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Should I Pay Off My Credit Card Debt Immediately or Over Time?

Editor’s Note: This question comes from Lacy on Twitter and we are answering it as part of our “Ask Susie Q&A” Series. If you have a question for us, ask us on Facebook or Twitter and we may pick yours to answer next.

Lacy’s question: “I recently came into some money. If I have credit card debt, should I pay it off quickly or pay off the debt over a number of months?”

The answer: It all depends on how much your credit card is costing you in interest charges and other fees.

What’s Your Credit Card Interest

Credit cards charge interest. The average Annual Percentage Rate (APR) for unsecured credit cards is about 18%. What that means is, every month that you carry a balance, you will be charge 18% interest which will result in finance charges. Those charges will be added to your outstanding balance. Here’s an example:

Say you owe $3,000 on you credit card. If you pay only the minimum payment, about $60 per month, it will cost you close to $30 every month in finance charges—that’s $360 dollars per year. In addition, it will take you more than 7 years to pay off that $3,000.

Does Paying Off Debt Slowly Help Credit Scores?

No, paying off your credit card slowly typically will not boost your credit scores. The two most important factors affecting your credit scores are:

  • Payment history: Always pay your credit card payment on time.
  • Credit utilization rate: Don’t use more than 30% of your available credit.

If you pay your credit card off with the money you received, you improve your credit utilization ratio (Good!). Then, always make on-time payments for any additional purchases you make with your card (Also good!).

So the bottom line is that it makes more sense to pay off your credit card, then carefully plan how to save or invest the rest of your money windfall. Lucky you, Lacy, and thanks so much for your question.