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Credit card can make paying bills and covering day-to-day expenses considerably more convenient, but they can also create problems if not paid in full. There is generally no benefit to keeping a balance when it comes to your credit score. The only reason to charge more than you can pay in full at the end of the billing cycle is that you need more time to refund a large purchase.
Having a balance on your card can affect your credit score, but it doesn’t always have a negative impact. There is no “right” or “wrong” answer that applies to all situations, and there are many scenarios where maintaining balance isn’t the end of the world. Here’s what you need to know.
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How a credit card balance can negatively impact a credit score
Debt is expensive
Carrying a balance on your credit card can be an expensive proposition, and that’s especially true if you’re using a credit card with a High APR. Sometimes paying off a credit card balance over time can be a smart money move, like paying off consolidated debt with a Credit Card 0% APR. But if you’re racking up debt with no goal of paying it off, you’re doing yourself a disservice and may find yourself unable to make a payment at some point.
The most important factor affecting your FICO score is your payment history, which accounts for 35% of your score. If you make even one late credit card payment, you could take a toll on your credit score. And of course, subsequent late payments can cause even more damage over time.
Late payments reported to the credit bureaus may stay on your credit reports for up to seven years. This means that the consequences of paying your credit card bill late could affect your financial situation for several years.
Using too much available credit
Another important factor that makes up your FICO score is how much you owe relative to your total credit limits. This is also known as use of creditand that’s 30% of your score.
Borrowers who consistently meet or exceed their credit limits are considered “at risk” by the algorithms that determine credit scores. Most experts, including those at the Consumer Financial Protection Bureau (CFPB), suggest keeping your total usage below 30% to avoid a negative impact on your credit score. So someone with a total credit limit of $10,000 would aim to charge no more than $3,000 in total across all of their credit card.
Should I leave a small balance on my credit card?
In addition to keeping your total usage on all cards below 30%, you should try to keep usage below this level on each individual card you own. If you carry most of your debt on one credit card and little or no balance on the others, high usage on the card you use the most could also be bad news for your credit score.
For example: Let’s say you have four credit cards with a total available balance of $20,000. You carry a balance of $7,000 on a credit card that has a limit of $10,000, so your usage on that specific card is 70% (7,000/10,000 = 0.7 or 70%). Even if you don’t have a balance on your other credit cards, using this card doesn’t bode well for your credit score. And that’s true even if your total usage across all cards would only be 35% (7,000/20,000 = 0.35 or 35%).
Other Situations Where Carrying a Balance Doesn’t Make Sense
We’ve shown how carrying a balance can hurt your credit score in the short and long term, but there are plenty of other reasons to avoid carrying a balance on a credit card. Here are some scenarios where wearing a balance is a bad idea:
When you use a credit card to earn rewards
The credit cards with the most benefits, including credit cards with travel rewards, tend to charge the highest APRs in order to offset their benefits. This creates a situation where many people seeking rewards end up overspending and carrying a balance, which means that the interest they pay easily erases the value of any rewards earned.
Consider that the average credit card APR at the end of Q3 2022 was 18.43% for interest-rated accounts. At the same time, rewards and travel credit cards typically have single-digit payout rates, ranging from 1% to 6% of the purchase price.
Even if you transfer points to a partner airline to cover expensive business class flights or other luxury travel, you would have a hard time getting a value close to the amount you spent paying the interest charges on your credit card bill.
Use your credit as a crutch
If you frequently bill more than you can afford each month, chances are you would benefit from tracking your expenses and using a monthly budget. This can prevent you from leaning on your credit and ultimately paying high interest on every purchase, ultimately making everything you charge your card more expensive.
Your best bet is to figure out how to spend less than you earn each month. This way you can stop racking up more debt and focus on paying off the debt you already have.
Refund a large purchase
Remember that credit cards don’t work very well as short-term loans, although they are convenient. The interest rates they charge are just too high. If you need to buy new appliances, pay for major repairs in your home, or cover unexpected medical expenses and need to borrow money, you’re probably better off taking out a personal loan with a much lower APR. Note that personal loans offer low fixed interest rates, a fixed monthly payment and a fixed repayment schedule, while credit cards offer expensive variable rates that can increase further over time.
When it comes to financing a major purchase, you can also consider credit cards that offer 0% APR on purchases for a limited time. Credit cards in this category allow you to avoid interest on purchases you make for a limited time, ranging from six months to nearly two years. Just be aware that your interest rate will reset to the regular variable rate after the introductory offer ends. The best cards 0% APR can even earn rewards on your spending along the way, making it a good option if you want to rack up points and know you can pay off your big purchase in a fairly short amount of time.
As a tool to improve credit score
Carrying a balance on a credit card to improve your credit score has proven to be a myth. The Consumer Financial Protection Bureau (CFPB) says that paying off your credit cards in full each month is actually the best way to improve your credit score and maintain great credit over the long term.
If your goal is to improve your credit score, the best way is to pay all your bills early or on time, keep your credit balances low, check your credit reports and challenge any mistakes you findand avoid opening credit accounts that you do not need.
You don’t need to pay interest to build or maintain good credit, so don’t carry a balance because you think it will improve your credit rating.
Is carrying a balance on your credit card a bad idea? Yes. Most of the time you will be better off if you can avoid it. You’ll maintain the best possible credit score if you keep your debt to a minimum to begin with. You can avoid paying interest on everything you buy if you pay your credit card bill in full each month. While keeping your usage below 30% of your total balances seems like your best bet, experts agree that avoiding long-term debt is probably the smartest move for your credit and financial health.
Avoiding debt also allows you to take advantage of important credit card benefits like rewards and travel insurance without having to pay for the privilege. Ultimately, you should strive to use credit cards to your advantage, and paying your bill in full and on time is the best way to do that.
Frequently Asked Questions
What does a negative balance on a credit card mean?
A negative balance on your credit card means the credit card company owes you that amount. This can happen when you overpay an invoice or return an item and your statement credits are more than your charges. You can apply this amount to your next purchase or some banks will allow you to request a check. Policies vary by issuer.
What does the current balance on a credit card mean?
Current balance refers to the amount of money you owe on your bill at the time the credit card statement was generated. This includes unpaid fees, interest and all relevant charges. This is different from your statement balance, which shows what you owe at the end of each billing cycle. Your current balance may change from day to day if you use your card often.
How much balance can you keep on a credit card?
In general, it’s always better to pay your credit card bill in full than to carry a balance. There is no significant benefit to your credit score for carrying a balance of any size. With this in mind, it is suggested that you keep your balances below 30% of your overall credit limit. For example, if you have a total credit limit on all your cards totaling $10,000, try to keep the total amount you owe on your cards below $3,000.