Carrying a credit card balance allows you to pay off purchases over time by rolling balances from one billing cycle to another. Card issuers typically charge interest, or annual percentage rates (APRs), on unpaid balances that range from 11% to 30%. However, maintaining cards with high balances can hurt your credit score if you’re not careful.
Reasons to Consider Carrying a Balance
While it’s a good idea to pay off your balances every month to avoid interest charges, you’re only required to make a monthly minimum payment. This means you can use your card to purchase items you don’t have immediate cash for but can pay off later. There are several situations when you might consider carrying a balance, such as if you need to:
- Access more purchasing power: If you need to make a larger purchase, you can finance it on your card instead of saving up the money. While this means you’ll have to carry a balance, you’ll be able to pay it down over time with interest.
- Cover unexpected expenses: If you have unexpected emergency expenses, like car repairs or medical events, you can use your card to help finance them. This allows you to get the services you need without interrupting your cash flow.
- Take advantage of a 0% APR offer: 0% APR credit cards allow you to carry a balance without paying interest for nine months or more. If you have a card with this offer, carrying a balance wouldn’t become an immediate financial burden. However, it could hurt your credit score.
- Finance business purchases: By using a business credit card, you can fund startup equipment and float other business expenses easily while paying it off over time. What’s more, business credit cards come with sign-up bonuses and introductory 0% APR offers like personal credit cards.
Credit cards are handy financial tools that are, at times, necessary to help make purchases. If you choose to carry a balance, it’s best to set a payoff deadline and make timely payments.
Reasons to Avoid Carrying a Balance
Although carrying a credit card balance can be a convenient way to make purchases without cash, it can hurt your credit score and cost you more money in the long run. There are many cases in which you should avoid carrying a balance, such as when you want to avoid:
- Adding more debt on top of other high-debt cards: Carrying balances on multiple cards can increase your credit utilization ratio and hurt your credit score. If you have other debt, it’s best to pay it down before you consider carrying a balance on another card.
- Potential interest charges: Issuers charge interest on any unpaid balances, which means if you carry a balance, you can fall into a debt trap. If you want to avoid potential interest charges, pay off your card in full monthly.
- Damaging your credit: Carrying a balance will increase your credit utilization ratio and can decrease your credit scores. Maintaining low balances can help you improve your credit.
- Penalties on charge cards: Charge cards are typically required to be paid in full every month, but some offer programs that allow you to carry a balance with interest. These APRs tend to be even higher than standard cards and will cost you more money.
Credit cards are a great tool, but they shouldn’t be your go-to for paying for everything. There are circumstances when using a credit card is beneficial like an emergency car repair, hospital bills, or school expenses. However, because cards charge interest that increases the total balance you owe, you should carry a balance sparingly. If you do plan on carrying a balance, be sure you can afford your monthly minimum payment.
The Cost of Carrying a Balance
The cost of carrying a balance lies in the interest your card accrues during the repayment period. The interest you’ll pay is dependent on three factors: your APR, your balance, and how long you carry that balance. As a result, carrying a balance can be costly. However, if you use a 0% APR offer to pay off the entire balance before the no-interest period ends, you can make purchases now, pay off your card later, and avoid interest altogether.
According to the 2019 consumer credit card market report, the average APR for general-purpose credit cards was 20.03%. The table below illustrates the total interest you’ll pay based on your balance and the number of months it takes to repay that balance, assuming you make equal monthly payments throughout your repayment term.
Example of Carrying a Credit Card Balance
Total Interest for 6-month Payoff
Total Interest for 12-month Payoff
Total Interest for 24- month Payoff
How Carrying a Balance Affects Your Personal Credit
Carrying a balance on a credit card can damage your credit if it causes your credit utilization ratio to go above 30%. Your credit utilization, or the ratio of your total credit card balance compared to your total credit limit, accounts for almost a third of your total credit score.
As a rule of thumb, it’s best to keep your credit utilization ratio at 30% or below. For example, if your card has a limit of $1,000, it’s best to have a maximum balance of $300 or less. You can still carry a balance and use a card to your advantage as long as you keep your balances low to help protect your credit.
How Carrying a Balance Affects Your Business Credit
Carrying a balance can also affect business credit scores if you own a business. Although most business credit cards require your personal information, your business credit score will also benefit from keeping your business credit utilization ratio under 30%. By paying on time and keeping your credit utilization ratio below 30%, you can maintain strong business scores.
5 Tips for Managing a Credit Card Balance
- Make timely payments: Paying your credit card statement on time each billing cycle will prevent delinquencies, help pay down your balances, and lower your credit utilization ratio.
- Keep your credit utilization ratio below 30%: Maintaining a credit utilization ratio between 0% and 30% can help keep your balances manageable and can protect your credit score.
- Create and follow a payoff plan: You can reduce interest charges and save money by using an online credit card calculator to determine an attainable payoff plan like paying off your balance in six months or less.
- Make multiple monthly payments: Make more than the minimum payment by setting up multiple automatic payments each billing cycle. Making multiple payments will help you pay off balances quicker and reduce interest charges.
- Pay off balances before any 0% APR offers end: When you have a card with an introductory interest-free financing period, you should pay off the entire balance before the introductory period ends, and the ongoing APR comes into play.
Frequently Asked Questions (FAQs)
While we covered a lot of content around carrying a balance, there are a few commonly asked questions that we’d like to address here. If you have any additional questions, please feel free to leave a comment below, and we’ll respond as soon as we can.
Does carrying a credit card balance hurt your score?
Carrying a balance can harm your credit score when it increases your credit utilization ratio above 30%. Your credit utilization ratio makes up nearly one-third of your overall credit score. To maintain a low credit utilization ratio, be sure to pay off any transactions you make.
How much of a balance should you leave on your credit card?
If you choose to carry a balance, it should be less than 30% of your credit limit. For example, if you have a credit limit of $500, you should keep your balance below $150. This will help you maintain a low credit utilization ratio and prevent your credit score from falling.
Is it better to pay off your credit card or keep a balance?
It’s best to pay off your balance in full each billing cycle to avoid interest charges. Any unpaid balances will accrue interest as you carry them from month-to-month, which means you’ll end up paying more in interest when you carry a balance.
Carrying a balance on a credit card can be beneficial if you need to cover unexpected expenses or have a card with a 0% APR offer. However, you may face repercussions like damaging your credit score. If you need to carry a balance, make a plan to pay it off in the shortest amount of time possible.