Credit question, pay now or later?

Someone is in a situation where credit cards are their only source of payment for everything, bills, food, all of it for the immediate future. They have a credit card balance of $400 and receive a check for $400.

Is it wiser to pay off the CC and accrue new debt until a new revenue stream is found, or do they use the new money and let the balance ride?

My instinct says to kill the accruing interest and deal with the resulting newer debt, but something tells me this is a trick. No, this is not a homework assignment.

Crap. Can this be moved to GC? My bad.

Letting the balance ride into the next month’s statement will result in

  1. charges
  2. if they spend the whole $400 on the card without making allowance for the charges, then those charges will be over the limit, and will so result in over-limit fees, and consequently an extra sum to be paid the following month

My advice is to clear it up and use the card again.

Let me emphasise that credit cards:

  • are not a source of income
  • attract a high rate of interest if not paid off immediately

Also a credit card ‘balance’ is actually a credit card debt.

It’s a scary situation where someone has no money at all (i.e. intends to pay for everything with the card), and is already $400 in debt.
How soon is the person going to get some regular income?

Kill the accruing interest and debt. Do their best to not let it happen to such an extent again, where their DTI is 1:1; it looks like they’ll have to gradually work their way out of a cycle that can cause them terrible grief sooner than later.

How long is the “immediate future”? The only reason I can see NOT to pay off the card in full is if it’s going to make it impossible for them to make the minimum payment in subsequent months and cause them to get hit with late fees. If that’s the case, then they would need to reserve enough to cover those future payments until such time as they anticipate having actual income, but I’d still recommend paying down as much as they could.

If they anticipate having income within a month or two, of course they should pay it all, because going into the next billing cycle fully paid off should buy them a grace period before the new charges start accumulating interest.

If the credit card has 20% interest, you’re paying 6.50 per month in interest. That’s not huge, but it adds up in the long run. Paying off the credit card, then using the card for expenses saves you 6.50 in interest prorated by how long it takes to accumulate $400 on the card and however the credit card’s billing cycle works. You’re better off if you pay off the card, but it’s not a huge amount. If you’re not going to have money to make minimum payments after the $400, then you’re better off making minimum payments with the money, because if you can’t make one then there’s usually a fee and a credit hit, plus the interest still accrues.

Keeping a balance on a credit card essentially adds a surcharge to everything you purchase on that card. I’d avoid doing it unless I had absolutely no other choice, and then I’d do everything I could to not use that card again until the balance was completely paid off.

If the $400 check is a one time-thing, they’re better to keep most of that money and make the minimum credit card (“CC”) payment on time. Rather than feed the whole $400 into the CC. That’s assuming they’re disciplined and won’t blow the saved-out cash on additional non-mandatory spending.

The key thing is that as bad as paying $6.50 in interest each month is, paying that plus paying a $30 late fee plus having the interest rate doubled is worse. Which is exactly what *will * (not might; will) happen if 30 days from now they have a fresh $400 CC balance from new charges and no fresh $400 check to pay it.

As somebody mentioned, another issue is the CC’s credit limit. You don’t want to blow through that, or have accumulating interest push you over that. This may or may not be an immediate issue, but it pays to check. If you are paying at least the minimum then the balance will be going down expect for additional purchases. And they’re unlikely to approve a purchase that’ll put you over the limit. But if they do you’re the one who’s screwed, not them.
Bottom line, as others have said. A typical high interest CC is a very crappy source of rainy day funds. For people who are already having trouble earning enough money to meet their fixed expenses it’s easy to use a CC to dig a hole in two months that takes 3 *years *to dig out of. And that’s assuming nothing else goes wrong in those three years. Which is pretty darn unlikely.


The credit rating of the affected party is right at 750. The limit on the card is about 3K. Percentage of usage isn’t a factor here.

Since further charges on the account are unavoidable, and there is a minimum monthly charge, a payment was made to make the balance right at the minimum charge level so as not to pay any more interest than needed.