Carrying a balance won't improve your credit score

Some lenders would like you to think that not paying off your balance each month is better for your credit rating.

By MSN Money Partner Apr 19, 2011 5:55PM

This post comes from Jim Wang at partner blog Bargaineering.

I'm one of the moderators of the personal finance sub-reddit at Reddit.com, which routinely sees plenty of credit score-related questions. This recent one made my blood boil: User "wooga" told me his lender advised him to carry a balance to improve his score. Wooga said:

I was told by the lender that if I paid down to 1/3 of my balance that it would improve my score by 100 points in a few months, more than it would to keep a zero balance (or pay off each month) which is what I normally do. I didn’t believe it. …

I'm glad he didn't because it's flat-out wrong.

Estimate your credit score for free

Lenders would like you to believe that your credit score improves when you pay interest, but it's simply not true. Credit cards report your balance when your statement closes. They report it again when the next statement closes. These are snapshots in time with no information about what happens between those two moments. The reports are the same whether you carry a balance or pay off the balance in full, so carrying a balance does not improve your score. Post continues after video.

It's important to remember that the FICO credit score is designed to calculate the likelihood you will default on a loan. Whether or not you carry a balance is not any better an indicator than your balance at statement's close. If you charge $500, pay off $500, and then charge $500, you are no riskier than someone who charges $500, pays the minimum plus interest, and carries the $500 forward.

Don't carry a balance if you can avoid it and certainly don't do it because you think it'll improve your credit score.

More on Bargaineering and MSN Money:

Tags:

bankingBargaineeringcreditcredit cardscredit scoredebt

< Back to Smart Spending

0Comments

DATA PROVIDERS

Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.

Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.

Japanese stock price data provided by Nomura Research Institute Ltd.; quotes delayed 20 minutes. Canadian fund data provided by CANNEX Financial Exchanges Ltd.

Feedback

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

Editor Bev O'Shea lives and works in the foothills of the Appalachians. A former copy editor for The Atlanta Journal-Constitution and the Orlando Sentinel, she joined MSN Money in 2007. She's a fan of sunsets, college football and free shipping, among other things.

Having worked as a writer, reporter and editor for more than 25 years, Editor Julie Tilsner is the sort of person who can't help but correct grammar in Facebook postings and on billboards. She's written for BusinessWeek, the Los Angeles Times, Parenting, Redbook, AOL and others. She lives in Los Angeles County with her family and loves to drink wine and practice yoga, although not generally at the same time.

A writer for MSN Money since January 2007, Donna Freedman won regional and national prizes during an 18-year newspaper career and earned a college degree in midlife without taking out student loans. She also writes about smart money tactics for magazines and on her own site, Surviving and Thriving.

Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.

Marilyn Lewis is an award-winning writer with a passion for getting readers clear, straight information that helps them stay out of financial trouble. A former reporter for The San Jose Mercury News, she works from her home in Port Townsend, Wash. Contact her at MarilynLewis@Outlook.com.

LATEST BLOG POSTS

Report: Hazards higher for poor kids

Children from lower income families are at greater risk of suffering accidental injuries and being sickened by food, according to a Consumer Federation of America study.