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carrying a balance on a credit card
7 Jul 2018

The Do’s and Don’ts of Carrying a Balance on a Credit Card

Did you know that in the third quarter of 2017, there were 362 million open credit card accounts in the United States? With an adult population of 249.5 million in that year, this means the average was more or less one account per individual.

This shows how immense the popularity of credit cards is in the U.S.

The thing is, even with credit cards having existed for nearly seven decades now, consumers still lack knowledge on its proper use. There’re the common myths about carrying a balance on a credit card, for instance.

Unfortunately, these misbeliefs about how or whether to carry a balance contribute to the continuous climb of credit card debt. For reference, Americans owe a whopping $931 billion in credit cards alone.

So, what is the truth about carrying a credit card balance?

That’s what we’ll share with you today, so, keep reading!

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What “Carrying a Balance on a Credit Card” Means

In a more recent report from Experian, it showed that the average American holds $6,354 in credit card balances. But what exactly does this “balance” mean?

At its core, a credit card balance is whatever you owe to your credit card issuer. You may see this either as a negative, positive, or zero.

To have a negative balance means you paid more than your outstanding balance. A positive balance, on the other hand, means you still owe the card company money. A zero means you’ve already paid your entire balance.

The positive balance you see in your statement covers all recent purchases you made – and hasn’t paid yet. It also includes unpaid balance (from previous statements) and their interest charges. Depending on when you started using the card, you may also see an annual fee.

In case you made a late payment last month, you’ll see a “late fee” charge in your most current statement. Keep in mind that non-use of credit cards can also incur an “inactivity fee.”

The most important thing to remember is that your current balance includes all new purchases. One more thing: Every time you make a payment, your balance goes down.

Always keep in mind that credit cards are some of the most useful credit-building and -improving tools at your disposal. Some of the best credit cards for people with bad credit can even help you recover from your previous financial disasters.

However, you can only reap the most out of your credit cards when you practice balance management the proper way.

So, now that you know the basics of the question, “What does it mean to carry a balance?”, the next thing is to determine whether you should or shouldn’t. Or, to make it easier for you, know the dos and the don’ts when it comes to credit card balances.

Do Understand the Difference between “Using Credit” and “Having a Balance”

One of the most common reasons behind the myths on carrying a credit card balance is because many people think it’s the best way to build credit. They base this on the belief that credit card issuers look more favorably at cardholders with balances because they earn money off them.

This isn’t the case. How much your card company makes from you doesn’t impact your credit score. What’s more important is that you pay your debts on time and you keep your account active.

In other words, you’ll build credit so long as you use your card, pay your balance, and keep away from delinquencies.

Do Pay Off Your Current Monthly Balance on Time

True, you need to have a balance so you can start building credit through your card.

You need to make actual purchases, allow the card issuer to reflect them on your statement, and spend money on them. Pro tip: When using your cards, set your max credit utilization ratio to 30%. This way, you’ll have an easier time handling your repayments. If you are having difficulty paying down your cards to this target 30% rate, you can consider a personal loan with no credit check, which will allow you to pay over a longer timeframe.

Now, the question is, should you keep a balance on your credit card?

In an ideal world, you should pay off whatever balance you owe every month. This is the only way to protect yourself from the possibility of an ever-growing interest on your balances.

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Don’t Allow Balance Carry Overs to Continue

So, what happens if you let the balance carry over to the following month and continue doing so?

That’s when you’ll experience the true consequences of interest rates. For instance, if your card has a 24.99% annual interest rate (APR), a purchase that costs $100 incurs an additional $25 fee per year. That’s 2.0825% every month, or $4.165 monthly interest.

Even if you pay that interest (whether the per year or per month), you still owe your credit card company $100. While this may seem like a high cost to pay, the interest rates are still lower than bad credit loans, which can charge up to 3x the card interest rate, depending on the timeframe.

All these said, you want to strive hard to bring your balance to 0 before your new statement cycle starts.

Do Strive to Pay More than the Minimum Amount Due

As much as you’d want to pay off your entire balance every month, there are some situations where you can’t.

However, it’s still a great idea to pay more than the minimum amount due. Why?

For the simple reason that it reduces the total amount you pay, which only goes towards interest charges.

Take the example above. If you pay only the $4.165 interest, the $100 balance carried over to next month means another possible $4.165 interest. But you’d also make new purchases, which means you have new interests on top of those from last month.

If you make another $100-worth of purchase during the new statement cycle, this means you’ll most likely owe a total of nearly $210 at the end of the month. $10 of that only goes towards interest! Take note that this applies to even the best credit cards with minimal interest charges.

On the other hand, if you pay, say $50 towards your monthly bill, then only the $54.165 will carry over to next month. The card issuer will place interest only on that $54.165, which means an additional of only $1.13 on your next statement. That’s a lot better – and easier to pay off – don’t you think?

The best way to think about this is in terms of an installment loan. If you take out that same $100 as a loan, the sooner you pay off the loan, the less interest you will pay. While it may be difficult, it is ALWAYS better to pay off the loan as soon as possible, to minimize the amount of interest you’ll pay over the loan’s lifetime.

So, the higher the payment you make every month, the less your total debts and interest charges are.

Do Make Sure to Pay on Time, Even If It’s Only the Minimum Amount Due

In case you can only pay the minimum amount due, then at the very least, pay it on time! Depending on the card issuer, late fees can range anywhere from $27 to $38.

This isn’t the sole reason you want to make your payments on time. There’s also the fact that delinquencies can pull your card’s interest rate up. The worst thing is, your late payments can show up on your credit history.

Missing your due date has a serious negative impact on your credit score. More than a third of your credit score revolves around your payment history, after all. As such, even a single late payment – especially one left unpaid for more than a month – can already bring your score down.

When this happens, you’ll have lower chances of securing a new credit card. It also affects your opportunities for mortgage or other loan approval, and may force you to ultimately apply for a no credit check loan. Imagine that small, yearly interest of $25 (for every $100) can already reduce your chances of finally becoming a homeowner.

The fact alone that a late payment can already cost you up to nearly $40 should be enough to make you more cautious.

Don’t Let Your Credit Card Balances Go Too High

Living within one’s means is a golden rule to credit card use. Just because you can swipe for a $10,000 purchase doesn’t mean you should. Unless of course, it’s of utmost importance, such as medical or hospital bills.

In other words, use your credit cards up to the point that you’ll have no problems paying the minimum amount due. Of course, it’s still better if you can make greater payments or even pay off the entire balance for that month.

Having too high credit card balances also have negative effects on your credit. This leads to excessive utilization rate, which in turn can bring your credit score down.

Again, try to keep your utilization rate within 30%. That means $300 for every $1,000, or for a $10,000 credit limit, a balance of less than $3,000.

Do Prioritize Balances with the Most Expensive Interest Charges

Credit cards can vary greatly in terms of interest rates. On one end of the spectrum, you’ll find cards with zero interest introductory rates.

If you can’t pay off all (or majority of) your balances right away, then start with those credit card accounts with the highest interest rates. However, don’t forget to still pay the minimum amount due on the rest of your accounts though.

Do Prioritize Balances with the Most Expensive Interest Charges

Credit cards can vary significantly in terms of interest rates. On one end of the spectrum, you’ll find cards with zero interest introductory rates.

If you can’t pay off all (or majority of) your balances right away, then start with those credit card accounts with the highest interest rates. However, don’t forget to still pay the minimum amount due on the rest of your accounts though.

Do Your Research before Applying for a Credit Card

Before you can even begin carrying a balance on a credit card, you first need to apply for a card. So, it’s best you start proper credit card utilization from the very beginning. This is why you should spend as much time comparing your options before racking up those card charges.

We can help you find the best credit cards for your needs. Feel free to check out our extensive credit card reviews so you can locate the most appropriate credit card for you!