Can a Credit Card Balance Improve or Damage Your Credit Score?

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You may already know that paying off debt can help your credit score. Still, there is a stubborn myth about credit card balances and credit scores that is worth clearing up: some people believe keeping a small balance from month to month is good for credit.

That claim is not true. But can a balance hurt your score instead? The answer is that it depends. Here’s what really happens when a card balance shows up on your credit report.

How a Credit Card Balance Can Influence Your Score

Five main factors go into a credit score:

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

Credit utilization, which measures how much of your available credit you are using, makes up 30% of your score. A common guideline is to keep that ratio under 30%. If you can keep it at 0%, even better.

It gets a little complicated, though. If you use credit regularly, a balance will likely appear on your credit report because you do not control when your card issuer sends account activity to the credit bureaus.

For instance, if you have a $5,000 limit and no balance, then make a $100 purchase, your utilization would be 2% if the issuer reports that activity, even if your payment is not yet due.

Having utilization above 0% is not automatically a problem. Experian says consumers with a perfect 850 FICO score have an average utilization rate of 4%¹.

That does not mean those consumers are carrying a 4% balance from one month to the next. Credit bureau reporting is just a snapshot of the account at a certain moment. Even if you pay your bill in full every month, your report may still show that you are using part of your available credit.

In fact, if your utilization stays at 0% because you never use your cards, your score could take a hit. When you are not making regular credit purchases and you do not have loans, there may be little activity for the bureaus to record. That can be a disadvantage, since payment history matters even more than utilization.

There is also another risk: your card issuer could close an inactive account. That would hurt your score in two ways:

1. Your utilization rate could rise because your total available credit would shrink.
2. Your average account age could fall if the closed card is one of your oldest accounts.

Is It a Good Idea to Carry a Balance?

Keeping a balance does not provide any credit score advantage if you are not paying it off in full. It can also lead to interest charges you do not need, unless you are using a limited-time interest-free offer.

Still, you should not panic if a balance appears on your report. As long as both your overall utilization and the utilization on each individual card remain below 30%, you can still build strong credit.

Here are a few habits commonly followed by people with credit scores above 800:

• Pay on time every time. The top habit of people with excellent credit is never missing a payment. One late payment can remain on your credit report for as long as seven years.
• Keep utilization under 10%. Most people in the 800-plus group pay their balances in full each month, and many also avoid letting balances rise above 10%.
• Leave your oldest card open. As your credit improves, you may qualify for better rewards cards. Even so, people with excellent scores often keep older cards open and use them for small charges. Credit scoring models reward long-standing card relationships.

Lastly, do not worry too much about small score changes from month to month. Your score can move around depending on when a lender reports your balance to the credit bureaus, and that kind of fluctuation is normal. Focus on paying on time and keeping balances low, and you will be on track for a healthy credit score.