Common Money Myths - Myth # 1
Myth: Carrying a balance on your credit card will help your credit score.
Have you ever heard that carrying a small balance from month to month on your credit card is good for your credit score? This statement is not true, but it's a persistent myth.
Here’s where the confusion comes into play:
It’s commonly suggested that to improve/maintain your credit score, it’s best to keep your credit card balances low, using less than 1/3 of your available credit. Using only one credit card as a simple example, let’s take a look at what this means:
If you have a credit limit of $5,000 on one credit card, it’s recommended that you cap spending on this credit card at $1,500 in purchases (Credit utilization = Total credit card balances/Total credit card limits = $1,500/$5,000 = 30%).
By keeping your balances at $1,500 or lower for this particular credit card, it would indicate that you’re able to use credit responsibly because your credit utilization rate is low (at or below 30%).
A low credit utilization rate may be correlated with higher credit scores as the second-biggest factor that goes into the calculation of credit scores is credit utilization. But, if you only pay down a small amount on this $1,500 balance each month, you’re actually paying more for every item purchased due to the accumulating interest charges on the balances that are carried over month-to-month.
The truth is that paying on time, every time, is what's good for your credit — and paying in full is the most economical way to do that.
Information contained in this article was taken from a recent survey conducted by LendingTree - https://www.turnto23.com/lifestyle/over-90-of-americans-believe-in-at-least-one-money-myth