Do I Build Credit Faster By Carrying a Balance on My Credit Cards?

creditCardsMYTH alert: Carrying a balance on a credit card does not increase your credit scores and it does not cause you to build credit any faster than if you were to pay it in full each month.  In fact, it can hurt your credit, if your credit card balance is near your credit limit.  You improve your credit by paying your credit card on time, paying it in full, and keeping the account for years.  The combination of these three items comprises 80 percent of your credit score.

Paying on time

Paying on time is considered your payment history which is 35 percent of your credit score.  Payment history includes paying your bills on time, how many times you have been past due, and the amount you have been past due.

Paying in full

Paying in full would be in the category of how much is owed, which represents 30 percent of your credit score. If your credit card balances are near your total credit limit, you are using most of your credit, and this is considered negative. How much of your credit you used indicates how you manage money.  If you are using most of your available credit, credit grantors don’t consider you a good credit risk.  You usually can’t pay your bills in full, if you carry too much debt.

If you can’t pay in full each month, you should at least pay the minimum.  Keeping your balances low helps your credit.  The proportion to strive for is 10 percent. In other words, the total you owe on your credit cards should be 10 percent of your available credit or credit limit. For example, if your total balances are $1,000 and your credit limit is $10,000, you have used 10 percent of your available credit (1,000/10,000 = .20 and when multiplied by 100 is 10 percent).

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Having a high balance on an installment account such as a mortgage or car loan is to be expected, and it takes time to lower the balance.  The balances on these accounts do not lower your score.

Keeping the account for years

This is more of a byproduct of having an old account but  it does improve the measurement known as “length of credit history” or, more formally referred to as “time in file.” This category represents 15 percent of your credit score.

You don’t have to carry a balance to build credit.  If you charge on your credit card monthly and pay in full each month, a balance will still be reported on your credit report.  Credit card issuers report their accounts receivable information to the credit bureaus, which is based on the monthly statement you receive. You have to pay the amount owed before the closing date on your bill, if you want to lower your score and your total balance is over 10 percent of your credit limit.

JRU on 60 Mins SetCredit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.