Is it better to pay off your credit cards in full every month or leave a manageable balance?

By , CardRatings contributor
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An excellent question with kind of a complicated answer, since I can easily say "yes" in both cases.

Ideally, you should always pay your credit cards in full every month. Yes, you'll hear that credit issuers like to see a debt-to-credit utilization ratio of about 25 to 30 percent, meaning that if you have a credit card with a credit line of $1,000, for instance, you shouldn't be carrying a balance of much more than $250 or $300 on it. This tells a lender that you have some financial discipline.

But credit issuers are also very happy to see your utilization ratio at zero percent, too, which also demonstrates a lot of financial smarts. Plus, if you're paying off your credit cards every month, that's going to be very healthy for your credit score. The only time a zero utilization ratio is considered a negative is when you haven't used your credit cards for the last year or two. Your credit score improves if you have current information that shows you're managing your money well.

And leaving a balance on your credit cards and paying interest on that debt for no particular reason, other than to make your creditors happy and a little richer, isn't managing your money well.

But life isn't always ideal, as most of us have learned. If you're carrying a load of credit card debt that you could pay off at once, but it would kill the rest of your month or year, because you wouldn't be able to pay the water bill or buy cough medicine for your kid, then obviously it's better to leave a manageable balance on your credit cards.

Take care of everything else and don't take any extreme measures to pay off the credit card debt, especially if your debt-to-credit ratio is under 50 percent. Just chip away at it until it's eventually gone. The important thing here, as you said, is "manageable." You always want to keep your credit card debt manageable rather than letting everything spiral out of control.

Correction, Jan. 17, 2012: According to John Ulzheimer, president of consumer education at SmartCredit.com and an expert on the FICO score, the ideal percentage of credit utilization is not 30 percent, but from 1 to 10 percent.


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