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Should I Carry a Balance to Keep My Credit Score High?

Sept. 15, 2014
Credit Cards, Credit Score, Personal Finance
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One of the cardinal rules of credit card use is that you should never carry a balance from month to month. This is an almost sure-fire way to rack up double-digit interest on your spending.

But what impact will this have on your credit? According to a 2014 survey conducted by BMO Harris Bank, 30% of Americans believe that carrying a balance will help their credit score. If you’re one of them, be sure to check out the details below — you might be surprised at what you find.

You need to utilize some credit to build and maintain your score

Part of the confusion around whether or not carrying a balance is good for your credit probably comes back to the exact definition of “carry a balance.” Many people interpret this phrase to mean utilizing some credit at some point during the month. Technically, if you have any unpaid charges sitting on your card you’re “carrying a balance,” even if you’ll pay them off in full by the end of the month.

If this is how you define the phrase “carry a balance,” then, yes, you’re right. In order to build and maintain your credit score, you need to consistently demonstrate that you’re responsible with handling borrowed money. An easy way to do this is to use a credit card regularly, keep your utilization in check, then pay your bill on time and in full every month.

Plus, keep in mind that if you’re trying so hard to avoid carrying a balance that you never use one of your cards, your issuer might decide to cancel it. This could end up doing damage to your credit score, especially if you’re in debt on another card. Your credit utilization ratio will shoot up due to the loss of available credit from the canceled card.

Paying interest on a balance is never a good idea

However, there’s another way to characterize the expression “carry a balance.” To many people, this means not paying a bill in full at the end of a month and carrying it over to the next. If this is how you define “carry a balance” and you think that it’s a good way to help your credit score, you’re mistaken.

Here’s why: The FICO model, which is used to produce the most widely used credit score in the United States, doesn’t tack extra points onto your score for failing to pay off a balance in full at the end of the month. (Neither does the VantageScore, its competitor.) In fact, if you get into the habit only paying minimums and eventually end up using more than 30% (and less is better) of your available credit, you’ll actually hurt your credit score.

Plus, there’s the interest to consider. As of September 2014, the average credit card interest rate is hovering around 15%. Rolling over a balance for even a few months could get seriously expensive, so even if you could gain a few points on your credit score for carrying charges from month-to-month, it probably wouldn’t be worth it.

This is a good time to remember that it’s smart to keep your overall financial picture in mind when you’re deciding whether or not to do something for the sake of your credit score. Chasing down a few points is almost never justifiable if it’s going to cost you money in interest.

Tips for keeping your credit utilization in check

By now you’re probably thinking that the FICO model is like Goldilocks when it comes to credit utilization; too much is no good, but so is too little. You’ll need to strike a balance that’s just right.

But how can you achieve this? The most important thing to keep in mind is that you should never use more than 30% of your available credit on any of your cards at any point during the month. If you can keep your utilization between 10% and 20%, this is better still. To keep your utilization in this range, we have a few tips:

  • Keep a budget and track your spending.
  • Elect to get regular balance alerts via text or email from your credit card issuer.
  • Find out which day of the month your credit card issuer reports to the credit bureaus and plan to make a big payment in advance of that date.
  • Keep a backup credit card on hand; if your utilization is getting too high on your primary card, switch to your backup until you can make a payment.

Using a credit card image via Shutterstock