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. CNBC Select explains why and how carrying a balance can harm your financial health.
Should you pay your credit card in full?
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.
How carrying a balance becomes expensive
Let’s say you’ve bought a $1,400 laptop and charged it to your credit card. You could pay off the $1,400 balance in full but that would mean giving up breathing space in your budget for the month. You decide to carry the balance instead 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.
Credit cards and large 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 an incredibly helpful tool 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 Wells Fargo Active Cash® Card, one of CNBC Select’s picks for the best 0% APR cards. The card offers 0% intro APR for 15 months from account opening on purchases (20.24%, 25.24%, or 29.99% variable APR thereafter). With $100 monthly payments, you get rid of the balance in 14 months. You pay nothing in interest. Not only that, but you get $28 in rewards since the card earns 2% cash back on purchases.
Wells Fargo Active Cash® Card
On Wells Fargo’s secure site
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Rewards
Unlimited 2% cash rewards on purchases
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Welcome bonus
Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months
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Annual fee
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Intro APR
0% intro APR for 15 months from account opening on purchases and qualifying balance transfers; balance transfers made within 120 days qualify for the intro rate
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Regular APR
20.24%, 25.24%, or 29.99% variable APR on purchases and balance transfers
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Balance transfer fee
Introductory fee of 3% for 120 days from account opening, then up to 5% ($5 minimum)
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Foreign transaction fee
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Credit needed
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 in 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 — so striving for 0% is always the best approach.
If you want to check your credit score and see how your card balances are affecting it, you can do so by using 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
On Experian’s secure site
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Cost
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Credit bureaus monitored
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Credit scoring model used
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Dark web scan
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Identity insurance
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 happens.
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.
- 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.
- 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 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.
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Bottom line
If you have a credit card balance, it’s typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt. Plus, using more than 30% of your credit line is likely to have a negative effect on your credit scores. Work on making it a habit to always pay off your credit card in full. When it’s not possible, make sure you have a plan to get rid of the debt and prevent it from turning toxic.
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. See our methodology for more information on how we choose the best credit cards.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
