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Credit Reporting

How carrying a balance can affect your credit

There's a lot of bad financial advice out there. Like, save up until you can buy your house in cash. Or, only pay for things with a debit card. Or, that credit cards are bad for everyone. We could go on and on. Perhaps, one of the worst tips is the advice that carrying a credit card balance could "benefit" your credit score. This little nugget of bad advice floats out of financial gurus' mouths all the time. In fact, you've probably heard it yourself. That's what brought you here. You're wondering, "Should I leave a small balance on my credit card?"

Spoiler: The answer is a definitive, hard no.

Let us explain why.

What does “carry a balance” mean?

Let's do a quick rundown on how credit cards work. When you have a credit card, you're offered a revolving account with a maximum spend. You have access to your entire spending credit limit for every credit card billing cycle (usually 30 days).

When you spend money, you usually have a "grace period" to pay off those purchases without incurring interest. If your purchases remain unpaid beyond that grace period, you're now carrying a balance. Having a balance is essentially borrowing money from your credit card provider. Every day that you carry a balance, you pay interest on that money.

Your grace period is usually equal to our credit card billing cycle. Once you carry a balance, you pay interest on what you haven't paid off and on every new purchase on your card.

Don't forget, credit card interest can be high, high, high. The average interest rate on a credit card is 20.97% but it can go much higher depending on the type of card you have.

Should I leave a small balance on my credit card?

Okay, so let's talk about that advice you hear about leaving a small balance on your credit card. It's not good advice. The same person who tells you this is probably convincing you that snow tires are a scam and multilevel marketing schemes can "sometimes make sense." Put plainly—they're wrong.

Some people are convinced that carrying a balance can help your credit score. This idea has its root in some truth. Some debt can be helpful to your credit score. For example, your credit mix is one of the five factors that make up your credit score. A healthy credit mix is made up of both revolving and installment credit. This means if all you have is installment credit (like a student loan), and you open a revolving account (like a credit card), you could see your credit score increase.

So, yes, having a credit card can diversify your credit mix, which can help your credit score.

But here's where it all goes wrong. Another factor that impacts your credit score is payment credit utilization. Credit utilization ratio is the credit available to you versus the amount you use each month. If you have two credit cards, each with a $1,000 credit limit, and you spend $800 across the two cards every month, your credit utilization ratio is 40%.

Experts recommend keeping your credit utilization below 30% if you don't want it negatively affecting your credit. Anything higher can lower your credit score. Why? Because lenders want to see that you're responsible with your credit. Essentially, they want to see that even though you have access to credit, you don't rely on using it every month.

So, when you carry a balance—even a small one—you're unnecessarily increasing your credit card utilization ratio.

If you ever have a balance on your credit card, you'll probably see that your credit score drops slightly shortly after. And if you pay that card off, your credit score will go back up.

Also, don't forget about that interest rate. Carrying a credit card balance means you're just paying more for everything you buy. Can you think of any reason why that would possibly be a good idea? Go ahead, we'll wait.

Nothing? Yeah, we agree.

Now, someone needs to go and tell those financial gurus how little sense carrying a small credit card balance makes because we think they need to hear it too.

When you have no choice but to carry a balance

We get it, emergencies happen, and sometimes you can't pay your credit card off in full. In this case, try to make the minimum payment at least—and always make it on time. The biggest factor contributing to your credit score is your payment history. Your payment history makes up 35% of your credit score and is exactly as it sounds. It's a record of all the payments you make to your creditors.

If you miss a payment or make it late, your creditor might report you to the credit bureaus, which will add the negative item to your credit report. These negative items lower your credit score and can stay on your credit report for up to seven years.

So, make at least the minimum payment, and as soon as you can, start paying down the remaining credit card debt.

The main point here is not to be in a situation where you can pay off your credit card in full and willingly choose not to. Hopefully, we've outlined how little sense this tactic makes. Remember that it can actually do some harm to your credit score!

What does healthy credit card usage look like

Using your credit card smartly can improve your credit score. Just make sure to follow these tips:

  • Pay your credit card on time and in full whenever you can.

  • Consider setting up autopayments, so you never miss a payment.

  • Always make at least the minimum payment.

  • Don't spend more than 30% of your credit limit each billing cycle.

  • Avoid overspending and racking up credit card debt.

Now that we've successfully busted this popular credit card myth, spread the word! This bad advice has far too many people fooled who may be unknowingly harming their credit scores.

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