Almost half of American households carry a credit card balance. The average credit card balance for those that have one is $5,700.
Some people leave the balance on their credit card on purpose. Others will tell you that this is a mistake and you should completely pay off your card every month.
This leaves you wondering, is it better to pay off your credit card or keep a balance? We are going to give you the definitive answer and bust the myths.
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Why Would You Leave a Balance?
The argument for keeping a balance on your credit card is that this is a sign you are actively using your credit. This would make you a responsible user of your credit.
The other side of this argument though is that you are irresponsible. You are consistently using your credit card because you can’t budget your money and pay your debts.
Although you can mitigate this by saying there is a big difference between having a balance of $10 or $100 and carrying a balance of thousands of dollars. Keep in mind though that it doesn’t matter how much the balance is you’ll pay interest on it.
The credit reporting bureaus like when you’ve recently used your credit. So regular use of your credit card can help your score.
Keep an Account Active
Maybe you don’t use a particular credit card very often. Then keeping a small balance or charging your card for something small every month will keep the account active.
This will ensure that your account stays open. If the credit card account gets closed for inactivity this could cause your credit score to drop. The closed account means one less source of credit open.
Why Would You Pay It Off?
If you want to raise your credit score, paying off your credit card every month is the best way to do it. Plus by paying off your credit card each month you won’t have to pay any interest on the balance.
After your payment history, the second most important thing is your credit utilization ratio. This is the ratio between your total credit limit and the balance you carry.
Want the best utilization ratio? Then pay off your credit cards. The ideal utilization rate is 30%. So the lower your credit card balances, the better you are performing.
As people use their credit card and carry a small amount of debt, they become desensitized to the debt. Then the debt amount grows and it doesn’t seem to be that big of a deal. After all, it’s only a bit higher than the debt you’ve been carrying.
Over time this amount grows and grows until it becomes a mountain of unmanageable debt. Soon reality will hit that you can’t manage the debt, but now it will be too late to pay off the balance.
Is It Better to Pay off Your Credit Card or Keep a Balance?
If you are still undecided on which is better, you can run a small test yourself. Start the experiment by paying off your credit card in full. This should leave you with a balance of zero.
Now, wait at least 30 days so that the credit reporting agencies have a chance to update. Then run your credit score.
For the next month, you need to have a balance of $5 or $10 on the card. Then wait another 30 days and run your credit score again.
Be sure to do nothing else that could affect your credit score. Otherwise, you risk contaminating the results.
What you should see is your credit score go up with a small balance.
Word of Caution About Small Balances
You may find it tempting to carry the small balance because you feel that the few dollars in interest are worth the couple points you’ll gain on your credit score. However, this can be a bad strategy if you forget about the card.
What happens to most people is that they get a new card with better benefits. They start using the new card over the old one.
After a month goes by, they forget about the small balance on the old card. Suddenly, you get dinged with a delinquent payment.
Now that delinquent account is on your credit score for the next 7 years. Plus your credit score could go down anywhere from 60 to 110 points.
This is a huge risk with the potential for your score to drop a significant amount. That’s not worth the potential couple points your score could up by maintaining that small balance.
The best thing to do is weight the benefits. It is smarter to aim for large gains like keeping your credit utilization low.
Confusion over Terms
Some people say they carry a balance on their credit card, but this isn’t quite accurate. What they are actually doing is continually charging and paying off their card.
While there is always a balance of debt, it is rotating. So the charges they make at the beginning of the 30 days get paid off before interest gets charged at the end of the 30-day cycle.
This is different than carrying a balance that you make payments on, but also get charged interest on.
Take Control of Your Credit Card Debt
Now you know the answer to whether it is it better to pay off your credit card or keep a balance. The best thing you can do is pay off your card and go for the big credit score gains over the small points.
Remember, you want to show financial responsibility. You do this by making payments and paying off your debt, not by getting creative and trying to manipulate the credit bureaus algorithms.
Want to pay off your credit card balance? Then you need these 6 strategies for paying off your credit card debt, including taking out a loan.
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