Is it better to pay off your credit card or keep a balance?

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One of the benefits of having a credit card is that it allows you to make large purchases without having to pay for them all at once. Many people who have credit cards choose to carry a balance on them. But, is carrying a balance really the best financial choice for your credit card bill?

The short answer to this question is “no”. Carrying a balance on your credit card may seem like the most comfortable way to deal with the purchases you make. However, carrying a balance will cost more in the long term.

Benefits of paying off your card in full

Paying off your credit card balance each month will offer some handy benefits. For starters, paying off your credit card in full could give you access to a grace period. A grace period is the timeframe after you make a purchase before your issuer charges interest on that purchase. A grace period usually starts on the last day of your billing cycle and ends when your payment is due. If you don’t carry over a balance during this period, it can serve as an interest-free period for purchases.

However, one thing to consider when paying off a balance is the timing of when you pay. If you are using up a lot of your available credit, and paying it off after your issuer has reported your balance, you will see a dip in your credit score. This is because, at the time of reporting, your credit utilization will be high. Credit utilization makes up 30 percent of your credit score calculation. Ideally, you want to keep your utilization between 10 and 30 percent of your available credit.

One more benefit of paying off your balance in full is the access you will have to available credit in case of emergencies. Life happens, and having available credit to deal with unexpected expenses is helpful. Having no balance, or even a low balance, on your accounts will provide you available credit when you need it most.

Should you pay off your credit card after every purchase?

When you use your credit card, you are building your credit score. And if you have a rewards card, you may be earning valuable points or cash back. While it’s important to pay off the purchases you make, paying off every purchase after you make it may actually work against you. In an interview with CNBC Make It, Greg McBride, chief financial analyst at Bankrate.com said, “If you’re paying with every single transaction, it may not even show that you’re even using credit and it’s reporting to the credit bureau as a zero balance all the time.” He went on to say, “With regard to revolving lines like credit cards, you want to demonstrate the ability to put expenses on the card and then to pay that off.” The key here is to make sure that you allow use of your card to be reported before paying it off.

If you only have one credit card, make sure 10 to 30 percent credit utilization is being reported before you pay off your balance. For example, if your credit line is $1,500, you’d want a minimum of $150 credit utilization and a maximum of $450. If you have multiple lines of credit, it’s okay to completely pay off some of your balances before reporting, but keep at least one in that ideal credit utilization range for reporting.

When you do pay off your balance, it’s best to do it in one payment. The one exception would be if you are trying to take care of a large balance. In that case, you may want to make one early payment to get your credit utilization down before reporting. After that you can make your normal monthly payment to take care of the rest of the balance.

Best practices for healthy credit

When used responsibly, credit cards are great tools for building your credit score. If you decide to carry a balance on your credit card, make sure you’re keeping tabs on your credit utilization. If keeping your utilization below 30 percent is a struggle for you, try to come up with a budget for credit card purchases before you make them to help plan for repayment. Save up for big purchases so that you can pay them down as much as possible and pay them off quickly. And consider paying your credit card bill early, which can help keep added interest payments low. It will also help to keep your credit utilization in a good place, which will ultimately help to keep your credit score healthy.