Credit Score Damage

• One of the major factors in your credit score is the amount you owe. This portion of your score not only considers the overall dollar amount owed, but also the ratio of your credit card balances to the card limits. Having a high balance can hurt your credit score. For example, if you have a card with a limit of $4,000 and charge $3,000 on it one month, your utilization ratio will be 75 percent, even if you pay the whole balance at the end of the month. According to Liz Weston of MSN Money, a utilization ratio of 30 percent is good, but a ratio of under 10 percent is best for your credit score.
  
  

Interest Costs

• Carrying a balance on your credit card is costly in terms of the interest you pay on the borrowed money. For example, if you have a balance of $4,000 on a credit card with an rate of 16 percent, this is costing you $53.33 per month in interest alone. This means that the first $53.33 you send to the credit card company all goes toward interest, and only the amount remaining actually reduces the amount you owe. On the other hand, if you pay your credit card balance in full every month by the end of the grace period, you will not owe any interest.
  
  

Low Available Credit

• If you have a balance on your credit card, it reduces the amount of credit available to you. Having available credit is especially important if you do not have an emergency fund built up and plan to rely on credit cards for unexpected expenses.
  
  

Benefit of Balance

• Although it might sound good to not use your card at all because you will have available credit, a zero percent utilization ratio and no interest costs, this actually could end up hurting you. Credit scoring formulas do not weigh inactive cards as heavily as active ones, so you will not reap the benefits of your responsible spending. In addition, some credit card issuers cancel inactive cards, which both reduces your available credit and removes the low utilization ratio from your credit report. Use each credit card at least once every few months for a small purchase and pay it off in full for best results.