Putting off the payoff: Why we carry balances on credit cards

There are reasons to revolve a balance, but it’s costly and it can hurt your credit

Brady Porche
Managing Editor
Personal finance journalist with an eye for industry news

Putting off the payoff: Why we carry balances on credit cards

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Have you ever carried a balance on a credit card, even though you had enough cash to pay it off in full?

It may seem like an irrational choice, but it’s not uncommon. In a recent CreditCards.com poll, about half of the consumers who said they had ever carried a balance on a credit card did so because they didn’t have enough money to pay it off. But about one-third said they wanted to free up cash or spread out payments, and 22 percent mistakenly believed that carrying a balance would help their credit score.

Carrying a balance on a credit card is risky. If you don’t pay the amount you owe in full before your minimum payment is due, you’ll be charged interest on the unpaid balance. And if you routinely pay less than the full amount, your credit utilization will gradually increase, which could hurt your credit score.

Not paying off a balance because you don’t have enough cash isn’t irrational because it’s not really a choice – you can’t pay your credit card issuer money you don’t have. But if you have enough in the bank to erase a card balance, head off interest charges and keep your credit score intact, why not do that?

Here are some reasons why you may be caught in a cycle of carrying card balances, and how you can break the habit.

Reason 1: You’re building up an emergency savings account

It’s reasonable to defy the logic of paying off a card debt when you have other important financial priorities, such as building up an emergency savings account.

“If you’re financially privileged and have adequate liquid assets, it doesn’t make financial sense,” said Deborah Thorne, a sociology professor at the University of Idaho. “But people who question the stability of their current circumstances are going to say, ‘I’ve got money, and I’m going to hang on to it because I don’t want to be vulnerable.’”

Opinions differ as to how much money you should have in your rainy-day fund, but three to six months’ worth of essential expenses is a good rule of thumb. That can provide financial breathing room if you unexpectedly lose your job, or if there’s a medical emergency in your family or your car needs a pricey repair.

However, if you lean hard on your cards for everyday expenses and your card debt rises each month, you may face a dilemma – should you pay down your balances or sock away savings? It makes sense to want to keep your card debt under control, but to divert money away from your emergency savings could leave you in the lurch if a sudden expense pops up. (And, you could end up racking up even more card debt.)

“A lot of times credit card debt keeps my clients from saving because in their mind they should be putting that money toward the debt, so they end up getting into this Catch-22 and not saving at all,” said Susan Connick, a financial counselor.

What to do: An emergency savings fund is essential, and a credit card is not a good substitute for one. If you find that spending on your card and paying down the balance is stifling your savings, trying using cash or debit for your everyday purchases instead of credit. That will limit the amount you can spend without cutting into the amount that you typically put into savings. 

See related: Americans' fears of missing a debt payment rise

"A lot of times credit card debt keeps my clients from saving because in their mind they should be putting that money toward the debt, so they end up getting into this Catch-22 and not saving at all."

Reason 2: You’re financing a big purchase

Most of us can’t just plunk down a wad of cash to pay for a car, a home renovation or a brand-new replacement for a worn-out appliance. A credit card or a loan can typically get you the item you need or help you start your project without having to break the bank or wait until you’ve saved enough to pay in cash.

But you don’t have to be short on cash to use credit to finance a big purchase – sometimes it just feels better to spread out payments instead of parting with a big chunk of change.

Ayo Sopitan, who works as a project manager for a data services company, said he and his wife once used their Platinum Delta SkyMiles® card from American Express to pay for various items for their new home over a two-month period, even though they could have paid everything off at once.

“It was an irrational, emotional decision because we didn’t want to pay $7,000 all at once,” Sopitan said. “We had it, but we chose to pay it off slower than usual because it felt good not to shell out a fairly large amount all at once.”

The Sopitans were able to quickly pay off their card debt, though they were charged interest because the card didn’t have a promotional APR when they made their purchases.

Financing a big purchase with a card can be a risk if you carry the balance for too long. Many retail cards offer deferred interest deals, which promise you several months to repay your balance without getting charged interest. But if you don’t get it paid off within that time frame, you get charged interest on the entire purchase amount – not whatever balance is left on your statement.

What to do: Before you make a big purchase with a credit card, give yourself a repayment deadline and stick to it. A card with an introductory no-interest period can help you establish a cut-off point.

If you have a good credit score (700 or above), consider signing up for a general-purpose card with a lengthy no-interest period instead of a store card.

See related: Don't become addicted to balance transfer offers

Reason 3: You’re desensitized to debt

If you routinely use your credit card and only make the minimum payments, you’ll eventually be stuck with a heap of debt. As your balance grows to a level you can’t easily erase, you may begin to feel despair about ever paying it off, which could lead you to spend more without keeping track of your mounting debt.

“I honestly think there’s a little switch in the human brain that says, ‘Oh well, I’m already carrying a balance, so why don’t we put this on it, why don’t we put that on it,’” Connick said. “And it gets even more out of control.”

Connick said some consumers may develop this habit because they feel entitled to a certain lifestyle, even if their economic situation changes (such as a job loss or higher property taxes). Without an emergency savings fund, the debt predicament only gets worse.

“The cost of living keeps going up, and people have a tendency to not want to make adjustments in a timely fashion when that happens,” Connick said. “Some of this is more about accrual than it is about dysfunction.”

What to do: The best way to prevent an unsurmountable credit card balance – other than putting your cards away – is to pay it in full every month. If you lose your job or get saddled with an unexpected emergency expense, adjust your budget and change your card spending habits accordingly.

Save, no matter what  

It’s not uncommon to carry a credit card balance. Forty-four percent of cardholders are “revolvers,” according to the American Bankers Association, and total revolving debt in the U.S. is at an all-time high.

However, with card APRs on the rise, it’s getting costlier to carry a balance. If you’re increasingly burdened with interest charges and your credit score is falling due to higher credit utilization, it’s time for a new strategy. That could mean making drastic changes in your budget, taking on a side job to increase your income or selling items of value to help pay down your card debt.

But no matter what plan of action you take, it’s critical to balance it with a steady saving strategy.

“It’s scary not to have a savings account,” Thorne said. “It’s not scary to carry a balance on a credit card.”

 


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Updated: 11-16-2018