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Do I Need to Carry a Credit Card Balance to Get a High Credit Score?

By Nathan Hamilton – May 8, 2017 at 8:23PM

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The answer might surprise you.

While the underlying algorithms of credit scoring models are shrouded in mystery, the broader pillars are well understood, including credit utilization, which measures the amount of debt you're carrying in relation to your total available credit. Credit utilization is an important factor in improving your credit score, as it accounts for 30% of your total FICO score.

In the previously recorded Facebook Live video segment below, Motley Fool analysts Michael Douglass and Nathan Hamilton answer a user-submitted question about how much debt cardholders need to carry to land a higher credit score.

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Michael Douglass: First off, what is a good credit utilization percentage to show? Pete, I think your first question is, what are you using it for? Your credit score particularly matters when you're trying to take on debt of some kind. If you're trying to buy a car, a home loan, that's when this really starts coming into play. The conventional wisdom you usually see you around the internet is, you want to be under 30%. We actually tend to go more conservative. We tend to say 10% or 15%.

Nathan Hamilton:
Yeah. You can actually go down to 0% by charging and paying off your balance every month, because what happens with your credit utilization ratio is your balance is reported on the statement date, not the due date of your payment. If you pay off your balance before the statement date, $0 is going to be reported to the credit reporting bureaus. Then, from there, you have the best possible credit score from it. You don't need to actually have credit utilization. You don't need to report 20% or 30% to have a good credit score. As you mentioned, typically, to have a good credit score, or at least not be penalized by too high of a utilization, you have to be below 30%. But there's no reason you can't be at 0%. The lower you go, the better

Nathan Hamilton owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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