If you have a balance on your credit card, you might have the option to pay it off in full or carry it from month to month. Most of the time, paying off your credit card in full is the best approach.
Carrying a balance on your credit card does not help your credit score. Doing so can also result in extra fees and interest charges. CNBC Select explains why and how carrying a balance can harm your financial health.
Why carrying a balance isn't a good idea
First and foremost, carrying a balance costs money. Interest accumulates daily on most credit cards, and coupled with high APRs, it's a recipe for expensive debt.
Let's say you've bought a $1,400 laptop and charged it to your credit card. Instead of paying it off, you carry the balance and pay $100 per month. At a 23% APR, it takes you 17 months to get rid of the debt and you end up paying $245 in interest. That's 15% of your laptop's price.
Naturally, the more debt you have and the less you pay monthly, the more you'll lose to interest. Not to mention, the balance will take you longer to repay. That's how people often fall into the credit card debt trap. In the example above, a single laptop purchase might not do much harm, but it's too easy to keep using your credit card, adding to the balance. Once such a spending pattern solidifies, you risk finding yourself in toxic debt.
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How to manage large credit card purchases
Using a credit card for a big purchase can still be a good strategy — you just need discipline and the right credit card. Namely, a 0% APR credit card is incredibly helpful when it comes to financing expensive items. This type of card comes with a promo period during which interest doesn't apply, allowing you to avoid APR charges. The goal with this method is to stick to your repayment plan and pay off the balance before the intro period ends. Otherwise, you'll be hit with the regular purchase APR.
Let's go back to our laptop example. To buy the computer, you sign up for the Chase Freedom Unlimited®, one of CNBC Select's picks for the best 0% APR cards (see rates and fees). The card offers a 0% intro APR for 15 months from account opening on purchases and balance transfers (18.24% - 27.74% variable APR thereafter). With $100 monthly payments, you would get rid of the balance in 14 months. You pay nothing in interest. Not only that, but you get $21 in rewards since the card earns 1.5% cash back on purchases.
The Chase Freedom Unlimited® is a no-annual-fee card that earns generous cash-back on everyday purchases and a lucrative welcome bonus.
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select's editorial staff.
- Earn a $200 Bonus after you spend $500 on purchases in your first 3 months from account opening
- Enjoy 5% cash back on travel purchased through Chase TravelSM, our premier rewards program that lets you redeem rewards for cash back, travel, gift cards and more; 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery service, and 1.5% on all other purchases.
- No minimum to redeem for cash back. You can use points to redeem for cash through an account statement credit or an electronic deposit into an eligible Chase account located in the United States!
- Enjoy 0% Intro APR for 15 months from account opening on purchases and balance transfers, then a variable APR of 18.24% - 27.74%.
- No annual fee – You won't have to pay an annual fee for all the great features that come with your Freedom Unlimited® card
- Keep tabs on your credit health, Chase Credit Journey helps you monitor your credit with free access to your latest score, alerts, and more.
- Member FDIC
Balance transfer fee
Intro fee of either $5 or 3% of the amount of each transfer, whichever is greater, in the first 60 days. After that, either $5 or 5% of the amount of each transfer, whichever is greater.
Foreign transaction fee
3% of each transaction in U.S. dollars
How your credit card balance affects your credit
A credit card balance puts a beating on your bottom line — but what about your credit score?
The notion that revolving a balance can help your credit is a stubborn credit score myth. In reality, paying off your credit card in full every month is best both for your wallet and your credit health.
This has to do with a credit utilization rate, or how much of your available credit you're using. This is the second most influential credit score factor and is measured as a percentage. For example, if you have a $10,000 credit limit and a $1,000 balance, your credit utilization rate is 10%.
To avoid credit damage from high credit utilization, you want to keep it under 30%. The lower the rate, the better for your credit — it is recommended to aim for a credit utilization rate of 10% or below for the best score.
If you want to check your credit score and see how your card balances are affecting it, you can do so with a credit monitoring service. One of our top choices is Experian free credit monitoring which tracks your FICO score and gives you great insight into your Experian credit report.
Experian Dark Web Scan + Credit Monitoring
Cost
Free
Credit bureaus monitored
Experian
Credit scoring model used
FICO®
Dark web scan
Yes, one-time only
Identity insurance
No
Terms apply.
How to practice good credit card habits
A credit card is simply a financial tool. If you use it right, it can help you build a better life. If you use it wrong, the opposite could happen.
Paying your credit card in full and on time is key to correct credit card usage. Here are a few habits to develop to help you do just that.
Remember your budget
It can be easy to go overboard with purchases if you're not keeping track of your money. Create a healthy budget and know how much you can afford to spend on your needs and wants every month.
If you want to make budgeting easier, consider using a budgeting app like You Need a Budget (YNAB) that connects to your bank and credit card accounts and does most of the work for you.
You Need a Budget (YNAB)
Cost
34-day free trial then $109 per year ($9.08 per month) or $14.99 per month (college students who provide proof of enrollment get 12 months free)
Standout features
Instead of using traditional budgeting buckets, users allocate every dollar they earn to something (known as the "zero-based budgeting system" where no dollar is unaccounted for). Every dollar is assigned a "job," whether it's to go toward bills, savings, investments, etc.
Categorizes your expenses
No
Links to accounts
Yes, bank and credit cards
Availability
Offered in both the App Store (for iOS) and on Google Play (for Android)
Security features
Encrypted data, accredited data centers, third-party audits and more
Terms apply.
Treat your credit card like a debit card
If you don't have the money in your checking account (and monthly budget) to make a purchase, you most likely can't afford it. Don't put it on your credit card.
Make rewards work for you
Rewards credit cards can be a fantastic way to get some money back on your everyday purchases and even earn free travel. However, don't change how you spend purely to earn more cash back or points. Your card should fit your spending habits, not the other way around. Similarly, you don't want to spend more than you can afford just to meet a minimum spending requirement for a welcome bonus.
Keep using your card
While you don't want to carry any balance, make sure you're still using your credit card regularly — at least on small charges. Otherwise, your credit card issuer can potentially close your account after months or years of inactivity. If you're only using a card for small, infrequent purchases, it can be helpful to turn on autopay, to ensure a payment never gets overlooked.
If you need to carry a balance, have a plan
Don't take on credit card debt without a solid strategy to repay it. The solid strategy is realistic and one you can stick to. Paying down debt is a personalized process, so not every method will be right for you. There are many different plans to pay down debt so it's important to find one that feels achievable to you.
FAQs
Does carrying a credit card balance help your credit score?
No, carrying a credit card balance will not positively affect your score, and may actually hurt it.
Does credit utilization matter if you pay in full?
Yes, your credit utilization still matters even if you pay your bills in full. Since there is no standard date or time credit card companies report to agencies, it's hard to prepare your balance in advance. It's often best to try and keep your credit usage below 30% with some experts suggesting even lower.
Should you pay your credit card's current balance or statement balance?
You should pay your credit card statement balance in full by the due date to avoid additional interest or fees. While you can opt to pay your card's current balance, there's usually not much benefit outside of managing your credit utilization and will reduce your available funds.
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Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every credit card guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of credit card products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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