Credit Card Payoff--Maybe Kind of Wacky

[mikefixac]

Normally I pay off my credit card in full automatically every month.

Today, I paid off the card in full--$0 balance, even though a payment wasn't due until a few more weeks.

Here's what I like about it: Before, even though I pay the card in full, there's still a balance. I never actually get it to $0.

Now, that it is $0, I might not so readily put something on the card. Does that make sense?

[Another Reader]

I started paying these off as soon as I made a purchase a while back.  Not so great for the credit score, but I hate owing money, even for a short period, that does not contribute to capital growth.  Yes, I'm getting the benefit of a free short term loan from the issuer, but I prefer to tie what was purchased to an immediate outlay of cash and just collect the cash rewards.

[marty998]

Whilst having a $0 balance is a nice feeling, taking advantage of the interest free loan is a no-brainer.

I can't see the benefit in what you are doing, but that is just me.

[Another Reader]

If I was taking advantage of the loan in some arbitrage transaction, I would agree.  For 20 to 50 days at today's low interest rates, I don't see it.  When short term interest rates skyrocket to double digits, I will rethink this.

[Jamesqf]

Who cares if interest rates are low?  They're still positive, so you are earning something on the money you don't give the credit card company, and every little bit helps.

[Dee]

Mikefixac, you ask: "Now, that it is $0, I might not so readily put something on the card. Does that make sense?" Why don't you report back about whether it works for you and you do use this as incentive not to use the card at all, thereby delaying purchases or ultimately deciding not to buy things you would have charged? If it does accomplish this and thereby saves you money, then it totally makes sense.

[Ishmael]

I've started paying my credit card off every week. It seems to work better, and never results in a surprise (oh, yeah, I forgot that was on there!), because it's really easy to remember what you did the past week, but not so much a month ago.

[frugalman]

Every other Friday (payday) I do the following.
Pay off my credit card balance.
Take note of pending items on my credit card (they won't allow me to pay pending items).
Set my checking balance to $1,000 plus pending credit card items
Send the rest to my springy debt home equity credit line, and if that's paid off, to my investment account.

[AJ]

I started paying these off as soon as I made a purchase a while back.  Not so great for the credit score, but I hate owing money, even for a short period, that does not contribute to capital growth.  Yes, I'm getting the benefit of a free short term loan from the issuer, but I prefer to tie what was purchased to an immediate outlay of cash and just collect the cash rewards.

At that point, mightn't you be better off with a rewards debit card swiped as credit? Effectively, that is what you are doing already if you pay off your card after every purchase. Just a thought...

[Hotstreak]

I started paying these off as soon as I made a purchase a while back.  Not so great for the credit score, but I hate owing money, even for a short period, that does not contribute to capital growth.  Yes, I'm getting the benefit of a free short term loan from the issuer, but I prefer to tie what was purchased to an immediate outlay of cash and just collect the cash rewards.

At that point, mightn't you be better off with a rewards debit card swiped as credit? Effectively, that is what you are doing already if you pay off your card after every purchase. Just a thought...

Unfortunately banks canceled debit card rewards.. the few that still offer them have major restrictions and dont pay out well. Credit cards are the only way to get good rewards these days.

[AJ]

Unfortunately banks canceled debit card rewards.. the few that still offer them have major restrictions and dont pay out well. Credit cards are the only way to get good rewards these days.

Mine pays 1% - which is pretty standard as general rewards go. Amex blue would be better for groceries & gas, but as a general card it's comparable, without the hassle of transferring money after every purchase.

[tuyop]

I just set my credit card to automatically pay its statement balance off in full as per Ramit Sethi's automation method and it rolls over into my chequing buffer. I'm not so concerned with the interest I'd be earning on the 1200 or whatever that's sitting in my chequing account and I don't overspend on the card because what I buy really has no relation to what any of my account balances are, they're things I've planned for in my budget at least to the category level.

But hey, YMMV!

[dahlink]

It is my understanding the credit cards currently offer much better consumer protections than a debit card.  Clark Howard has ranted a little about the lack of protections with debit cards.  Something to keep in mind.

[Rich M]

I started paying these off as soon as I made a purchase a while back.  Not so great for the credit score, .....

Not sure how this would affect your credit score.  I thought utilization ratio was the important measure, not whether you pay off your balance.  That is, the amount you owe compared to your available credit affects credit negatively when you approach your limit.  When paying off credit cards every month, your average balance is simply your average charges.  As long as your keep those monthly charges low compared to your credit limit, it will reflect positively on your credit.

I read that less than 50% is the magic number.

[Inquizator]

It is my understanding the credit cards currently offer much better consumer protections than a debit card.  Clark Howard has ranted a little about the lack of protections with debit cards.  Something to keep in mind.

I don't know specific details on the policies or differences, but I do know that when my debit card number was suddenly used on about $800 in online purchasing, it really wasn't too big of a deal. I found out when I left work for lunch and saw an e-mail from my bank (Bank of America) saying they'd cancelled my card for potential fraudulent activity. I called them and was told I'd have to get a new debit card and that I'd have to wait till the charges finalized and posted to the account before I could request the funds back. All told it took maybe a week and a half to get the money back. For some people that could be catastrophic, but I think for most people here, it's easily manageable.

As a side note: This happened early on in our journey towards mustachianism and the way we were able to absorb that amount of money suddenly missing was an event that really cause my wife to realize just how much nicer and less stressful life is when you live on a lot less than you make. A friend of her's from work had a similar thing happen a few months later (with a similar amount of money) and she was extremely stressed out and upset for weeks... big difference.

I started paying these off as soon as I made a purchase a while back.  Not so great for the credit score, .....

Not sure how this would affect your credit score.  I thought utilization ratio was the important measure, not whether you pay off your balance.  That is, the amount you owe compared to your available credit affects credit negatively when you approach your limit.  When paying off credit cards every month, your average balance is simply your average charges.  As long as your keep those monthly charges low compared to your credit limit, it will reflect positively on your credit.

It's my understanding that the utilization ratio gets it's numbers from the monthly statements. So if you spend $1,000 on a $10,000 credit limit and pay it off after you get the statement, then you have a 10% utilization ratio, which should be good for your credit score. But if you spend $1,000 and pay it off after every purchase, your end of month statement will only show one purchase worth of balance or probably even a $0 balance, giving you a 0 utilization ratio.

I'm no expert or professional, so I may be mistaken, but that was my understanding.

[SunshineGirl]

After reading frugalman's message about paying off his cc every two weeks, combined with setting up YNAB to start tomorrow (love it, BTW), I paid off each of my credit cards mid-cycle -- and it felt GREAT. They're set up to be paid in full at the end of every month anyway, and we always have enough in the account, but just having that amount hanging over my financial head always bugs me.

I'm going to follow his plan for awhile and pay them off every two weeks on payday. Something about it is very empowering.