Carrying a Credit Card Balance

Paying your credit card balance in full each month is the ideal way to use your credit card. You don’t risk getting into debt and you never have to pay interest on the balance (as long as the card has a grace period). However, many of us have fallen into the habit of carrying a credit card balance because it’s easier. Even if you carry a balance, do it the smart way.

Avoid carrying a balance on high interest rate credit cards. If you carry a balance, and remember it’s typically best not to, carry it on your credit card with the lowest interest rate. The finance charge on a $1,000 balance at 11% APR is $9.17 while the finance charge on the same balance with a 24% APR is $20. Over several months, the APR makes a big difference in the interest you pay.

Keep your balance below 30% of the credit limit. Always keep in mind that larger balances negatively affect your credit score. The more of your credit limit you’re using, the bigger the hit to your credit score. Aim to keep your balances at 30% of the credit limit or below to protect your good credit score or to rebuild a bad one.

Pay off your balance before charging more. If you’re charging more than you’re paying each month, then your overall balance is increasing. Keep it up and before long you’ll be above 30% of your credit limit. Before you know it, you’ll reach your credit limit. At that point, you’ll have to stop charging and change your spending habits. Keep yourself out of debt by paying off what you’ve already borrowed before you borrow more.

Pay more than the minimum, unless the minimum would pay off your entire balance. Your credit card statement will include the shocking details of how much it will cost and how long it will take to get rid of your balance if you only pay the minimum. The minimum payment might be ok if you’re having financial difficulty or if you’re strategically paying the minimum as part of your overall debt plan. Otherwise, put as much as you can toward your monthly credit card payment.

Get rid of the balance before any promotional rate expires. You may not be in a hurry to pay off your balance if your card has a low introductory rate. But, be mindful of when the rate expires and the payment you need to make to pay off the balance by that time. Otherwise, the higher interest rate will kick in and so will the finance charges.

With some promotional offers, you have to pay off the full balance by the end of the promotional period or else the accrued interest will be added onto the balance. Read the terms of the promotion to be sure that procrastinating on full payment won’t cost you.

That Myth About Needing to Carry a Balance

If you’re carrying a credit card balance to build a good credit score, you can stop. You do need to use your credit card periodically so it’s regularly updated on your credit report, but you can build a good credit score even if you pay it off each month.

Credit card issuers report data at various times through the month. Your card issuer might report your account at a time when you actually do have a balance, so your credit report won’t necessarily reflect that you’re paying it off every month. That's why it's important to charge just a portion of your credit limit, regardless of how much of it you pay off.