Using credit cards responsibly plays a role in building a positive credit history to show lenders you can be trusted with money. However, your use of cards doesn't have to cost you a fortune. Carrying a balance is harmful to your bottom line, and it's not going to help your credit score. Paying off a credit card benefits your credit score and bank account.
Save on Interest
Credit card interest rates are some of the highest of any type of loan, so when you carry a balance, you're paying a steep price. As of January 2014, the Bankrate website lists the average fixed-rate card with interest rates higher than 13 percent and the average variable-rate card with interest rates higher than 15 percent. At 15 percent, carrying a balance of $1,000 for 12 months costs you $150 in interest alone.
Credit Score Myths
You may have heard that it's better to carry a balance on your credit cards for the sake of your credit score, so paying some interest is worth it in the long run. Not true, reports the TIME Business & Money website. You'll just be paying extra to the credit card companies. Credit cards report your balance to the credit bureaus at the time your statement closes. Whether you charge $1,000, pay it in full and then charge another $1,000 the next month, or you charge $1,000, pay the minimum and charge just enough to get to $1,000 before your next statement, it looks the same on your credit report.
Optimal Credit Utilization Ratio
Part of your credit score comes from your credit utilization ratio, which measures how much of your credit limit you are using at a time. For example, if your credit limit is $8,000 and you owe a balance of $2,000, you're using 25 percent of your available credit. According to the Chicago Tribune, keeping your credit utilization ratio lower than 30 percent benefits your credit score. If you keep your card balance at half the available credit, you're damaging your credit score -- not helping it.
Tips for Loan Applications
If you plan to apply for a loan in the near future, minimize your credit card use to lower your debt-to-credit ratio. Don't max out your credit cards this month, even if you're going to pay the balance in full. That way, your credit utilization ratio is low when prospective lenders pull your credit score.
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