Does Carrying a Balance on Your Credit Card Improve Your Credit Score?

Carrying a balance on your credit card is a common practice After all, life happens, and you may not always be able to pay off your credit card in full each month But does keeping a balance actually help or hurt your credit? In this article, we’ll break down the facts so you can understand the implications carrying a balance may have on your credit score.

What Does It Mean to Carry a Credit Card Balance?

When you carry a balance on your credit card, it simply means you did not pay off the entire balance and some amount was carried over to the next billing cycle. For example, if your statement balance was $1,000 but you only paid $700, you carried over a $300 balance.

This is different from paying your balance in full each month, where you pay off the entire statement balance by the due date and carry no balance over.

Carrying a balance means you will begin accumulating interest charges on the remaining balance, The average credit card interest rate is around 16% APR, So that $300 balance carried over would accrue around $4 in interest charges for that month

The Myth of Carrying a Small Balance to Build Credit

There is a common myth that carrying a small balance, say $20-50, can help boost your credit score. The idea is that keeping a tiny balance shows lenders you are using the credit line responsibly. Unfortunately, this is false and carrying any balance does not help your credit.

Here are some key facts

• Credit bureaus do not track if you carry a balance – The bureaus only record the balance amount reported on your statement each month. They have no way of knowing if you carried that balance over or paid in full.

• Lower utilization helps your credit score – Carrying a balance inevitably leads to higher utilization, which hurts your score. Keeping your utilization low by paying in full helps your score.

• No need to show active usage monthly – Your credit score only cares that you use credit responsibly over the long term. It does not look at each month in isolation.

So carrying a small balance does not help build your credit. You’re better off paying your balance in full each month.

How Carrying a Balance Affects Your Credit Score

While carrying a balance doesn’t help your credit score, it often hurts it. Here are two of the main ways carrying a credit card balance can negatively impact your score:

1. Increased Credit Utilization Ratio

Your credit utilization ratio measures how much of your total available credit you are using. It is a key factor in calculating your credit score. Experts recommend keeping your utilization below 30%.

When you carry a balance, it directly increases your credit utilization because that balance is counted as credit in use. And the higher your utilization, the more it hurts your score.

For example:

• You have 1 credit card with a $5,000 limit
• Your monthly statement shows a $1,000 balance
• Your utilization is $1,000/$5,000 = 20%
• You pay $700 and carry a $300 balance
• Now your utilization is $1,300/$5,000 = 26%

By carrying that $300 balance, your utilization jumped above the recommended 30% threshold. This could cause your credit score to decrease.

2. Potential Missed or Late Payments

Carrying a balance makes it more challenging to pay your credit card bill in full each month. If you cannot afford to pay the balance and minimum payment, it could lead to a missed payment.

Additionally, if you pay late because you struggled to pay the balance, it will hurt your credit. Payment history (whether you pay on time) is another major factor in your score.

Both missed payments and late payments can drastically lower your credit score. A single late payment can drop your score by over 100 points.

When Can Carrying a Balance Improve Your Credit?

There are a few scenarios where carrying a small, controlled balance can help indirectly improve your credit:

• If it allows you to keep utilization under 30% when you would otherwise max out your limit

• If you carried a $0 balance for many months, showing $1 monthly may prove you use the card

• If you carried a large balance previously and now show you can manage a small balance responsibly

However, it is usually better to just pay your balance in full. The impact here would likely be small or temporary. Paying in full is the safest way to maximize your credit score.

Best Practices for Credit Card Balances and Your Credit Score

Here are some tips to manage credit card balances while optimizing your credit score:

• Pay your balance in full each month – This avoids interest and keeps your utilization low. Set up autopay if it helps.

• Use less than 30% of your limit – Try to keep monthly charges low enough to maintain under 30% utilization.

• Ask for a limit increase if needed – A higher limit means lower utilization for the same balance amount.

• Pay down large balances aggressively – If you currently have high utilization, focus on paying down balances quickly.

• Use balance transfer cards strategically – These cards can give you a temporary 0% APR to pay down balances faster.

• Monitor your credit regularly – Use a free service like CreditWise to monitor your score and catch issues early.

The Bottom Line

Carrying a credit card balance does not help your credit score. Paying off your balance in full each month is the best practice for optimizing your score and avoiding interest charges. But if you do carry a balance, focus on paying it down as quickly as possible while keeping utilization under 30%. With good credit card habits, you can build and maintain excellent credit over time.