Is It Better To Pay Off Your Credit Card Entirely or Keep a Balance?

On the road to financial freedom, you’ll have to make many decisions. One of these is deciding whether to pay off your credit card balance in its entirety or to keep a balance.

In this article, we've answered the "Should I pay off my credit card in full" question and several other important ones you might have. Stay with us and learn more about financial tricks that will save you time and money!

What Is a Credit Card Balance?

A credit card balance is the amount of money you owe to your credit card company. If you have a balance of $0, it means you've paid your statement in full and don't owe anything. However, if you only make the minimum payment and keep carrying a balance on your credit card, you'll be charged interest on the remaining balance.

To put it simply: every time you buy something using your credit card, your balance will increase. If you don't pay back your credit card debt, the amount that's left will be carried over to next month's bill, and you'll be charged interest on it. 

Knowing that the total national credit card debt in the United States was $756 billion in Q3 of 2020, it's safe to say that you should do all you can to get rid of your credit card balance.

How Do Credit Card Balances Impact Your Credit Score?

The biggest factor in your credit score is your payment history, i.e., whether you pay your bills on time. This includes credit card balances.

In short, if you carry even the smallest balance from month to month, it will have a negative impact on your credit score. On the other hand, if you always pay your balance in full, your score will positively reflect that responsible behavior.

In addition to your payment history, your credit utilization ratio is also a factor in your score. This is the amount of debt you have compared to your credit limit. So, if you have a high balance and low credit limit, your ratio will be higher, which can negatively impact your score.

However, if you have a low balance and a high credit limit, your ratio will be lower, which is better for your score. Generally speaking, a utilization level above 30% will quickly start to negatively impact your FICO score, and paying off your credit cards in full will help lower this number.

There are a few other factors that play into your credit score as well, but payment history and utilization are the two biggest ones. So, if you're trying to improve your score, it's generally best to pay off your balance in full each month.

What About Low-Interest Cards?

Even though many credit card companies offer low-interest credit cards and a variety of zero-percent introductory APR credit cards (for a set period of time), carrying a balance can still pose an increased risk of debt. If something unexpected occurs and you're unable to make a payment, you'll end up accruing interest and late fees, which can quickly add up. 

In some cases, your interest rate could even increase after the set period of time, which would further add to the cost of carrying credit card balances on your cards. So, if you're trying to improve or maintain a good credit score, it's generally best to avoid keeping a balance.

Benefits of Paying Off Your Credit Card in Full

Paying your credit card balance in full each month has a few key benefits:

• You'll avoid paying interest on your balance.

Your credit card bill typically comes with a grace period, which is the time you have to pay your bill in full before interest is charged. However, if you don't pay off your balance during this time, you'll be charged interest on the remaining balance, which can quickly add up. By paying in full each month, you'll save money and keep more of your hard-earned cash. 

• Your credit score will improve.

As we’ve mentioned, credit card payment history and credit utilization are the two biggest factors in your credit score. So, by paying off your balance in full each month, you'll improve both of these factors, which will likely lead to higher credit scores.

• You might get a credit limit increase.

Credit bureaus typically like to see a credit utilization ratio of 30% or less. If you have a good history of paying your balance in full and on time each month, your credit card issuer may raise your credit limit. This can be beneficial because it will lower your credit utilization ratio, too, which is good for your score.

Best Way To Pay Off Credit Card 

Now that we’ve established that paying off credit card debt in full is the best route you could take, you may be wondering what the best way to pay off your debts is. Here are some options to explore.

Pay Off Your Balance All at Once

The simplest way to clear your credit card debt is to pay the entire balance at once. This will help you save on interest and get out of debt quickly. If you have the money saved up, this is a great option. 

Snowball Method

“But what should I do if I cannot pay off my credit card bill in full?” - you might wonder. If you want to reduce your debt, a good idea to consider is the snowball method. 

You’d start by paying off your credit card with the smallest balance first, while still making minimum payments on the others. Once that debt is cleared, you would move on to your next smallest balance, and so on. The idea behind this method is that it gives you a quick win to help motivate you to keep going. 

Avalanche Method

The avalanche method is similar to the snowball method, but instead of starting with the smallest balance, you start with the card that has the highest interest rate. The logic behind this method is that you’ll save more money in the long run by tackling your most expensive debt first.

Debt Consolidation

To pay your credit card in full, you might consider consolidating your debt. This means taking out a loan to pay off your credit card debt. This can be a good option if you have a lot of debt and you’re struggling to make your payments. When done correctly, debt consolidation can help you save money on interest and get out of debt faster. 

The Bottom Line

With all that said, we’ve answered the titular question and shed some light on how you can best pay off your credit card debt in order to save on interest, improve your credit score, and potentially even get a credit limit increase. 

If you have accrued a lot of debt and can't afford to clear it at once, consider the snowball or avalanche methods to get out of debt more quickly. Alternatively, you might want to explore debt consolidation, as it can help you pay off your debts and improve your financial situation.