The use of credit is helpful when you need a convenient payment option or extra time to pay for purchases. When it comes to carrying a balance or paying off your credit card, however, it’s better to settle up with the credit card company and zero out your balance each month. While having regular balances can positively impact your credit health, you don’t want to carry balances from month to month.
Why Keep a Balance on Your Credit Cards?
No matter who you talk to, different people have an opinion on why you should keep a balance on your credit cards. Here’s a look at a related myth and truth.
Myth: It Helps Your Credit
Credit scoring models factor in a variety of credit behaviors to calculate individual credit scores. But whether you keep a balance on your credit cards is not a factor. What is a primary factor in credit scoring, however, is whether you pay what you owe on time.
Truth: It Shows Active Use of the Account
Carrying a balance on your credit card — especially one that fluctuates — does show that the account is active. And if you rarely use the card, carrying a small balance can keep the card issuer from closing the account for lack of use.
But you can also keep the account active by charging a small amount — such as using it for an autopay on a recurring bill — and paying off the balance each month.
Reasons to Pay off Your Credit Balance Each Month
Credit scores are based in, in large part, on payment history. So whether you pay the minimum payment due or pay your balance in full, it will have the same effect.
The difference is that you’ll pay interest if you carry a balance. And over time, interest can add up — meaning less money in your bank account.
Another reason to pay off your credit balance each month is to avoid having your card’s balance creep up toward the limit. Credit scoring models also consider your balance-to-limit ratio, and when you utilize too much of your balance, it can indicate credit risk and negatively impact your report.
Does Spending More Money Build Your Credit Faster?
Although it’s helpful to use credit cards for purchases, spending more money will not benefit your credit health. It could actually have the opposite effect.
Credit utilization, or your balance-to-limit ratio, is a factor in credit scoring. If you make larger purchases and don’t pay your balance in full, you may want to avoid using more than 30% of your overall credit limit per card or across all cards.
For example, if you have a card with a credit limit of $3,000, avoid charging more than $900 — or 30% of the limit — before paying it off in full.
Here are some ways to keep your credit utilization in check:
- Schedule balance alerts through your credit card issuer, which will alert you if you’re approaching 30% of your overall limit.
- Avoid closing credit cards if it would cause your overall credit utilization to increase.
- Try making more than one payment each month to help keep balances from creeping up.
- Request a higher credit limit on a card if you find that your spending brings the card’s balance too close to 30% of your limit.
The Downside to Small Balances
Keeping a small balance on your credit card won’t benefit your credit. But some people may choose to keep a small balance on a credit card they rarely use in an attempt to keep their creditors from closing it.
But the downside to keeping a small balance on a card you rarely use is that if you forget to make a payment on the card, it could hurt your credit history. Plus, it could take over a year for your credit score to rebound if you miss one payment.
Paying off Your Credit Card Each Month is Best
Overall, paying off your credit card each month can more positively affect your credit health than leaving a balance month-to-month. Your credit won’t benefit by carrying a balance. Plus, keeping a small balance on a card you rarely use can be risky. You can forget about it and miss a payment, which can result in an ugly surprise: A negative impact on your credit report.
One way to avoid any surprises with your credit is to sign up for a credit monitoring product like ScoreSense. ScoreSense provides users with scores from all three credit bureaus. In addition, you’ll receive monthly updates on your credit score and daily monitoring that will alert you of suspicious activity related to your credit or identity.