Does Carrying a Balance On Your Credit Card Help Your Credit Score?

If you’re like most Americans, you likely have a credit card and you may be wondering whether carrying a balance on your credit card helps your credit score? We will answer this question in much detail below.

Does Carrying a Balance On Your Credit Card Help Your Credit Score?

Carrying a balance on your credit card does not help your credit score. In fact, carrying a balance on your credit card can actually hurt your credit score because it increases your credit utilization. Credit utilization refers to how much of your available credit you utilize. The more of your available credit you use, the lower your credit score will be. So, if you’ve been told that carrying a balance helps your credit, now you know that doing so does not, and can actually lower your credit score.

Keeping the balance on your credit card as low as possible is one of the best things that you can do to help your credit after making all of your payments on time. This is so because your credit utilization accounts for 30% of your credit score. The lower your credit utilization, the better your credit score will be. So, if you’re considering leaving a balance on your credit card in hopes of raising your credit score, now you know that paying down your balances is one of the best things that you can to improve your credit score.

As a rule of thumb, you should strive to keep your credit utilization below 10% and never exceed 30% credit utilization. If you exceed 30% credit utilization, you will significantly lower your credit score. So, always pay off as much debt as you can afford to pay off. For example, if you have a total credit limit of $10,000, you should not allow your credit card balance to exceed $3,000.

Additionally, to help your credit score, you should make all of your payments on time. Your payments account for 35% of your credit score, so making them on time is the best thing you can do to boost your credit score. Missing even a single payment on your credit cards or loans can cause significant damage to your credit score. So, make sure to make all of your payments on time.

Some people believe that to keep their account active, they must keep a balance on their credit card. This is not the case. Using your credit card for small monthly payments is sufficient to keep your account from being closed for being dormant (unused).

So, if you were wondering whether carrying a balance on your credit card helps your credit score, now you know that it does not. You will just be paying interest for no reason. Therefore, if you have a credit card with a balance, pay it off if you can afford to do so because doing that will save you money on interest.

Why Should You Avoid Carrying a Balance On Your Credit Card?

1. Avoid Paying Interest On Your Credit Card Balance

You should pay down the balance on your credit card to avoid paying interest on your credit card balance. Credit cards often charge consumers high-interest rates on the balances they carry on their credit cards. Interest can be avoided by paying off the credit card in full at the end of your billing cycle. So, if you want to save money on interest, pay off your credit card at the end of each billing cycle.

2. Reduce Your Credit Utilization

You should avoid carrying a balance on your credit card to reduce your credit utilization (how much of your available credit you’re using). Reducing your credit utilization is good for your credit score because it accounts for 30% of your credit score. The lower your credit utilization, the better your credit score will be. As a rule of thumb, you should keep your balances below 10% of your available credit and never use 30% or more of your available credit. If you utilize more than 30% of your available credit, you will significantly lower your credit score.

3. Prevent Yourself From Accumulating Too Much Debt

Paying off your credit card instead of carrying a balance allows you to stop yourself from accumulating too much debt. Spending and accumulating debt can happy quickly and while you least expect it. So, paying off your credit cards and avoid leaving a high balance on your credit card accounts.

What is a Good Balance to Carry On Your Credit Card?

Carrying no balance on your credit card is the best thing that you can do for your credit because the lower your credit utilization, the better your credit score will be. However, we know that life happens sometimes and it’s not possible to pay off your credit card. As a rule of thumb, you should utilize no more than 10% of your available credit and never exceed 30% credit utilization. If you use more than 30% of your available credit, your credit score will drop.

For example, if you have credit cards with a limit of $10,000, you should keep the balances on your credit cards below $3,000 for the best impact on your credit score.

If you find yourself utilizing too much of your available credit, you should contact your card issuer and request a credit limit increase. If your request is approved, your credit limit will be increased, lowering your credit utilization. That said, before you request a credit limit increase, you should be aware that your card issuer may add a hard inquiry to your credit report when it reviews your credit report to make a decision on your request for a credit limit increase. Nevertheless, a single hard inquiry will only lower your credit score by a few points. Just don’t ask for too many credit limit increases within a short period of time, and you should be good.

Bottom Line

The bottom line is that carrying a balance on your credit card is not good for your credit nor is it good for your credit score. One of the best things that you can do for your credit score is to pay off all the balances on your credit cards. This is so because the lower the dollar amount of your available credit you use, the better your credit score will be. So, the next time your close friend or relative tell you that carrying a balance improves your credit score, now you know that it does not improve it and could actually lower your score.