When it comes to your credit score, misinformation and rumors abound. For example, you may have heard that checking your credit report will hurt your score, which is blatantly wrong. Maybe you’ve also heard that you only have one credit score, or you can pay a company to fix your credit score quickly in the blink of an eye. These two common rumors are also false.
Another common credit myth is having a balance and figuring out the exact impact debt has on your credit score. After all, a lot of people seem to believe that having a small or medium balance on their credit cards can help boost their score in one way or another.
Does having a balance on a credit card help your score? Ultimately, this question has a definitive answer that may surprise you.
If you’re hesitant to pay off your entire credit card because you think small balances are helping, think again. Having a balance on your credit card doesn’t do anything for your credit, but it will cost you money in the long run. After all, the average credit card APR is currently around 16%, so even interest on small balances can add up quickly.
According to the Consumer Financial Protection Bureau (CFPB), the rumor that debt helps your credit is the opposite of the truth. In fact, they write that “paying off your credit cards in full each month is the best way to improve your credit score or maintain a good score.”
This truth is easy to understand when you take a closer look at the factors that affect your credit score. For example, when it comes to your FICO credit score, the second most important aspect of your credit history is how much you owe against your credit limits, also known as the credit utilization ratio. . This factor represents 30% of your FICO credit score, and it can be negatively affected if you use too much of your available credit in any given month or over time.
The CFPB says that maintaining a low credit utilization rate (preferably below 30%) shows lenders that you are a responsible borrower. However, they also state that “paying off your entire balance is best and keeps the ratio low, thus boosting your credit scores.”
The balance is not the only factor that affects your credit score.
Now that you know that maintaining a balance won’t help your credit, you should take the time to understand the additional factors that can affect your credit. First of all, you should know that your payment history is the most important factor that makes up your FICO credit score. That’s 35% of your score, and you can excel in this category by paying all of your bills – including credit card bills – early or on time without exception.
Another factor that impacts your credit score is the length of your credit history, which is 15% of your FICO score, and you can improve in this category by keeping credit accounts in good standing for as long as possible. . By the way, this credit score factor is the main reason credit experts suggest keeping old credit card accounts open even if you are not using them.
Other factors that make up your credit score include new credit (10% of your score) and your credit mix (10% of your score). You may see negative scores in the new credit category anytime you apply for a new credit card or loan and a serious investigation is placed on your credit report.
During this time, your credit mix is determined by the different types of credit you have, including revolving accounts, installment loans and more. You can see a positive impact in this category if you have several different types of credit accounts and they are all in good standing.
Since your credit card balances won’t improve your credit score in any way, your best bet is to avoid debt if you can. Obviously, paying your credit card bills in full each month can help you save money on interest, but it can also help in other areas of your life. For example, living a debt-free life can help you overcome financial difficulties more easily, and it’s easier to save money when you don’t have huge debts to pay off.
If you have credit card debt that you just can’t pay off right now, the best first step is to stop using credit cards for purchases. After all, paying off debt is considerably more difficult when you are still racking up balances.
Once you are no longer using your credit cards to spend, you can make a plan to pay off your cards with a strategy like Snowball Debt or Debt Avalanche, or even with Help. a credit card with balance transfer that pays no interest on your debt for a limited time.
Then, to avoid carrying over credit card balances in the future, consider these tips:
- Use a monthly budget to plan your spending. When you use a budget to plan your spending each month, a credit card becomes a tool for paying bills and covering everyday expenses. With money set aside in your budget for whatever you buy, you can stick to your plan and spend accordingly.
- Pay off your credit cards several times a month. Also, keep in mind that you can pay your credit card bills multiple times a month. This strategy can help you control your spending and avoid “surprises” when your bill comes due.
- Only use credit cards for purchases you can afford to pay immediately, and avoid situations where you charge for purchases you can’t afford. Due to the high interest rates charged by credit cards, plastic is a bad option if you need a short term loan.
Read more stories in our “Credit Myths” series:
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