There is a persistent myth that carrying at least a small balance from month to month on your credit cards is good for your credit score. That’s not true.
The truth is that paying on time, every time, is what’s good for your credit — and paying in full is the most economical way to do that.
Here’s what you should know about managing your payments to protect your credit.
You do need to use credit
To build and maintain your credit, you need to consistently demonstrate that you repay borrowed money as agreed. One way to do this is to use a credit card regularly, then pay your bill on time.
Focus on never missing a payment (on any bill), because payment history has the biggest influence on credit scores. A misstep on this credit scoring factor can really hurt.
But don’t use a lot of credit
Try to avoid using more than 30% of your available credit limit on any of your cards, and less is better. That’s because the second-biggest influence on credit scores is how much of your available credit you use, which is called your credit utilization ratio.
To keep your utilization low:
- Sign up for regular balance alerts via text or email from your credit card issuer so you can stop using a card if it gets too close to 30%.
- Consider making multiple payments during the month to keep balances low.
- If your credit is good or your income is up, ask for a higher credit limit. This will lower credit utilization as long as your spending stays the same.
- Think twice about closing old or unloved cards, because they contribute to your overall credit limit. Your credit utilization could shoot up due to the loss of available credit from the canceled card.
Carrying a balance is costly
If you don’t pay your credit card bill in full and instead carry a balance, you’re not helping your score. FICO, which produces the most widely used credit score in the United States, doesn’t award extra points for carrying a balance month to month. Neither does VantageScore, its competitor.
In fact, if you get into the habit of paying less than the full amount, you could hurt your credit score by gradually creeping above 30% utilization.
Plus, there’s the interest to consider. Rates climb as high as 20% for some rewards cards, and even low-interest cards exceed 10%.
It’s smart to keep your overall financial picture in mind when deciding whether to do something for the sake of your credit score. Chasing a few points is seldom a good idea if it’s going to cost you money in interest.