Do You Have to Carry a Balance to Earn a Good Credit Score?

A good credit score is very important. With good credit, you can get a mortgage loan that's affordable or have your choice of where to rent since landlords won't be concerned about your ability to pay. You can also qualify for the best credit cards and get tons of other benefits like more affordable insurance. And your credit record won't cost you a job if you undergo a credit check, which somewhere around 15% to 30% of employers perform. 

If you want to earn good credit, you have to show you can be responsible with borrowing. Using a credit card is a good way to do that. But do you have to carry a credit card balance in order to earn a good credit score? Here's what you need to know.

There is no benefit to your credit of carrying a balance on your cards

Despite what you may have heard, there is absolutely no benefit to carrying a balance on your credit cards. Carrying a balance is not part of the credit scoring formula and, in fact, if you let the balance on your cards get too high, this could hurt your score.

You do need to use your cards in order to earn a good credit score, however. Payment history is the most important factor in the scoring formula, accounting for about 35% of your FICO® Score.  You'll want to be able to show you are charging purchases and paying the bills. And, if you don't ever use your card, your card issuer could close the account, which could hurt your score since your mix of accounts and the age of your accounts are also part of the credit scoring formula.

But despite the benefits of using your cards, there's no advantage to allowing your balance to carry over from month to month -- and thus getting hit with interest charges. You can and should pay your balance in full and will still get all of the benefits associated with having a credit card on your record. 

There are lots of downsides to carrying a credit card balance

There are plenty of reasons not to carry a balance on your credit cards, so it's good there's no benefit to doing so.

One of the biggest downsides of carrying a balance is the most obvious downside -- it would be really costly. See, the average credit card interest rate is 21.19% as of August 2023.  If you get stuck paying interest on your cards, you're going to make all of your purchases a lot more expensive.

Letting your balance grow too much can also hurt your credit rather than helping it. If you use more than 30% of the credit available to you, that hurts your credit utilization ratio (a measure of credit used versus credit available). Credit utilization is the second-most important factor in the FICO credit scoring formula. A lower one is better than a higher one. 

These downsides should be enough to convince you that carrying a balance is not the right move if you're trying to build credit. Instead, sign up for a credit card if you don't already have one, make a few small charges on it per month, and pay the card in full each month. 

If you can't qualify for a card because you don't have credit yet, a secured card should be available as long as you can make a deposit equal to your credit limit. Apply for one today so you can start building credit -- and be sure to pay your balance in full each month as you do it.