37% of Americans Are Buying Into This Dangerous Credit Score Myth

Don't fall into the same trap.

If you've ever had to carry a balance forward on one of your credit cards, you're not alone. It's common for consumers to rack up some credit card debt when emergencies strike and their savings account can't cover those unplanned bills. Or, you might accrue a credit card balance due to something like having to attend a destination wedding that's beyond your budget but you feel obliged to attend. 

Although carrying a balance on a credit card may be unavoidable in certain situations, it's best to steer clear of that scenario to the greatest extent possible. Any time you don't pay off a credit card balance in full, you accrue interest by virtue of carrying it forward. Plus, having a credit card balance could actually hurt your credit score -- even though some people might think otherwise. 

A scary myth you shouldn't fall for

In a recent survey by Capital One, 37% of respondents said that carrying a balance on a credit card each month is a good way to increase your credit score. But that's really not true at all.

Here's what is true. If you charge expenses on a credit card every month but then pay off your balance on time and in full consistently, that positive payment activity could help your credit score increase. But carrying a credit card balance on purpose to boost your credit score is not something you should do by any means. And the main reason, aside from the fact that it can cost you in interest, is that too high a credit card balance could actually damage your credit score.

One factor that goes into calculating your credit score is your utilization ratio. This speaks to the amount of available revolving credit you're using at once. Once that ratio climbs above 30%, your credit score could take a pretty significant beating. So it's best to avoid a credit card balance if you have the money to pay your bills in full. 

As an example, let's say you have a spending limit of $10,000 across your various credit cards. Once you carry a balance above $3,000, your credit score could potentially incur damage. 

Now, will a smaller balance -- say, owing $1,000 in this scenario -- have the same impact? No. A balance that small relative to your total spending limit may not cause much, or any, damage to your credit score. But again, you'll be racking up interest on that $1,000 balance. So it's best to not carry it forward if you can avoid doing so.

A better way to build credit

If your goal is to boost your credit score, you can do so by paying all of your bills on time and in full every month, and by hanging onto credit cards you've had open a long time instead of closing out accounts frequently. Not applying for too many new credit cards within a short period of time could also help your credit score improve or stay strong, as could keeping your credit card balance to a minimum. 

If you have to carry a credit card balance because you're in a pinch and don't have the money to cover an unplanned bill, so it goes. But don't intentionally not pay your credit card bills in full because you think it's good for your credit score.