Credit Score Myth: Should You Carry a Balance?
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Your Money Briefing. Money and market stories from the Wall Street Journal.
Welcome to this special edition of Your Money Briefing. I'm J.R. Whalen in New York. Maintaining a strong credit score is important, but understanding what components go into determining your credit score is equally important. Turns out millions of Americans mistakenly carry a credit card balance, thinking it helps build strong credit. And creditcards.com senior industry analyst Matt Schultz joins us to discuss. So Matt, it turns out more than one in five people carry a credit card balance for the purpose of maintaining good credit. And a balance has nothing to do with that. How do you think that myth became so widespread?
Boy, I wish I knew because it is really the cockroach of personal finance myths. This thing won't die. And I don't know where it started from, but it is incredibly important to understand that carrying a balance on your credit card is not something that improves your credit score. And in fact, carrying a balance... can negatively affect a person's credit score if it impacts your credit utilization rate and pushes that too high. And what your credit utilization rate is, is basically how much debt you have compared to how much available credit.
Okay, so what does go into determining a consumer's credit score?
Well, there are different scores and different formulas, but really what it comes down to is three things. It's really about paying your bills on time every single time. It's about keeping your balances as low as possible, and it's about not going too crazy applying for too much credit too often. If you do those three things, lather, rinse, repeat, over the course of of years, your credit's going to be just fine. And it is important for folks to understand that credit is a marathon and not a sprint. So you're better off the longer you have done a good job with credit, the better your credit will be.
So we've heard that it's good to apply for credit cards and to build up credit like that, but you're saying just don't overdo it.
Yeah, it's one thing to apply for even, you know, a handful of cards spread out over the course of the year if you're a sign-up bonus junkie and you'd like to play the rewards game, that's fine.
Why do millions of Americans wrongly believe carrying a balance improves credit?
What you don't want to do is apply for a half dozen cards in the span of a few days because then that casts you in a certain light in the eyes of credit card issuers, it can basically make you look desperate.
All right. Now, just getting back to the idea of balances with regard to your credit score, your research shows that younger credit card users and those with lower income are most likely to fall into that misconception trap, right?
Yeah, absolutely. So younger folks, less educated folks, folks with lower incomes are the most likely to believe this myth. And I think a lot of that simply is about inexperience with Because, I mean, we're not teaching these things well enough in schools. A lot of our parents aren't the best financial role models, even though we love them dearly. And the truth is that sometimes you have to find this information out the hard way. What we're trying to do with surveys like this at creditcards.com is to spread the gospel a little bit and make sure that people don't fall for these myths and that they know what is right.
And aside from misconceptions about your credit score or your FICO score, it seems that Americans are having more difficulty paying off their credit cards on time. And the reasons go beyond simply not having the funds to make the payments.
Yeah, it was interesting. We asked people if they had ever paid late, and we found that about 40% of folks confessed to doing so. And women were more likely than men to admit to doing so. But overall, we found that about three quarters of those who said that they had paid late blamed it on the fact that they either just forgot or they were too busy. That's troubling because with technology today, There's no excuse for being late with a payment anymore because it's as easy as setting up auto pay either through your card issuer or through your bank and making sure that you are paying at least a certain set amount each month to ensure that you never get dinged on your credit for being late.
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