Should I carry a balance on my credit card?

You shouldn't carry a balance on your credit card unless you have to. If your goal is to use your card but still maintain low credit utilization for credit-scoring purposes, you should aim to have an outstanding balance as close to $0 as possible at the end of your monthly billing cycle. For more information on this, please see our Credit Utilization Guide.

If you believe making purchases with plastic will cause you to overspend, you’re better off not using your card at all. When in doubt, debt-free is the way to be.

Credit utilization is basically the ratio of your outstanding credit card balance divided by your credit limit. Utilization that is too high indicates you are desperate for spending power and may encounter payment problems down the road. That is certainly a valid concern, considering how debt can easily snowball into unsustainability and thus impede credit-building efforts. It’s therefore unsurprising that people with credit utilization above 90% have the lowest credit scores on average, while those with utilization between 1% and 10% have the highest scores.

And remember, the best way to monitor your credit utilization is to sign up for a free WalletHub account, which updates your credit-report information and credit score on a daily basis.

As with so many financial questions, the answer is often, "it depends." In this case, the term, "credit utilization" describes how much of your available credit is being used on a monthly basis in the form of unpaid credit balances.  Credit reporting bureaus typically use this measurement as part of their credit scoring formulas. 

Credit utilizationis defined as your total open credit card balances divided by your total open credit card limits. This ratio correlates with lending risk, so  the greater your credit card utilization (balance vs. credit limit), the lower your credit score.

Discover more about debt and credit management in our new book What Your Financial Advisor Isn’t Telling You.