Does Carrying a Balance Help or Hurt Your Credit Score?

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You might already be familiar with the fact that your credit score impacts several critical areas in your financial life. A higher credit score can help you to lock down lower interest rates, better mortgage deals, and can even help you to snag an apartment. That being said, does carrying a balance on your credit card help or hurt your credit score?

What does it mean to carry a balance?

First off, what does carrying a balance even really mean? By definition, when you carry a balance on your credit card it means that you’ve used a portion of your pre-approved credit to make purchases that you haven’t paid back yet. Essentially, that means you’ve swiped your card and in doing so borrowed money from your credit card company. Your balance can last for just a day or two if you pay it off immediately, or it can last for months (or even years) is you don’t pay it off. Additionally, if you don’t pay it within the first billing cycle, you’ll face interest charges. A balance can be any amount, from a small charge (like a $2 coffee) to a purchase that uses your entire credit limit.

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Do you need to carry a balance to build credit?

What seems like a fairly simple question is one that continues to confuse consumers who are looking to build up their credit responsibly without going into credit card debt. The conundrum exists in the details: to carry a balance means to carry debt. Paying off debt can help you to build credit. But consumer debt is also the very thing that gets so many into trouble when they can’t make payments or are challenged by high interest rates.

The question is: If paying off a loan or debt can help to increase a credit score but you don’t want to take on (more) debt – are you required to carry a balance (and take on debt as a result) in order to maintain a healthy credit score?

The truth: you don’t have to carry a balance to have a great credit score. Paying off your balance in full each month (without carrying it over to the next month) can help you strengthen your score and also saves you from paying interest charges.

The Good
When you can pay off the balance at the end of each billing cycle you theoretically prove to lenders that you’re a responsible borrower and demonstrate that you can make timely payments. As a result, you increase your credit-worthiness and can benefit from a higher credit score as a result. That being said, your credit score is compiled of several other elements (age of accounts, amounts owed, types of credit, etc.) and not simply by credit card usage. Companies don’t need to see a high balance but they do want to see that you can make on time payments.

The Not So Good
Carrying a balance on your credit card that you can’t pay off each month will result in interest charges and puts you in danger of potentially lowering your credit score. Late payments will count against you, especially if they go past 30 days. Then, they’re entered onto your credit report as a negative mark.

In addition, carrying a high credit card balance can hurt your credit score. Most financial institutions recommended that you spend no more than 30% of your credit limit to remain within a positive credit utilization ratio.

Using a balance to build your credit score

The middle-ground in building credit without putting yourself in debt or hurting your credit score lies in two key elements:

  • If you do use your card to help build credit, remain below the recommended credit utilization ratio.
  • Pay the balance in full each payment cycle.

Remember: when you carry a balance on your credit card it indicates to a bank or lender that you’ve also entered into an agreement to pay off a balance. Even zero interest cards need to be repaid despite their “perk” of no interest charges. Never take on unnecessary debt.

Other ways to boost your credit

It’s a pervasive myth that you need to accumulate debt in order to raise your credit score. Though using credit responsibly can help you to boost it there are several other ways to improve your credit score without using your credit card.

For example:

  • Reporting your rental payments
  • Paying student loans/mortgages/other installment loans in a timely manner
  • Keeping older accounts open to lengthen an account history
  • Increasing your credit limit (without spending it!)

Another option if you’re just beginning to build your credit is to opt for a low interest credit card and diligently pay small balances off in full before the billing cycle ends. To be clear, these should be purchases that you feel 100% comfortable paying off. Paying off small balances immediately allows you to solidify responsible borrower habits while also building up your credit. Remember, this is only beneficial if you actively pay off any charges incurred. You’re still responsible for any money borrowed, regardless of a low interest rate.

Bottom line

Though credit cards can help you build up a higher credit score, your total financial security depends on your ability to pay off your balances or your credit cards and remain in control of your money. Don’t take on unnecessary debt or carry a balance just for the sake of raising your credit score. If you’re currently paying off debt, consider utilizing other ways that can help raise your score without taking on more debt.

Image Credit: Dennis van Zuijlekom

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  • Great post. There are still a lot of misconceptions about carrying debt and using credit cards.

  • Danny

    I would like to challenge some of the items. I am not finance expert but I simply have been able to take care of my own with my own methods.

    1. Keep your balances low and regards of utlization
    High credit limits are always good for utilization ratios and also to have the buffer for emergencies. However, you will never be able to make the case to a bank for needing more credit if you hardly use it or you only use a little bit.

    If you have a $1000 credit limit and you stay under $300 and use it infrequently then there is really no need to increase your limit since it seems just fine. So in order to make a case to a bank to increase your limits you have to demonstrate that the current limit is not enough and you can only do so if you go past the “recommended utilization and at time have to go as far as 80% of your limit. So when you make your case to the bank, you can tell them that you spend for more than what the credit is allotted and in keeping your utilization low.

    2. Usage
    Banks like to see a lot of swipes, every time you swipe they make money. If you don’t use your card a lot, you are not a “preferred” customer, however, they don’t like when they think you stretch yourself thin. So the bottomline is that you should use credit instead of cash meaning that if you have the money to pay for it cash, hold on to it, pay in credit then use the cash to pay the bank.

    Add a nice reward program to your CC and you actually earn something for it.

    So the way I have learned it there are 2 audiences that you have to please 1. The bank who gave your the credit card and 2. The credit bureaus and what they report.

    Your bank wants to see lot of usage, the more the better, these banks keep algorithms of your spending, they know if you are “struggling” by your spending habits and they also know if you just use your card as a tool. That’s why each business has codes applied to them to know what type of business they are. So if you use your card a lot charge it up but can manage you pay it down BEFORE the bank reports the CRA you are going to strike gold

    I never use the actual due date, I use the “statement closing date” which is always before your due date but that way, your balance won’t be reported high and you look good for other prospects. But at the same time you are giving your bank all of the reasons to provide more credit.

    • Dashawn R.

      Your strategy sounds nice but doesn’t apply to all situations.

      Here’s why…

      1.) Keep your balances low in regards of utilization rate.
      This work well if indeed your credit limit is high. On the contrary, a lot people don’t have a very high credit limit and mainly due to the fact most people have to “earn banks trust” first in order for the banks to extend them more credit (increasing their credit limit). With that being said, from what I’ve learned by doing my own due diligence and extensive digging and building my credit up myself is that banks want to be sure you can handle the already given credit you have in conjunction with successfully utilizing the given credit limit you have within the “Under 30% utilization rate” before they can “trust” or give you a higher limit on your credit card. In most cases, once banks have tracked your careful credit card usages more often than not in most cases and within a given timeframe they’ll extend your credit limit without you having to ask, thus, negate the idea of having to make your case to the bank for a higher credit limit. They’ll be the purser of giving a higher credit limit, not you. Banks much rather see a responsible spender versus a spender who’s spending just because they have the credit available.

      2.) Usage
      The “Credit card instead of cash” strategy is great to use as well, only if;
      a.) Your credit limit is already high so you won’t be in danger of extending yourself over 30%-50% utilization rate by trying to pay everything with your credit card then playing catch up by paying all back in cash.
      b.) Indeed you have enough cash to pay off at least more, if not all of the complete balance before the statement is reported to the bureau(s). Every bank has a different reporting timeframe, so calling them to verify when this is sent is the best thing to do. Also, “statement closing dates” aren’t always before the credit card due date. I bank with BOA and my credit card due date is the 16th of every month, but “my statement closing date” is the 19th of every month which actually allows me a 3 day gap to have my balances paid in full before BOA report my credit card statement to the bureau(s).

      • Danny

        I agree with you. My post was about a strategy for getting a higher CL with the bank when you don’t have one. A lot of banks don’t just give CLI’s with a lot of them you have to ask for it and then they ask you “Why Do You want it”. The “Utilization” excuse doesn’t work with them. You have to make a case with them for example I received an Amazon CC with only $400. I used it all the time and I charged it always up to about 80% then made a payment to bring back down before the statement closing date being mindful of my utilization. I requested a CLI 3 months in but got declined.

        So I continued to go high on my CL every time and using it a lot, but also making payments. So several months in, I contacted Synchrony and asked them about CLI and the rep asked my “Why do you need an increase”.

        I told him that that $400 is not doing anything for me, I can’t really buy anything and have to make frequent payments, so that card is not being much of a benefit since I have to make sure that I don’t max out the card with small purchases and allow me to leverage their promos. He then asked me how much I needed and I said $3000 and I told him that he can see on my history that I make multiple payments per month and lots of purchases but it’s a hassle using the card. After few minutes he came back and gave me what I asked for.

        That worked with many of my CC and I have BofA as well where I received 3 increases within 6 months.

        You are absolutely right about the banks needing to trust you but you build that up by heavy usage and showing the bank that you have more then enough to cover your purchases if they just increase you limit so you don’t have to consistently make multiple per month to be mindful of your CL