Consumers who are concerned about their credit scores are often looking for ways to improve their creditworthiness in the eyes of lenders. One aspect that has always puzzled consumers is whether or not having a card balance helps boost their credit scores.
Q: I have two credit cards that I use normally. One has cash back while the other helps me rack up miles. I make sure that I always pay off their balance in full after every month. But, I’m hearing that it is actually better for your credit scores if you carry a balance from month to month so that it shows activity. Should I leave a small balance to help build credit?
– Peter M.
A: It is true that having a small balance reported to credit bureaus will help to increase your credit scores slightly. However, there is a difference between carrying a balance month to month as opposed to simply having a balance reported to credit bureaus.
Credit card issuers generally report your account balance as of the date that your statement was sent to you. For instance, if your account balance was as high as $2,000 during the billing cycle, but you paid off $1,000 before the billing cycle ended, your account statement and the amount reported to credit bureaus is $1,000.
So, you don’t have to carry a balance into the next month. A balance will still be reported to credit bureaus if you pay it off in full. You don’t want to hold a balance from month to month because you’ll have to pay interest charges.
Ideally, you pay off part of your balance before a statement is issued (as in the above example) so that your balance is lower. Credit scores consider your debt utilization ratio, which is the amount of existing debt divided by your total combined credit limits. A lower balance reported is better for your credit scores.
Despite the slightly higher credit scores that you can get by having a balance reported every month, you don’t have to go through this process if you won’t be applying for a new loan any time soon.
Instead, just maintain the sound habit of paying of your balance your balance, or refraining from incurring a balance at all.