This week, well wrap up the four common myths regarding credit scores.
Myth #3: In order to build credit, you need to carry a balance on your credit card
There is no evidence that this is true, so if you’re carrying a balance just to improve your credit score, you’re likely wasting money by paying interest for no reason. Part of the reason for this misconception may be a misunderstanding regarding credit utilization ratios. While its true that those with 0% credit utilization have a lower credit score on average that those with small credit utilization ratios, not carrying a balance does not mean you have a 0% credit utilization ratio.
Which brings us to myth #4: paying off your credit card in full each month will result in a 0% credit utilization ratio. Credit card companies will generally provide information to the credit bureaus once a month. However, this is rarely done right after you’ve paid your credit card bill; in fact, more often than not, this information is sent to the credit bureaus at the end of your billing cycle. Which means, your credit utilization is usually calculated using your balance at the end of the billing cycle, when you receive your statement. So even if you’re paying your credit card in full each month, if you’re using a large percentage of your credit card balance, you could still be damaging your credit score. Going back to myth #3, the primary reasons people with 0% credit utilization tend to have lower scores – in order to have a 0% credit utilization that consumer is likely not using their card at all, meaning they’re not creating payment history, which is the largest factor that determines your credit score.