If you rack up more purchases with your bad credit credit card than you can pay off by the end of the month, you’ll find yourself carrying a balance. Or you may have heard misguided financial advice that carrying a balance is good for your credit score, so you deliberately don’t pay your balance in full.
We’re sorry to be the bearers of bad news, but carrying a balance on credit cards for people with bad credit just isn’t a smart idea. Here are three reasons why you should aim to pay your balance in full instead of carrying a balance.
1. You’ll pay high interest rates
Credit cards for poor credit have some of the highest interest rates out there, often over 20%. When you carry a balance instead of paying it off in full each month, you have to pay interest on that borrowed money. Not only is this high interest fee a waste of money, but you can’t make as much progress on debt because a large portion of your payments go toward interest instead of the actual amount you owe. This alone is enough to get some people stuck in a cycle of debt for longer than anticipated.
2. It won’t improve your credit
You may have been told that carrying a balance improves your credit score, but this is a bad myth that just won’t die. Carrying a balance on a bad credit credit card, or on any credit card for that matter, won’t do anything for your credit. Instead, try other proven tactics for improving your credit score, such as carrying a low balance and paying your bills on time. These strategies also don’t require you to spend any money on interest payments.
3. It can actually hurt your credit score
Many factors go into determining your credit score, but one of the big ones is your credit utilization ratio. A massive 30% of your credit score is determined by how much of your available credit you are using at any given time. Using credit isn’t necessarily bad, but carrying a large balance can hurt you. According to myFICO, “When a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.” Aim to use no more than 30% of your credit limit on each of your credit cards for optimal credit health.
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The post Bad Credit Credit Card Balance: 3 Reasons to Pay It Off Now appeared first on NerdWallet Credit Card Blog.
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