The One Thing Too Many People Get Wrong About Credit Cards

Americans on a whole aren't strangers to credit card usage. And as of the end of 2022, total U.S. credit card balances sat at $930 billion, according to TransUnion.

Sometimes, when money gets tight, consumers have no choice but to fall back on credit cards to pay their bills. In those situations, it's common to carry a balance forward for months or even years at a time, since credit cards generally give you that flexibility.

But if you think that carrying a large credit card balance and paying it off over time is a great way to build credit, you'd be mistaken. Here's why.

Don't fall into this credit card trap

It's true that using a credit card can be more conducive to building credit than paying for purchases in cash all the time. When you pay cash, there's no record of your payments for a reporting bureau like TransUnion to see. But when you charge expenses on a credit card and make your payments each month, that payment activity gets reported to the credit bureaus. And if you're timely with your payments, it could help your credit score improve.

Because of this, some consumers are of the impression that racking up high credit card balances and paying them off over time is a good thing that will help their credit scores improve. But actually, not only might that move hurt you financially, but it might also hurt your credit rather than help it.

While your payment history is a big factor that goes into calculating your credit score, so too is your credit utilization ratio, or the amount of revolving credit you're using at once. If your utilization ratio climbs above 30%, it has the potential to damage your credit score. And so if you accrue too high a balance on your credit cards, you might get dinged from a credit score perspective, even if you're able to make your minimum monthly payments on time.

That's why if you're looking to build credit via credit card usage, a better bet is to charge some expenses on your card -- ideally, one with a generous rewards program so you benefit along the way -- and then pay your bills in full every month. That activity alone could really help your credit score improve. And if you pay your bills in full monthly, you won't lose money to costly interest charges.

Be an informed consumer

There's a lot of bad personal finance information out there, so as a consumer, it's important to read up on how to best manage your credit cards and build credit. Using a credit card regularly definitely has the potential to help your score improve. But you don't want to put yourself in the position where you've racked up expensive debt along the way.

You should also know that another way your credit cards can help you build credit is by keeping the same ones open for many years. The length of your credit history plays a role in establishing your score, too, so it's a good idea to find a few credit cards you can see yourself using for a long time.