You should not carry a balance. Carrying a balance results in you paying interest, and you never want to pay interest. Paying interest does not help your credit score, and even if it did you still shouldn't do it because you should never pay money solely for the sake of your credit.
In fact, having a zero balance or close-to-zero balance on your credit cards can be beneficial in many ways. A few of the most important benefits are: reducing debt, improving one's credit score and avoiding late payments and/or interest charges.
To maintain a low credit utilization rate, consider reducing your spending or making periodic bill payments throughout your billing cycle so you have a lower statement balance. The lower your statement balance, the lower your credit utilization rate, which can improve your credit score.
Paying off the highest interest rates first saves you money in the long run. But if you're struggling financially month to month, paying the smallest amounts first, regardless of interest rates, will free up some money every month in the short term.
Generally, you should prioritize paying off your statement balance. As long as you consistently pay off your statement balance in full by its due date each billing cycle, you'll avoid having to pay interest charges on your credit card bill.
In short, no, it isn't bad to have a zero balance on your credit card. Or, put another way, yes, it's okay to have no balance on your credit card; it can even help your credit score.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
In most cases, however, it's best to keep unused credit cards open so you benefit from longer credit history and lower credit utilization (as a result of more available credit). You can use the card for occasional small purchases or recurring payments to keep it active as opposed to using it regularly.
Lenders consider your credit utilization when making lending decisions because it represents how well you're managing your existing debts. In general, lenders look for a credit utilization ratio of 30% or less. Having a ratio higher than this can signal you're using too much of your available credit.
The key is to keep your balance at or below 30 percent of your credit limit to help improve and maintain a good credit score, which means having no balance at all is even more helpful. Always try to pay off your credit card in full when possible.
Your credit utilization ratio goes up
By closing a credit card account with zero balance, you're removing all of that card's available balance from the ratio, in turn, increasing your utilization percentage. The higher your balance-to-limit ratio, the more it can hurt your credit.
Most of the time, paying off your credit card in full is the best approach. Carrying a balance on your credit card does not help your credit score. Doing so can also result in extra fees and interest charges. CNBC Select explains why and how carrying a balance can harm your financial health.
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
The 15/3 rule, a trending credit card repayment method, suggests paying your credit card bill in two payments—both 15 days and 3 days before your payment due date. Proponents say it helps raise credit scores more quickly, but there's no real proof. Building credit takes time and effort.
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
Keeping a low credit utilization ratio is good, but having too many credit cards with zero balance may negatively impact your credit score. If your credit cards have zero balance for several years due to inactivity, your credit card issuer might stop sending account updates to credit bureaus.
So which scenario is worse — not having any credit or having bad credit? “Neither is good,” says Greg Reeder, CFP, a financial advisor with McClarren Financial Advisors in State College, Pennsylvania. However, “A poor credit score is worse,” he says. “If you have no credit, you can start from the ground up.
To maintain a healthy credit score, it's important to keep your credit utilization rate (CUR) low. The general rule of thumb has been that you don't want your CUR to exceed 30%, but increasingly financial experts are recommending that you don't want to go above 10% if you really want an excellent credit score.
Use the debt snowball method
In order to use this method, list all of your credit card debts from lowest balance to highest balance. Now start concentrating on wiping out the credit card with the lowest balance while still making the minimum payments on the other cards. The point of this strategy is to build momentum.
Generally, your overpayment will appear as a credit in the form of a negative balance on your account. This negative balance will roll over towards any new charges you make or outstanding balances for the next month.
Even though you paid off your account, there could have been residual interest from previous balances. Residual interest will accrue to an account after the statement date if you have a balance transfer, cash advance balance, or have been carrying a balance from month to month.