Banker Says – Carry Debt to Improve Credit Score

Even a banker’s advice could be totally wrong.

I can’t believe what I heard, but a banker told me that carry a credit card balance can improve my credit score.  In fact, there are many people who give the same advice – don’t pay your credit card balance in full to raise your score.  So today, let’s clear up all the smoke.  Pay off your credit card balance regardless of what people say.  Let me explain why.

It’s true that having a balance and showing that you can pay it off can increase your credit score, but you can have the same effect even if you pay off the balance in full every month.  Below is an illustration of a typical credit card usage pattern:

July 1 – Groceries for $29, Balance Owed is $29
July 4 – Lunch for $11, Balance at $40
July 8 – Statement Comes with Balance of $40, Due July 20
July 12 – Dinner for $69, Balance at $109
July 18 – Gas for $38, Balance at $147
July 20 – Pay $40 for Amount Due, Balance at $107

As you can clearly see, this person’s balance was almost never at $0.  Therefore, it would show that there is a balance no matter when the credit card company decides to report your amount owed to the credit agencies.  In fact, paying off your balance in full will likely decrease your overall debt to credit ratio, raising your score.

Two caveats though:

1. You Have to Use Your Credit Card – Part of your credit score is based on the fact that you show ability and commitment in paying off your debt on time.  If you never use your card and your debt is always nothing, your score will suffer as a result.
2. Pay it Off in Full After the Statement Comes – Some people like to pay the balance off the night they make a purchase.  These people will almost always show a balance of $0, and credit agencies will never know that you have the ability to pay off balances because you never have any to begin with.  Credit agencies calculate your score based only on the information available on your credit report.  If there are no records, there is no way they will know that you can potentially pay off loans even your cash position makes Bill Gates jealous.

While carrying a credit card balance may make sense when you first listen to the advice, it clearly isn’t logical when you sit down and  think about it.  Actually, I will still recommend paying your balances off even if paying in full affects your score negatively because it’s the only responsible way to manage your finances.

Stop listening to the wrong advice (no matter where they work at) and pay off your balance in full to the best of your ability.

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Related Articles at Personal Finance Blog by Money Ning:

• Increasing Your Credit Score
• Credit Scams: Part 1 – Credit Reports
• Debt to Income Ratio
• Debt Problems With Credit Cards Can Get Worse If We Are Not Careful
• Getting Used to The Debt Situation

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