File this one under deadly credit scoring myths.
For some reason, probably due to the clandestine nature of Fico’s credit scoring algorithm, many consumers believe carrying a balance on a credit card will benefit their credit score somehow.
This can’t be further from the truth, and in reality, can be quite detrimental to one’s finances.
Why Would You Get Rewarded for Carrying a Balance?
If you take a moment to stop and think about it, why would Fico and other credit score providers reward you for carrying a balance and paying costly finance charges.
This clearly wouldn’t make a lot of sense, and it wouldn’t be responsible of them to reinforce poor borrowing habits.
The short version of the story is that the less available credit you use, or have outstanding, the higher your credit score will be.
So again, it would be counterintuitive to think that carrying a credit card balance would somehow help your credit score.
Credit Card Balance Could Mean You’re Overextended
If anything, a balance could tell the credit bureaus that you can’t pay off your purchases in full (even if you really can), thus increasing your credit default risk.
After all, if a consumer pays their balances in full each month, it shows that they’re living within their means, as opposed to getting overextended and falling behind.
Those who carry balances month-to-month are essentially telling new creditors that they’ve already got debt they can’t fully manage.
Would you rather lend to someone who pays their bills in full each month, or only kicks the can down the road?
Personally, I’d rather let someone borrow money who didn’t already have pre-existing debt in front of mine.
An Open and Active Credit Card Can Help
All that said, the confusion really lies in the fact that people don’t fully understand how credit works.
It’s good to have open and active lines of credit, such as credit cards, because it shows creditors you’re actively making good on the money you borrow.
So you don’t need to carry a balance – rather, you just need to keep the credit card open and make some purchases each month.
That way the credit card works in your favor, and builds credit history.
Obviously, if you don’t use your credit card it won’t do much good. Sure, you’ll have access to more credit, but you won’t be adding on-time payments to your credit report each month.
Where people get tripped up is that they think an “active credit card” is one that has a balance. This isn’t the case. An active credit card is simply one that is being used on an ongoing basis.
In summary, you should never carry a credit card balance to boost your credit score. If anything, it will backfire and you’ll wind up paying a ton of interest.
What’s the point of that? You should never have to pay for a better credit score. Period.
For the record, Fico “strongly encourages” paying your credit card balance in full each month. They can’t see the payment you’ve made anyways; they only see the credit card balance reported by the credit card issuer, which may not reflect what you actually paid.