One of the primary reasons credit cards exist is to facilitate purchases that you don’t want to pay for with cash or a debit card. This can include, but is not limited to, furniture, shopping trips to a clothing store, or even something like a down payment on a car.
In the case of one Redditor, their post in r/personalfinance is a pretty simple one. Their question is all about whether it’s okay to make a large payment on a credit card and then immediately pay it off. The good news is that not only is this okay, it’s actually recommended.
Paying Everything Off
While this Redditor doesn’t give any specific information regarding their desire to pay off this charge immediately, they should know it’s not an issue in any way. For people who don’t want to carry a balance on a credit card, you essentially have two options: pay it off in full every month or after every purchase.
Depending on how frequently you shop, paying off your balance after every purchase could quickly become a real headache. Personally, as someone who uses a credit card multiple times a day, it’s challenging to imagine trying to keep up with a daily balance that requires constant attention.
Instead, the best and most important advice for using credit cards is simply paying them off every month. Not only will this help you stay away from any interest accrual, but it’ll help your debt-to-income ratio, which could play a big role the next time you want to buy a car or take on a mortgage for a new home.
Managing Large Purchases
While it may not be a mistake to make a single $4,000 payment to immediately get rid of the balance on this sofa, there is an alternative to consider. If you know you’re going to make a large purchase like this, consider taking out a credit card with a 0% APR bonus offer now. Typically lasting between 12 and 18 months, this option enables individuals to spread the $4,000 cost over time.
Instead of a single balance and payment, you could instead look to pay anywhere between $222 and $333 per month on a payment plan. As long as you stick to the plan and pay off the sofa or any other large purchase before the intro period ends, it could help relieve some of the immediate financial burden of making a single large payment.
How Credit Balance Affects You
When it comes to the “why” around paying off large purchases immediately, it likely comes down to your credit utilization rate. This number essentially represents the percentage of your available credit that you are currently using. For example, if you purchase something for $4,000 and have a credit card line of $10,000, your credit utilization rate is 40%.
The ideal situation for credit card users is to keep their credit utilization rate under 30%, which is what the credit card companies want to see on your credit report. However, if you want to really raise your credit score as high as you can, keeping your utilization score under 10% is the ideal scenario.
It’s for this reason that you’ll see numerous recommendations to pay off your credit card balance in full every month. Not only does it help you avoid interest, but it also helps increase your credit score as much as possible.
Ultimately, remember your budget and avoid making any purchases that you cannot afford to pay off every month. This is the best way to use a credit card, with the caveat being that you need to be aware of any potential emergencies. Treat your credit card like a debit card, and if you don’t have the money to make an immediate payment, don’t make the purchase.
Flywheel Publishing has partnered with CardRatings for our coverage of credit card products. Flywheel Publishing and CardRatings may receive a commission from card issuers.
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