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Many Americans think that carrying a small balance on their credit card will improve their credit score. But will it indeed?
Carrying a balance on your credit card can be expensive, especially if you are using a credit card with a high APR. Even if you keep the card balance low, it will ultimately cost you money. However, there's belief that carrying a small balance is actually good for your credit score.
This myth might derive from the notion that while having a credit card and using it responsibly can help consumers establish a good credit score, using your card infrequently may result in a closed credit card, which may drop your credit score. Some consumers mistakenly interpret being a frequent user as keeping a balance on their credit card.
Another possible reason for that belief is that it's commonly recommended to keep your total credit utilization rate below 30% to avoid damage to your credit score. We all know that the second most important factor that makes up our FICO score is the amount owed in relation to the available credit limit - credit utilization. This applies to overall debt and amounts owed on each individual credit card. Your credit utilization rate is the amount of credit you're currently using divided by the total amount of available credit.
Thus, many consumers may mistakenly interpret keeping credit utilization below 30% as keeping a small balance on their credit cards.
While making minimum monthly payments on time can generally keep you in good standing with creditors, this practice won't help your credit score, but quite on the contrary - can damage your credit score. Making larger monthly payments that are still less than the full amount of your bill, will be better for your credit score, but can be expensive for you. The average credit card rate is over 16% and it will only go higher as the Federal Reserve plans several interest rate hikes this year. So, your debt will eventually become very expensive.
Having little to no utilization shows you are a responsible borrower. Therefore, the less you owe, the better it is for your credit score. You can achieve this by making small purchases and then paying the card off in full each month. If you have a big balance you can't pay right away, consider getting a zero interest balance transfer credit card to pay off that debt.