Most people know the basic steps required to build a good credit score, which include paying all your bills on time, keeping debt levels in a reasonable range and refraining from opening or closing too many accounts. However, there are still an endless number of credit score myths out there, many of which can cause harm to consumer scores — or even cost them money in the long run.
One such myth is the idea that you’ll have a better credit score if you carry debt than if you don’t. On the flip side of that, others believe you’ll hurt your credit score if you pay your credit card balance in full each month and perpetually carry a $0 balance.
So, does carrying a credit card balance hurt your credit score? Also, which factors actually play a role in where your score falls? This guide will answer these important questions about carrying a balance to help you make an informed decision with your credit.
The truth about carrying a balance and your credit score
To understand the true impact of debt on your credit score, you have to know the factors that make these scores up. When it comes to FICO credit scores, which are the most popular type of scores used by 90% of top lenders, the following credit factors come into play:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
As you can see, the most important factor that makes up 35% of your FICO score is your payment history — or your history of paying bills on time. After that is a factor called “amounts owed,” which is also referred to as your credit utilization ratio. This is the factor that measures and rates how much debt you have in relation to your credit limits, and it makes up 30% of your FICO score.
Most experts recommend keeping your credit utilization ratio below 30% of your available credit for the best results to your credit score. This means carrying no more than $3,000 in debt for every $10,000 in available credit limits you have.
The trend becomes even more clear from there, with good credit consumers (670 to 739) having a credit utilization ratio of 35.2%, fair credit consumers (580 to 669) having a ratio of 56.1% and those with poor credit having an average credit utilization ratio of 82.1%.
This goes to show that having some debt doesn’t have to negatively impact your score, but that too much debt definitely can. The Fair Isaac Corporation (FICO) explains this factor and its importance clearly on the company website:
“If you are using a lot of your available credit, this may indicate that you are overextended — and banks can interpret this to mean that you are at a higher risk of defaulting.”
Does carrying a $0 balance hurt your credit score?
You may have also heard that never carrying debt and always maintaining a $0 balance can hurt your credit score. However, this is a complete myth, and it can become a costly one if you carry debt for no reason. The average credit card interest rate is well over 20% right now according to a recent CardRatings report. Interest rate charges at that level can can quickly add up, even on the smallest balances.
The Consumer Financial Protection Bureau (CFPB) addresses this myth directly on its website, saying the following:
“Myth: Carrying a balance on my credit cards will improve my credit score,” the agency writes.
“Fact: Paying off your credit cards in full every month is the best way to improve a credit score or maintain a good one.”
With this in mind, you should know that it’s perfectly okay to use your credit cards for purchases but always pay your balances down to $0 when your bill comes due. Not only can avoiding debt help your credit score in the long run, but it can help you avoid paying exorbitant credit card interest rates, too.
Real-life steps that will help your credit score the most
At this point, we’ve clarified a few key points about carrying debt and how that impacts your credit score. First off, carrying a balance on your credit card may not negatively impact your score. The key is making sure you’re not carrying too much debt, which you can avoid by always keeping your credit utilization at or below 30% of your available credit.
However, paying your balances down to $0 each month can have the greatest positive impact on your score and help you avoid paying credit card interest. This means that, if you don’t want to (or don’t need to) carry credit card debt, you absolutely shouldn’t.
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With these key facts in mind, here are the most important steps that can help your credit score grow in the long run:
- Avoid paying bills late. With your payment history being the most important factor that determines your credit scores, you should always pay bills on time and do whatever it takes to avoid late payments. This could mean setting up some of your bills for auto-pay, marking bill payment due dates on your calendar or both.
- Keep accounts open as long as possible. The length of your credit history makes up another 15% of your FICO score, and keeping old accounts open can help — even credit cards you’re not using.
- Keep debt levels low. To reiterate this factor, make sure you always keep your debt levels at or below 30% of your available credit for the best results to your credit score.
- Don’t open too many new accounts. Avoid opening too many credit cards or loans at once. Each new credit card or loan results in a hard inquiry on your credit resorts, and this can ding your credit score in the short-term.
- Use different types of credit. Your credit mix makes up another 10% of your FICO score, and you can score better in this category by using different types of credit including installment loans, mortgages, revolving credit and auto loans.
The bottom line
Carrying a balance on your credit card may not hurt your credit score at all, especially if your balance is relatively low compared to your credit limits. However, the high interest rates credit cards charge can cost you big money over time, especially if you carry debt for the long-term.
With that in mind, it only makes sense to carry debt on a credit card when you need to — or when you can qualify for a credit card with an intro APR offer. Outside of those scenarios, paying your balances in full each month makes more sense for your credit and your finances.
