Credit card myth: you don’t have to carry a balance to build credit

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There is a widespread, but totally false, belief that you must have a balance on your credit card to create credit. This myth couldn’t be further from the truth, but experts say they still hear it often from credit card holders.

“This is the myth that I’ve tried to break my entire career,” says Beverly Harzog, credit card expert and consumer credit analyst for US News & World Report. “Basically you think you have to pay interest to get a good credit score, but you can get a great credit score for free. It just takes time and patience, and paying your bills on time.

This is because your payment history – showing that you can pay your bills on time each month, over time – is the most influential factor in your credit score. And keeping your balances low (or ideally no balances at all) also has a positive effect on the second most influential factor, the credit utilization rate.

“You don’t have to have a balance to get good credit,” says Anna N’Jie-Konte, CFP and founder of Dare to Dream Financial Planning. “What is needed is to show that you are using the card and paying for it. This is the most basic thing.

Here’s everything you need to know about building your credit score to avoid falling into this common myth, and what to do if you currently have a balance on your credit card.

How maintaining a balance affects your credit score

There is essentially “no benefit” to having a balance on your credit card, says Larry Sprung, CFP and founder of Mitlin Financial.

For starters, carrying a scale is expensive. Each day that you do not pay your statement balance in full after the monthly due date, you will earn interest on the remaining balance until it is paid. This can lead to a slippery slope in long-term debt, as most credit cards charge very high APRs – from 10% to over 25% – on the balances you carry.

Maintaining a balance can also increase your credit utilization rate. This is the total amount of available credit you use versus the total amount of credit you have. If you have a $ 5,000 credit limit and you keep a $ 3,000 month-to-month balance, for example, you would have a high utilization rate of 60%. Experts recommend keeping this ratio below 30%, although a value below 10% is ideal for building credit. An increase in usage has the potential to lower your credit score because it signals lenders that you may be in financial difficulty.

Better ways to accumulate credit

Your credit score influences many aspects of your financial life, from buying a car to buying a house or even renting an apartment. This is why it is essential to monitor your credit and make sure that you are adopting the habits that can help you build and maintain a strong credit rating.

Building credit can take time, but there are a few ways to get started – which don’t involve carrying a balance:

  • Pay your balance on time: Payment history is 30% of your credit score, so it’s important not to miss any payments. Automating your payments can help you stay on top of your credit card bills.
  • Keep your utilization rate low: According to experts, a 30% credit utilization rate is as high as you want it to be, but you should aim to keep it as low as possible.
  • Check your credit regularly: There is a difference between your credit report and your credit score, but it’s important to take the pulse of both. Visit to access your credit report. To check your credit score, log into your online account with your credit card issuer.
  • Correct any errors on your credit report: Data from the Federal Reserve shows that one in five people have an error on their credit reports. Quickly spotting inconsistencies or errors in your credit report can prevent you from being caught off guard by a sudden drop in your credit score.
  • Explore credit enhancement programs: Tools like Experian Boost, TransUnion’s eCredable Lift, and FICO’s UltraFICO Score leverage information that is not typically used in credit scoring data, such as bank history and utility payments, to help you increase your score. But you will sign up to actively enroll in these programs.

What to do if you carry a balance now

If you currently have a balance on a credit card, focus on eliminating those debt balances before interest accumulates. Even if you have other debt, tackling credit card debt first can save you more money in the long run, as credit cards tend to charge higher interest than other types of debt. ready.

One option to consider is to transfer your debt to a credit card with balance transfer. These cards offer an introductory 0% APR for a limited period – often 12, 15, or 18 months – during which you can make payments directly to your balance without taking more interest. This can help you save money in the long run, but only if you form a plan and commit to paying off your balance during the 0% APR introductory period.

Some of NextAdvisor’s top choices for balance transfers include the US Bank Visa® Platinum Card, Citi Simplicity® Card, and BankAmericard® Credit Card, among others.

You can also take out a personal loan from a bank or credit union to consolidate your debt. The interest rates on these loans are determined by your credit score, income, and debt, so shop around to make sure you save money by getting a personal loan with a better interest rate. Keep in mind that there is usually an initial set-up fee, which can be as high as 8% of the loan amount.

If you are looking for free or low cost help with your debt, consider working with a nonprofit credit counseling agency. Credit counselors can be a great resource for advice on budgeting and money management, and they can also set you up with a Debt Management Plan (DMP) for a small fee. Accreditation is key, so look for the initials NFCC (National Foundation for Credit Counseling) and FCAA (Financial Counseling Association of America) when looking for a reputable credit counselor.

Final result

Your credit score is never set in stone – it can go up or down depending on your credit habits. But having a balance on a credit card isn’t the way to increase your score and can often backfire or lead to long-lasting debt.

Pro tip

If you don’t have a credit history or bad credit history, checking your credit report and score is the first step to improving your credit. Having a complete picture of your current credit situation can help you better understand what you need to do differently to improve it.

Instead, the key to maintaining a consistent good credit rating is to manage your debt responsibly each month. This means paying your credit card bills on time, paying off your balances in full, and checking your credit regularly. And if you currently have a balance and are struggling to pay it off, there are debt repayment options to help you out, like a balance transfer card with a 0% long interest period, loans from. debt consolidation or consulting a credit counselor.

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