I don’t know who started the rumor that carrying a balance on credit cards is good for your credit score, but I hope they step on a lego in bare feet every day for the rest of their lives.
You shut your pie hole, Poppins. This is serious.
Of all the damaging misconceptions about personal finance we’ve had to correct over the course of running Bitches Get Riches, this is by far my least favorite. And it keeps popping up again and again in questions from our followers! Why? How? Who is teaching all of our darling kangaroo babies such a terrible way of handling their credit cards?
Until I can find the culprit and give them their just desserts (hot oil? The rack?), I have made it my mission to set the record straight.
Paying interest doesn’t help your credit score
The shitty advice goes something like this:
“Don’t pay your credit cards off at the end of every month. Instead, keep a small amount of money on a card so it carries over to the next month and earns the credit card company interest. The credit card company will like this, and thus, improve your credit score!”
This advice is akin to taking $10, putting it into the blender with some leafy greens, and drinking it as a kale smoothie for all the good it will do your finances. At best you’ll end up poorer by $10 and probably with some unpleasant intestinal gas to boot.
Your credit card company does not determine your credit score. So you have no need to make them happy. Instead, they report your activities to credit reporting bureaus like Equifax, TransUnion, and Experian, who then take that information, swirl it around in a vat with some other numbers, and spit out a credit score.
If you want to know what else goes into your credit score, we wrote all about it here:
The only thing carrying a balance does is accrue interest… interest that you then have to pay back to the credit card company in addition to the rest of the money you owe them.
In other words, this bad fucking advice is literally costing you money for no goddamn reason.
Pay off your credit card in full and on time
Having a good credit score is important for all kinds of reasons. It helps you get better terms on things like mortgages, student loans, and credit cards. A bad credit score, by contrast, can prevent you from renting an apartment or financing a car, among other things.
So it’s totally understandable why someone would try anything to get a good credit score! And that’s why lots of us fall prey to shitty advice about credit in an attempt to stay out of trouble and in the black.
But there is no better way to build credit than to pay your bills in full and on time every time. This includes your credit card bill.
There are tons of things you can do to help improve your credit if it’s already shit. But this one good habit—on time, in full—will save you from getting your credit in the hole in the first place. Here’s some more advice on how to improve your credit:
- How to Build Good Credit Without Going Into Debt
- How to Instantly Increase Your Credit Limit
- The Best Way To Pay off Credit Card Debt: From the Snowball To the Avalanche
On top of all that, if you don’t carry a balance on your credit cards from month to month, you’ll never accrue interest. And if you never accrue interest, you’ll never have to pay it back. Which means you’re basically getting to use the credit card company’s money for free.
#winning #bossbitch
The origins of this infuriating myth
As best I can tell, there are two likely reasons for the prevalence of this misconception. Sadly, they both link back to perfectly true—but often misunderstood—facts about how credit works and how you can improve your credit.
The first is credit utilization. This is the amount of credit available to you vs. what you’ve used. Many a personal finance guru suggests not going over a 30% utilization rate to help your score (though this is more of a guideline than a hard-and-fast rule). This means never ever using more than 30% of your credit limit.
It does not mean you should always have 30% of your available credit tied up in debt. But I could see how this advice would get mangled to sound like you should. Again: pay your credit cards off in full and on time every month.
The second is timing. The conventional wisdom goes that if you pay your debt too soon, the information that you used your cards won’t make it to the credit reporting bureau, and then you won’t get “credit” (see what I did there?) for using the cards. You should therefore wait long enough to ensure the credit reporting bureau “notices” your usage. (How long? Literally no one had an accurate answer when I was researching this post. Definitely before the due date, though.)
Using your credit cards does in fact help your credit score, insofar as it shows you are capable of responsibly using credit. But I can see how advice to “wait for the charge to be included in your credit report” could insidiously morph into “wait until after the charge has earned interest.”
Let’s simplify the question of timing. It’s way more important that you pay your credit cards off by the due date every month than that you leave a balance on the card long enough to be calculated into your credit report. Full stop.
So to be clear: pay your credit cards off in full and on time every month.
I beseech you, I implore you, I beg you!
Do I sound like a broken record yet?
If you can afford it, paying your credit card bill in full and on time every billing cycle is the best possible thing you can do for your credit and your general financial well being. If you can’t pay it off in full, pay off as much as you can! Even if the balance is super low, pay it off! You have no reason to wait and roughly 9,000 reasons to act.
Just pay your card off. Fucking pay it off! Don’t listen to the siren song of shitty old wives’ tales about credit cards. Don’t be confused by the mysterious ways in which credit works!
For fuck’s sake, pay the goddamn card off!
PAY YOUR MOTHERFUCKING CREDIT CARDS OFF IN FULL AND ON TIME EVERY MONTH. JUST FUCKING DO IT.
Please.
Think of the children.
It’s heartbreaking to me to think that there are people out there who believe this, and are probably posting it on Facebook along with all the other urban legends they’ve ever heard. And then they pat themselves on the back for their good deed of informing their friends and family about the evils of vaccinations, or whatever. UGH. Thank you bitches for helping to edumacate us.
That’s an insane idea that I’ve never heard of before – and you’re entirely right to squash it completely. And if anyone believes that they need to make “the credit card company happy” they can rest easy – the cc companies make loads of money off of you even when pay in full and on time (every time you swipe the card, they get a percentage of that purchase amount). Try this experiment: pay on time and in full for years and years, then call up your company and ask for a favor (like, “please increase my credit limit” – not like “please wash my car”) and see how they respond. Hint: the answer is that the agent on the phone looks at your history of on time and in full payments, states “wow” out loud, and gives you the requested credit increase immediately. PAYING ON TIME AND IN FULL = BEING A GOOD CUSTOMER WHO MAKES THEM BOATLOADS OF MONEY, AND THEY LOVE YOU.
OMG – I am shocked that people actually believe this. Then again, I’m shocked at quite a lot of things nowadays.
Same. I wrote this out of frustration because we keep getting asked about this on our Tumblr. Granted, the audience there skews young, but still! What a horrible idea to instill in a young person just starting out.
Sadly, I keep hearing the same thing. It drives me crazy because people who believe that will. not. be. dissuaded. They basically give you an “Okay, honey” expression while you try to tell them that you’re involved in the PF blogosphere and you promise — PROMISE — it’s not true.
The 30% utilization thing… That’s not one I’ve heard (or if I did, I forgot all about it). We’ve often used more than 30% of our credit limit, and our credit is pretty durn good. So unless you mean carrying a balance of more than 30%… I don’t see how it’d affect your score unless you happen to have a credit check run before you’ve paid off the card for the month.
Who spreads this malarkey? Your parting words said it best–think of the children. Don’t let your children watch you pay buttloads of interest to credit card companies every month lest they think this is how it should be done when they get a credit card. That’s just bad parenting.
My parents told me carry a balance at the end of the statement period (i.e. don’t pay off your credit card as soon as charges hit so your statement is $0) but for a while there (granted, during a 0% intro interest rate) I was clearly missing the corollary to that advice, which is pay that shit off in full as soon as you get your statement. I wonder if that’s also where some of the confusion is coming from?
DON’T PAY INTEREST TO YOUR CREDIT CARD COMPANY FULL STOP.
I never hear it from the source but I ALWAYS hear “but I was told to carry a balance” and then my head bursts into flame like Ghostrider.
Hey Bitches! I try to keep up with you on Tumblr, and I wanted to share this badass credit card-related tip.
So, my job uses Fidelity for their 401k, and the website for checking my balance and whatnot has a library section full of financial advice articles. Most of it is stuffy crap geared for people making at least twice my annual income (less than $30k), but I found a tidbit of gold in the “Budgeting and Debt Management” section.
Okay, let’s be real. I have about $4,400 in total credit card debt on two cards, both with Capital One. I’ve been working on paying it off, making sure to pay on time (if not early) and pay more than the minimum.
The advice? Call your credit card company and ask for a lower interest rate. The article said that if you have a good history of on-time payments, they’re usually willing to do it, but they won’t if you don’t ask.
I decided to call on my lunch break today.
I did the automated system shuffle (only about 2 or 3 minutes) to get to an actual person. The guy I talked to sounded super enthusiastic, maybe because I was being calm and nice and not in super bitch mode, lol. I told him I’d been a customer for a few years, never missed a payment, yet my interest rate still keeps jumping up to sky-high amounts, and I wanted it lowered. He pulled up my account, saw my payment history and current APR on both my cards (27% and 25%), checked his computer, and guess what?
The advice WORKED.
He said it would take 1 to 2 billing cycles to take effect, but my interest rates for BOTH my cards were lowered by 4%…on EACH CARD! So I went from 27% and 25%, to 23% and 21%. Not as much as I hoped for, but still a vast improvement! He did say that it was an “offer” for a lower rate for 7 months, then it would return to the current rate, but all I would have to do is call back and ask again. As long as I keep making my payments on time, they’d easily do it again.
The best part? The entire phone call, including the time spent with the automated system, only took ten minutes. TEN. FREAKING. MINUTES! And my interest rates on my cards were lowered by a combined rate of 8%.
I can’t say how easy it would be for other credit card companies, and I swear I’m not trying to plug Capital One, lol. But regardless of what company someone uses, this is a legit pro tip to help fellow bitches pay off their credit cards, cuz the lower the interest rate, the less you get charged in interest, and the less you pay overall.
Hey, if it worked for me, other bitches can do it too!
Always, always, A L W A Y S call the companies to lower your payments or get better deals AT LEAST ONCE A YEAR. This works with your insurance. This works with your credit cards. This works with your internet. It works with pretty much everything except for a handful of things (refinancing (sorta), city utilities, etc); basically being a good customer and paying on time and in full gets you a bunch of perks pretty much everywhere- but they’ll never hand it over if you don’t ask, because they make money on you by not doing so.
Yes yes yes!!! This is the perk of having good credit: it puts you in a better place to negotiate better deals.
This works really well with internet too. I have Comcast/Xfinity and I’ve been on “promotional” rates for 6 or 7 years. Often when I called, not only did they reduce my rate, but they would increase my services at the same time. Free (for a year) channel upgrades when I had cable and increased internet speed.
My great aunt has Comcast/Xfinity too and when they raised her monthly bill to an insane amount, her sons told her that’s just how it was. I said nope and called them for her; its saved her over $3000 to date.
I’m glad I never heard the “advice” of keeping a balance on your card because it’s such BS. I pay off my cards in full every month (I have 4) and my score is always in the high 700s – low 800s. Clearly not carrying a balance is not hurting me.
GREAT question, Joanne.
Either method will work for avoiding interest. But if you ARE worried about charges remaining on the card long enough for the credit reporting bureaus to track and positively affect your credit score, then what you’re doing (paying off the statement balance when it’s due) is the way to go.
Personally, I pay the total outstanding balance. My credit’s great.
The only, ONLY, thing that you should carry an interest-charging balance on are asset purchases. Like, if you’ve bought something that you could conceivably sell to pay off the debt. A car. A house.
Otherwise, pay it off monthly. If you can’t afford to pay off the dinner out, new outfit, games, takeout, etc. before interest is charged, then you can’t afford to go out to dinner, get a new outfit, a new game or get takeout. Harsh advice but true.
If you use you card for necessities like food and can’t pay the balance off, then you need to organize a union in your workplace and start the revolution, baby. Someone is screwing you over and you need to kick ass, take names, and get a raise.
The only, ONLY, thing that you should carry an interest-charging balance on are asset purchases. Like, if you’ve bought something that you could conceivably sell to pay off the debt. A car. A house.
Otherwise, pay it off monthly. If you can’t afford to pay off the dinner out, new outfit, games, takeout, etc. before interest is charged, then you can’t afford to go out to dinner, get a new outfit, a new game or get takeout. Harsh advice but true.
If you use you card for necessities like food and can’t pay the balance off, then you need to organize a union in your workplace and start the revolution, baby. Someone is screwing you over and you need to kick ass, take names, and get a raise.
Yeah, No. Don’t even get a credit card. Fuck it, fuck the industry, Let it burn.