Does Carrying a Credit Card Balance Help Your Credit Score?
You don’t have to carry a credit card balance from one month to another to help your credit score.
Hence, this act has led to many paying higher interest on card purchases that should have been paid in full.
Thus, if you want to build your credit, you might have heard that carrying a balance can be helpful.
However, the truth remains that these credit card companies know that you’re using your card.
In this article, we will tell you if carrying your credit card balance can help your credit card.
Also, we will give you some helpful tips on how to build your credit.
Having said that, let’s begin.
Credit Utilization: Why it matters and how it is misunderstood.
When it comes to building your credit, credit utilization plays a very important role.
Hence, it is the percentage of the credit limit on your credit card.
For instance, if you have a credit limit of $100,000 and a balance of $10,000, your credit utilization ratio is 10%.
However, we advise you to keep your ratio low as it plays a major role in building your credit.
Hence, you should maintain a ratio under 30% if you want to build your credit aggressively.
Thus, most people feel paying their credit card balance in full put their ratio at 0% and may affect their credit.
Well, this idea is wrong and it is not necessary to build your credit history.
Pay Your Card Off In Full
Carrying small credit card balances from one month to another does not help your credit.
Hence, you help your credit score more when you pay off your credit card balance in full.
Thus, moving your balance from one month to another only incur extra charges on your credit card.
So, make sure you pay your balance in full to avoid extra charges on your credit card.
Why You May Be Confused
Now, that you know that carrying a small balance over to the next month won’t help your credit, let’s look at how it all began.
You may not be rewarded for carrying your balance over to another month. But you will be rewarded for using your credit card wisely and maintaining a small balance.
So, the question is how can credit card companies know that you can handle credit if you’ve never used the cards?
Well, the answer is they can’t. If you’ve never used a credit card, you’ll have a 0% credit utilization and a $0 balance.
Hence, this doesn’t show that you can handle credit, because you’ve not used the card.
So, in other to boost your credit, you will have to use the card at least for a while.
But, when you get your bill, still pay off your balance in full.
Credit Utilization Is Reported Before Due Date
Generally, your credit usage is always reported to the major credit bureaus. Hence, this is done even before you’re billed.
However, your credit usage may be reported during your billing cycle based on your card.
Hence, you don’t have to carry a balance over to a new month to prove that you’re using your card.
Thus, the credit bureaus already know that they’ve been informed already.
So, even if you pay off your balance in full each month, lenders will want to know if you used your credit.
For instance, if you have a credit limit of $10,000 and spend $9500, then pay it off in full, you’ve used 90% of your credit.
Hence, lenders will look at this ratio and assume you were almost unable to pay your bill.
But, if you have a credit limit of $10,000 and spend $1000, you appear as less risk to lenders.
How to Keep Credit Utilization Low When Trying To Build Your Credit
Having said that carrying a balance and paying interest is wrong. Now, what should you do to maintain a low credit utilization?
Well, the only way is to ensure few purchases on your credit, thereby keeping the ratio low.
But, if you have a low credit line, it can be a bit difficult maintaining a low ratio.
Hence, in this case, you can opt to make multiple payments each month to ensure that your balance looks good.
For instance, if you have a credit limit of $1, 000 and a balance of $300. You can make a mid-month payment of $250 to get your balance down to 450.
Thus, by doing this, you’ll still have a low balance. And also a good utilization ratio when the balance is reported.
Verdict
To sum it up, carrying a credit card balance and paying interest is wrong. And also, it is not a good way to build your credit history.
Hence, maintaining a low credit utilization. And also paying your balance in full is the right way to build your credit.
However, if you have any questions, leave them in the comment below.
Having said that, thank you for reading!