Blogging for Change

Does Carrying a Balance Help Your Credit Score?

by Jesse Campbell on
6/26/2024
in Using Credit
Young woman using smartphone and making purchase with credit card.

The following is presented for informational purposes only.

There’s a fairly common misconception that you need to carry a balance in order to positively impact your credit score. The truth is that you do need to use credit consistently and wisely in order to build a positive credit history, but you don’t need to carry a balance.

How does your credit balance impact your credit score?

Your credit score is a mathematical representation of your creditworthiness. There are a variety of credit scoring models and they all weigh factors slightly differently, but almost all heavily weigh the following five factors:

  • Payment history
  • Amount of available credit 
  • Length of credit history
  • Amount of new credit
  • Types of credit in use

Carrying a balance directly impacts that second factor, "amount of available credit." This is your credit utilization ratio. It's the amount of available credit you're currently tapping into. If your total available credit across all of your open cards is $10,000 and you're carrying a total balance $5,000, you're using half of your available credit, for a 50% credit utilization ratio.

The more of your available credit that you're currently using, the worse it is for your credit. Keep in mind, your credit score is basically a simplified way for lenders to determine how safe it is to lend you money. If you're already using a lot of your available credit that's a red flag and suggests that you may not be able to handle taking on more debt.

So if you're concerned about building strong credit, keep your balances low, with a credit utilization ratio below 30%. Or better yet, don't carry a balance at all. Paying off your balances in full every cycle is the best way to maintain strong credit and avoid paying any interest charges.

In short, you absolutely don't need to carry a balance in order for an account to have a positive impact on your credit score.

Do you need to use a credit card at all for it to impact your credit score?

If not carrying a balance is the safest way to optimize your credit history and avoid interest charges, the question must be asked: what happens if you just never use a credit card?

Well, you don't want to totally ignore a credit card. If you absolutely never use an account, the creditor may reduce the credit limit or even close the account for non-activity. Both of those changes could hurt your credit score.

Lowering your credit limit could negatively impact your credit utilization ratio. Let's say you've got $2,000 in debt spread across multiple cards with a total available credit of $10,000. That's a 20% credit utilization ratio, which is well below the 30% threshold we mentioned earlier. 

But let's imagine that you've got a card with a $5,000 limit that you never, ever touch. It gets closed by the creditor for inactivity. Now your total available credit is $5,000. Your debt is still $2,000, but with less available credit your ratio jumps up to 40%.

Additionally, the age of your accounts is a factor in your credit score. Closing an account, especially one that you've had for a long time, lowers the average age of your accounts and can also hurt your score. 

So you don't want to completely ignore an account, but you also don't need to use it frequently for it to have a positive impact on your credit history. While we talk about "payment history" as the most important factor in your credit score, that's a little misleading. The important thing is that an account is current every month, meaning no missed payments. If you haven't used it and therefore don't need to make any payment that counts as being current.

Long story short: use your accounts at least occasionally to keep them open, but you don't need to use them all the time, and you definitely don't ever need to carry a balance.

Carrying more debt than you can handle? We can help. The debt management plan (DMP) from MMI is a great way to consolidate payments without a loan and save money through significant interest rate reductions. Begin your free online financial assessment and see if a DMP is right for you.

Tagged in Understanding your credit report, Smart shopping, Build your credit score

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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