04 Nov Fact Check: Carrying A Balance On Your Credit Card
Fact Check: Carrying A Balance On Your Credit Card
The most circulated Personal Finance Myth.
I can’t tell you how many times I have heard people say this to me, in an effort to seem educated on the subject. In reality, it can’t be further from the truth…
My background is in retail banking. I was the teller or banker that you saw for transactions and account questions. Naturally, personal finance questions were a common occurance. This was by far the most common question I received.
I did my best to help educate those who had heard this myth. There were even times when I came across people who had already put themselves into a terrible position by racking up credit cards – in the name of building credit. These were often the people who continued to go into high interest debt by taking out payday loans when they could no longer use their card.
This one is totally false. You do not need to carry a balance on the credit card in order to build your credit with the credit card. In fact, carrying a balance – especially a higher one – can actually hurt your credit more than help it. The credit bureaus monitor your credit availability and usage. This means that they look that the percentage with a balance out of all of your available cards you have. So for example:
$2000 Credit Limit
50% Utilization Rate
Easy right? Well, using half of your credit isn’t going to do you any favors. Most experts suggest 30% or less. In my opinion, the lesser the better. In addition to bringing down your score, you would also be paying interest on that $1000 in this scenario. Perhaps, now you are starting to see why this myth can be frustrating.
It is important to remember that the utilization percentage is a relative number. With total available credit cards only being $2000, that naturally results in a high percentage. If you have say.. $10,000 in total availability, this scenario looks much different.
$10,000 Credit Limit
10% Utilization Rate
You do need activity.
If the credit card is sitting unused, there is no benefit to having it. While you don’t necessarily need to carry a balance, utilizing the card and paying it off monthly will help boost your credit score. The reason is that those payments show up even if there isn’t a balance as on time payments. 35% of your credit score is made up of payment history. So why wouldn’t you continue to add more good payments into the mix?
Not every card needs used and it isn’t appropriate to do so. It’s also important to remember that everyones situation is different. However, if you have the ability and dillegence to utilize multiple cards – I reccomend it. Especially if you are in a position of building credit, the more positive payments to report the better. Just remember to pay it off in full each month and don’t spend more than you can afford.
I hope this helped to clarify things for you. I’m sure at some point in time you have heard this myth before. Now you know and can help educated others on proper credit card usage.
While we definitely help provide for those with bad credit. If you manage your cards well, you may not need to worry about a bad credit loan.