Credit card companies allow customers to revolve their balance every month. A large part of the way the credit card companies make their income is through the finance charges and the interest that they charge their customers. However, they can only charges interest if the customer decides to pay the balance in parts by revolving the balance from one month to the next. For example, if the balance on your credit card is $2000 and you make the payment of hundred dollars every month it will take you more than two years to pay off the credit card completely provided he do not make any additional charges to the card. You will have also paid around $500, give-or-take, as interest to the credit card company.
However, a customer who plays down the balance on his credit card every month is not so profitable for the credit card company. The only way that the credit card company makes a profit from these customers is from the service fee that they charge the retailer with whom the credit card is used. If this be the not exist then the credit card company would not encourage customers who pay the complete balance every month at all.
The credit card company refers to customers who pay down the balance every month as deadbeat. While this may seem like an unsavoury term to be used, it is in fact what you should aspire to be as far as usage of credit cards is concerned. Being a deadbeat means that you save hundreds of dollars from going to the already flourishing multibillion-dollar credit card industry by the way of interest and financial charges. By paying down your balance every month you avoid the financial restraint and stress of being under debt and knowing that you have to pay it off in the next few months or years. Paying down the balance on your credit card every month also helps in keeping the debt utilisation ratio and therefore is more favourable to your credit score.
Paying down the balance of the credit card is a better way to manage your credit. It also displays to future lenders and creditors your ability and organisation skills to deal with your loans. Plus has already mentioned it boosts up your credit score which is what most of the lenders view and evaluate primarily before approving a consumer for a credit loan.
There are however certain situations under which making use of the loan facility and revolving a particular balance on a credit card makes good sense. Read more about when it is a good idea to revolve balance on your credit card in our next column.