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.

Your credit report and credit score are designed to calculate how likely you are to default on your loans. It’s increasingly being used in some surprising ways, such as determining whether or not to rent you a home. The reasoning for using credit this way, for determining whether or not to rent an apartment to someone, has to do with the reality that in many areas, it’s hard to evict a non-paying renter. You’re essentially “lending” them a place to stay with the hopes they pay you.

(Click to continue reading…)

One of the big lessons from the post-credit crisis era, and you could argue we’re still fighting through the crisis itself, is the idea that cheap credit and cheap debt are bad for you. In general, I’d agree that racking up double digit interest rate debt is a very bad thing, but having access to that credit can be a very good thing.

It’s been a while since I wrote a Devil’s Advocate post but I felt that it was time. There’s been a huge backlash against credit and debt lately, in part because they were a cornerstone of the credit crisis, and I think that anger and fear is a bit unfounded. For every irresponsible borrower, there’s a responsible one taking full advantage of credit and using it in a way that enriches their life. Today, we’ll look at just a few of the reasons why you shouldn’t abandon credit.

(Click to continue reading…)

With the economy improving and consumer spending on the rise, I’ve been getting a lot of credit report and credit score related emails. With more people buying things, some of which will inevitably be on credit, folks are looking to make sure they don’t make any mistakes that could jeopardize their good credit scores. and increase their borrowing costs. I like the fact that people are becoming more conscious of their behavior and how it affects their financial lives, it’s one of the more positive side effects of the crisis.

Unfortunately, there are still a few ideas out there about credit that are flat out wrong. While I’m no credit expert, I’ve been reading enough experts and am able to separate the fact from the fiction.

(Click to continue reading…)

With it being a few short days until Christmas and nearly two weeks since the end of Hannukah, it’s a little late to be “preparing” for the holidays. That, however, doesn’t mean that you shouldn’t be financially prudent in the waning few days before the crescendo. I saw the results of a recent myFICO holiday study (packaged up into a pretty infographic) that gave me greater insight into the American shopper this holiday season. myFICO is a part of Fair Isaac Corporation, originator of the FICO credit score.

(Click to continue reading…)

A lot of people are “underwater” on their mortgages, that is the value of their home is below the amount they still owe on their mortgage. Other people simply can no longer afford their monthly mortgage payments and are on the verge of being foreclosed on. Regardless of the reasons, some homeowners are considering walking away from their home and their mortgage and it’s important to understand what the actual costs are going to be.

(Click to continue reading…)

Reader Carl recently asked me whether or not you build credit with a joint credit card:

I’m a nineteen year old guy, and opened my first credit card account at Best Buy, in order to buy a laptop for school, along with other “necessities.” Mind you, this was in 2009, and it was incredibly hard to find credit, so I had to co-sign with my dad.

Now I hold a total of three credit cards: Best Buy, Express Clothing (my first independent credit card), and my Bank of America Visa card. My BB card has a $2,300 limit, Express $250, and Boa $2,000. During a recent conversation with one of the bankers at BoA, they informed me that my BB card really doesn’t help my credit report, as it’s not necessarily my “own” credit card. Should I close the first account, and attempt to reopen one in only my name?

(Click to continue reading…)

I had a reader Jackson email me the other day asking about switching credit cards. It turns out that his current main credit card is being phased out and replaced with one whose rewards structure is less rewarding for him. The one thing holding him back is the thought that switching credit cards would hurt his credit score. As we traded emails, I learned that he recently bought a house, had a great credit score, and was generally very fiscally responsible. The only reason why he was concerned was because the whole credit scoring system was a black box.

(Click to continue reading…)