The average American does a pretty decent job managing their credit. But if you want to boost your credit score, it’s important to avoid falling for a commonly held myth: Carrying a balance on your credit card each month helps improve your score.
“This is not true,” Tommy Lee, FICO’s senior director of analytics and scores, tells CNBC Make It. “Carrying balances from month to month and incurring interest fees does not help your credit score.”
In fact, you risk harming your credit score rather than helping it if you’re carrying a balance on purpose. A higher balance translates to a higher credit utilization ratio, which is the percentage of your available credit you’re using.
Since your credit utilization lets lenders know how well you’re managing your credit, experts typically advise aiming to keep your balances low.
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Additionally, letting your credit card balance carry over for multiple months could cost you money in the long run, due to expensive interest charges that accrue on your unpaid debt.
Say you have a $2,000 balance on a credit card with a 25% annual percentage rate, which is about average, according to LendingTree data. If you made monthly payments of about $107 for two years, you’d pay close to $562 in interest charges. But the quicker you’re able to pay that off, the less you’ll pay in total interest.
Of course, you won’t incur any interest charges at all if you’re able to pay off your credit card balance in full before the end of your billing cycle.
“Life’s expensive enough in 2024. The last thing you need to do is pay more for something than you absolutely need to,” Matt Schulz, chief credit analyst at LendingTree, told CNBC Make It in May.
It’s OK if your budget is stretched thin and you’re unable to pay off your balance in full each month. But make sure to at least pay the minimum amount you owe on time.
How to improve your credit score
No matter where your credit score stands currently, the good news is that it isn’t set in stone, Lee says.
There are several factors that are used to calculate your credit score:
- Payment history (35%): How consistently you’ve paid your credit card bills on time
- Amounts owed (30%): How much money you owe across your different accounts and how that compares with your overall available credit
- Length of credit history (15%): How long you’ve been using credit
- Credit mix (10%): The different types of credit you’re maintaining, such as credit cards, mortgages and student loans
- New credit (10%): How many new lines of credit you’ve applied for or opened recently
The importance of each of these factors can change depending on your unique credit usage, which is why it’s not always possible to pinpoint which specific category may be impacting your credit score at a given time, according to FICO.
That being said, one of the most important steps you can take to improve your credit score is to pay your bills on time since it accounts for the largest percentage of how your score is calculated, Lee says.
And remember, excellent credit isn’t built overnight. Ultimately, it takes time and consistency, Schulz says.
“It is about doing three things over and over again: paying your bills on time every single time, keeping your balances as low as possible, and not applying for too much credit too often,” he says. “If you do these things consistently for years, your credit is going to be just fine.”
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