It's that time of the month -- the time when that statement from your credit card company arrives, and you're dreading the idea of opening it. If you made the mistake of racking up what you know is a hefty credit card balance, you're not alone. Countless Americans fall victim to a similar fate month after month, and when they do, they're left wondering how on earth they're going to tackle that whopping bill.
Now you may be thinking: Well, if I can't cover my credit card bill, I just won't pay it. But that's a major mistake. There are several repercussions if you don't make your credit card bill payments when they come due. First, a late payment will affect your credit score. Secondly, if you only make your minimum payment, you'll accrue interest on your remaining balance that will end up costing you more in the long run. That's why you should always aim to pay your credit card on time and in full -- even though that's often easier said than done.
Don't damage your credit score
There's a difference between not paying your credit card bill in full and not paying it at all. When you get your statement, you'll see not just your balance, but the minimum payment you're required to make for the month. If you pay that minimum, but carry the remainder, you'll accrue interest charges -- but you won't damage your score (at least not initially).
On the other hand, if you ignore your credit card bill completely and don't make your minimum payment, you'll drag down your credit score rather quickly. Now, the extent to which you wreck your credit will depend on how late you are on your payment. Though being 30 days isn't great for your credit, the real damage kicks in when you're 90 days late or more. In fact, that sort of late payment can remain on your record for up to seven years.
That's why if you can't pay your bill in full, you should at least make sure to submit your minimum payment. Paying that minimum on time won't ding your payment history, which is the single most important factor in determining your credit score.
Why should you care about your credit score? It's simple: The better your score, the greater your chances of getting approved for a loan or line of credit, and at a more favorable rate. Having poor credit could make it difficult, if not downright impossible, to get a mortgage, apartment lease, vehicle, or even a job. So, if you don't pay your credit card bill at all, you're bound to run into trouble at some point down the line.
Don't rack up expensive interest charges
The other problem with not paying your credit card bill has to do with interest. Basically, for each day you don't pay your balance in full, you risk accruing interest that will end up making your purchases more expensive than necessary in the long run. You'll also risk kick-starting a vicious cycle where you're stuck with that debt because your interest is accruing at a faster rate than the rate at which you're paying off your balance.
Here's something else you should know about carrying a hefty credit card balance: While making your minimum payments will prevent you from damaging your payment history, if you're not careful, you could end up ruining your credit score by virtue of increasing your credit utilization ratio.
Your credit utilization ratio is another factor that goes into calculating your credit score, and it speaks to the extent to which you're using your existing credit. Ideally, that number should cap out at 30%, which means if you have a total line of credit of $10,000, you should never have a balance higher than $3,000 at any given point in time. Therefore, if you rack up a $3,000 bill one month and can only make the minimum payment, and then charge more on that card while your remaining balance is still intact, you could end up exceeding that 30% threshold and lower your credit score in the process.
A better approach to credit card usage
There are many benefits to paying with credit cards, but the key is to be smart about how you use yours. For one thing, never charge more than what you can afford to pay by the time your bill comes due. Furthermore, keep track of your spending during the month so you're not surprised when your bill arrives in the mail. Finally, don't ever make the mistake of not paying your credit card bill at all. Otherwise, it could take years to recover from what might otherwise seem like a basic blunder.
The Motley Fool has a disclosure policy.