Monday, 24 June 2019

Myth Busters: Do You Need to Carry a Balance on a Credit Card to Raise Your Score?

Myth Busters: Do You Need to Carry a Balance on a Credit Card to Raise Your Score?
04 Jun
2:18

There is one persistent credit card myth that befuddles consumers from all walks of life. Parents tell children. Friends tell each other. Managers lecture employees. “You should carry a balance on a credit card,” they announce in authoritative voices. “It’s good for your credit.”

In reality, there is absolutely no need for you to carry a balance on a credit card, and, in fact, it can hurt both your credit and your wallet if you do so.

Let’s break this down, and end the confusion for once and for all.

You have three options for paying your credit card bill

1. Pay The Minimum Due

When your statement comes in the mail, or via email or appears in the online portal for your credit card, it will show the total balance due as well as a minimum due. If you owe $1,500, your minimum due may be just $45.

Sure, you can pay the $45 and your credit report will reflect that you paid on time, and it won’t hurt your score. However, this strategy will hurt your wallet because you’ll start paying interest on the outstanding balance due.

2. Pay the Balance

This one is simple and should be your go-to move. When the statement comes in, pay it off on time and in full.

In this case, your lender, the credit bureaus and your wallet should all be happy.

3. Pay As You Go

Let’s say you swipe your card at the grocery store on Monday to purchase $35 worth of food. On Wednesday, you log into your credit card portal online and see the $35, which you immediately pay off.

Result: While this strategy may make you feel like a responsible credit card user, it isn’t beneficial for your credit score. Part of developing a strong score is show utilization. If you pay as you go and show $0 spent when your statement cycles, then it shows 0% utilization to the credit bureaus. It’s a bit of a catch-22 because you certainly aren’t being irresponsible, that would hurt your score, but you’re also not proving you’re responsible either.

Where the confusion probably started

If I were to guess, the confusion about carrying a balance probably started because someone misunderstood the difference between receiving a statement and carrying a balance.

Yes, you need to let your statement cycle so you show some utilization on your bill. Even something small like a $5 purchase, don’t pay it the second it appears on your online portal and let it appear on your statement. A statement doesn’t cycle until you receive a message from your credit card company that your statement is available and you owe XX amount or a XX minimum.

What you shouldn’t do is receive the statement and just pay the minimum due – thus carry a balance. While it doesn’t hurt your credit score to only pay the minimum due, it just ends up being more money you pay in interest to the bank. Why pay your lender for something you can be getting for free?!

To put it in simplest terms

  1. You don’t need to carry a balance to have a good credit score. In this case, carrying a balance means only paying the minimum and always owing money to your credit card company.
  2. You do need to show a balance on your credit card statement – which you should immediately pay off in full.

What if you can’t pay in full?

If you’ve charged more to your credit card than you can afford, you should at least pay the minimum due plus as much as you can afford on top of the minimum. Not paying at all — or waiting until after the due date will result in major damage to your credit score. One missed payment could be up to 100 points off your credit score. So, if you’ve put yourself in a tough situation, at least pay the minimum by the due date.

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