Is It Better To Pay off Your Credit Card Or Keep A Balance?

In a perfect world, no one would ever carry a balance on a credit card. Carrying balances usually means you are paying interest on your purchases, so whatever you bought ends up costing you more than the original purchase price.

Even with low or no-interest promotions, carrying debt is a risk. Besides the risk of not paying off the balance before the intro period ends, if your balance is high in relation to your credit limit, you could also damage your credit score. Let’s break down how carrying a balance can affect your credit and when you should pay off your credit card.

Does keeping a balance help your credit score?

In short, carrying a balance does not help your credit score, so it’s always best to pay your balance in full each month.

Contrary to a popular credit card myth, keeping a balance doesn’t help your credit score. If your balances are high in relation to your credit limits, it may even do damage.

The impact of not paying in full each month depends on how large of a balance you’re carrying compared to your credit limit. Your credit utilization ratio, or the amount of available credit you’re using compared to the amount available to you at any given time, is an important factor in your credit score. Credit utilization is second only to your payment history and counts for about 30 percent of your total FICO score. VantageScore also uses a weighted scale, with credit utilization accounting for 20 percent of your VantageScore 4.0 score.

The lower you can keep your credit utilization, the better it will be for your score — assuming, of course, that all the other factors that make up your credit score are in good shape.

Those who enjoy the best credit scores often have utilization in the single digits, pay their bills on time, don’t close old accounts so as to maintain their credit history, have a good credit mix and only open new accounts as needed.

How credit utilization works

Here’s a simple illustration of how credit utilization works.

Let’s say you have a credit card with a $500 limit, and you use $250 to make a purchase. Your credit utilization ratio is then 50 percent, which will likely have a negative effect on your credit score. Conventional wisdom says not to use more than 30 percent of your available credit, or $150 in this case, to keep from losing points on your credit score.

If you have additional credit cards, your credit score takes those balances into account, as well. Here’s how that might look:

• Card #1: $500 credit limit, $250 balance
• Card #2: $2,000 credit limit, $400 balance

In this case, your total credit limit is $2,500, and you’re currently using $650 of that limit. Therefore, your credit utilization is 26 percent — which is below the recommended target maximum of 30 percent to maintain a solid credit score.

Is it better to pay in full or carry a small balance?

The best advice is to pay in full, every time. Paying your balances in full every month demonstrates that you are living within your means. In other words, you are not using credit cards to extend your income but as a way to spend the income you already have. This is a sign of good overall financial health.

When does your issuer report your balance?

If you are carrying a balance, it’s important to know when your credit card issuer reports your account information to the credit bureaus. Your balance on that day will be what’s reported to the bureaus, and it will be factored into your credit utilization.

Pros of paying off your credit card in full

• Save money on interest
• Maintain a low credit utilization ratio
• Enjoy the full value of your rewards since there are no interest charges cutting into them

Is it ever helpful to carry a balance?

No, carrying a balance month to month is never helpful. Showing card usage is helpful, but you can do that without carrying a balance and running up interest charges.

Remember, banks report balances once a month, usually around the close of your statement period. If you have a balance on your card when the statement closes, that will be reported and serve as evidence to creditors that you are using your cards. However, there’s no reason you have to carry that balance past the statement due date and accrue interest charges.

Consumers with exceptional credit will likely have some balance reported each month. That demonstrates they’re using their credit cards, but it doesn’t mean they’re carrying a balance month to month and racking up interest charges. Neither the major credit bureaus nor FICO say it’s necessary or helpful to carry a balance to improve your score.

Additionally, the balances consumers with exceptional credit do show are manageable. Recent data from Experian shows that consumers with exceptional credit scores (800 to 850) had an average utilization rate of just over seven percent in Q3 of 2024. However, chasing the perfect credit score can lead to far more trouble than it is ultimately worth.

So, your best course of action is to keep a small balance ahead of your statement date and then pay it off within the grace period to show some account activity and still avoid interest charges. Remember, carrying a balance can cost you money in interest while hurting your credit score by increasing your credit utilization ratio.

When carrying a balance hurts your credit score

Carrying a balance will affect your credit utilization ratio, which makes up 30 percent of your FICO credit score calculation. This applies even if you’re carrying a balance on a 0 percent introductory APR credit card.

There is also the more obvious consequence: Carrying a balance costs you money through interest charges. Using low-interest credit cards and cards with 0 percent APR intro offers can help you strategically avoid or minimize interest charges on large purchases.

However, these offers last for a specific period of time, often 12 to 18 months. While carrying a balance on a card like this may make financial sense in some scenarios, it’s important to keep in mind that it also comes with increased risk if you pass the introductory period with a balance.

Other scenarios that may impact your credit score include:

• Failing to make the minimum payment on your balance
• Racking up charges for both purchases and balance transfers, but your intro APR offer only applies to one or the other — not both
• Losing your grace period and then owing interest

The bottom line

Using more than 30 percent of your combined credit limit not only carries financial risk, it can also hurt your credit score. Keeping your balances low helps improve your score while minimizing risks. The lower your balances, the better your score.

Carefully consider how you want to use your available credit based on your goals and your personal situation. Keep in mind, however, that the best way to maintain a high credit score and lower your financial risk is to pay your balances in full and on time, every time.

Frequently asked questions about credit card balances

• What do you do if you overspend?

  It’s never ideal to find yourself with a larger balance than you can handle. The answer to this quandary is to pay your balance down as much as possible, especially if you have an intro 0 percent APR offer and the regular APR is about to kick in. That way, you’ll minimize the interest you get charged.

  If you’re in a pinch, you could transfer your balance to another credit card with a 0 percent intro APR period. This can be a slippery slope, though. You don’t want to end up in a similar (or worse) situation in a few months. If you choose this route, make sure you have a plan to eliminate your debt within the new card’s 0 percent APR period.

• Why carry a balance during your intro 0 percent APR period?

  There are only a few instances where you may need to carry a balance on an intro 0 percent APR card:

  1. You’re transferring a balance from a high-interest card. Let’s say you’re already struggling to pay off a large balance on a credit card with a high interest rate. Transferring the amount to a balance transfer card with a 0 percent intro APR can allow you to pay some of your balance off each month without incurring more interest.
  2. You need to make a large purchase you can’t pay off immediately. You might need to use your card to pay for a big-ticket item you need right away. Carrying a balance on something you need time to pay for is a good use of a 0 percent intro APR offer, but this should be used for emergencies only.
  3. You want to take advantage of other balance transfer card incentives. Some credit cards offer additional benefits that can help you manage your balance. For example, the Chase Slate Edge℠* offers a 2 percent APR reduction each year if you spend $1,000 by your next account anniversary and make on-time payments.

*The information about the Chase Slate Edge℠ has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.