Credit Myth #3: Carrying a Small Balance Is Good for Your Credit
There’s a lot of bad credit advice floating around the internet, much of which is spread by self-proclaimed financial gurus. Because much of the misinformation comes from reputable sources, it can be difficult to discern between fact and fiction. Yet, if you want to achieve and maintain a good to excellent credit rating, you need to do just that. One myth you need to stop believing is that carrying a small balance on your credit cards will boost your score. That is not the case.
Carrying a Balance Can Hurt Your Credit Score (and Your Wallet)
Not only will carrying a credit card balance from month to month not boost your credit score, but it can also ding it. The second biggest factor credit bureaus consider when scoring consumers is credit utilization, or the ratio between your total limits and your total balances. Ideally, you should keep your utilization rate under 30%, meaning your balances don't exceed 30% of your total limit. Anything higher can hurt your score, but anything lower will only serve to improve it.
Another reason to not carry a balance is the cost of doing so. Unless you’re still in the 0% interest promotion period, you will accrue interest for every day your card carries a balance. The average consumer pays $1,162 in interest each year, which amounts to roughly $100 each month. If you’re wondering where your money is going, review your APRs.
Though Revolving Balances Can Hurt Your Score, Revolving Credit Can Help It
One financial planner thinks that this myth continues to hang around because consumers continually misinterpret the advice they’re given; they confuse "show lenders you can use credit responsibly” with "carry a balance.” You need available credit from month to month to have any form of credit.
However, there are ways to keep accounts open without having to pay a penny of interest. For example, you can charge a small, recurring expense each month to a card and pay it off right away.
You don’t want to risk letting a card become inactive, because this may cause the lender to close your account. If that happens, your credit score will suffer.
If you carry a substantial balance on your cards and want to consolidate them to reduce interest (and boost your score), consider taking out a consolidation loan. Find the best rates and terms through our loan search engine today.