Will having a credit card balance hurt your credit score?

You may know that paying off debt is good for your credit score. But there is a long-standing myth about credit card balances and credit scores. Some people say that there is a small balance every month that helps your credit score in some way.

The idea that holding a balance helps your credit score is completely wrong. Read on to learn the facts about how your balance affects your credit score.

How your credit card balance affects your credit score

Five things determine your credit score.These Credit score factors The breakdown is as follows:

  • Payment history (35%)
  • Credit utilization rate (30%)
  • Average credit age (15%)
  • Credit portfolio (10%)
  • Hard inquiry and new credit (10%)

As you can see, your Credit utilization, Or the percentage of outstanding credit you are using, which accounts for 30% of your credit score. The rule of thumb is that you don’t want your credit utilization to climb above 30%. If you can set it to 0%, that would be ideal.

This is where it gets a little tricky. If you use credit frequently, the balance may appear on your credit report. That’s because you have no control over when the credit card company reports activity to the bureau.

For example, suppose you have a limit of $5,000 and a zero balance. Then you bought 100 dollars. If your creditor subsequently reports to the bureau, you will get a 2% credit utilization rate ($5,000/$100 = 2%), even if the bill is not yet due.

However, credit utilization higher than 0% does not necessarily need to be worried. According to Experian data, consumers with a FICO score of 850 have an average credit utilization rate of 5.8%.

This does not mean that the average person with full marks has a monthly balance of 5.8%. When your creditors report to the tax bureau, they just provide a snapshot of your account at the time. Even if you pay off your balance in full every month, your account will most likely show that you are using up part of your outstanding credit line.

If your credit utilization is 0% because you have never used a credit card, your score may be affected. When you are not making regular credit purchases and you have no outstanding loans, you will not have activities reported to the credit bureau.This is harmful because Payment history Even more important than your credit utilization.

In addition, your credit card company may cancel your card due to inactivity. This will hurt your score in two ways: your credit utilization may increase because the amount of credit you have outstanding will decrease.If the card is also one of your old accounts, it will also lower your average Credit period.

Should you carry your credit card balance?

When you don’t pay off the balance in full, your credit score will not benefit you. You will also pay unnecessary interest unless you use the temporary interest-free window.

In other words, you don’t have to worry about the balance shown on your credit report. As long as your total balance and the balance on each card remain below 30%, you will be able to build good credit.

Please follow the tips below Those with a credit score of 800 or higher:

  • Pay on time. The number one habit of people with excellent credit scores is that they will never miss a payment. An overdue payment will be kept on your credit report for seven years.
  • Always keep your utilization rate below 10%. Most members of the 800 club pay off their balance in full every month, but many people say that their balance never exceeds 10%.
  • Keep your oldest card open. When you build a good credit, you usually qualify for a better Credit card rewardsBut people with first-rate credit will keep these old cards and use them to make small purchases every month. The credit scoring model is beneficial to customers who have a long-term relationship with a credit card.

Finally, don’t worry too much about small fluctuations in your credit score. Depending on your creditor’s balance when reporting to the tax office, your score may vary from month to month. Fluctuations are completely normal. Focus on paying on time and keeping your balance low, and you will build a healthy credit score.

Robin Hartill is Penny Hoarder’s certified financial planner and senior writer. She wrote a column of personal financial advice for Dear Penny.Send your tough money questions to [email protected] Or chat with her Penny Hoarders Community.






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