The average interest rate on a credit card is now 16.65%, according to Forbes. That’s some high-stakes borrowing if you carry a balance, which is why every credible expert cautions against piling up revolving debt.
But is carrying a balance on a credit card always bad?
Keep reading to find out when it might be OK to carry a balance on a credit card — and when it’s definitely not.
How Does Carrying a Credit Card Balance Affect Your Credit Score?
Your outstanding balances make up 30% of your FICO credit score — at 35%, only your on-time payments carry more weight. The more of your available credit you utilize by carrying a balance, the worse it is for your score. That’s especially true when you start using more than about 30% of your credit, which is when lenders begin to see you as possibly being overextended.
This is true both for individual cards and all of your cards combined.
Utilizing too much open credit can certainly harm your credit score, but carrying a balance can work in your favor, too, albeit rarely. According to FICO, “In some cases, a low credit utilization ratio will have a more positive impact on your FICO scores than not using any of your available credit at all.”
What Are the Benefits of Carrying a Balance?
Competition in the credit card market is fierce, and many companies battle for customers by offering introductory deals with 0% APR on all purchases or balance transfers.
If you can get a card with 0% APR, you can take advantage of the intro period and carry a balance for purchases that you absolutely need to make but want to string out into payments, provided those payments are interest-free. Keep in mind, however, that once that intro period ends, your interest payments begin, so make sure you pay off your balance beforehand.
Balance transfers are the other time when it makes sense to carry a balance on a 0% APR credit card. By carrying a balance there instead of on high-interest cards, you’re sheltering your balance from finance charges while you pay what you owe at a pace you can handle.
What Are the Consequences of Carrying a Balance?
Unless you’re basking in 0% APR during an introductory period, it’s always a bad idea to carry a balance. Credit card interest typically compounds daily, and once it’s added to the principal amount you borrowed, interest begins accruing on that larger amount, and the process continues into perpetuity.
When you pay your statement balance in full for two months straight, however, you can use your card without any finance charges, provided you pay your balance in full every month thereafter.
Let’s say you have a credit card with a 15% APR and you carry a $2,000 balance on it for 12 months. That means you would pay $300 on that balance in interest alone. If you used that $300 to pay down the balance, it would lower your debt while improving your all-important credit utilization ratio, which would likely improve your credit score.
Should You Carry a Credit Card Balance?
If you have a 0% APR credit card offer, by all means, use it to carry a balance on your credit card. Just remember to pay off the balance by the time the intro period ends.
However, if you carry a balance on your credit card and have interest piling up on that balance each month, you risk joining the legions of Americans who spend their days drowning in the stress and anxiety that comes with staring down insurmountable credit card debt.
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Andrew Lisa contributed to the reporting for this article.