Credit Repair

Will Carrying a Balance Help or Hurt My Credit Score?

Editorial Note: Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone

There are a lot of myths about credit, especially around what can improve or hurt your credit score. One example is that you need to carry a balance on your credit cards.

The simple truth is carrying a balance hurts your credit utilization ratio, which is a big factor in determining your credit score. Credit utilization is a measure of how much of your available credit you’re using at a given point in time.

“The higher your balances as compared to your limits, the worse it is for your credit score,” said Rod Griffin, director of consumer education and awareness at Experian. “You never want your balances to exceed 30% of your credit limit, in total [or] on individual credit cards.”

Are there positives to carrying a balance?

There is one reason why it can be considered a positive to have a balance on a credit card.

“The myth may come from the fact that you must have at least three months, and often as much as six months, of activity reported for the account for it to be included in score calculations,” Griffin said.

Rather than carrying a balance, he suggests people make small charges on the card and then pay that amount off at the end of the month. The creditor will report the card activity for the month, so there’s no need to carry a balance that can lead to interest fees.

Unfortunately, having a credit card with a small enough balance is not always possible. The average balance on credit cards for Americans was $4,293 in the third quarter of 2018, according to Experian.

With balances that high, paying them off appears to be unobtainable for many. But there are ways to get a handle on the debt.

Build a budget

Figuring out a proper budget is the first step to paying down debt. Don’t be afraid to ask for help.

“I would suggest they work with a professional to set up a budget,” said Theresa Williams-Barrett, vice president of consumer loans and loan administration at Affinity Federal Credit Union in Wyckoff, N.J. “The professionals have a third-party view that will offer suggestions that the individual did not think of.”

A professional will also provide some straight talk about the numbers and what’s important to spend money on — and what isn’t.

Avalanche or snowball method

These are two ways to pay down credit card debt when you’re looking to make larger payments.

The avalanche method focuses on paying down the cards in order of interest rate. Whatever card has the highest rate takes priority. Pay the minimum amount on the other cards and use any leftover amounts to pay down debt on the card with the highest interest rate. This method is effective in limiting the interest fees you’ll pay over time.

Then there’s the snowball approach, which focuses on the balance of the cards. With this method, the card with the lowest balance takes priority while the others receive a minimum payment. Although this method can end up costing more money because of interest, it will help you pay off cards one by one, which can boost your sense of accomplishment.

Debt consolidation loan

Depending on your credit status, a debt consolidation loan may be available to help you pay off your credit card balances.

The advantage of going with a loan is that your balances will be paid off right away, giving a boost to your credit score since you’ll have a lower credit utilization rate. It’s also likely that the loan will have a fixed interest rate, which will probably be lower than the adjustable rate on the credit cards.

Transferring balances

Like the loan, this option could be available depending on your credit score. Although it seems risky to use one credit card to pay off other credit cards, this method could actually save a lot of money.

Certain credit cards allow for balance transfers, and it’s common for these transfers to have a promotional interest rate. In some cases, the interest rate can be as low as 0% and stretch from 12 to 24 months.

The only problem with this method is that it requires discipline and an understanding of all the terms of the new card. If you don’t pay off the transferred balances during the promotional period, you may find yourself with an even higher interest rate than what you had before. You also may now have to deal with an annual fee, which may not have been the case with the other cards. If you plan to use this method, plan accordingly so that you won’t find yourself in a worse situation than before.

Bottom line

In the end, it’s important to keep your credit card balances low, or nonexistent if possible. Making only the minimum payments is far from ideal, as interest rates and fees will pile up, costing you money over time.

Your best bet is to pay off your entire balance every month, if you can. If you can’t do that, you should put down as much as possible. If you are carrying high balances on your cards, it’s time to look into a strategy to pay them down before you end up paying far too much.

 

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