Is it better to pay your credit card in full or carry a balance?

If you have a balance on your credit card, you might have the option to pay it off in full or carry it from month to month. 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.

First and foremost, carrying a balance costs money. Interest accumulates daily on most credit cards, and coupled with high APRs, it’s a recipe for expensive debt.

Naturally, the more debt you have and the less you pay monthly, the more you’ll lose to interest. Not to mention, the balance will take you longer to repay. That’s how people often fall into the credit card debt trap. In the example above, a single laptop purchase might not do much harm, but it’s too easy to keep using your credit card, adding to the balance. Once such a spending pattern solidifies, you risk finding yourself in toxic debt.

Compare credit repair options

Using a credit card for a big purchase can still be a good strategy — you just need discipline and the right credit card. Namely, a 0% APR credit card is incredibly helpful when it comes to financing expensive items. This type of card comes with a promo period during which interest doesn’t apply, allowing you to avoid APR charges. The goal with this method is to stick to your repayment plan and pay off the balance before the intro period ends. Otherwise, you’ll be hit with the regular purchase APR.

Let’s go back to our laptop example. To buy the computer, you sign up for the Chase Freedom Unlimited®, one of CNBC Select’s picks for the best 0% APR cards. The card offers a 0% intro APR for 15 months from account opening on purchases and balance transfers (19.99% to 28.74% variable APR thereafter). With $100 monthly payments, you would get rid of the balance in 14 months. You pay nothing in interest. Not only that, but you get $42 in rewards since the card earns 3% cash back on purchases (on up to $20,000 spent in the first year, then 1.5% cash back).

A credit card balance puts a beating on your bottom line — but what about your credit score?

The notion that revolving a balance can help your credit is a stubborn credit score myth. In reality, paying off your credit card in full every month is best both for your wallet and your credit health.

This has to do with a credit utilization rate, or how much of your available credit you’re using. This is the second most influential credit score factor and is measured as a percentage. For example, if you have a $10,000 credit limit and a $1,000 balance, your credit utilization rate is 10%.

To avoid credit damage from high credit utilization, you want to keep it under 30%. The lower the rate, the better for your credit — it is recommended to aim for a credit utilization rate of 10% or below for the best score.

If you want to check your credit score and see how your card balances are affecting it, you can do so with a credit monitoring service. One of our top choices is Experian free credit monitoring which tracks your FICO score and gives you great insight into your Experian credit report.

Paying your credit card in full and on time is key to correct credit card usage. Here are a few habits to develop to help you do just that.

Remember your budget

It can be easy to go overboard with purchases if you’re not keeping track of your money. Create a healthy budget and know how much you can afford to spend on your needs and wants every month.

If you want to make budgeting easier, consider using a budgeting app like You Need a Budget (YNAB) that connects to your bank and credit card accounts and does most of the work for you.

Treat your credit card like a debit card

If you don’t have the money in your checking account (and monthly budget) to make a purchase, you most likely can’t afford it. Don’t put it on your credit card.

Make rewards work for you

Rewards credit cards can be a fantastic way to get some money back on your everyday purchases and even earn free travel. However, don’t change how you spend purely to earn more cash back or points. Your card should fit your spending habits, not the other way around. Similarly, you don’t want to spend more than you can afford just to meet a minimum spending requirement for a welcome bonus.

Keep using your card

While you don’t want to carry any balance, make sure you’re still using your credit card regularly — at least on small charges. Otherwise, your credit card issuer can potentially close your account after months or years of inactivity. If you’re only using a card for small, infrequent purchases, it can be helpful to turn on autopay, to ensure a payment never gets overlooked.

If you need to carry a balance, have a plan

Don’t take on credit card debt without a solid strategy to repay it. The solid strategy is realistic and one you can stick to. Paying down debt is a personalized process, so not every method will be right for you. There are many different plans to pay down debt so it’s important to find one that feels achievable to you.

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