You probably know that paying down debt is good for your credit score.
But theres a persistent myth about credit card balances and credit scores you should know about.
Some people say carrying a small balance from month to month helps your credit score.
The idea that carrying a balance helps your credit score is completely false.
But does the balance hurt your credit score instead?
Read on to learn the facts about how your balance affects your credit score.
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The rule of thumb is that you dont want your credit utilization ratio to climb higher than 30%.
If you could get it to 0%, thats ideal.
Heres where it gets a bit tricky.
If youre regularly using credit, a balance will probably show up on your credit report.
Thats because you dont control when your credit card company reports activity to the credit bureaus.
For example, suppose you have a $5,000 limit and a zero balance.
Then, you make a $100 purchase.
Having a credit utilization ratio above 0% isnt necessarily something to worry about, though.
According to Experian, consumers with a perfect 850 FICO score have an average credit utilization of 4.1%.
Thats harmful because yourpayment historyis even more important than your credit utilization rate.
Moreover, your credit card company could cancel your card because of inactivity.
That account closure hurts your score in two ways:
Heard of These Credit Card Debt Tips?
But millions of Americans overlookthese easy tipsthat could help them manage credit card debt even more wisely.
Read moreto boost your credit knowledge and keep your credit score in check.
Should You Carry a Credit Card Balance?
Theres no benefit to your credit score when you dont pay off your balance in full.
Youll also pay unnecessary interest unless youre taking advantage of a temporary interest-free window.
That said, you shouldnt worry about a balance showing up on your credit report.
Finally, dont worry too much about small fluctuations in your credit score.
Fluctuations are completely normal.
Focus on making on-time payments and keeping your balances low, and youll build a healthy credit score.
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Up for a debt challenge?
In 10 days,these 10 practical stepscould help you get back on the right financial track.
Robin Hartill is a certified financial planner and a former senior writer at The Penny Hoarder.
She previously wrote the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected].
