When it comes to your credit score, misinformation and rumors abound. For example, you may have heard that checking your credit report will hurt your score, which is patently false. Maybe you’ve also heard that you only have one credit score, or that you can pay a company to quickly fix your credit score in a pinch. Both of these common rumors are also untrue.
Another common credit myth involves carrying a balance, and the exact impact that debt has on your credit score. After all, many people seem to believe that having a small or medium-sized balance on their credit cards can help boost their score somehow.
Does carrying a balance on a credit card help your score? At the end of the day, this question has a definitive answer that may surprise you.
Carrying a balance does not help your credit score
If you’re hesitant to pay off your credit card in full because you believe small balances are helping you, think again. Carrying a balance on your credit card does nothing for your credit, yet it’ll cost you money over the long run. After all, the average credit card APR is currently around 16%, so even interest on small balances can add up in a hurry.
According to the Consumer Financial Protection Bureau (CFPB), the rumor that debt helps your credit is the opposite of the truth. In fact, they write that “paying off your credit cards in full every month is the best way to improve a credit score or maintain a good one.”
This truth is easy to understand when you take a closer look at the factors that impact your credit score. For example, when it comes to your FICO credit score, the second-most important aspect of your credit history are the amounts you owe in relation to your credit limits, also known as your credit utilization ratio. This factor makes up 30% of your FICO credit score, and it can be impacted in a negative way if you use too much of your available credit in any given month, or over time.
The CFPB says that keeping a low credit utilization ratio (preferably under 30%) shows lenders you’re a responsible borrower. However, they also state that “paying off your entire balance is best and keeps the ratio low, strengthening your credit scores.”
Other factors that impact your credit score
Now that you know carrying a balance won’t help your credit, you should take time to understand additional factors that can impact your credit. First off, you should know that your payment history is the most important factor that makes up your FICO credit score. This comprises 35% of your score, and you can excel in this category by paying all your bills — including credit card bills — early or on time with no exceptions.
Another factor that impacts your credit score is the length of your credit history, making up 15% of your FICO score, and you can improve in this category by keeping credit accounts in good standing for as long as you can. As a side note, this credit score factor is the main reason credit experts suggest keeping old credit card accounts open — even if you’re not using them.
Other factors that make up your credit score include new credit (10% of your score) and your credit mix (10% of your score). You can see negative marks in the new credit category any time you apply for a new credit card or loan and a hard inquiry is placed on your credit report.
Meanwhile, your credit mix is determined by the different types of credit you have, including revolving accounts, installment loans and more. You can see a positive impact in this category if you have several different types of credit accounts and they’re all in good standing.
Steps to avoid carrying a balance on your credit card
Since carrying a balance on your credit cards won’t help your credit score in any way, your best bet is avoiding debt if you can. Obviously, paying your credit card bills in full every month can help you save money on interest, yet it can also help in other areas of your life. For example, living a debt-free lifestyle can make it easier to overcome financial hardships, and it’s easier to save money when you don’t have huge amounts of debt to pay off.
If you have credit card debt you simply cannot pay off right now, your best first step is to stop using credit cards for purchases. After all, paying down debt is considerably more difficult when you’re still racking up balances.
Once you get away from using your credit cards for spending, you can hatch a plan to pay your cards off with a strategy like the debt snowball or the debt avalanche, or even with the help of a balance transfer credit card that offers zero interest on your debt for a limited time.
Then, to avoid carrying balances on credit cards in the future, consider these tips:
- Use a monthly budget to plan your spending. When you use a budget to plan your spending each month, a credit card becomes a tool to pay bills and cover regular expenses. With money set aside in your budget for everything you buy, you can stick with your plan and spend accordingly.
- Pay off your credit cards several times per month. Also, keep in mind you can pay your credit card bills off several times per month. This strategy can help you stay on top of your spending and avoid “surprises” when your bill comes due.
- Only use credit cards for purchases you can afford to pay for right away and avoid situations where you’re charging purchases you can’t afford to pay for. Because of the high interest rates that credit cards charge, plastic is a poor option if you need a short-term loan.
Read other stories in our “Myths about credit” series:
Looking for a new credit card? Read CNN Underscored’s guide to the best credit cards of 2021.