Advertiser Disclosure

How Carrying Credit Card Debt Can Affect Your Fair Credit

Jan. 27, 2015
Credit Score
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

If you have fair credit, you undoubtedly want to work your way to a good credit standing. After all, the better your credit, the more likely you are to get approved for loans and secure lower interest rates.

As misguided as it sounds, you may have heard that carrying debt is one strategy to improve your credit score. But is it true? Can accumulating debt really improve your fair credit?

Fact or fiction?

The short answer is no. Here’s why.

Credit scores are a reflection of your creditworthiness — your ability to responsibly manage and pay off debts. In order to demonstrate your capability to be trusted with credit, you have to make charges and subsequently pay them off, which is where the erroneous notion that carrying debt improves credit may have originally developed.

Now make no mistake — it’s true that you need to be diligent with making and paying off charges in order to boost your credit score, but you don’t need to carry debt to accomplish this.

How it works

You may have assumed that keeping a constant debt on your card will demonstrate to the credit reporting bureaus that you’re able to effectively manage a balance on your card. If you’re maintaining a balance and making regular payments, you’re doing everything correctly, right?

Not quite. In reality, credit balances are often reported midmonth. This means that making a positive impact on your credit score is best accomplished by paying your bill in full and on time at the end of the month.

Your credit balance (displaying the charges you made) will be reported to the credit bureaus around the middle of the month, and your payment (displaying the payment you made) will be made at the end of the month. Within this cycle, you’ve both acquired and paid off debt, and in the process, demonstrated your creditworthiness.

It pays to pay it off

You’ve now seen that carrying credit card debt won’t improve your fair credit. But did you know it can be detrimental to your financial standing?

For starters, the more debt you carry, the closer you climb toward your maximum credit limit. One of the metrics used to determine your FICO credit score is “amounts owed.” This is a calculation of the amount of debt you owe compared with the maximum debt limit you have been approved for. The lower your debt-to-credit-limit ratio, the better. In general, you never want your credit utilization ratio to exceed 30% on any given credit card.

Additionally, the longer you carry a balance on your account, the more interest you’ll accumulate as you slowly pay down what you owe. And the more interest you rack up along the way, the more money you’ll end up paying in the long run.

With all of this in mind, our best advice is to pay off your credit card in full each month. If you follow this strategy, you’ll be doing your fair credit score much more good than you would be by carrying a balance.

Image via iStock.