When do I have to pay back the money I spent on a credit card?
This is a great question to ask. First, I like it because it acknowledges the fact that many people gloss over – when you spend money on a credit card, you’re borrowing it from someone. Secondly, you’re looking to do the responsible and honorable thing – actually pay that money back at some point.
Honor isn’t really something we talk about with money too often. Usually, we’re more concerned with rates of return, the amount of risk we’re taking, and when we can access our money. Honor might not even make a top ten list for most people when it comes to important financial concepts. Maybe that’s part of the reason why our society looks like it does. But when it comes to credit cards, there’s actually a good case to be made that what’s honorable and noble is actually a sound financial decision too.
Let’s envision a situation that most of us have been in at one point or another – you spend $1,000 on your credit card last month. Maybe this is a lot of money for you. Maybe it’s not. But you spent it. And now you’re wondering about how and when to pay it back. Now, nearly every credit card out there has a minimum payment requirement – they mandate that you pay back a portion of the outstanding balance each month. That amount varies based on the card – it might be $25, it might be one percent of the outstanding balance plus interest, it might be three percent of the outstanding balance and no additional interest. In this case, you could pay off just the minimum amount each month. But that also means that the outstanding balance is going to start accumulating credit card interest, which means that you are likely going to end up having to spend significantly more than $1,000 to pay off those purchases over an extended period of time.
On the other hand, if you pay that $1,000 balance off within a single billing cycle, usually one month in length, you are typically not charged any interest by the credit card issuer. That means that if you spend $1,000 on the card, if you pay it off within the billing cycle, you only have to pay back what you spent, or $1,000. There’s no additional interest that you owe. Given that interest rates on credit cards are often very high, usually at least 15% and can reach as high as 30%, the best course for you from a financial perspective is to pay the money back as soon as possible.
However, I realize that unforeseen circumstances can make this difficult for a lot of people.
I’ve been there several times as well. Occasionally, it was because of really stupid stuff I did when I was fresh out of college – spending too much on beer for a few weekends in a row, or maybe a poorly-planned trip to a casino. Stupidity happens, and I’m not excluding myself from this statement. But I’ve also had a couple instances where something unexpected came up that wasn’t of my own choosing. I had some bills from the emergency room that took me a few months to pay off after a soccer injury unexpectedly landed me there when I couldn’t get in to see any other doctor. And I couldn’t pay all of that money at once. So it ended up on my credit card, and it took me a few months to work through it.
But the core principle from above still stands – paying the money you owe on a credit card as soon as possible will reduce the total amount of interest you end up paying, and so it still is in your best interest to wipe those balances out as quickly as you can. Yes, if you have a lovely promotional offer where you have 0% interest for a year, you can take a little more time to do so, as you’re not accumulating interest in that case. But don’t use that time as an opportunity to let your balance grow, because then you’re stuck paying interest once the promotional period runs out. Instead, use it to reduce your balances at no additional cost.
When someone lends you money, the honorable thing to do is to pay them back as quickly as possible. With credit cards, it just happens to be a great financial move as well.