Should I pay off my credit card debt right away?

Is it better to pay off your credit card balance all at once or over time? We look at how repayments affect your credit score and the best ways to pay off your credit card if you can’t afford to clear your balance straight away, from snowball to avalanche methods...

Is it better to pay off your credit card balance all at once or over time? We look at how repayments affect your credit score and the best ways to pay off your credit card if you can’t afford to clear your balance straight away, from snowball to avalanche methods...

Anelda Knoesen
From the Money team
6
minute read
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Posted 12 NOVEMBER 2021

When should I pay off my credit card? 

The first thing to say is always pay your credit card bill before the payment due date found on your statement. Missing the deadline can land you with late fees, not to mention an increased interest rate. Lenders will typically charge you £12 for a late payment, so not paying your credit card bills on time can be costly and make it harder to borrow in the future. 

If you can afford to pay off the whole balance straight away, it’s a good idea to do it, because it means you won’t be charged interest on the amount you’ve borrowed. But if you’ve recently made an expensive purchase, like a new washing machine, you might need to pay it off in more manageable chunks instead. The best thing to do is prioritise your essential payments first, then think about paying more off your credit card.

Will paying off my credit card debt improve my credit score? 

Many people are under the impression that they need to keep an outstanding balance on their credit card to maintain a healthy credit score . In fact, the sooner you can clear your debt the better. You’ll pay less interest, and good debt-management could help you achieve a higher credit score. 

Big balances can mean higher credit utilisation, which could harm your credit rating. Your credit utilisation rate is how much of your credit limit you’ve used, expressed as a percentage. So if your credit card spending limit is £2,000 and you use around £1,000 over the month, your utilisation rate is 50%. It’s recommended that you keep it below 30% because it can start to hurt your credit score if it gets above this. 

Paying your balance on time and in full every month shows that you’re not living beyond your means. It’s a good sign that your finances are in a healthy state and shows lenders you’re a reliable borrower who can be trusted to handle debt responsibly.

What happens if you only pay the minimum amount due? 

If you only make the minimum repayments on your credit card bill each month, you’ll pay interest on the remaining balance, which will be carried over to the next billing period. Repaying the smallest amount possible means it can take ages to reduce your balance. Paying more than the minimum can help you clear your balance sooner and prevent interest from stacking up. 

The table below shows you the huge difference when you pay off your balance quicker.

Balance

Interest rate

Monthly repayment

Years to pay off

Total interest

£2,500

20%

£63 (minimum)

26 years, 2 months

£3,631

£2,500

20%

£200

1 year, 2 months

£296

As you can see, the more of your credit card balance you clear each month, the less you’ll pay in interest. That said, paying the minimum amount due is better than nothing as it ensures you won’t be hit with late payment charges.

How to pay off credit card debt 

The golden rule is to always pay off your credit card balances in full each month if you can. 

According to a study by Compare the Market in April 2021, 31% of credit cardholders have been unable to repay their balance in full each month since the pandemic began. Young people have been hit particularly hard, with the figure rising to 41% for those aged 25 to 34. 

Here are some of the ways you can pay off credit card debt over time. 

Debt avalanche 

With the debt avalanche method of paying down credit card debt, you focus on the account with the highest APR (annual percentage rate). APR is the total cost of borrowing over a year, including interest and fees. 

As well as making the minimum payment on all your credit cards, you pay extra off the card with the highest interest rate. Once that card is paid off, you can move on to the card with the next highest APR, and keep following this pattern until you’ve paid them all off. This strategy needs quite a lot of self-discipline to stay motivated if you have a high balance, but it will help you save the most money in interest charges in the long run. 

Debt snowball 

If you find that paying off a card with a high balance and APR is an uphill struggle, you might be more inspired by the debt snowball method. 

With this strategy, you pay extra off the credit card with the lowest balance while continuing to make minimum payments on the rest of your cards. Once that card is paid off, you move on to the card with the next lowest balance, until you eventually tackle the largest debt. Although you’ll pay more in interest in the long run than the avalanche method, you’ll feel like you’re making more headway. This can give you the push you need to keep going towards your bigger targets. 

Debt landslide 

This involves focusing on paying down the card you most recently opened while continuing to make minimum payments on your other cards. Most credit-scoring algorithms give more weight to payment activity on the newest accounts rather than older ones. So paying off the card most recently opened could be the quickest way to boost your credit score. 

Debt consolidation 

One way to consolidate debt is by moving your outstanding credit card debt to a 0% balance transfer card. You’ll get an introductory period when you won’t be charged any interest on the balance you’ve transferred, in some cases for more than two years. This should help you lower the amount you owe more quickly. You’ll need to make sure you’ve cleared the balance by the end of the introductory period though, as rates will almost certainly rocket after this. And you’ll usually need a good credit score to get a balance transfer card.

Frequently asked questions

What will happen to my credit score if I don't pay my debts?

If you don’t pay your credit card bill, you can expect to receive late fees, increased interest rates and a black mark on your credit report. If you continue to miss payments, you credit score will take a dive. 

Regardless of whether or not you pay off your credit cards immediately, it’s important not to miss your payments altogether. 

If you’re worried about repayments, there is help available. Let your card provider know if you’re having problems or get free confidential advice from a debt charity such as StepChange or National Debtline.

Can I get a loan to consolidate my credit card debt?

Yes, it’s possible to take out a debt consolidation loan with a lower interest rate than your credit cards. By rolling multiple balances into one loan with fixed monthly payments, you can potentially save on interest and pay off the debt more quickly. It should also make it simpler to manage your debts. 

Just be aware that if you take out a secured debt consolidation loan, you risk losing your car or home if you fail to keep up with the repayments.

Does credit card inactivity lower your credit score?

It can, yes, but it’s better to spend nothing than too much. Keeping your credit card active is one way to maintain a healthy credit score. When your rating is calculated by the UK’s three main credit reference agencies – Experian, Equifax and TransUnion – they need to see activity in the account to include it in your overall score calculation. 

If you haven’t used your card for several months, the card could be cancelled by your provider and might cause your credit score to dip. This doesn’t mean you should always carry a balance though. Spending on and paying off your card in full each month counts as activity.

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