A Credit Card Myth to Stop Believing
August 16, 2021
At some point, you may have heard that keeping a small balance on a credit card will improve your credit score. It’s time to forget that advice immediately. In fact, instead of improving your credit score, keeping an unpaid credit card balance can do the opposite.
This myth continues to persist because of the (often confusing) way credit scores are calculated. More specifically, the “carrying a balance” myth stems from another misconception that having a $0 balance on your credit card brings down your score. That’s only true if you have a $0 balance over multiple months because you’re simply not using your credit card. In that case, your credit card company may stop sending updates to the credit bureaus or may even close your card. These two things can affect your credit.
But not using your credit card at all is very different from carrying a balance. Here’s a look at the facts, and why you should forget the balance-carrying myth once and for all.
Fact: Carrying an unpaid balance can hurt your credit score.
On its own, carrying an unpaid balance on your card can damage your credit score. One of the most important factors in determining your credit score is “credit utilization,” or the amount of your available credit that you’re using.
When you carry a balance on your credit card, you’re utilizing some of that available credit from month to month. And that can push your score down. Instead, if you pay off the balance each month, your balance-to-limit ratio goes down, boosting your credit score.
Fact: Paying your balance each month helps your credit score.
Thirty percent of your credit score is based on the amount of debt you’re carrying. That’s because research shows that credit utilization rate can predict a person’s risk of future repayment issues. That means people with higher credit utilization rates are at greater risk of defaulting on a credit account.
For that reason, people who keep their credit card balances low are likely to have higher credit scores. And the best way to keep your credit card balance low is to pay off the balance each month.
Maintaining a balance on your credit card for the sake of improving credit is counterproductive. Instead of rolling a balance forward each month, pay it off if you can. You’ll save yourself from paying interest and you’ll help improve your credit score at the same time.
Fact: You can save money by paying off your balance each month.
If you don’t pay the full amount you owe on your credit card by the due date each month, your credit card company will charge interest on the amount you owe. If you continue to leave your full balance unpaid, the interest charges will keep growing. You’ll be charged interest on the interest carried over from one month to the next.
By paying off the full balance each month, you won’t be charged any interest. You’ll simply pay the cost of your purchases and keep the rest of your money to yourself. Paying off your balance in full every month will boost your credit score because it shows your lender you can reliably pay back what you borrow.
In the end, carrying a balance is something to avoid if you can.
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