Myth Busting– You Don't Need to Carry Credit Card Balances to Improve Your FICO Scores
The idea that you need to carry a credit card balance to improve your FICO® Scores is a myth. Here's what actually matters.
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Not paying off in full the credit card balance reported on your credit card statement will likely cost you money as interest accrues — and it doesn't help your FICO® Scores.
Even though that's always been the case, according to a February 2023 survey from the U.S. News & World Report, 48% of people incorrectly believed carrying a credit card balance improves your credit score. There are a few reasons why this credit scoring myth might persist.
While it is true that actively using and managing your credit can help you meet the minimum criteria to generate a FICO® Score (as well as improve your FICO Scores), you don't need to carry a balance or pay interest to do this.
How can credit cards affect your FICO® Scores?
Opening and using a credit card can impact your FICO® Scores in different ways — some may help your score, while others can hurt it.
How a credit card can help your FICO® Scores:
- Using your card and paying the credit card bill on time can help you build a positive payment history.
- Having an open credit card might add to your credit mix.
- Keeping credit cards open can increase your available credit and help you maintain a lower credit utilization ratio.
How a credit card might hurt your FICO® Scores:
- Applying for a new credit card could lead to a hard inquiry.
- Opening a new card that is then reported to the credit bureaus can lower the average age of your credit accounts.
- Missing your credit card payment could result in a late payment.
One of the most significant ways a credit card can affect your FICO® Scores is through the card's credit utilization rate. This important scoring factor compares the account's balance and credit limit as they appear in your credit report.
A lower utilization ratio on individual credit cards and across multiple credit cards is best for your FICO® Scores. And a very low utilization ratio could be better than no utilization. However, you can pay off your credit card balances in full to avoid interest payments and still have a low-but-not-zero utilization ratio.
Demystifying credit reporting timelines
One reason it's hard to shake the credit card balance myth is that people might not realize that the balances on their credit reports don't necessarily reflect their current account balances. And it's the balances reported on your credit report that are used in the generation of FICO® Scores.
Generally, credit card issuers report your account information to the credit bureaus once a month on your card's statement closing date — at the end of each billing cycle. You then have about three weeks to pay the credit card bill for this statement (aka the “due date”). The balance as of the statement closing date is what is reported on your credit report.
Assume you get your credit card bill and it shows a balance of $1,000 is owed. That's what gets reported and appears in your credit report. Even if you pay your balance in full by the due date, the reported balance won't change because it was reported before you made your payment. And when a FICO® Score analyzes your credit report, it uses that number to calculate your credit utilization ratio.
Here are a couple ways to manage your credit card while trying to maximize your FICO® Scores.
- If you frequently use your credit card, perhaps to earn rewards, pay down the balance early – before the statement date. You can use these early payments to help make sure a $0 or low balance mount is reported to the bureaus. Otherwise, you might have a high utilization ratio even if you pay the bill in full.
- If you rarely use a credit card, start using your credit card for a small monthly subscription and pay the bill in full. Setting up autopay can make this easier to manage.
Most FICO® Scores only consider the most recently reported credit card balances and limits when calculating utilization ratios. However, one of the newest FICO Scores, the FICO Score 10 T, also considers trends in your credit report. Regularly paying down credit card debt or paying your bill in full each month could be better for this FICO Score than carrying a balance.
Carrying a balance can be costly and unnecessary
An active credit card account and low utilization ratio can be better for your FICO® Scores than a credit card without any utilization, but you don't need to carry a balance. If you do, interest could accrue on that balance. And once you're carrying a balance, many credit cards also start immediately charging you interest on new purchases. Avoid these extra and unnecessary costs — they won't help your FICO Scores.
Get your FICO® Score from FICO, for free. No credit card required.
Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.