Jean Chatzky
Do one thing: For those who don’t pay off their credit card balances monthly, take a look at your most recent statements to see how much interest you’ve paid this year. To avoid those fees, aim to only charge what you can pay off at the end of the billing cycle.
What Credit Card Camp Are You In?
When it comes to how you pay your credit card bills, are you a transactor or a revolver?
In the eyes of credit card companies, there are basically two types of customers:
- Revolvers. Those who tend to hold balances and pay interest on their cards.
- Transactors. Those who promptly pay off the balance at the end of each billing cycle.
A Federal Reserve study published in May 2024 found that less than half of U.S. credit card holders – some 47% – carried a balance on a card for at least a month in 2023. That means about 53% of credit card holders paid their balances in full that year.
Credit Transactors
“A transactor is somebody who utilizes the score of benefits of credit cards including fraud protection, cash back, and purchase/travel benefits while avoiding the main drawback of credit cards – paying interest,” explains Chris Diodato, CFP, founder and CCO of WELLth Financial Planning in Palm Beach Gardens, Florida. “A transactor also pays off their credit card balance in full each month, using their credit card in much the same way as a debit card, never spending more than what’s available in their bank account.”
- How Credit Card Companies View Transactors. While being a credit card transactor is great for your personal bottom line, credit card companies and other lenders don’t always appreciate this practice. Why? Because lenders are in the business of making money. And the longer it takes someone to pay off a balance, the more a credit card company can potentially earn from that customer. What if you are even one day late with a payment? You are often slapped with a late fee, AND your interest rate could potentially spike, translating to even more money rolling in for the credit card company.
What Can Revolvers Do To Break The Cycle?
Diodato says his advice to revolvers is this: Minimize the overall interest paid to credit card companies by:
- Taking advantage of lower APR cards, often issued by local and regional credit unions
- Using balance transfer opportunities for new cards with lower promotional interest rates
Fortunately, it’s common for some cards to offer 0% interest for purchases made in the first 15 months or so for a newly issued card, he says, adding that this type of perk is excellent for planning out big purchases and avoiding interest expenses.
More Smart Credit Card Payment Strategies
Daniel E. Milks, CFP, founder of Fiduciary Organization & Woodmark Advisors, wants those who don’t pay off their credit card balances monthly to start taking these actions as they work to improve their financial health:
- Make more than the minimum payment every month
- Call your credit card issuers and negotiate lower interest rates
“These behaviors not only reduce debt,” Milks says, “but also improve credit scores and financial stability.”
Take a Credit Card Time Out
Stacy Dervin, a certified financial planner and founder of Tailored Financial Planning, LLC, says when she works with clients who routinely hold a credit card balance and continue to charge regular expenses to their credit card each month, they get put in a credit card timeout, so to speak.
“I understand the benefit of earning points by using cards for everyday expenses, but the benefits are far outweighed by the negative of paying high interest rates on balances,” says Dervin. “I’ll ask clients to put away their credit card for three months, using their checking account to keep spending in check for the month.”
- How it works. The idea behind this system, notes Dervin, is instead of spending with no limits on the credit card, they learn to watch their checking balance go down throughout the month, and it acts as a tool that helps them change their spending behavior: “The consequence of overspending is running out of money before the next paycheck or even overdrafting their account. It forces accountability.”
Savvy Tips For Lowering High-Interest Debt
No matter what credit card payment camp you land in at the moment, it’s important to understand which strategies will help you spend less and ultimately save more for the future. Transactors have an advantage by paying off balances each month because they don’t incur any interest charges.
Unfortunately, as stated previously, revolvers ultimately pay more because of interest charges. If you are a revolver, take heart. You can follow Dervin’s advice and put away your credit cards, then only buy what you can pay for right now. It might be challenging at first, but after a while, you can get the hang of it. Good luck!
With reporting by Casandra Andrews
