance to demonstrate that you are using the card and making use of it. This is simply not true. While some activity is beneficial, having debt can lower your credit score and increase your expenses.
The Bottom Line:
The best way to manage your credit and save money is to pay off your credit card balance in full each month. It’s the best course of action for your financial well-being, even though credit card companies might not like it.
Bonus Tip:
If you’re struggling to pay your balance in full each month, consider setting up automatic payments. This will ensure you never miss a payment and avoid late fees.
So, embrace your inner “deadbeat” and pay your credit card balance in full. Your wallet and your credit score will thank you for it.
Money-Making Tactics of Credit Card Companies
Avoiding the traps set by credit card companies can help you stop debt from ballooning. To understand how these companies operate, lets take a stroll in their shoes.
A companys best customer is one who brings in the most profit. This is the revolver for credit card companies: the client who gradually reduces debt while seeing his balance increase The companies actually make little profit from the responsible customer, who quickly and fully pays off balances. Interest rates compound over time, so the longer you leave a balance unpaid, the more debt you’ll have. So why do people fall into this trap?.
Credit card companies use a straightforward psychological tactic to successfully cultivate their best clients by having the lowest monthly payment. Because this minimum payment is so enticingly low—typically around 4 percent—people are enticed to pay just that and put off the remaining amount. Lets say you have a $5,000 balance, but only $200 is required right now. If you’re having a hard time this month but you know that your big break is coming—a raise, an inheritance, or something else entirely—you’ll wait to make the extra payment until then. However, if you only pay the minimum, interest charges will make your already large balance even larger, making it even more difficult to make larger payments the following month. Because of this, it makes sense to pay off as much of your debt as you can, ideally in full each month.
Beware of cards bearing low-interest gifts. Credit card companies, like any business trying to sell you something, will use gimmicks to hook you. One of the most popular is a low introductory rate. You will be able to maintain a balance with little growth for a few months with this plan. But as soon as you settle in, the business will replace your pleasant, low rate with one that is significantly higher. Some people like to play the game of moving their debt to a new card every few months that offers a low introductory rate. However, this requires work, and making too many credit inquiries could negatively impact your credit score.
In addition, credit card companies bury hidden fees and rules in confusing, fine-print language. Some point out, however, that heavy federal regulations require this technical language [source: Frontline]. Regardless, its important for a consumer to understand the terms. For instance, if you exceed your credit limit, youll get an over-the-limit fee. Even if youre just one day late, you get a bonus — a late fee. And, despite years of punctual payments, if you slip up one time and pay your bill late, youll probably have to kiss your low interest rate goodbye.
Another tactic people object to is universal default. Lets say youre a responsible credit card user who never misses a payment and never goes over your limit. You get a letter in the mail telling you that due to a change in your credit score, the interest rate on your credit card is going up. Apparently, the bank told the credit card company you forgot about a car loan payment a few months back. “But, that has nothing to do with my credit card,” you argue. However, according to the contract you entered, it does. If you are more than 30 days late with any payment, the credit card company has the right to increase your interest rate [source: Burt].
Find out more about credit and debt with the great links on the next page. A Prisoners Debt Dilemma.
As we bemoan our credit card woes, we can take comfort that we dont face Debtors Prison. Just a few centuries ago, this was a common punishment for debt. The obvious drawback was that prisoners themselves cant work to pay off debt while incarcerated. When his father was incarcerated in debtors prison, young Charles Dickens was forced to quit school to work off the debt.
Should You Pay Off Credit Card IMMEDIATELY After EVERY Purchase to Raise Credit Score?
FAQ
Will my credit score go up if I pay off my credit card in full?
Is it better to pay in full for credit card?
How do credit card companies make money if you pay in full?
Is it bad to max out a credit card and pay it off immediately?
Should I pay off my credit card in full?
If you have a credit card balance, it’s typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt. Plus, using more than 30% of your credit line is likely to have a negative effect on your credit scores. Work on making it a habit to always pay off your credit card in full.
Do credit card companies like paying in full each month?
Yes, credit card companies do like it when you pay in full each month. In fact, they consider it a sign of creditworthiness and active use of your credit card. Carrying a balance month-to-month increases your debt through interest charges and can hurt your credit score if your balance is over 30% of your credit limit.
Should you pay your credit card balance in full?
Paying your card balance in full keeps interest and debt at bay, but choosing to pay over time can afford financial flexibility when paying off major purchases. Credit cards don’t need to be paid in full every month, but doing so prevents interest charges from accruing and debt from accumulating.
Do credit cards need to be paid off every month?
And even when money isn’t tight, sometimes it’s better for your budget to pay off expenses over time. Fortunately, credit cards don’t need to be paid off in full every month. You can carry a balance at the expense of interest charges. Unfortunately, that’s not the case for traditional charge cards.