Should I Leave a Small Balance on My Credit Card?

Many misconceptions and confusion surround credit cards, leading to misinformation. Sometimes, this misinformation is relatively harmless. Other times, it can lead to issues with your credit score —like leaving damaging information on your credit report or slowing your ascent from bad credit to good credit. 

Learn some common tips, tricks and misconceptions below — including the answer to the question, “Should I leave a small balance on my credit card?” — to help you start managing your credit cards and credit score confidently and correctly. 

Should I leave a small balance on my credit card?

It's a common misconception that leaving a small balance when making your credit card payment after each billing cycle will help your FICO credit score. The logic behind this is that having no balance will result in your credit card issuer reporting a net-zero balance and not reporting your on-time payment. 

This is a myth, as paying your balance in full still counts as a payment. You'll get an on-time mark on your credit report, which can help build credit, as your payment history makes up 35% of your FICO score. Payment history is the most important factor in your credit score. 

FICO is the credit scoring model that 90% of lenders use when deciding whether or not to approve potential borrowers for credit. And because your credit history may vary between the three main credit bureaus — Experian, Equifax and TransUnion — your FICO score may also vary between these bureaus. 

Leaving a small balance after each statement simply accrues unnecessary interest on the balance you carry to the next billing cycle. 

Now that we’ve answered this question, let’s look at some other tips about your statement balance and paying off your credit card.

Pay off your statement balance monthly to avoid interest

Building an even stronger case against the myth of leaving a small balance on your credit card each month is the fact that you can pay off your entire balance by your due date each month and pay no interest. 

This is the beauty of the interest grace period, which is the period of time between your statement closing date and your credit card bill's due date when your credit card company will not charge any accrued interest, as long as you pay the full statement balance. 

Plus, even though you won’t pay interest, the credit card company will still give you all the cash back and reward points you are entitled to from that statement. You are effectively turning your credit card into a slightly profitable venture. 

Additionally, by paying off your credit card balance monthly, your credit utilization ratio — your total credit card balances relative to your total credit limits — will remain at 0%, which can help you earn a good credit score. It's a win all around. 

Balance an unorthodox pay schedule with a credit card

If you work on commission, own a business or freelance, you likely have an unorthodox pay schedule or inconsistent pay amount. This can make budgeting tough. However, a credit card can fill the gaps while you let your sporadic pay accrue throughout the month. 

Simply set a budget based on your average monthly income and use a credit card to pay all your daily expenses and bills based on this budget. While using your credit card to live for the month, leave all your income in the bank untouched. Then, at the end of each month, pay the statement balance off in full with the income you've saved throughout the month. 

Plus, if you use a credit card that offers points and rewards, you can earn some nice perks over time.

Balance transfer your way to quicker debt repayment

If you have high-interest-rate credit accounts, it can take a while to pay off, even when using innovative debt management methods like the debt avalanche and debt snowball. This can take so long because of the huge interest charges you could pay monthly. 

If you watch your mailbox and email inbox closely, you may find promotional APR offers from credit cards you currently hold or new signup APR offers. These can sometimes be as low as 0% APR for up to 18 months. If you transfer a high-interest credit card onto one of these balance transfer credit cards, you could save tons in interest, which will also significantly trim your repayment time. 

These balance transfer offers often come with a 3-5% fee. It’s wise to consider the cost of the fee to determine if the deal will still save you money. More often than not, though, the 0% interest far outweighs any small balance transfer fee. 

Even if a card offers a 1.9% or 2.9% deal, it will likely still be worthwhile if you plan to pay off the debt quickly. 

Avoid late payments — which may come with more than just late fees

Late payments can be a real letdown, as the credit card company can charge up to a $28 late fee when you're late for the first time in six months. Then, each time you're late for the following six months, the credit card company can charge you up to a $39 fee.

These fees may apply starting the first day following your due date. 

On top of this fee, the credit card company may hit you with a late-payment mark on your credit report after the payment is 30 days late. Since your monthly payment history accounts for 35% of your FICO credit score, the negative impact could be significant. 

After you're 60 days late, you get another, more impactful negative mark and may be subject to a penalty APR of up to 29.99%. You have to pay this penalty APR for up to six months after your last late payment, as long as you bring the account current. If it remains late, you continue paying the penalty APR.  

Negotiate your APR

Are you tired of paying an exorbitant interest rate and maintaining a perfect payment history without even an offer to lower your interest rate? Your credit card company will rarely reach out to you to lower your interest rate — unless it's a variable interest credit card.

Did you know you may be able to negotiate this rate down? 

Gather all the positive information you can about your credit card account, such as use frequency, payment history, how long you've been a customer, etc., then call the customer service line on the back of your credit card. Inform the representative you'd like to discuss your interest rate. 

In some cases, the representative will look at your account and determine if a rate reduction is appropriate. However, some credit cards simply don't offer this and will let you know upfront. 

Use the above tips for sound personal finances

Credit card misconceptions can send your personal finances and credit score into the tank, or delay any improvement in some not-so-dramatic cases. Leaving a small balance on your credit card falls into the latter category, as it won't send your credit card spiraling out of control, but it could muddy your path to good credit. 

By following the above tips, you can work your way toward a solid credit score and proactive personal finances. With these two pieces of the financial puzzle in check, your money will be easier to manage. 

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