Image compression reduces file size by decreasing the resolution, which can affect quality by making images appear blurry or pixelated if overdone. Best practices for balancing quality and file size include using the correct resolution for web display, typically 72-96 pixels per inch, which aligns with most computer monitors' capabilities. Tools like Web Resizer or Fast Image Resizer help optimize images for the web by reducing file size while maintaining clarity. This ensures images load quickly without sacrificing the professional appearance of your website.