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How Carrying a Credit Card Balance Affects Your Credit Score

Your credit score is not something magically assigned to you for no reason. It comes from a string of events, many of which you have control over, and it has a dramatic impact on your overall financial health. Once you realize the amount of control that you have, much of which comes from understanding how you actually get a “credit score,” you can take control of your financial health and financial future.

One thing that is not well understood by most people is how having a balance on your credit cards, or owing money to lenders, can affect your credit score. Most might assume that it is a bad thing to owe money, but, when it comes to your credit score the opposite is often true.

Now, this does not mean that if you owe a ton of money that you could never repay that you will have a good credit score.But, it does mean that when you owe money, you have an opportunity to show how responsible and disciplined you can be and that you can “build credit” by owing money and making regular payments.

How Can You Get a Good Credit Score?

Credit bureaus use a variety of factors to determine your “credit worthiness.” They look at how much you owe, how regularly you make your payments, what types of credit you have, and how long you have had any established credit history to determine whether or not to lend you money or extend a line of credit to you.

When you are able to show that you have a good history with all of these factors, you will ultimately build up a very solid credit score, one that will allow you to enjoy the benefits of a mortgage, car loans, credit cards or even certain jobs. With a good credit score, you will pay lower interest rates and have better perks than those with low credit scores or no credit.

Should You Pay Off Your Credit Card Balances?

In all reality, paying off your credit card balances each month will definitely help you to get a great credit score. But, having a balance on your credit card is not always a bad thing when it comes to your credit score.

As long as your balance does not get close to your credit limit, and as long as you are making regular payments (always more than the minimum payment due), then you can show the credit bureaus that you are serious about your financial health and that you are not a huge risk when it comes to lending money or extending credit. Being a responsible borrower is the most important thing you can do to affect your credit score, overall.

The major downside to carrying a balance on your credit card is that you have to pay interest on your purchases or on the balance that you owe. That certainly can change any “great deal” that you got when making the purchase.

Steps to Improve Your Credit

There are certainly things that will help your credit, and things that will hurt it—or sometimes things that will just make no difference either way. For example, using a prepaid debit card will not hurt your credit, but it will never help to improve your credit score. But, having a credit card and making every single payment on time, every time, will definitely help your credit score.

Make sure that, if you carry a balance, that it is never more than you can realistically pay off in a reasonable amount of time. Simply put, you should be spending within your means, and not splurging on things you cannot afford. Check your credit report regularly to make sure that it is accurate, and, should you find any problems, immediately report them to the credit bureaus and have the situation fixed. The longer you wait to fix a problem, the bigger it will become.

Never make late payments! All of these things are critical to your financial well being. Not only will you be able to get credit when you follow these simple rules, you will get a better interest rate and save tons of money in the long run.

Bottom Line

Carrying a balance is not the only factor that is considered when the credit bureaus assign you a credit score. How long you have had accounts, how regularly you make payments, and your patterns of spending will all factor in when it comes to establishing good credit. Make having a good credit score a priority, and you will find that everything else falls into place!