When it comes to understanding your credit score, it can be tricky to figure out how it all works. Should you use your credit card for purchases and pay it off, should you keep a balance for a little while, should you get a new credit card or cancel old ones you don’t use? It can be confusing. If you don’t currently have any credit card balances, you might be wondering what you can do to maintain or even boost your current credit score a little. Should you consider making a few purchases and charging them to your card and paying it over a few months vs. in full? After all, you don’t want the credit bureaus to forget that you know how to be responsible with credit. But how is carrying a balance really affecting your credit?
35% of your credit score is determined from data about your payment history. They look at if you are paying the minimum required amount due and that you are paying it on time.
Another 30% of your score is determined by how much you owe, and it’s not just on your credit cards, it’s your total debt including student loans, car payments, credit cards, and mortgages. So even though you are paying on time, the higher your credit card balance, the higher your credit utilization rate. There is no magic number when it comes to credit utilization that helps your credit score. Balances are debt and carrying debt affects your credit score.
So why is there is myth around carrying credit card balances? Well, credit inactivity can negatively impact your score. We aren’t saying go out and rack up a bunch of credit card debt just to use your cards, but it is better to use your credit card occasionally and pay it off right away versus not using your card at all.
You might think that just because you pay your cards off in full each month that the credit bureaus won’t see the payments, but rest assured that they will still know you used your credit card, because your credit utilization gets reported to the bureaus sometimes before you’ve had a chance to pay the bill. Your current account balance isn’t necessarily the balance that shows up on your credit report and factors into your FICO Scores. Your account balance on your credit report will reflect the account balance your lender reported to the credit bureau (typically the balance from your latest monthly statement). So even if you pay your credit card balances in full each month, your account balance won’t necessarily show on your credit report as $0. Confusing, yes, but it’s really just a timing thing.
In addition to increasing your credit utilization number, you also most likely be incurring interest if you carry a balance each month. Paying interest, even on a small balance, is not the best way to try to raise your credit score or help increase your savings account balance. The best thing to do to boost your credit score is to pay on time each and every month and pay your statement balance in full when possible. If you aren’t able to pay your balance off in full each month, check out our blog on other options to help pay down your debt.
Vice President, Lakeville Manager