Does Having a Credit Card Balance Hurt Your Credit Score?

You probably know that paying down debt is good for your credit score. But there’s a persistent myth about credit card balances and credit scores. Some people say that carrying a small balance from month to month somehow helps your credit score.

The idea that carrying a balance helps your credit score is totally false. Read on to learn the facts about how your balance affects your credit score.

How Your Credit Card Balance Affects Your Credit Score

There are five things that determine your credit score. These credit score factors break down as follows:

  • Payment history (35%)
  • Credit utilization (30%)
  • Average age of credit (15%)
  • Credit mix (10%)
  • Hard inquiries and new credit (10%)

As you can see, your credit utilizationor the percentage of open credit that you’re using, accounts for 30% of your credit score. The rule of thumb is that you don’t want your credit utilization ratio to climb higher than 30%. If you can get it to 0%, that’s ideal.

Here’s where it gets a bit tricky. If you’re regularly using credit, a balance will probably show up on your credit report. That’s because you don’t control when your credit card company reports activity to the bureaus.

For example, suppose you have a $5,000 limit and a zero balance. Then you make a $100 purchase. If your creditor then reports to the bureau, you’ll have a 2% credit utilization ratio ($100/$5,000 = 2%), even if the bill hasn’t come due yet.

Having a credit utilization ratio above 0% isn’t necessarily something to worry about, though. According to Experian, consumers with a perfect 850 FICO score have an average credit utilization of 5.8%.

That doesn’t mean the average person with a perfect score is carrying a 5.8% balance from month to month. When your creditor reports to the bureaus, they’re simply providing a snapshot of your account at that given moment. Even if you pay off your balance in full each month, it’s likely that your account will show that you’re…

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