Some say carrying a small credit card balance will increase your credit score. Is that true or an urban legend? We asked the credit experts.
I’ve spent countless hours research credit scores. One of the more interesting assertions I came across had to do with credit card debt. Some financial experts say it’s better to carry a small credit card balance than to carry no balance at all.
I’d actually never read this before, even though I’ve been writing about personal finance for nearly a decade now. But it’s an interesting idea, so I set out to determine the truth about this claim.
Credit Score Formula
If you spend any amount of time reading (or writing!) about credit scores, you’ll find that sometimes getting a straight answer is tough. This happens for a couple of reasons:
- Credit scores are highly personal. What negatively affects my score might not affect yours at all. Or what causes your score to increase by 100 points might only increase mine by 25.
- Credit scoring algorithms are practically state secrets. Companies like FICO make money from having the most finely-tuned credit scoring algorithms that lenders trust. This means they’ll release general information about their algorithms, which is good for consumers who want to boost their scores. But they tend to avoid giving hard and fast answers about some questions. Plus, algorithms are constantly being updated, so what’s true today may not be true tomorrow.
With all that said, getting answers about questions like this isn’t impossible. We just have to look to the actual sources–places like FICO and the actual credit bureaus–for information. And then we need to apply some common sense to the answers–and variations in answers–that we might find there.
What the Experts Say
First, I dug around the internet to find some different opinions on this question. One Bankrate article said experts tend to recommend carrying a balance equal to 10 to the 30 percent of your available credit, though the lower is better.
The article notes that carrying some balance is important for two reasons:
- It shows credit reporting bureaus that you’re actually using your cards, which is a good thing from a credit score perspective.
- It can keep your credit card accounts from being unexpectedly closed due to lack of use.
A Time Money article, on the other hand, said that consumers should not carry a balance. This advice is mainly because carrying a balance means paying interest. And carrying a balance can get you started down the road to hefty credit card debt.
A blog post from Credit.com agrees that it’s in consumers’ best interests to pay the balance in full each month.
What the Credit Bureaus Say
So how do we resolve this discrepancy in expert opinion? Let’s go straight to the source: the credit reporting bureaus.
Experian, the bureau with the best online documentation, says, unequivocally, that it’s best to pay off your balance in full each month, if possible. A second Experian article says that any credit utilization ratio under 30 percent is good, but that lower is better.
- Get your credit score for FREE with Credit Sesame
What About Reporting Timelines?
One factor that plays into this question is when credit card companies report to the credit bureaus. If you use a free credit reporting service, you may notice that your credit card balances don’t all change at the same time. That’s because your credit card company might report your balance at the end of your billing cycle, rather than after you pay off the balance when you receive the bill.
This can be a problem if you use your credit card for everyday expenses, leading to a high balance at any point during the billing cycle.
So What’s the Verdict?
After sorting through the information online, it’s clear that paying off your credit card balances in full each month is the best option. Since we’re disagreeing with the Bankrate article, let’s break down why we think the information there isn’t quite correct.
- Credit bureaus only care if your account is open. It’ll be counted as active, even if you don’t use the account frequently, or at all. The credit card companies just report your monthly credit limit and balance, and that’s what counts towards your credit score.
- You don’t have to carry a balance for a credit card issuer to consider your account active. You can pay off your balance in full each month when you receive your bill, and the issuer won’t close your account for inactivity–because it’s not inactive.
Some Caveats and Exceptions
If you can’t pay off your credit card balance in full, it’s not the end of the world. You just need to make a plan to pay off your balance as soon as you can. And know that the lower your balance gets, the better your credit score will be in most cases.
Also, I’m not saying that it’s a completely dumb decision to finance a big-ticket purchase on a 0% APR credit card. Let’s say your fridge putters out unexpectedly. You have some money in emergency savings, but not enough to have money left over after you replace your fridge. But you qualify for a credit card with a 0% introductory APR offer on purchases.
Should you charge the new fridge to the credit card? Or should you drain your savings account?
Well, as long as that charge to the credit card won’t max out the credit card in question, charging the fridge isn’t a terrible idea if you meet the following criteria:
- You have a good track record with managing debt.
- You can definitely pay off the debt well before the introductory APR offer is up.
- Your overall debt-to-credit ratio won’t go above 30 percent with this purchase.
In this case, using the credit card isn’t the worst choice you could make. But, again, make sure you pay it off as quickly as possible. And don’t make a move like this if you’re getting ready to apply for a large loan like a car loan or mortgage.
- Check your credit score for FREE with Credit Karma
Your Credit Card Strategy
So what’s your best credit card strategy if you’re trying to keep your credit score high? Here’s what you should do in our opinion:
- Pay down any balances you’re currently carrying. Use this debt calculator to figure out the best way to pay down your debts.
- Make a habit of paying off your debt in full each month.
- Keep total balances under 30 percent of your total available credit each month, so that your balance doesn’t show as too high at the end of your billing cycle.
- If you do want to net rewards by using your card for most of your expenses, consider paying down the balance midway through the cycle to avoid the above issue.
- Only use your credit cards to finance longer-term purchases if you meet the criteria above, and limit this type of activity whenever possible.
Finally, check out our guide on how to get out of credit card debt once and for all.
Published or updated October 9, 2017.
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