Keeping Balance Will Not Improve Your Credit Score
Imagine this scenario: You have no credit card debt, either because you paid it off or because you completely avoided it. You have an excellent credit history and a high rating. But you don’t want credit bureaus to forget that you know how to take charge of a loan. Therefore, from time to time you make a purchase and allow it to be carried over to the next month without paying the balance in full. You let this revolving balance hang just long enough to get noticed by the bureau and then pay off. This is the best way to show that you are a responsible user of credit, right?
This is actually not the best way. This is one of the most common credit card and account myths in the world. It’s like Bigfoot, Loch Ness Monster and Jersey Devil rolled into one. It’s a delightful urban legend, meaty enough to be believed. But this is simply not true.
The largest chunk of your credit score – 35% of the pie chart – is calculated based on your payment history. It has nothing to do with how much you pay, only that you pay at least the minimum amount required by your lender and do it on time.
The second largest factor – 30% of your score – is the amount you owe. It is calculated based on how much you owe on all of your bills, including student loans, car payments, credit cards, and more.
The higher your credit card balance, the higher your credit utilization rate. There is no credit utilization ratio that helps your credit rating. Debt is bad. End of story.
The confusion around this is that inaction on the loan can negatively impact your score. It is better to use a credit card from time to time and pay with it right away than not to use it at all.
Even if you pay the bill in full each month, the credit bureaus will still know that you have used your credit card. This is because sometimes your credit bureaus are reported to the bureau before you can pay the bill.
FICO and VantageScore, the two most commonly used credit rating models, support this myth. (Sites with free credit ratings usually use VantageScore, while your bank or credit card issuer likely shows you the FICO score.)
FICO explains that credit reporting charts can confuse this myth:
Your current account balance is not necessarily the balance that appears on your credit report and counts towards your FICO scores. Your account balance on your credit report will reflect your account balance as reported by your lender to the credit bureau (usually the balance from your last monthly statement). Thus, even if you pay your credit card balance in full each month, your account balance will not necessarily show up as $ 0 on your credit report.
In addition, VantageScore states that having a balance sheet does nothing to accelerate credit build-up:
A credit card opened 12 months ago is a one year old credit card, regardless of your practice of paying out or changing your balance. In addition, the monthly credit card balance means that you will be charged interest.
Paying interest even on a small balance is a terrible way to improve your credit rating. If you want a healthy credit history, pay on time every month and don’t trust anyone who says having a balance sheet helps you look your best in the eyes of lenders and credit bureaus. It just isn’t true.