Don’t Fall for the ‘Carry a Balance’ Credit Score Myth
Don’t Fall for the ‘Carry a Balance’ Credit Score Myth
Summary: Building a strong three-digit FICO credit score is important if you ever want to apply for a mortgage, auto, student or personal loan. Fortunately, building a higher score isn’t complicated. Click through for tips on improving your score.
A dangerous myth
You might have heard that carrying a balance on your credit card will help improve your FICO score. Don’t believe it. This is not only false — it’s a big financial mistake.
That’s because credit cards come with high interest rates, often 24% or higher. If you carry a balance past your credit card bill due date, you’ll have to pay this interest on your debt. If your balance grows too high, you could pay significant amounts in interest each month.
Carrying a balance can also cause your credit score to fall because of what is known as your credit utilization ratio, which is a measure of how much of your available credit you are using at any one time. The more of your credit you are using, the worse it is for your credit score. If you carry a balance, you run the risk of racking up a high credit utilization ratio, which may damage your FICO score.
The best way to use a credit card? Never carry a balance. Instead, only charge what you can pay off in full. And then pay your full balance on or before your due date. That way, you can take advantage of the benefits of a credit card without paying any interest on your purchases.
How using a credit card can help your FICO score
Using a credit card can help boost your credit score. Every time you make an on-time payment to your credit card account, your card provider reports it to the three national credit bureaus: Equifax, Experian and TransUnion. These on-time payments will gradually but steadily cause your FICO score to increase.
Just make sure to pay on time. If you make your credit card payment more than 30 days past its due date, your card provider will report a late payment to the credit bureaus. This may cause your FICO score to fall by 100 or more points. A late payment also remains on your three credit reports for seven years.
If you want to build a strong credit score, don’t believe the myth that carrying a balance on your credit card is a smart move. Instead, pay off your purchases in full and never carry credit card debt past your due date. This will not only result in a string of on-time payments in your credit history, but it will also keep your credit utilization ratio low. That is a winning combination when it comes to building a desirable FICO score.
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