Does Carrying a Small Credit Card Balance Really Help Your Credit Score?

A woman puts a credit card up to her eyes.
Getty Images

You probably know that paying down debt is good for your credit score. But there’s a persistent myth about credit card balances and credit scores. Some people say that carrying a small balance from month to month somehow helps your credit score.

The idea that carrying a balance helps your credit score is totally false. Read on to learn the facts about how your balance affects your credit score.

How Your Credit Card Balance Affects Your Credit Score

There are five things that determine your credit score. These credit score factors break down as follows:

  • Payment history (35%)
  • Credit utilization (30%)
  • Average age of credit (15%)
  • Credit mix (10%)
  • Hard inquiries and new credit (10%)

As you can see, your credit utilization, or the percentage of open credit that you’re using, accounts for 30% of your credit score. The rule of thumb is that you don’t want your credit utilization ratio to climb higher than 30%. If you can get it to 0%, that’s ideal.

Here’s where it gets a bit tricky. If you’re regularly using credit, a balance will probably show up on your credit report. That’s because you don’t control when your credit card company reports activity to the bureaus.

For example, suppose you have a $5,000 limit and a zero balance. Then you make a $100 purchase. If your creditor then reports to the bureau, you’ll have a 2% credit utilization ratio ($100/$5,000 = 2%), even if the bill hasn’t come due yet.

Having a credit utilization ratio above 0% isn’t necessarily something to worry about, though. According to Experian, consumers with a perfect 850 FICO score have an average credit utilization of 5.8%.

That doesn’t mean the average person with a perfect score is carrying a 5.8% balance from month to month. When your creditor reports to the bureaus, they’re simply providing a snapshot of your account at that given moment. Even if you pay off your balance in full each month, it’s likely that your account will show that you’re using up part of your open credit.

If your credit utilization ratio is 0% because you never use your credit cards, your score could suffer. When you’re not making regular credit purchases and you don’t have outstanding loans, you aren’t generating activity that’s reported to the credit bureaus. That’s harmful because payment history is even more important than your credit utilization.

Moreover, your credit card company could cancel your card due to inactivity. That hurts your score in two ways: Your credit utilization could increase because the amount of open credit you have will drop. If the card was also one of your older accounts, it will also lower your average length of credit.

Should You Carry a Credit Card Balance?

There’s no benefit to your credit score when you don’t pay off your balance in full. You’ll also pay unnecessary interest, unless you’re taking advantage of a temporary interest-free window.

That said, you shouldn’t worry about a balance showing up on your credit report. As long as your balances — both overall and on each individual card — stay below 30%, you’ll be able to build good credit.

Follow these hints from people with credit scores above 800:

  • Make every payment on time. The No. 1 habit of people with exceptional credit scores is that they never miss payments. One late payment will stay on your credit report for seven years.
  • Always keep your utilization below 10%. Most members of the 800 club pay off their balances in full each month, but many say they never let their balances climb above 10%.
  • Keep your oldest card open. As you build good credit, you typically qualify for better credit card rewards. But people with top-notch credit keep those old cards open and use them for a small monthly purchase. Credit scoring models favor customers who have long-term relationships with their cards.

Finally, don’t worry too much about small fluctuations in your credit score. Your score can vary from month to month based on the balance you have at the time your creditor reports to the bureaus. Fluctuations are completely normal. Focus on making on-time payments and keeping your balances low, and you’ll build a healthy credit score.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].