How to pay off a credit card

Credit cards offer convenience, protection against unauthorized transactions, and in some cases, rewards. However, if you continue to miss making monthly payments, or max out your card’s limit often, you could damage your credit score and build up some unwanted debt. 

Want to make sure you are paying off your credit card effectively? 

We dive into some common questions about when and how to pay off your credit card, the benefits of paying your credit card bill in full each month on time, as well as tips for eliminating your credit card debt.

To avoid additional interest charges, or a blip on your credit report, you need to make the minimum payment on your credit card by the due date provided on your credit card statement every month. But you can also consider making an early payment or paying your credit card several times per month. There are no prepayment penalties and making multiple payments throughout the month can help to keep your credit utilization ratio low.

Your credit utilization ratio is the amount of credit you use in relation to your credit limit. This ratio is one of the factors used to determine your credit score. Experts recommend that your credit utilization ratio stays below 30%. So, if you have a $1,000 credit limit, you may want to keep your balance under $350.

Ideally, you should aim to pay your credit card in full each month. There is a common misconception that carrying a balance on your credit card will improve your credit score. This is not the case.

Carrying a high balance on your credit card can negatively impact your credit score by increasing your credit utilization ratio. If your credit cards are consistently maxed out this will result in a high credit utilization ratio and signal that you are a high-risk borrower.

If you are unable to pay off your monthly credit card payments in full, a good plan of action is to keep your credit utilization ratio below 30%.¹

Paying off your credit card in full each month is the gold standard for credit card usage. If you can achieve this standard, you might be able to enjoy some of these benefits:

• Interest-Free Grace Period. The number one benefit to paying off your credit card in full each month is avoiding credit card interest on new purchases that you make each month (remember there is no interest-free grace period on cash advances on your card – you will pay interest from the date of the transaction). 
• Improved credit score. Paying your credit card in full each month should help to improve your credit score by keeping your credit utilization score low. A high credit score can make it easier to get approval for other credit such as mortgages or loans. 
• Managing your debt. You will not carry a balance and make more interest or potentially default on your card. 

Achieve your goal of paying off your credit card debt faster using the following tips:

A budget is your plan for your money. By determining how much of your income goes to needs (fixed necessary costs such as mortgage, rent, groceries, car payments) vs. more of your wants (often optional expenses such as eating out, subscription services), you can see what you have to work with. From here, you can cut out those optional expenses and redirect any extra money to credit card repayment. 

If available on your credit card, you could consider using an installment plan on your credit card that can help you break up the payments for your purchases, into smaller, more budget-friendly amounts, which can help you pay them off on time.

An installment plan allows you to gradually pay for purchases over an extended period of time, usually over three, six, or 12-months.

Remember that if you are able to pay your balance in full each month (so that you have an interest-free grace period on your new purchases), an installment plan may not be the feature for you.  Read the terms and conditions of your installment plan feature on your credit card carefully before you consent to a plan – whether it is offered to you as an after purchase or at purchase solution. 

With an Scotia SelectPay^TM installment plan that is available on certain Scotiabank Visa* credit cards, you can use them to pay off your eligible purchases made on your card.

If you are only making your minimum payments each month, it will take longer to pay your balance and you will pay more money on interest. Instead, aim to pay off more than your minimum payment each month and keep your credit utilization ratio (the available credit vs. credit limit) under 30%.

Consider pausing or minimizing your credit card usage as a way to avoid additional debt and interest payments. Consider using your debt card instead and budget for any new purchases vs. using always using credit. 

There are different strategies available for prioritizing how you will pay down debt. Two useful approaches to consider are:

• Debt avalanche. The debt avalanche method is a good choice for those who are highly disciplined and want to pay the least amount of interest over time. To apply this method, make the minimum payments on all of your debts, then allocate any remaining funds you have available for payments to the credit card with the highest interest rate. When you've paid off this card, move on to the credit card with the next highest interest rate. The benefit of this strategy is that you save more money over time on interest by paying your highest interest rate cards first.
• Debt snowball. With the debt snowball method, you make the minimum payments on all of your debts. Then, all remaining funds you have available for payments go to paying off the credit card with the lowest balance. When you've paid off this card, you move to the card with the second-lowest balance, and so on. The benefit of this method is that it can be more motivating because you begin to see success sooner when you start with the lowest balance card.

You could consider a debt consolidation loan or a personal loan with a lower interest rate and then use that loan to pay off your credit card debt. Or a balance transfer from a credit card at a lower interest rate (or no interest rate offer) for a limited time to transfer higher rate debt and consolidate your credit card debt. By using a low-rate balance transfer on your credit card, you can move your balance on a high-interest rate credit card to a credit card with a lower interest rate. Basically, you use one credit card to pay off another credit card, or several credit cards. If you have a good credit score, you may be able to take advantage of a 0% introductory rate on a balance transfer for a specified period.