Creditors certainly want to see that you use your credit cards. So, it's difficult to achieve an excellent credit score if you never use your credit. However, this doesn't mean that you need to carry a balance. In this clip, Michael Douglass and Matt Frankel debunk this pervasive credit myth.
A full transcript follows the video.
This video was recorded on Nov. 27, 2017.
Michael Douglass: Myth No. 4: You have to carry a balance to boost your credit score. That's specifically talking about carrying a balance on your credit card month to month to boost that credit score.
Matt Frankel: Yeah. There's some truth to this myth in the sense of the way it's started, that you need to use your credit card and credit to maximize your credit score. That doesn't necessarily mean carrying a balance. That could mean, every time you fill up your car with gas, paying with your credit card, and paying it off at the end of the month. Creditors definitely want to see you using it for obvious reasons. They want to know that you can handle it responsibly. But you don't need to carry a balance to show them that you're doing that. And it's really easy for credit card balances to get out of control really quick. Even if you just keep a small balance, the interest on credit cards is three or four times what you'll pay on a mortgage or car loan. So, you're paying a relatively high amount of interest, even on a small amounts of credit card debt, and it's just unnecessary to do this.
Douglass: Yeah, it's interesting. People often get the idea of utilization -- that's actually using debt in some way -- conflated with this idea that you have to be carrying that debt month to month. With a credit card, basically, if you put some stuff on it, maybe it's lunch, maybe it's dinner, maybe it's, as you mentioned, Matt, gas or something else, and then pay that off each month, you're achieving utilization of your credit card. You're using it. So, the credit bureaus will report that you are using credit. But carrying it doesn't do anything.
Frankel: Yeah, in the credit report, there's two figures you'll see in each credit card listing. You'll see your current balance, and you'll see what's called the high balance, which is how much you have ever used. Not necessarily your carry balance, just how high your balance has gotten. So, through that, creditors can see that you're actively using your credit cards, or that you have been using your credit cards. You don't need to actually have a current balance in order to do that.
Douglass: Yeah, exactly. And I will say, for the record, it's important to have debt for your credit score. When I bought my first car, I had no credit score, and it was a lot harder for me to get a loan as a result. So, it's certainly a useful thing to have a credit score and to have carried some debt to do that. But you don't have to keep a credit card balance month to month to achieve that. I think that's really the key thing to keep in mind. It's great to have a credit card it's not a good idea, generally speaking, to carry a balance on your credit card.
