There is a lot of misinformation and rumors going on when it comes to your creditworthiness. For example, you may have heard that checking your credit report is affecting your score, which is obviously wrong. Also, you may have heard that you only have one credit rating, or that you can pay a company to get your credit corrected quickly if necessary. These two popular rumors are also untrue.
Another common credit myth involves carrying a balance and the exact impact debt has on your creditworthiness. After all, a lot of people seem to believe that having a small or medium balance on their credit card can help improve their score in some way.
Does Carrying a Balance on a Credit Card Help Your Score? At the end of the day, this question has a definitive answer that might surprise you.
If you are hesitant to pay off your credit card in full because you think small funds will help you, think again. A balance on your credit card doesn’t add to your balance, but it will cost you money in the long run. After all, the average APR on a credit card is currently around 16%, so the interest on small credit balances can add up quickly.
According to the Consumer Financial Protection Bureau (CFPB), rumor that debt will help your credit is the opposite of the truth. In fact, they write that “Paying off your credit cards in full each month is the best way to improve or maintain a good credit score.”
This truth is easy to understand once you take a closer look at the factors that affect your creditworthiness. For example, when it comes to your FICO credit history, the second most important aspect of your credit history is the amounts you owe in relation to your credit limits, also known as your credit utilization. This factor makes up 30% of your FICO credit score and can have a negative impact if you overuse your available credit in a given month or over time.
The CFPB says that a low credit utilization (preferably below 30%) shows lenders that you are a responsible borrower. However, they also find that “Paying out all of your balance is best and keeping the ratio low, which adds to your creditworthiness”.
Balance isn’t the only factor that affects your credit score.
Now that you know that maintaining a credit balance won’t help your credit, it is time to take the time to understand additional factors that can affect your credit. First off, you should know that your payment history is the single most important factor in your FICO credit score. This represents 35% of your score, and you can excel in this category by paying all of your bills – including credit card bills – early or on time, without exception.
Another factor that affects your credit score is the length of your credit history, which is 15% of your FICO score, and you can improve in this category by keeping credit accounts in good shape for as long as possible. As a side note, this credit score factor is the number one reason credit professionals suggest keeping old credit card accounts open – even if you’re not using them.
Other factors that determine your credit score are new loans (10% of your score) and your credit mix (10% of your score). You can see negative marks in the new credit category every time you apply for a new credit card or loan and a tough request is made on your credit report.
Meanwhile, your credit mix will be determined by the differences Types of any 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 all of them have good reputations.
Since keeping a balance on your credit cards will not improve your credit score in any way, it is best to avoid debt if you can. Paying your credit card bills in full each month can save you money on interest, of course, but also in other areas of your life. For example, a debt-free lifestyle can make it easier to overcome financial difficulties, and it can be easier to save money when you don’t have large debts to pay off.
If you have credit card debt that you just can’t pay off right now, the best step is to: stop using credit cards to make purchases. After all, paying off debts is considerably more difficult when you are still piling up on funds.
Once you have finished using your credit cards for spending, you can come up with a plan to pay off your cards using a strategy like the debt snowball or debt avalanche, or even a credit transfer credit card that does not charge interest on your debts for a limited time.
To avoid carrying balances on credit cards in the future, here are some tips to keep in mind:
- Use a monthly budget to plan your expenses. When you use a budget to plan your monthly expenses, a credit card becomes a tool for paying bills and covering regular expenses. With money in your budget for everything you buy, you can stick to your plan and spend accordingly.
- Pay off your credit cards several times a month. Also, keep in mind that you can pay your credit card bills several times a month. This strategy can help you keep track of your expenses and avoid “surprises” when your bill is due.
- Only use credit cards for purchases that you can pay for immediately and avoid situations where you will be billed for purchases that you cannot pay for. Because of the high interest rates that credit cards charge, plastic is a poor option when you need a short-term loan.
Read more stories in our “Myths About Credit” series:
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