I’ve always heard it’s best to pay off your credit card in full each month, but this certainly not the universally accepted opinion. Some people actually think carrying a balance on their card is the best way to build credit. What about you though – is it good or bad for your credit score if you carry a credit card balance?
The argument for paying off your credit card in full each month is straightforward:
- It demonstrates your ability to handle credit responsibly by only borrowing what your budget can afford. This can boost your credit score.
- You’ll save money on interest (although the amount of interest you pay doesn’t necessarily impact your credit score).
But there is also an argument for carrying a balance:
- If you make the minimum payment on time, carrying a balance doesn’t count against you.
- Paying off debt regularly builds your credit.
The problem with the second point is that it tends to assume you need to keep creating and paying off debt to raise your credit score. This simply isn’t true. Not only are there other ways to build your credit; there are risks to carrying a balance on your credit cards.
Other Ways to Boost Your Credit Score
Credit score formulas use many pieces of information about your credit accounts: the age of your accounts, the types of credit, and how much debt you carry. To boost your credit score without taking on more debt, focus on making timely payments on your rent, mortgage, or student loans, and keep your oldest accounts open. It’s the whole picture – not just one aspect of your credit – that counts.
The Credit Score Risks of Carrying a Balance
Carrying a balance without carefully monitoring it increases the chance your balance will get out of control, and you won’t be able to make the minimum payment within each billing cycle. Late payments are obviously bad for your credit score. Second, even if you make you payments on time, carrying a high balance on your credit card can work against you thanks to something called the credit utilization ratio.
This can also impact people who pay their balance in full each month. In other words, regardless of which camp you fall into, pay attention to your credit utilization.
How Credit Utilization Works
Credit utilization refers to how much of your available credit you’re using. Most financial experts suggest keeping this ratio positive, or below 30% — the threshold of where it starts to impact credit scores.
One tricky thing about this rate is that you don’t always know how it’s calculated. Some institutions compile the balances and limits across all your credit cards, while others calculate the rate for each card. The other tricky thing is that issuers report to credit bureaus at different times of the month, so even if you pay your balance in full, exceeding the 30% credit utilization at any point in the month could hurt your score. With that in mind, it’s always wise to keep all your cards at or below 30%.
Here are a few easy ways to keep your credit utilization ratio positive:
- Set up alerts with your card issuer so you’ll know when you reach 20% of your credit limit. You can also set a cap on the amount you can charge.
- Find out when your issuer reports to credit bureaus and plan your payments around this date.
- If paying once a month brings you dangerously close to 30%, make it a habit to pay mid-cycle (perhaps automated and coordinated with your bi-weekly payroll deposits).
- Ask for an increase to your line of credit – but only if you can handle the temptation to spend more than you can afford to. Increasing your line of credit will allow you to spend more before you reach the 30% threshold.
In the end, it doesn’t matter much to your credit score whether you’re a pay-in-full person or a carry-balance person. It matters that you understand how your habits affect your score, use credit responsibly, and pay attention to your credit utilization.