Does having a balance improve your credit score?

When it comes to your credit score, misinformation and rumors abound. For example, you may have heard that checking your credit report will hurt your score, which is obviously untrue. Maybe you’ve also heard that you only have one credit score, or you can pay a company to quickly fix your credit score in the blink of an eye. Both of these common rumors are also false.

Another common credit myth is having a balance and knowing the exact impact that debt has on your credit score. After all, many people seem to believe that having a small or medium balance on their credit cards can help boost their score in some way.

Does carrying a balance on a credit card help your score? Ultimately, this question has a definitive answer that might surprise you.

Wearing a scale makes do not help your credit score

If you’re hesitant to pay off your credit card in full because you think small balances help, think again. Carrying a balance on your credit card does nothing for your credit, but it will cost you money in the long run. After all, the average credit card APR is currently around 16%, so even interest on small balances can add up quickly.

According to the Consumer Financial Protection Bureau (CFPB), the rumor that debt helps your credit is the opposite of the truth. In fact, they write that “paying off your credit cards in full each month is the best way to improve a credit score or keep it in good shape.”

This truth is easy to understand when you take a closer look at the factors that affect your credit score. For example, when it comes to your FICO credit score, the second most important aspect of your credit history is the amounts you owe against your credit limits, also known as the credit utilization ratio. This factor makes up 30% of your FICO credit score, and it can be negatively affected if you use too much of your available credit in any given month or over time.

The CFPB says that maintaining a low credit utilization rate (preferably below 30%) shows lenders that you are a responsible borrower. However, they also state that “paying off your entire balance is better and keeps the ratio low, thereby boosting your credit scores.”

Other factors that affect your credit score

Now that you know that carrying a balance won’t help your credit, you should take the time to understand additional factors that can affect your credit. First, you should know that your payment history is the most important factor that makes up your FICO credit score. This represents 35% of your score, and you can excel in this category by paying all your bills – including credit card bills – early or on time, no exceptions.

Another factor that affects your credit score is the length of your credit history, which accounts for 15% of your FICO score, and you can improve in this category by keeping your credit accounts in good standing for as long as you can. . By the way, this credit score factor is the main reason why credit experts suggest keeping old credit card accounts open, even if you’re not using them.

Other factors that make up your credit score include new credit (10% of your score) and your credit mix (10% of your score). You may see negative ratings in the new credit category whenever you apply for a new credit card or loan and an in-depth inquiry is placed on your credit file.

Meanwhile, your credit mix is ​​determined by the different types credit you have, including revolving accounts, installment loans and more. You can see a positive impact in this category if you have several different types of credit accounts and they are all in good standing.

Steps to avoid carrying a balance on your credit card

Since keeping a balance on your credit cards won’t help your credit score, your best bet is to stay out of debt if you can. Obviously, paying your credit card bills in full each month can help you save money on interest, but it can also help you in other areas of your life. For example, living a debt-free life can make it easier to resolve financial difficulties and it’s easier to save money when you don’t have huge debts to pay off.

If you have credit card debt that you just can’t pay right now, your best first step is to stop using credit cards for purchases. After all, it’s much harder to pay off debt when you’re still accumulating balances.

Once you are no longer using your credit cards for spending, you can develop a plan to pay off your cards with a strategy like debt snowball or debt avalanche, or even with help a balance transfer credit card that pays no interest on your debt for a limited time.

Then, to avoid carrying balances on credit cards in the future, consider these tips:

  • Use a monthly budget to plan your expenses. When you use a budget to plan your spending each month, a credit card becomes a tool for paying bills and covering regular expenses. With money set aside in your budget for everything you buy, you can stick to your plan and spend accordingly.
  • Pay off your credit cards several times a month. Also remember that you can pay your credit card bills several times a month. This strategy can help you control your spending and avoid “surprises” when your bill is due.
  • Only use credit cards for purchases you can afford to pay for immediately, and avoid situations where you charge for purchases you can’t afford to pay for. Due to the high interest rates charged by credit cards, plastic is a poor option if you need a short-term loan.

Read more stories in our “Credit Myths” series:

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