The use of a credit card can provide a convenient payment option when you don't have cash on hand or when you prefer to charge a purchase to the card. Accumulating a balance on a credit card does carry some risk. Therefore, you should understand whether you should always pay off your credit card balance in full.
According to MSN Money, you should pay off your credit card balance each month. Carrying a balance on your credit card will result in paying more interest charges on that balance. By paying your balance off each month, you can avoid the finance charges the card issuer will apply. This is especially important if you have a high interest rate. The higher the interest rate, the more you will pay in accumulated interest. Also, depending upon your balance, if you make only the minimum payment, it can take years to pay off that balance.
The amount of debt you have affects your FICO credit score. This factor, which also includes your credit utilization ratio, represents 30 percent of your overall credit score. The credit utilization ratio measures how much credit you're using relative to your credit limit, which is the amount of credit you have available. The lower the percentage of your credit limit you are using, the lower your credit utilization ratio and the higher your credit score. If you are using a large percentage of your credit limit, the ratio will be higher and your score will be lower, according to MyFICO.
According to MyFICO, the leading factor in determining your credit score is whether you make your payments on time. This counts for 35 percent of the credit score. Whether you pay off the balance in full or make monthly payments on the balance, your credit score will suffer if the payments are not made on time. According to Bankrate, one payment that is 30 days late can drop your FICO credit score by 60 to 110 points.
Credit card issuers may slash your credit limit for a variety of reasons, according to Bankrate. If you carry a balance and your credit limit is reduced, it will reduce your available credit and, therefore, will increase your credit utilization ratio, which damages your credit score. It could cause your card to appear maxed out (100 percent credit utilization) if the credit limit is reduced to a level that's close to your current balance. Bankrate reports a maxed-out card can drop your credit score by as much as 45 points.