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Carrying a Credit Card Balance Won’t Improve Your Credit Score

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I’m one of the moderators of the Personal Finance sub-reddit (at Reddit.com), which routinely sees plenty of credit score related questions. This recent one made my blood boil when user wooga told me that his lender advised him to carry a balance to improve his score.

wooga: I was told by the lender that if I paid down to 1/3 of my balance that it would improve my score by 100 points in a few months, more then it would to keep a zero balance(or pay off each month) which is what I normally do. I didn’t believe it. …

I’m glad he didn’t because it’s flat out wrong.

Lenders would like you to believe that your credit score improves when you pay interest but it’s simply not true. Credit cards report your balance when your statement closes. They report it again when the next statement closes. They are snapshots in time with no information about what happens between those two moments. The reports are the same whether you carry a balance or pay off the balance in full, so carrying a balance does not improve your score.

It’s important to remember that the FICO credit score is designed to calculate the likelihood you will default on a loan. Whether or not you carry a balance is not any better an indicator than your balance at statement’s close. If you charge $500, pay off $500, and then charge $500, you are no riskier than someone who charges $500, pays the minimum plus interest, and carries the $500 forward.

Don’t carry a balance if you can avoid it and certainly don’t do it because you think it’ll improve your credit score.

{ 42 comments, please add your thoughts now! }

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42 Responses to “Carrying a Credit Card Balance Won’t Improve Your Credit Score”

  1. Hunter says:

    I find there is a lot of misinformation about credit scores & reports. Number of inquiries throws people. It’s reasonable to expect mortgage shoppers, for example, to have a number of inquiries, and lenders recognize this. A few extra hits won’t impact your score.

  2. Wow, I always thought that carrying a balance would add up to a better credit score (though I’m not willing to pay interest to get a better credit score.)

    So if this doesn’t work, what are some actual ways to improve your credit? I tend to pay cash for big purchases, so that might be what’s hurting me.

  3. zapeta says:

    Geez, how did I miss that subreddit? I’ve now subscribed.

    I’m not surprised that a lender gave someone such a “helpful” suggestion to improve their score.

  4. thunderthighs says:

    Claims by some that carrying a balance proves yourself “worthy” to creditors never made sense to me, either. Good to see you’re clearing this up for a lot of people.

  5. govenar says:

    It could be true in a sense, if by “pay off each month” he meant paying before the statement closed.

    Do lenders benefit more from your score being lower or higher? With lower scores, they have an excuse to charge you a higher interest rate (and all the other lenders would say the same thing; seems like collusion).

  6. shiftomnimega says:

    Having a balance may not affect your score, but it does make you more attractive to lenders. If you consistently pay, but still carry a balance they may see you as low risk, but they’re still able to make money off of the interest you’ll pay. I’m not saying this is a good idea, but it is how lenders think.

    • kitty says:

      Maybe, but unless the prospective lenders actually call the other lenders (and then it’s unclear if they are allowed to give out that information), there is no way for them to know if you are paying in full or not. The credit report shows the balance at a specific moment in time, so as the post says, if you charged $500 this month, your credit report will show $500 balance. If you pay it in full, you still have bought something in the meantime next month’s balance will show new purchases. If your balance was $500 last month and $300 this month, there is no way for whoever checks your credit report to know if $300 is entirely new purchases or balance.

      Personally, I’ve always paid my balance in full, and I have no shortage of new credit card offers.

  7. I did without a card for about a year now while I was paying off my debts. Now my debts are gone and I’m ready to build my credit score again.

    I plan on paying off the balance each month, but I’m glad that I saw this story. I would not want to carry a balance just to try to raise my credit score.

  8. Chris says:

    Quick question. Let’s say you have a total credit limit of $1,000 (I know it’s low) and you spent $800 on the card. So you would be utilizing 80% which is way high. If you decide to pay the card down by $600 before the statement closes, what gets reported to credit agencies…the $200 remaining (20% utilization) or the $800 (80% and highest amount during the period)? Just curious…

    Thanks!

  9. Strebkr says:

    I have always wondered what a lender thought of a typical use your credit card and pay it off person. From what I have seen my credit report always shows a balance of between 1,500 and 2,000 each month. This is what we spend in a month and then promptly pay it off when we receive the bill. Do they think I just always have a balance and it moves up and down because I charge a little then pay a little? Or can they see that all 1,500 was spent that month and then paid off.

    Honestly I don’t think it matters, but I’m just throwing the question out there.

    • govenar says:

      I don’t think there’s any way a lender can tell from your credit report whether you paid off the balance after the statement closed. (Though, maybe if the lender was the same bank that your credit card is from, they could look at some internal info to determine that?)

      • Strebkr says:

        I wonder if I should just pay it to 0 before the end of my statement period so a 0 gets reported every once in a while. This way they can see that it does get paid down and its not an old 2,000 balance hanging over my head every month.

  10. skylog says:

    interesting, i was always under the impression that it made “some” difference, after doing a lot of reading on the subject. as others have stated, there certainly appears to be a great deal of confusion and misinformation when it comes to credit scores.

    i have a feeling that is exactly the way “they” want it.

    • Strebkr says:

      They want it to be mystical and unknown. I’m not sure exactly what the benefit is to them to have consumers not know the formula, but there must be one.

  11. Donald says:

    A bank manager once told me that closing my savings account at his bank would hurt my credit score. I closed it anyway because it was paying almost no interest and later discovered that what he said was not true. This kind of thing is unethical if not outright fraudulent but goes on all the time.

  12. Shirley says:

    Like Kitty, I pay off the balances every month and CC/loan offers are still at the high point. I have also never been turned down for a loan, CC, or credit limit upgrade.

    • Strebkr says:

      Shirley – How often do you ask for credit limit upgrades? I think I should ask just for the sake of asking. I won’t spend anymore, but it will knock my credit utilization down if I have a larger limit.

  13. pianofreq says:

    I have a question: If the CC companies report only “snapshots” of your statement at the end of each billing cycle and you do not carry a balance from month to month, how do the credit bureaus know you’re even using the card?

    Day 1: $0 balance
    Day 12: spend $500
    Day 20: make a $500 payment
    Day 30: $0 balance

    With the above example, you credit utilization is 0% according to the credit bureaus, right? Just curious, thanks!

    • Jim says:

      They won’t know and you are correct in your example.

      • pianofreq says:

        So would I be correct in assuming that the following two people will improve their credit score at the same rate?:

        Person A) holds an account open with zero balance (not using the card at all)
        Person B) USES a credit card month to month (maxing it out s/he wishes) and paying the whole balance off before the end of the statement each and every month

        If the above is true, then could I just increase my credit score by just opening random accounts and keeping the balance at zero?

  14. john says:

    wronwrongwrong…..

  15. john says:

    This info is wrongwrong wrong!!! You have to carry a balance to show your using your credit!! I did this test personally for the last year and 2 months, I have 2 CC that have been reporting a zero balance, my score went from 623 to 638 in that time. 3 months ago i charged $120 to one and started making the minimum payment, my score has gone up 12 points in that time…. You must carry a balance, not a big one though.

    • Ronald says:

      I would like to point out that late payment fees and interest charges are noted along with the balance on the monthly statement by the credit bureaus. I was told (by Chase e-mail rep) that 2 or more consecutive late payment fees have an negative impact on your credit score.

  16. deztooslick says:

    @john,i think a balance would be the amount that comes out of your statement which you are at liberty to pay in full by due date.makes sense?

  17. Cybergeek says:

    Okay, I have been using a secure card for about 8 months, and still my credit score is insufficient.

    This is what I do:

    CC Limit: 200

    Beginning of the month: balance 0

    Week 1: Spend $4

    Week 1: Current Balance is $4, and Available Credit is $196

    Week 2: Pay off $4

    Week 2: Current Balance is 0, and Available credit is 200.

    End of the month, balance:0, CC limit: 200, Available credit: 200.

    At the end of the month it doesnt show any where that I used this card!

    • Bizmac says:

      Cybergeek,

      I have been reading about credit scores for a couple of weeks now and I think you have a similar problem to me. I recently was turned down for a credit card for what seemed like a very odd reason. It turns out that I was paying off my balance before it could be posted to the credit agencies, and from what you are saying it sounds like you are doing the same thing.

      It is unbelievably stupid, but apparently you can be too aggressive in paying off your credit cards to the point where they don’t even notice you are using it. I’m not an expert, but I think that is what is happening to you as well.

  18. Jon Dough says:

    So everyone here has the wrong idea.

    For example:
    Nov. 5 to Dec 5- Statement Cycle
    Dec 5′ish- Credit card statement is reported
    Jan 1′ish- Due date

    So therefore your credit card carrier will report your balance to credit bureaus with your balance.

    Also, it is to show a balance on your credit card. as long as its paid by the due date.

    So lets say for example your usage looks like this:

    Nov 5 to Dec 5- You spend $100
    Dec 5 to Jan 5- You spend $100

    Due Date is Jan 1st for the 1st month and Feb 1st for the second. Your total balance will be $200. You should only pay your statement balance of $100 on jan 1st. Most people would pay it all off.

    Keep in mind ideally you want a Utillization ratio of %30. So if you have a $10,000 credit limit. Try to spend $3,000 per month.

    • Jon Dough says:

      Correction: *Also, it is good to show a balance on your credit card. as long as its paid by the due date.

      • Jon Dough says:

        Note:
        If you fail to pay off your balance in full, you will be charged interest for the next billing cycle.

        For example.

        Nov 1 to Dec 1- Statement Cycle
        you spend $100 in this cycle.

        Jan 1′ish- Due date
        Due is $100.

        If you only pay partial on this due date then your next month will be charged interest.

        For example:

        You pay $80 on Jan 1′ish
        Balance is @20
        Jan 1 to Feb 1- You spend $100

        TOtal balance $120.
        Interest will be charged on full balance after Jan 1′ish (original due date).

        Best bet is to zero out your balance to ensure youre up to date.

        • New2Credit says:

          So in otherwords, make sure that:

          When your statement becomes available –(my statement date was Dec 15 for the cycle of Nov 18th – Dec 15),– that there is a balance to be paid reflected on the statement(mine is Due on Jan 12th).

          Pay it before or on the due date, and that balance(representing my utilization ratio) is what is shown on my Credit report and afgects my score.

          Correct?

  19. Hmm says:

    Equifax has a score simulator that fairly closely approximates your credit score based on a few hypothetical situations. One of those situations is changing your credit card utilization.

    If you are reported as having 0% utilization as compared to 1%, your score will be at least twenty points lower. I didn’t think it would make that big of a difference, so one month I paid off my entire balance. My credit score dropped by 24 points. I then went back to keeping a 1% balance and my score recovered as soon as the statement was posted. Nothing else changed. I didn’t get a new loan, or new inquiries, etc.

    Your advice is flat out wrong. Anyone with an Equifax account can easily verify this. The fact that you’re handing out advice on things you know nothing about is appalling.

    • Shonda says:

      Experian Have One Too. I Paid My Cc Down To 29% And It Say My Score Should Go Up 15 Points I Will See At The End Of This Month How True..

  20. Brad K says:

    “Hmmm’s posting 2/2 is very accurate. Faire Issac’s scoring algorithm is VERY sophisticated and importantly, it reacts differently depending on the score range in which you begim. I run a group of advisors that assists ETHICAL management of FICO score using all the simulation tools available to B2B credit data resellers ( we serve mortgage originators) not consumers directly. There is incredible amount of purposeful and unintentional misinformation about scoring…so much so, its impossible to address. BUT keeping it simple, a small level of credit card use (utilization) creates a higher score…In generak that level is between 5-10% overall with no one trade line 10%…hope that helps some…its a very complex subject. Efforts to broadly simplify rule of thumb DO NO EXIST. regards to all

  21. Anonymous says:

    Thank you so much. I was about to make that same mistake and intentionally carry a cc balance in order to increase my score. Good information that will help me to save money.

  22. Dion says:

    I charge everything to my credit card every month about $5000, but pay it off. Read that carrying a balance knocks ur credit score down and applied for a mortgage and they brought this issue up, though not a big deal. What If I funded my cc account with an extra $5000 then the cc would mostly show a credit every month.. Wonder how this extra funding would effect a credit score? Any comments?

    • Ronald says:

      Carrying a credit balance on your cc monthly statement has a small positive effect on your credit score. I recommend to make an advance payment only if you are going to make an over-limit transaction. The best way to improve your score (from my experience) is to always PAY THE BILLS IN FULL BY THE DUE DATE.

      • RJ says:

        Right. Having a balance and paying it off by due date has a better effect than have a $0 balance each month is my understanding.

        Two questions though: 1) Does paying off your CC every month (not paying any interest) negatively affect your ability to negotiate with the lender. That is, do they dislike you as a customer more because they aren’t making money off of you? 2) If you pay your bill off before the period closes, does that have the name “no impact” on your credit score as not using it at all?


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