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Credit cards can greatly simplify bill payments and daily expenses, but they could also lead to issues if not paid off fully. Generally, maintaining a balance doesn't benefit your credit score. The only rationale for charging more than you can pay off at the end of the billing cycle is to have extra time to settle a large purchase – which is a common situation most people will run into at some point.
Maintaining a balance on your credit card can influence your credit score, although it might not necessarily be detrimental. There isn't a definitive answer that fits all circumstances, and in many cases, having a balance isn't catastrophic, but there are better and worse ways to do it.
How Carrying Credit Card Balances Can Negatively Impact Your Credit Score
Credit Utilization Ratio
Another key factor in your FICO Score is the ratio of your current debt to your credit limit, known as credit utilization, accounting for 30% of how your score is determined.
Continuously maxing out or nearing your credit limits signals risk to credit scoring models. Financial experts, including those at the Consumer Financial Protection Bureau (CFPB), advise keeping your utilization below 30%. For instance, if you have a $10,000 total credit limit, try not to exceed $3,000 in total charges across all cards.
In addition to maintaining your overall utilization under 30%, you should aim to keep the utilization below this threshold on each individual credit card. If you concentrate most of your debt on one credit card while having minimal or no balance on others, the high utilization on the heavily used card will negatively impact your credit score.
Using a service like Kasheesh can help you split purchases between several credit cards and keep your utilization ratio balanced at all times.
Expense of Debt
Holding a balance on a credit card can be costly, particularly with high APR cards. Sometimes, paying off a balance over time, such as with a 0% APR credit card for debt consolidation, can be wise. However, accumulating large amounts of debt without a plan to repay it can be detrimental, potentially leading to missed payments if it gets to a point of not being able to afford the minimum monthly payments.
Your FICO Score is primarily influenced by your payment history, which constitutes 35% of your score. Even one late payment can significantly lower your score, and repeated late payments can cause further damage. Late payments reported to the credit bureaus can stay on your credit report for up to seven years, impacting your financial status for a very long time.
Is It Okay to Leave a Small Balance on My Credit Card?
If you’re in a situation where you have no other choice than to carry a balance, it’s better to spread out the balances between multiple credit cards, as mentioned earlier. If one card has high utilization while others have low or no balances, it will still negatively affect your score.
For example, with four cards and a total limit of $20,000, a $7,000 balance on one card with a $10,000 limit results in 70% utilization for that card, which can harm your credit score, despite the total utilization being only 35%.
Situations Where Carrying a Balance is Unwise
Becoming Too Reliant on Credit for Expenses
Regularly charging more than you can afford each month suggests the need for better spending tracking and budgeting. Accumulating a lot of debt often leads to high interest payments, making everything more expensive. It's crucial to figure out ways to spend less than you earn each month to avoid carrying debt and focus on paying off your existing balances.
When Trying to Maximize Credit Card Points and Rewards
Credit cards offering the most benefits, such as travel rewards cards, generally come with the highest APRs to compensate for their perks. This often leads to a situation where individuals chasing rewards overspend and end up carrying a balance. Consequently, the interest paid could nullify the value of any earned rewards, depending on how long you’re carrying the balance.
The average credit card APR is typically in the double digits for accounts that are charged interest. In contrast, rewards and travel credit cards usually offer earnings rates in the single digits, ranging from 1% to 6% of the purchase amount.
Even if you transfer points to an airline partner for expensive business class flights or other high-end travel, it would be very difficult to obtain a value equivalent to the interest charges incurred on your credit card bill. So if you’re a points maximizer, make sure you have a plan for paying off your balances at least within a few months.
To Improve Your Credit Score
Carrying a balance to improve your credit score is a myth. There is no benefit to carrying a 1% or 3% balance on a card, or any other number people are touting online. The Consumer Financial Protection Bureau (CFPB) recommends paying off credit cards in full each month as the best strategy for maintaining a high credit score. Key practices for improving your score include timely bill payments, keeping low credit balances, verifying credit reports for errors, and avoiding unnecessary new credit accounts.
Conclusion
Is it wise to carry a balance on your credit card? Generally, no. To maintain an optimal credit score, minimize debt from the start. Paying your credit card bill in full each month avoids interest charges. While keeping utilization below 30% is recommended, the best approach is avoiding long-term debt for overall financial health. This strategy also allows you to enjoy credit card perks like rewards without the cost of interest. Using credit cards wisely by paying in full and on time is the best practice.
F.A.Q.
What does a negative balance mean on a credit card?
A negative balance indicates the credit card company owes you money, which can happen if you overpay or return an item. You can use this amount for future purchases or request a check, depending on the issuer's policy.
What does ‘Current Balance’ mean on a credit card?
The current balance is the amount owed on your bill at the statement's generation time, including charges, interest, and fees. It differs from the statement balance, which is what you owe at the end of the billing cycle. The current balance can change daily with frequent card use.
How much of a balance is okay to keep on a credit card?
It's best to pay your credit card bill in full rather than carrying a balance. Carrying a balance doesn't benefit your credit score. It's advised to keep balances below 30% of your total credit limit. For example, with a $10,000 total credit limit, aim to keep balances under $3,000, and aim to keep the utilization below this threshold on each individual credit card as well, by splitting large purchases between multiple cards.
