When it comes to your credit card and credit score, misinformation and rumors abound. For example, you may have heard that checking your credit report will affect your score, which is completely untrue. You may also have heard that you only have one credit score or that you can pay a company to quickly fix your credit score in the blink of an eye. Both of these common rumors are also false.
Common credit myth
Another common credit myth is keeping a balance and the exact effect of debt on your credit score. After all, many people believe that keeping low to average balances on their credit cards can help improve their scores in some way.
Does carrying a balance on a credit card help your score? After all, this question has a definitive answer that might surprise you.
Balance won’t help to increase credit score
If you’re hesitant to pay off your credit card in full because you think a small balance helps, think again. Carrying a balance on your credit card does nothing for your credit, however, it will cost you money in the long run. After all, the average credit card APR is currently around 16%, so interest can add up quickly even on small balances.
According to the Consumer Financial Protection Bureau (CFPB), the rumor that loans help your credit is false. In fact, they write that “paying off your credit card in full each month is the best way to improve or maintain a good credit score.”
This fact becomes easy to understand when you take a closer look at the factors that affect your credit score. For example, when it comes to your FICO credit score, the second most important aspect of your credit history is your outstanding balance against your credit limit, also known as your credit utilization ratio. This factor makes up 30% of your FICO credit score and can be negatively affected if you use too much of your available credit in a given month or period.
Other factors that can affect your credit score
Now that you know that carrying a balance won’t help your credit, you should take the time to understand the additional factors that can affect your credit. First, you should know that your payment history is the most important factor that makes up your FICO credit score. This comprises 35% of your score, and you can excel in this category by paying all your bills, including credit card bills, without exception, early or on time.
Another factor that affects your credit score is the length of your credit history, which makes up 15% of your FICO score, and you can improve this range by keeping your credit accounts in good standing for as long as possible. By the way, this credit score factor is the main reason credit experts suggest keeping old credit card accounts open, even if you’re not using them.
Other factors that make up your credit score include new credit (10% of your score) and your credit mix (10% of your score). You may see negative scores in the new credit category every time you apply for a new credit card or loan, and review your credit report carefully.
Tips to avoid carrying a balance on your credit card
Since carrying a balance on your credit card won’t help improve your credit score, the best thing to do is stay out of debt if you can. Sure, paying your credit card bills in full each month can help you save money on interest, but it can also help you in other areas of your life. For example, living a debt-free life makes it easier to overcome financial difficulties and save money when you don’t have large debts to pay.
If you have credit card debt that you just can’t pay, your best first step is to stop using your credit card for purchases. After all, paying off a loan while you’re still building a balance is hard.
Once you stop using your credit cards to spend, you can come up with a plan to pay off your cards with a debt snowball or avalanche strategy, or even with the help of a credit card balance transfer. credit that offers no interest on your debt for a limited time.