Credit cards are a convenient way to make purchases and build credit history, but there's a debate about whether it's necessary to zero out your credit card every month. Some financial experts recommend doing so, while others argue that it's not necessary or even harmful. In this article, we will delve into the pros and cons of zeroing out your credit card each month and provide you with some insights on how to manage your credit card expenses effectively.
Firstly, let's understand what zeroing out a credit card means. When you zero out your credit card, you pay off the entire balance on the card before the due date each month. This ensures that you don't carry over any unpaid balance from the previous month, which can lead to higher interest charges if not paid promptly.
Those who advocate for zeroing out credit cards often cite several benefits. Firstly, it helps in maintaining a low credit utilization ratio (CUR). The CUR is the amount of credit you use compared to your total available credit. A high CUR can negatively impact your credit score, while a low CUR is seen as a positive indicator by lenders. By paying off your entire balance each month, you ensure that you never exceed more than 30% of your available credit limit, keeping your CUR low.
Secondly, zeroing out your credit card can help you avoid late fees and penalties. Credit card companies charge late fees if you fail to make a payment by the due date. These fees can add up quickly, especially if you have multiple cards or a large outstanding balance. By paying off your entire balance each month, you eliminate the risk of being charged late fees.
Thirdly, zeroing out your credit card can help you stay organized and disciplined with your finances. Knowing that you have a set amount to pay each month can prevent overspending and keep you focused on managing your debt. It also provides a sense of accomplishment when you see your balance drop to zero at the end of each month.
However, there are also arguments against zeroing out your credit card each month. One common concern is that it may not be feasible for everyone to pay off their entire balance each month. For example, those who earn a fixed income and have multiple bills to pay might find it challenging to cover all expenses without carrying over any balance. Additionally, some people prefer to maintain a small balance on their credit card to take advantage of rewards programs or cashback offers offered by credit card companies.
Another argument against zeroing out your credit card is that it can lead to unnecessary spending. If you pay off your entire balance each month, you might feel compelled to spend more just to maintain a non-zero balance, which could result in overspending and accumulating debt.
To determine whether zeroing out your credit card each month is right for you, consider the following factors:
- Financial stability: If you consistently earn more than you spend and have a low debt-to-income ratio, zeroing out your credit card each month might be beneficial. However, if you struggle with budgeting or have significant debt, it might not be feasible.
- Credit utilization ratio: As mentioned earlier, maintaining a low credit utilization ratio is crucial for improving your credit score. If you regularly carry over a balance from one month to another, consider setting up automatic payments to ensure you never exceed 30% of your available credit limit.
- Rewards programs: If you rely on credit card rewards programs for frequent flyer miles, cash back, or other perks, it might not be wise to zero out your card each month. Instead, try to maintain a balance that allows you to take advantage of these rewards while still avoiding excessive spending.
- Emergency funds: Always ensure that you have an emergency fund to cover unexpected expenses. Keeping a small balance on your credit card can serve as a safety net in case of emergencies.
In conclusion, whether or not to zero out your credit card each month depends on your individual financial situation and goals. If you want to maintain a low credit utilization ratio, avoid late fees, and stay organized with your finances, zeroing out your card each month might be beneficial. However, if you have difficulty covering all expenses or rely on rewards programs, it might be better to maintain a small balance on your card. Ultimately, the key is to create a financial plan that works for you and stick to it consistently.