Should I Pay Off my Credit Card or Save Up?
Credit card debt has a habit of creeping up on us when we least expect it. Of course, paying by card is simple and convenient – but it also makes it harder to keep track of our expenses, and before you know it, you may be spending money that you just don’t have. Eventually, the time will come when you have to pay back what you owe and settle your outstanding debts with the man from the bank. It may be hard to do, but at least it’s pretty straightforward… or so you’d think. At times, there are a lot of different expenses in life that seem to take priority over your credit card bill, and you may be left wondering if paying off your debt is really the best thing you could do right now. I mean, surely it can wait another month or two, right? To fully answer that question, we’ll also have to ask ourselves – Is it worth paying off your balance each month? How much debt is normal? And how does it affect your credit score? Should I Pay Off my Credit Card or Save Up?
Generally speaking, it’s better to pay off your credit card debts as quickly as possible rather than slowly chipping away at them over time. Why? Well, there are two main reasons –
- Interest – The interest rates on credit cards are usually extremely high. This means that, so long as you are in debt, the amount of money you need to pay is growing. In other words, the quicker you can get this debt paid off, the less you’ll need to pay overall.
- Credit Score – Your credit score is a number which allows lenders to evaluate your creditworthiness. Simply put, someone with a low credit score is normally seen as a bad investment as they are unlikely to pay back their loans on time.
Having a large outstanding balance on one or more of your credit cards is likely to lower your credit score as lenders tend to see you as incapable of efficiently playing back your debts. By contrast, paying your balance in full and on time each month is likely to improve your overall credit score.
When the time comes to divvy up your paycheck, you may be tempted to only pay the mandatory minimum amount as stipulated by the bank – try not to! As hard as it may be, it’s in your best interest to knock off as much of that debt as possible before it starts to snowball.
Remember: It’s also important that you find out what your interest rates are for each credit card. If you owe R10 000 on two different accounts, it’s better to prioritise paying off the one with a 15% interest rate, instead of the one sitting at 10%.
Is it Better to Leave a Balance on your Credit Card or Pay it Off Every Month?
When possible, it is better to pay off your outstanding balance each month rather than letting it carry over into the next month. As mentioned, the best reason to do this is that outstanding debts usually accrue interest over time, and will end up costing you more if you take too long to pay them off.
On the other hand, paying off your balance each month will increase your creditworthiness while lowering your chances of getting a high credit utilisation rate. This rate identifies how much of your available credit you use each month. If you spend up to your limit every month, it may negatively impact your credit score even if you’re able to pay it back. On the other hand, if your utilisation rate is low, you may be seen as more creditworthy in general.
Is it Worth Paying Off Credit Card Debt?
Absolutely. If you’re struggling for money, it may seem pointless to pay off your credit card debt, especially if the lender doesn’t seem very bothered by it.
However, the damage done to your credit score can be long-lasting and hard to fix, and you may find yourself unable to make large purchases down the line if you’re seen by lenders as unreliable with money.
Even when it seems like there are far more important financial issues building up in your life, it’s important that you set aside a portion of your income and pay off your outstanding debts as soon as possible.
How Much Credit Card Debt is Normal?
In 2022, the average balance per account in South Africa stood at around R21 200. It should be said, however, that each person’s credit balance should be judged with their specific financial situation in mind. In other words, a higher-than-average level of debt may not be a cause for concern if the individual in question receives an above-average income.
If you’d like to know whether or not your current balance is manageable, it is probably wiser to consider it as a Debt-to-Income Ratio (DTI). This method allows users to understand their balance in relation to the amount of money they’re bringing in each month.
Do Credit Card Companies Like it when you Pay in Full?
Yes, they do. People who are able to pay their debts in full are seen by creditors as fiscally stable and responsible individuals. This usually results in better credit scores and a heightened willingness on the part of creditors to lend you money.
Will my Credit Score Go Up if I Pay Everything Off?
It may. Credit scores are determined by a wide variety of factors, including things like –
- Repayment History
- Length of Credit History
- Total Debt
- Types of Credit
- Number of New Accounts
Paying off all your debts is definitely a step in the right direction, but it doesn’t necessarily mean that your credit score will suddenly go up. If, for example, you have a long history of late/partial repayments, multiple new accounts, and a large amount of debt overall, paying off one account may not be enough to convince creditors that you’ve suddenly changed your ways.
Oftentimes, people need to work on their credit score over the course of many years if they wish to steadily improve it.
Even if you pay off all of your debt all at once, creditors may assume that it was a one-time thing, so you’ll need to keep it up if you want your credit score to change over time.
In Conclusion – Should I Pay Off My Credit Card Debt?
It is almost always in your best interest to pay off credit card debt as soon as possible. Credit cards are notorious for having very high-interest rates that can build up your debt over time and end up outpacing your ability to pay them off. High levels of unsettled debts can then negatively impact your credit score, making it harder for you to get loans when you need them.
To prevent all this, individuals should prioritise paying off large balances with high-interest rates so that their debt doesn’t get out of hand.
Paying these debts off earlier also lowers the amount of money you’ll need to pay overall as you will have fewer periods of interest to pay off.
Another issue with unpaid credit card debt is your credit utilisation rate. In short, your utilisation rate pertains to the percentage of available credit you use each month. If you use as much credit as possible every month, you will end up with a high utilisation rate, which will have a negative impact on your credit score.
Paying off your debts will lower the risk of overspending and should, in turn, lower your utilisation rate. When determining how much debt is normal, it is better to consider your debt-to-income (DTI) ratio rather than looking for a specific number that tracks across multiple people. In other words, your level of debt should scale with your level of income, and a high level of debt won’t necessarily be a red flag, so long as you have a paycheck to match it (although less debt is always better).
That said, the average balance per account in South Africa is currently sitting at around R21 200. Paying off your credit cards is a good way to improve your credit score, however, it is not the whole story. There are multiple factors that go into determining a person’s credit score and simply settling your debts may not be enough if you have other problems to worry about.
For example, a person with a long history of late/insufficient payments will not have their entire record forgotten just because they paid what they owed once. In fact, a credit score is usually improved over a number of years and with a plethora of smart financial decisions, as creditors slowly gain trust in the individual and their ability to pay back any borrowed money.
Disclaimer Finance101: All of our posts are for research purposes only. Finance 101 aims to assist its readers with useful information on the laws of our country that can guide you to make financial decisions that will enable you to become more financially independent in the future. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law & finance-related queries. Should you require specific legal/financial advice we advise you to get in touch with a qualified financial expert.
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