This Credit Card Myth Won't Die -- and It Could Be Costing You Big Time

Ignorance isn't bliss when it's costing you money.

You can find any number of bad credit card takes on the internet (and off of it, for that matter). And regardless of how much data you try to throw at them, these myths still keep showing up like a Terminator in the rearview mirror.

One of the most pervasive of these myths has to be the idea that carrying a balance on your credit card will actually help your credit score. Even now, in the so-called information era, this myth just won't die.

In truth, carrying a balance past your credit card's due date does not help you build credit. Not only that, but it will also cost you money. Carrying a balance past your due date means you'll accrue interest on that balance -- interest you could have avoided by paying your balance in full.

The basics of credit card utilization

So, where does this myth come from and why is it so hard to kill? It likely stems from the fact that there's a lot of anecdotal evidence -- i.e., unconfirmed by officials but user-correlated -- that showing some level of utilization may be good for your credit.

What does this mean? Credit card utilization is when you use your credit cards. It's usually expressed as a ratio or rate based on how much credit you have. For instance, if you have a $1,000 credit limit and have a $200 balance, you have a utilization rate of: $200 / $1,000 = 0.20 = 20%.

A high utilization rate is bad for your credit score. We know this to be true and it's confirmed by credit scoring agencies. If it looks like you're using too much of your available credit, it makes lenders nervous that you're in over your head. High utilization across all of your credit cards will do a lot of credit damage. But even maxing out just one card can hurt your score quite a bit.

On the other end of the spectrum, a 0% utilization rate may also be less than ideal. This is where the anecdotal evidence comes into play. Some card users have found that if all of their credit cards have a 0% utilization rate reported to the credit bureaus, their credit score takes a hit. 

The theories about why this may happen are varied. Many posit that if you're not using your credit cards at all, lenders may see this as a red flag. Maybe you've lost your income or have some other sort of disaster.

Again, this is all anecdotal. Credit card scoring agencies haven't published any guidelines on if you can have too little utilization. Just that a high utilization is definitively bad.

Your statement date vs. your due date

Even if the idea that you need some sort of utilization for a healthy credit score is true -- that doesn't mean you need to carry that balance past your due date. The difference is in when you pay your bill.

Your credit card has two important dates: when the statement period ends and when the bill is due. The statement period is the time during which your transactions all count toward the same bill. For example, you may have a statement period that runs from Jan. 5 to Feb. 4. All of the transactions you make during that time are part of that statement cycle.

Your billing cycle is a little different. In most cases, your bill won't be due until 21 to 25 days after your statement period ends. So, the due date for a statement period that runs from Jan. 5 to Feb. 4 would likely be Feb. 25. 

In other words, the payment you make on or before Feb. 25 is to pay off the transactions you made during the statement period of Jan. 5 to Feb. 4.

The time between the end of the statement period and the due date for the bill is called the grace period. Most credit cards won't charge you any interest as long as you pay the full statement balance before the end of the grace period, aka the due date.

A positive utilization without paying interest

So, what does all of this mean for your utilization? 

Credit card companies tend to report your balance information to the credit bureaus once a month, usually when your statement period ends. This balance information is what the credit scoring agency will use to calculate your utilization rate, and, thus, your credit score.

If you're concerned about having a 0% utilization rate reported for all of your cards, you can leave a small balance on one card at the end of the statement period. Then, you can pay off your full balance before the due date to avoid interest fees.

To recap: Carrying a balance past your due date does not help your credit score. However, having a non-zero utilization rate reported to the credit bureaus may help your credit score. Most credit card issuers report your balance at the end of the statement period. Pay your statement balance in full before your bill's due date to avoid interest fees.