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When Does It Make Sense to Have Credit Card Debt?

Credit Card Basics, Credit Cards
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Credit card debt gets a bad rap–and for good reason. It can be devastating. Credit cards are insanely easy to use, and high interest rates can make it difficult to climb out of a hole dug too deep. Without caution and a little financial education, those little plastic rectangles can be surprisingly dangerous. However, there are a handful of situations when it’s OK to have credit card debt. If you play by the rules, credit cards can be an smart tool for building credit and an excellent way to increase your purchasing power. We’ll outline five situations when it makes sense to carry a balance.

When you’re trying to build credit

Establishing a solid credit score will make your life a lot easier. A good score increases your chances of getting loans, leases and even jobs. Building credit is a gradual process of borrowing and repayment. The goal is to demonstrate your ability to pay lenders on time and in the agreed on amount. By doing so, future potential lenders will see you as a more trustworthy prospect. Credit cards allow you continually prove your creditworthiness, but they work only if you stick closely to the proven credit-building techniques discussed below.

When you pay it off immediately

To successfully build a credit history, you need to keep up with your payments. As much as possible, don’t use your credit card to pay for things you can’t afford. When charging your card, it is best if you already have that money available in your bank account. If you pay it off before the grace period ends, you can avoid heavy interest charges. If you must carry a balance month-to-month, it’s not the end of the world, but you absolutely have to keep up with your monthly payments. Otherwise, you will pay additional fees and your credit score will plummet.

The best situation in which to make credit card purchases is when you can pay them off right away. So why use a credit card at all? Again, it will boost your credit score, and you can earn awesome free rewards in the process.

» MORE: How to pay off debt

When you keep it under 30% of your available credit

Sometimes you have to carry a balance month to month. That’s not necessarily a terrible thing if you obey a couple of vital guidelines. As mentioned above, keeping up with monthly payments is imperative. To keep your credit score intact, you should also keep your credit utilization ratio at a minimum. Your credit utilization ratio is your total debt compared with your overall credit limit. It will reflect positively on your credit history if you keep your debt under 30% of your limit. For example, if you have two credit cards with a combined credit limit of $12,000, try to keep your debt below $3,600 at all times.

When you have a no-interest intro deal

Interest rates can wreak havoc on your bank accounts, especially when you’re stuck with an APR upward of 22.9%. If you’re about to make a large purchase that will take time to pay off, you may want to apply for a card with a good introductory APR deal. Some cards offer 0% interest on new purchases. One of the best no-interest cards is the Discover it® - Cashback Match™ which has an APR offer of 0% on Purchases and Balance Transfers for 12 months, and then the ongoing APR of 11.24% - 23.24% Variable APR. It also offers 5% cash back in rotating rewards categories and late payment forgiveness. But 0% APR does not equate to a free pass to amass mountains of debt. You will still need to meet the monthly minimums, and the credit utilization ratio continues to apply. A 0% APR card can give you a break from interest, but it can’t put a pause on your credit score.

When you have an emergency

Credit cards are a great safeguard for emergencies. While it is preferable to have at least six months of income stashed away in case of catastrophe, that’s not always realistic, depending on your income and expenditures. It’s a good idea to keep a high-limit card in reserve just in case. You don’t want to ruin your FICO score or incur high interest charges, but sometimes putting the expense on a credit card may be one of the only viable options. Your health and safety are always more important than your credit score.

Credit card image courtesy of Shutterstock

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