Plenty of myths about how to manage your credit card debt have been debunked throughout the years, but one seems to be more resilient than others.
“The cockroach of credit scoring myths, the one that just will not seem to die, is that carrying a balance on your credit card helps boost your credit score,” Matt Schulz, chief credit analyst at LendingTree, tells CNBC Make It. “It’s just not true.”
One reason consumers have a hard time “separating truth from fiction” is due to the vast amount of information available about how to manage credit card debt and improve your score, Schulz says.
“People can get themselves in real trouble following advice that they think is genuine and wise but isn’t,” he says.
Another reason people may fall for this myth is because they don’t fully understand how their credit scores are calculated.
Your credit score is based on the following five factors:
- Payment history, 35%: How consistently you’ve made on-time payments toward your credit card bills and other loans
- Amounts owed, 30%: How much you currently owe compared with your available credit, also known as your credit utilization ratio. Ideally, you should aim to keep your utilization under 30%, experts say.
- Credit history, 15%: The length of time you’ve been using credit and the average age of your oldest and newest accounts. Typically, lenders like to see a longer credit history.
- New Credit, 10%: How recently or how often you’ve applied for new credit cards or other loans
- Credit mix, 10%: The various types of debt you’re managing, such as credit card debt, student loan debt or a mortgage. Although you’re not required to have multiple forms of credit, maintaining a variety of accounts can help improve your score by demonstrating to lenders that you can manage different forms of credit.
Within these categories, a number of different things may cause your score to improve or decline. For instance, you may think that carrying a balance is what’s improving your credit score when, in actuality, it could be due to one of your lenders increasing your credit limit, which improves your credit utilization ratio, Schulz says.
“There are just so many possible variables that trying to pinpoint just one reason for any movement is pretty much impossible,” he says.
Carrying a balance can hurt your credit score
Despite what some people mistakenly believe, carrying a balance doesn’t help your score — it can actually hurt it.
When you carry a balance from month to month on your credit cards, costly interest charges can cause your debt to balloon faster than you may expect. As of May 2, the average credit card interest rate was at an all-time high of nearly 21%.
Those accruing interest charges can make your debt more expensive in the long-run, especially if you’re only making the minimum payments. That’s because, typically, your minimum payment mostly goes toward interest instead of helping to reduce your principal balance.
Plus, as interest charges cause your balance to increase, that can begin to increase your credit utilization ratio, which can negatively impact your credit score.
Ultimately, if you want to boost your credit score over time and avoid pricey interest charges, don’t fall for the myth that carrying a balance will help. Ideally, you should aim to pay your balance off in full and on time, when possible.
“Life’s expensive enough in 2024. The last thing you need to do is pay more for something than you absolutely need to,” Schulz says. “Unfortunately, that’s what is happening for those who believe this myth.”
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