Here's What Happens When You Pay Off All Your Credit Cards

Paying off debt is one of the best things you can do for your finances, and this is especially true if the debt you pay off is that of the credit card variety. Credit card interest is variable, meaning it can change over time. And compared to interest rates for other means of borrowing money (such as personal loans or mortgages), credit card interest rates are quite high. Right now, the average interest rate for a credit card is over 20%, according to the Federal Reserve. It's for this reason that it's best not to carry a balance forward from month to month.

The realm of personal finance is full of best practices, shoulds, and should-nots, but sometimes life circumstances make it harder to pay off your credit card balances every month. This is especially the case if you're living without emergency savings and have had unexpected expenses pop up. That was my life for a long time, and you won't get any judgment from me for having to carry a credit card balance. Regardless of the why or the how, here's what you can expect if you do manage to pay off all your credit cards.

Your balances won't grow due to interest

Remember that credit card interest we discussed above? In addition to being high and variable, it also compounds daily. Compounding interest can be a great thing if you've got cash in a high-yield savings account or invested, but it's bad news when it comes to credit cards.

Credit card interest will grow the balance you have by compounding. This means that every day, more is added to your balance, and then you'll pay interest on the new amount the next day. And the next day. And the next. This is part of what gives credit cards the potential to be so dangerous if you're not careful -- your balance owed grows even if you've stopped using the card. If you pay off all your cards, though, you won't owe more money day after day.

You'll have fewer bills to worry about

Paying off all your credit cards is a great way to simplify your finances. Having to keep track of multiple credit card bills every month is exhausting and can be a bit nerve-wracking. Did you remember to pay that card this month? Double-check to be sure, because the last thing you need is a late fee on top of the balance you owe. If you get out from under those balances, it'll help you sleep better, and it'll also make budgeting a lot easier.

Your credit score improves

If you pay off your credit cards, you'll see a positive difference in your credit score. This is because credit utilization ratio has a big impact on that three-digit number. Credit utilization ratio is the amount of available credit you're using at any given time, expressed as a percentage. For example, if you have $20,000 available to you in the form of credit cards, and you're carrying balances totaling $5,000, you have a credit utilization ratio of 25%.

It's recommended that you keep this number under 30%, as a higher percentage shows lenders that you might struggle with managing credit and could be in over your head financially. For your FICO® Score, the amounts you owe on various debts reflect 30% of the score. So if you had a high credit utilization ratio and then cut it down in the process of paying off your credit cards, you'll see a credit score bump.

You might improve your relationship with credit cards

If you pay off all your credit cards, it's almost like getting a fresh start in your relationship with them. You start to see credit cards for what they are -- a useful financial tool that can be used to earn cash back and rewards on your everyday spending, as well as easily build credit. You might decide that the benefits of credit cards (the aforementioned rewards, but also the convenience and security of paying with one) make them worth keeping in your life.

So you evaluate all the card options available to you (especially now that you have a higher credit score), and you pick out cards to apply for that really fit your life and spending, like one that offers awesome grocery rewards. You get in the habit of paying your balance off every month (or perhaps even more frequently than that). And you remember what it was like to owe money on credit cards from month to month, and decide to avoid that in the future.

No matter how you get your credit cards paid off (may I recommend the debt snowball method?), getting out of credit card debt feels pretty darn fantastic. March into your financial future feeling freer, lighter, and more in control of your finances.