How much should I pay back on my credit card every month?

You want to know how much of your credit card balance you should pay off every month?

All of it. That’s the simple, true answer.

It’s also not necessarily possible or easy for people who have ended up situations with large amounts of credit card debt. So while paying your balance off every month is great if you can do it, and we should all strive to get to that point so we don’t have to pay interest, it’s not realistic for everyone.

I thought that rather than being critical of people who happen to have large credit card balances, a better option is to show you just how much better off you can be if you’re one of those people and you can get to a better situation by paying off more of your balance.

Remember that a credit card effectively functions by having the credit card issuer paying for your purchases through credit they extend to you. They in turn expect you to pay that money back to them at a later date. And typically, if you haven’t paid that money back to them by the end of one billing cycle, typically a month in length, they start charging you interest on the money they lent to you..

Let’s assume you’ve run up $10,000 in credit card debt. Maybe you have a shoe problem. Maybe there were medical issues that were more expensive than you could handle. I’m not here to judge – credit problems can happen to anyone, at any age, at any income level. So, let’s get you out of them.

So you’ve got $10,000 in credit card debt. And let’s also hypothesize that the interest rate on that balance is 20% per year. So right off the bat, if your balance stays exactly where it is, you’re going to owe $2,000 in interest over the course of the year. But that also assumes that the interest doesn’t compound and accrue on interest charges that build up over time as well. In reality, if you never paid off anything on your card, here’s what one year of interest charges would look like:

You end up accruing $2,193.90 in interest charges over the course of the year, and your balance goes up by that amount, meaning you now owe $12,193.90. This doesn’t make you feel very good. If you make no payments to a card that is charging you interest, this is what happens. However, you likely wouldn’t get to this point, as your account would go into delinquency if you didn’t make any payments for a full year.

Now, different credit cards have different minimum payment requirements in order to keep your account in good standing. For the purposes of this exercise, let’s use a 3% minimum payment requirement. This means that you must pay at least 3% of the outstanding balance each month. Here’s what happens in that scenario, again starting with $10,000 in debt and a 20% interest rate:

In this situation, you end up accumulating less interest over the course of the year – $1,858.17, so you save over $300 in interest charges that you do not have to pay off in the future. Your balance is also reduced by almost $1,500 over the course of the year, meaning you’re in better shape heading into next year as well. However, take note of the Pay-Off Amount for each month – it’s decreasing each month because your balance is decreasing, and you’re paying off 3% each month on the outstanding balance. What happens if you pay off a higher fixed amount every month instead? Let’s see what happens if you pay off $500 per month:

This obviously makes a bigger dent in the balance, as you are able to cut it nearly in half over the course of the year. And the interest charged is down to $1,609.31 for the year, almost $600 less than in the base scenario where you aren’t paying off anything. That extra $600 is money you could put towards paying off more of the balance, or use for other monthly bills to prevent your outstanding balance from growing again.

Credit cards can be a valuable tool in your arsenal if you use them properly. Some offer significant rewards points and bonuses, but you have to be careful in order to avoid a situation where your interest costs can overwhelm those benefits. In a perfect world, pay your balance off every month. But even if you can’t, contributing as much as possible each month towards reducing your outstanding balance can help to reduce the amount of interest you have to pay over time, and keep more money in your pocket.