Is it Better to Pay Off Your Credit Card or Keep a Balance?

If you’re like any other person who lives in the US, you probably want to improve your credit score or maintain your high credit score. At Credit Score Planet, we often get asked whether it is better to pay off a credit card or keep a balance on it. There are many myths about credit scores out there, and one of them is that if you keep a balance on your credit card, you will increase your credit score. So, is it better to pay off your credit card or keep a balance on it? We will answer this below in much detail.

Is it Better to Pay Off Your Credit Card or Keep a Balance?

It is better to pay off your credit than keeping a balance on it. The credit report agencies like to see people who only use as much credit as they can afford to pay off at the end of every month. So, paying off the balance on your credit card will help your credit score.

Leaving an unpaid balance on your credit card will not help your credit score. If anything, leaving an unpaid balance may hurt your credit score because it causes an increase in your credit utilization ratio, which is something that has the potential to reduce your credit score.

So, if you were wondering whether to pay off your credit cards or leave a balance on them, it is always best to pay them off.

Also, experts have agreed that keep your overall credit utilization below 30% is the best way to ensure that your credit score does not decrease. Exceeding a 30% credit utilization may cause a substantial decrease in your credit score. This is true when it comes to your overall credit utilization, as well as utilization of an individual credit card account. So, always try to keep your utilization below this threshold.

How Much Can Paying Off Your Credit Card Improve Your Credit Score?

Paying off your credit card instead of keeping a balance can substantially improve your credit score. This is especially true if you have utilized a significant portion of your overall available credit or the overall portion of your available credit for the specific credit card account.

This is so because keeping your credit utilization below 30% on individual accounts, as well as your overall credit utilization is considered as an important factor by credit reporting agencies when calculating your credit score. So, staying beyond this threshold shows creditors and lenders that you’re borrowing responsibly and that you’re not credit hungry.

So, if you pay off a significant portion of your balance, your credit score may and probably will increase once the paid off balance is reported by your bank to credit reporting agencies, such as Experian, Equifax, and Transunion. That said, if you make small payments and eventually pay off your balance, you may notice small and incremental changes to your credit score as pay off the balances for your credit cards. If you want to see a significant jump in your score, you should pay off big chunks of the debt that you owe.

After paying off your credit cards and improving your credit score, to maintain the improvement in your score, you should keep the accounts that you’ve paid off open and in good standing. This is so because closing an account that’s in good standing will decrease the overall age of your credit accounts, as well as cause your credit utilization to increase. So, keep making payments on your account, and keep it open.

Your Credit Card Payment History

The single most important factor in calculating your credit score is your payment history. So, ensuring that you make timely payments on your accounts, including credit cards is the best thing you can do to improve your credit score or maintain it. One way you can establishing a strong payment history is to make small purchases using your credit cards, and paying your cards in full and on time every month. Also, if you haven’t been paying off your credit cards, on way to improve your credit score is to pay your credit cards to make them current.

Does Paying Off Your Credit Card in Full Increase Your Credit Score?

Paying off your credit cards in full is always the smart thing to do because it shows lenders and creditors that you’re only using as much credit as you’re able to pay off. Also, paying off your credit card in full means that you won’t have to pay interest on the money that you’ve borrowed. So, does paying off a credit card in full increase your credit score? Yes, paying off a credit card in full can increase your credit score, especially if you have used a significant portion of your credit limit. Although paying a credit card in full is not necessary to maintain a good or excellent credit score, paying the minimum payment on time will help you build a good credit score as this shows lenders that you’re able to pay off the amount of money that you’re borrowing on time.

Why is Leaving a Balance on Your Credit a Bad Thing?

Leaving a balance on your credit card is a double-edged sword because although it shows creditors that you’re regularly making payments on your credit card accounts, it shows creditors and lenders that you’ve used more credit than you can afford to immediately pay off, meaning this can show creditors that you’re having money problems since you can’t completely pay off your account.

Also, from your own perspective, when you leave a balance on your credit card, you’re paying interest on the money you’ve borrowed. The interest can become a problem if you have borrowed a large amount of money on your account. Oftentimes, by the time you pay off an account, you may have ended up paying double the amount of money that you’ve borrowed.

Paying off an account in full makes you look better in the eyes of the credit reporting agencies, as well as creditors and lenders. Paying off a balance in full shows them that you have the ability to borrow money and pay it off entirely, reducing the chances that you have money problems.

So, if you believed that carrying a balance on account is a good thing and that paying it off in small chunks over time will improve your credit score, you should know that paying off the balance entirely will have a bigger and better impact on your credit score, especially if you do this often.

How to Build and Maintain Credit?

To build and maintain a good credit score, you need to show lenders and creditors that you have the ability to borrow money and pay off the money as agreed. Repeatedly borrowing money and paying it off in full is the best way to build a good credit score. Payment history represents the biggest chunk of every American’s credit score, so ensuring that you make timely payments on your accounts is the best way to improve and maintain your credit score. Missing even one payment can have a devastating impact on your credit score. Typically, making a late payment won’t hurt your credit score unless the creditor reports your missed payment to one of the three major credit reporting bureaus. Creditors do not often report an account unless the payment is more than 30 days late. So, if your late on making a payment, make sure that you make your payment within 30 days of the due date so that it’s not reported to the credit reporting agencies.

Frequently Asked Questions

1) Should you pay off your credit card immediately or over time?

The advice of experts is to spend as much money on your credit cards as you can pay off in full at the end of the month. Paying off a credit card in full immediately shows creditors that you’re only borrowing as much money as you can afford to pay off. So, if you have a credit card balance and you have the ability to pay it off, you should pay it off entirely as this will maximize your credit rating.

2) Should I pay off my credit card in full?

Yes, if you have the ability to pay of a credit card in full, you should do so, as this makes you look reliable to creditors and lenders because it shows them that you’re only utilizing as much credit as you can afford to pay off.

3) Having a credit card with a zero balance

Having a credit card with a zero balance especially after paying off your credit card is seen as a positive factor by credit reporting agencies and creditors because it shows them that you’re borrowing responsibly. To improve your credit score, makes small purchases or purchases that you can afford to pay off entirely, and zero out your balance at the end of the month to improve and maintain a good credit score.

4) What happens if I don’t pay my credit card balance in full?

If you don’t pay off your credit card balance in full, make sure to make the minimum payment, at least. If you can pay off more than the minimum payment, this is better. Paying off as much of your account is the best thing you can to do to improve your credit score. This is so because decreasing your credit utilization generally improves one’s credit score.

5) When should I pay off my credit card?

Ideally, you should pay off your credit card entirely as soon as you’ve used credit. However, we understand that life happens and not everyone has the ability to make full payments on their credit cards, so make sure that you at least make the minimum payment, and if you can, trying to make as big of a payment as possible. This shows creditors that you can pay off your account as agreed and that you’re borrowing responsibly.