No! Carrying Credit Card Balances Will Not Help Your Credit Scores

I have enjoyed talking with lots of people about the Travel Rewards Optimizer over the past few months. The topics that we cover run the gamut and the topics like credit scores and the factors that have an impact on these scores come up frequently.

One comment I hear often is that you can improve your credit score by carrying balances – that is, by not paying monthly credit card statements in full. The idea is that by doing this, you are showing the credit reporting agencies that you can reliably pay debt over time. Then,  you will be rewarded with an improved FICO score.   

When I hear this, I respond with a four-letter word: NOOO!

I did a little digging and learned that a poll conducted just last year revealed that almost one-half of Americans believe that it is beneficial to carry balances. It is certainly beneficial, but not for cardholders (more on that later).

There are several factors that go into FICO scores. A key factor, which can account for one-third of your score, is your payment history. Simply paying your credit card bill on time, every time, builds a history of reliability. But, there are no bonus points for carrying a balance and pushing some of what you owe into the next month.

A second key factor, also accounting for about one-third of your score, is based on the amount you owe as a percentage of the credit available to you. Another term for this is utilization. If the total amount of credit available to you is $10,000 and you put $1,000 on a credit card in a month, your utilization is 10%. Banks do not like to see utilization going beyond 30% because this might be an indicator of financial trouble. When you pay that $1,000 in full, those purchases are removed from the utilization equation (but are, of course, replaced with new purchases for your next monthly statement). Now, let’s say you only pay $500 of your $1,000 balance. Rather than knocking $1000 out of the utilization equation, you are only removing $500. The $500 that remains is increasing your utilization rate beyond what it would otherwise be if you had paid in full. In some cases, the utilization could be high enough that you are actually lowering your credit score despite your efforts to appear responsible.
 

Aside from the impact or lack thereof on your credit scores, the key reason you should avoid carrying balances is that the interest rates on credit cards purchases are very high. Travel rewards cards, because of their great benefits and free travel potential, have some of the highest interest rates. There is no positive impact on your credit scores for carrying balances and you end up financing groceries, gas, cappuccinos, etc. at 20-something percent interest.

 

The only winner when you carry a balance is the bank that issues the credit card. But, I can assure you, they will love you for it!!

I always hope to create a Travel Rewards Optimizer for anyone I meet who wants to travel. But, if someone carries credit card balances, I warn them that the interest they will pay will probably outstrip the travel rewards they receive. My advice to them is to avoid carrying balances and avoid paying interest. If that is not possible, opt for cards with the lowest interest rates you can find. And, for those who pay their credit card statements in full, the Travel Rewards Optimizer might be for you.

  We are ready to help you turn your routine credit card spending into the travel of your dreams.