Banker Says – Carry Debt to Improve Credit Score

by David Ning · 13 comments

Even a banker’s advice could be totally wrong.

I can’t believe what I heard, but a banker told me that carry a credit card balance can improve my credit score.  In fact, there are many people who give the same advice – don’t pay your credit card balance in full to raise your score.  So today, let’s clear up all the smoke.  Pay off your credit card balance regardless of what people say.  Let me explain why.

It’s true that having a balance and showing that you can pay it off can increase your credit score, but you can have the same effect even if you pay off the balance in full every month.  Below is an illustration of a typical credit card usage pattern:

July 1 – Groceries for $29, Balance Owed is $29
July 4 – Lunch for $11, Balance at $40
July 8 – Statement Comes with Balance of $40, Due July 20
July 12 – Dinner for $69, Balance at $109
July 18 – Gas for $38, Balance at $147
July 20 – Pay $40 for Amount Due, Balance at $107

As you can clearly see, this person’s balance was almost never at $0.  Therefore, it would show that there is a balance no matter when the credit card company decides to report your amount owed to the credit agencies.  In fact, paying off your balance in full will likely decrease your overall debt to credit ratio, raising your score.

Two caveats though:

  1. You Have to Use Your Credit Card – Part of your credit score is based on the fact that you show ability and commitment in paying off your debt on time.  If you never use your card and your debt is always nothing, your score will suffer as a result.
  2. Pay it Off in Full After the Statement Comes – Some people like to pay the balance off the night they make a purchase.  These people will almost always show a balance of $0, and credit agencies will never know that you have the ability to pay off balances because you never have any to begin with.  Credit agencies calculate your score based only on the information available on your credit report.  If there are no records, there is no way they will know that you can potentially pay off loans even your cash position makes Bill Gates jealous.

While carrying a credit card balance may make sense when you first listen to the advice, it clearly isn’t logical when you sit down and  think about it.  Actually, I will still recommend paying your balances off even if paying in full affects your score negatively because it’s the only responsible way to manage your finances.

Stop listening to the wrong advice (no matter where they work at) and pay off your balance in full to the best of your ability.

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{ read the comments below or add one }

  • RMG says:

    The headline is true – “Carry Debt to Improve Credit Score”. This WILL increase your credit score but it MAY NOT inprove your overall fiscal situation. Your credit score is a snapshot in time that reflects your credit risk, it is not a reflection of your finances. While doing the best thing for yourself (paying down your CC every month in full) eliminates the interest charges, you make take a bit of a hit in your credit rating. DO NOT be alarmed! You are still in great shape.

    Actually, pay attention to your statement issued date and not your due date. If your statement date has a balance and you still pay off before your due date, your credit card company will report that you have a balance even if you pay off your card in full every month. If you want to have a minimal balance of $1 on your statement date for credit reporting purposes, make sure that you pay your account down just before that date. That way you get the benefits of paying no or next to no interest and your CC is still reporting to the rating agency that you are carrying a very low balance. A very low balance is BETTER than a 0 balance as it still indicates that you pay your bills and that you have a low utilization ratio. Your credit score will RISE. Best of both worlds!

  • Brian says:

    “While carrying a credit card balance may make sense when you first listen to the advice, it clearly isn’t logical when you sit down and  think about it.  Actually, I will still recommend paying your balances off even if paying in full affects your score negatively because it’s the only responsible way to manage your finances.”

    I’m confused. It’s stated above “even if it affects your score negatively…” Am I taking it out of context? Are we saying paying it off in full does worse to your score than carrying a balance???? Everything made sence until that part.

    Thisnis good stuff, please comment.

  • Camp Taji says:

    I have three credit cards that are all with the same bank. Recently, they lowered my credit limit because I keep a near zero balance. I guess that does not really matter, as my home is paid off as are my cars.

  • Put this into perspective, though says:

    I’m late to the party on this one, but put this into perspective. If you pay interest, the banks are more willing to issue higher credit lines.. the higher the credit line, the more money you put on the card.. the more money you put on the card, (keeping under 40% balances carried) the better creditors can assess how you would do on a mortgage type situation. Banks make a profit on the interest you pay as you carry balances, Creditors see the banks willingness to issue you more credit, and everyone wins but your pocketbook. HOWEVER.. keep this also in perspective, you do need to show you can pay off a card in full a couple times a year. Carrying balances under 40% is great, but if you can manage to pay off the whole card, then bump the balance back up to just under 40%.. will help creditors see that you have that ability. Also, fully using a cards credit limit also, helps banks and creditors see that you actually need the credit line. Follow these reccommendations and it may just make a 1-2% difference on your next home mortgage. (In other words.. thousands of dollars)

  • Wilson Pon says:

    My credit card company always credited my monthly credit report on every 27th of each month. Honestly, I’m a little bit of shame, as I’m one of those who never have zero balance…

  • Thank goodness for this post, and for the growth of online personal finance blogs everywhere. When I was younger, all I heard was “use your credit card, don’t pay off balances, the larger, the better since they want to give you even more credit.”

    What a load of crap.

  • Annie G says:

    You can always ask your CC companies what date they report your balance to the credit agencies. Once I knew the date, I shifted my payment strategy to be sure that they were reported a small, but above $0 amount.

  • Using the fear of a bad a Credit Score and Credit Card debt is entirely a scam to keep consumers in a never ending cycle of interest payments to bankers.

    Think about it, the bankers are telling you to take out loans, short term high interest rate loans like credit cards, so that you will have a good credit score. A good credit score to do what exactly? BORROW MORE MONEY.

    Corporations leveraging debt in a well thought out investment strategy may be successful. However, consumers have to stop thinking they should attempt the same by financing their lives. If you have borrowed more than $30,000 (besides your home) and you earn less than 80k/year then you will likely be paying interest to somebody else for the rest of your life. You will never reach financial freedom, or at minimum you will severely delay the day when you can start investing in yourself.

    In my view the attitude needs to be, I do not need revolving debt, I do not use credit cards, I do not need a credit score as I do not need to use a loan for any purchase outside of a home loan.

    If the bulk of consumers become cash customers we will stop being a nation of debtors. Without credit card debt, auto loan debt and worse, pay day loans, consumers will reach that point where they are investing in themselves through contributions to investment accounts.

    Instead of borrowing our way to a false sense of security, we will be buying our way to a true sense of accomplishment.

    Stop being taken by the credit score scam and reject using any form of short term high interest rate loans.

  • Let me tell you, this is a very, very helpful post. It simply doesn’t make sense to carry debt, would just dig you in deeper. I make it a point to pay my outstanding balance in full every month, whenever possible.

  • Richard says:

    Telling someone to carry a balance just to improve your credit score sucks and just make no sense. If I were you, I would just walk out the door after hearing that.

  • Charlie@PayLessForFood says:

    I agree. This is not the best advice to give someone. Actually carrying a balance on your credit card in same cases can actually hurt your credit score.

    Credit score agencies look at your credit utilization rate to determine a large part of your score. Essentially they look at how much of your available credit you’re using. Typically you want a utilization rate less than 30%, meaning if you have $1000 available credit on your credit cards you need to try to keep your credit card balance under $300.

  • Sandy says:

    Great illustration of this myth. I always thought it was weird to consciously pay off less than the full amount in order to “build” credit. Now I know what NOT to do.

  • Lems says:

    The best thing to do is to get out of debt as soon as one can. Obviously showing that you have paid debt responsibly can do more than just keeping it there.

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