Head of Growth at Tally
June 12, 2017
Pop quiz! When your credit card payment comes due, which should you do if you’re trying to improve your credit score?
Pay just the minimum payment.
Pay a little bit under and carry a balance to next month.
Pay the full amount to bring your balance to zero.
If you’re like 30 percent of Americans, you may believe carrying a balance will improve your score, according to a BMO Harris Bank survey. It doesn’t. Carrying a balance is not the type of responsible card behavior credit bureaus look for.
Of all the information credit bureaus use to calculate your score, your ability to responsibly carry a balance is not one of them. On-time payments matter. So does how much available credit you’re using. Carrying over any portion of your balance does not have the credit-boosting benefits many believe it does.
“If you’re able to pay off your balance in full, always do so,” says Jason Huynh, Tally’s resident credit card expert and former business director at Capital One. “Intentionally carrying a balance never helps you.”
Many people believe paying their balance in full means banks will report a $0 balance to the credit bureaus. They think it’s best to carry a balance to prove their ability manage their card payments responsibly while building history.
This simply isn’t true.
The confusion likely stems from misunderstanding when your balance gets reported to credit bureaus. When you receive your monthly statement, credit bureaus simultaneously receive that exact same information. Your bank sends your balance to both.
No matter how much you pay off, that initial balance is the same in the eyes of credit bureaus. The billed charges on your statement are the same, whether you pay the minimum payment, your entire balance or an amount in between.
Credit bureaus also track if you’ve made minimum payments on time. Granted that you’re making on-time payments, you’ll receive the same credit toward your score whether you pay the minimum or your full balance.
While you won’t necessarily hurt your credit by carrying a balance, you’ll definitely take a hit to your wallet. Credit card interest rates are notoriously high, so even carrying a small balance adds up. That’s why if you can afford to make your payments in full every month, you should. You’ll continue to build good credit history, and you won’t pay a dime in interest.
Bottom line: Balances are not reported based on how much you’ve paid; they’re reported according to how much you’ve spent. Banks will only report a $0 balance to credit bureaus if you’ve spent $0 on your card. For a healthy credit score and happy wallet, do your best to pay your balances in full every month. Carrying a balance isn’t necessarily bad for your score, but it will cost you in interest.