Imagine this scenario: You don’t have any credit card debt, either because you paid it off or because you avoided it altogether. Your credit history is sparkling and your score is high. But you don’t want the credit bureaus to forget that you know how to be responsible with credit. So every now and then, you make a purchase and let it roll over to the next month without paying the balance in full. You let that revolving balance hang out just long enough for the bureaus to notice, then you pay it off. It’s the best way to show you’re a responsible credit user, right?
It’s actually not the best way. This is one of the most pervasive myths in the world of credit cards and scores. It’s like Bigfoot, the Loch Ness Monster, and the Jersey Devil rolled into one. It’s a delicious urban legend, meaty enough to be believable. But it’s simply not true.
The biggest chunk of your credit score—35% of the pie chart—is calculated from data about your payment history. It doesn’t have anything to do with how much you pay, only that you pay at least the minimum amount required by your creditor and you do it on time.
The second largest factor—30% of your score—is how much money you owe. It’s calculated based on how much debt you have for all your accounts, including student loans, car payments, credit cards, and beyond.
The higher your credit card balance, the higher your credit utilization rate. There’s no rate of credit utilization that helps your credit score. Debt is bad. End of story.
The confusion around this is because credit inactivity can negatively impact your score. It’s better to use your credit card occasionally and pay it off right away than it is to not use your card at all.
Even if you pay your bill in full each month, the credit bureaus will still know you used your credit card. That’s because sometimes your credit utilization gets reported to the bureaus before you’ve had a chance to pay the bill.
FICO and VantageScore, the two credit scoring models you’ll see used most often, confirm this is a myth. (Free credit score sites typically use VantageScore, while your bank or credit card issuer probably shows you a FICO score.)
FICO explains that the credit reporting schedules can make this myth a confusing one:
Your current account balance isn’t necessarily the balance that shows up on your credit report and factors into your FICO Scores. Your account balance on your credit report will reflect the account balance your lender reported to the credit bureau (typically the balance from your latest monthly statement). So even if you pay your credit card balances in full each month, your account balance won’t necessarily show on your credit report as $0.
Further, VantageScore says that having a balance does nothing to help you build credit faster:
A credit card opened 12 months ago is a one-year-old credit card, regardless of your payoff or balance rollover practices. Additionally, carrying a balance on a credit card each month means you’ll incur interest charges.
Paying interest, even on a small balance, is a terrible way to try to raise your credit score. If you want a healthy credit history, pay on time each and every month and don’t believe anyone who says that carrying a balance makes you look better in the eyes of lenders and the credit bureaus. It simply does not.