When to Carry a Balance on a Credit Card

Many say that there are no cases when you should ever carry a balance on a credit card. Most cases of carrying a balance are bad ideas; however, there are some notable exceptions under very limited circumstances that factor in psychology & math. The below also demonstrates in a way that many excuses for carrying a balance are illegitimate and not sound financially. The 1st 2 of the 4 below are related to my industry, real estate, though this list is not exhaustive, and the actual number of possibilities wouldn't be 50% real estate related.

A. Financing appraisal-required repairs or termite/moisture-required repairs for a property under contract with a buyer within a month before closing is one of the top times to put the charges on a credit card, especially if the time of spending and the time of disbursement after closing will be prior to the next statement date on your credit card. In this case, it's best to:

Check loan status 1st

Check on the status of the loan prior to doing the financing, with a loan being further along, reducing your risks.

Look into the buyer

While often not available (though I provide this information at times for buyers I represent to strengthen an offer if it's positive information), knowing a buyer has good credit and a long job history with their current employer reduces risks.

B. Another example is when selling a house and financing repairs after exploring other alternatives without seeing any better ones. In this example, there are a number of ways to reduce your risks of contract fall through. Below are some additional methods for reducing risks when using a credit card & other tips:

1. Low or No Interest

Seek out a low or 0% intro APR credit card, or more than one.

Servicemembers on active duty have an especially good deal here with the SCRA's 6% interest rate cap, but it has certain limitations.

2. Limit your balance if your credit will matter greatly in the short term (i.e. if buying and selling)

Be mindful of the impact of a revolving balance on your credit score, and ideally don't exceed a 10% overall revolving balance between revolving accounts (i.e. credit cards, not mortgages, which are "installment" debt), especially if also purchasing with financing.

When it's fine to have a higher balance:

3. When it's fine to have a higher balance:

There are some situations where a temporarily lower credit score won't be as likely to negatively impact you greatly, where carrying a greater than 10% balance could be worth it, i.e., a situation with the following all in place:

1. Your car insurance renewal isn't coming up

2. You're not using financing to buy

3. You're going to be living in temporary housing, that is a variant that doesn't factor in credit for a few months after the sale

4. Consider your credit score.

If you're also buying with financing, have great credit (i.e. 795+) & at least a few revolving accounts already (at least 5 if your average credit age is over 5 years), where a 9.9% revolving balance wouldn't be as likely to push you from one major interest rate/insurance threshold to another. That said, it's a good idea to check with your lender on what the interest rate (& if applicable, MIP/PMI) and other payment differences might be based on a different credit profile.

5. Check median market time.

If the median market time is 6 months, don't get a credit card that's only offering 0% APR for 6 months. You can often do much better than that with a 0% APR credit card.

C. Carrying a low or no interest balance that's below your rate of return on your savings account, after taxes, with the full amount needed for payoff in a designated account that you don't touch except for payments.

Pure Profit Motive

This example has a pure profit motive and balances psychology & math. It would be very similar to someone buying a car with a <2% APR rate despite having the cash to pay for the car in full because they want to take advantage of some extra profits from their >2% rate savings or checking account (after taxes).

Tangent Parallel Example: My car loan at the moment has a <2% rate with 1 payment left on a 36-month loan.

The below is purely tangential, but I thought it was of interest since I got a <2% rate while my best high-volume savings rates averaged over 4% (over 5% at first) throughout the duration of me having the loan.

Image courtesy Nissan Finance

My vehicle (2022 Rogue SV) has treated me well, with minimal maintenance needs (the biggest by far being tire replacements & free recall work), and over 35 MPG on an SUV without a hybrid motor being rare. While Nissan depreciation rates are my biggest regret with it where I expected to put more miles on it by now due to higher MPG to offset the depreciation rate vs a Subaru or Toyota, I plan to keep it for years without acquiring another vehicle.

In this case, I'd advise satisfying all of the following criteria when carrying a balance:

1. Either have 0% interest or a lower interest rate than your savings account, after taxes

2. You maintain at least the amount of money that you have as a balance in that other account, accruing interest, never going below it

3. You pay automatically directly from the account, not using it for anything else, a set it and forget it approach.

4. The account with the funds you are setting aside for the credit card debt is separate from your primary checking/savings accounts, designated exclusively for that purpose.

   • One way to make that easier is by having 2 similar or identical accounts at the same institution. For instance, I have 2 checking accounts & 7 savings accounts at a single institution, all visible from a single sign-in online.

5. Avoid having over 10% credit utilization on any cards

   • Even then, it will lower your credit score some on a monthly basis vs maintaining a balance closer to 0% while actively using the card at least once a month.

D. Encountering a hardship:

It's typically best to avoid using a credit card for hardships, relying instead on savings, and if necessary, loans. That said, there are some exceptions, especially if using some of the methods such as those mentioned above. Be sure to consider alternatives.

While there are plenty of other niche scenarios where carrying a balance on a credit card might be a good idea, keep in mind that as well that if you carry a balance and it hurts your credit, seeking out an installment loan that is easier to pay over time will be more difficult, and the rates will often be higher than they would have been if you had sought one prior to your credit score going up.