In a perfect scenario, no one would ever want to keep a balance on their credit card. Not paying in full means you carry over some balance to the next month, and you’d be liable to pay interest on the pending balance.
Whether you get a travel credit card or a cashback credit card for online purchases, it is important to pay off the balance. Let’s take a look at why paying in full is so important.
Keeping a Balance and Its Effect on Your Credit Score
One thing to remember is that keeping a balance on your credit card will not improve your credit score. Therefore, it is always advised to pay off your balance in full at the end of each billing cycle. Having said that, you might experience an adverse effect on your credit score if you leave a balance on your credit card.
The impact will depend on the amount of balance you’re carrying each month compared to your credit limit, commonly known as the credit utilization ratio. The ratio plays a major role in constituting your credit score, and you need to keep it below 30% to maintain a healthy credit profile.
Should You Keep a Small Balance?
Paying your bill in full at the end of every billing cycle shows that you manage your financial situation responsibly and live within your means. In simple terms, this indicates you’re not using a credit card to extend your income but as a way to spend your existing income strategically.
Some credit card users might be tempted to carry a small balance to show that they are using the credit facility provided by the bank. But this is unnecessary because no major credit bureau advises users to keep a balance.
Hurting The Credit Score
A major reason not to carry your balance to the next month is to avoid interest charges. However, some credit cards offer 0% APR for an introductory period. Now, you can afford to leave a balance in such facilities, but you need to be aware that you might be charged a hefty interest when the introductory period ends.
But there might be situations beyond your control, such as a loss of income or sickness, which may require large spending on your credit card. In such situations, you might be left with a huge balance to repay, and if you fail to make these payments, it may hurt your credit score.
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