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COMMENTARY | Noah Brier

Do I Need to Carry a Balance to Get Good Credit?

April 29, 2009 | RSS | EMAIL | PRINT | 5 COMMENTS

I remember when someone first said this to me, I was in college and DJing and the bartender was giving me financial advice. His argument was that if you pay your balance every month in full then you never build any credit. I remember thinking it was absurd at the time (and told him that), but it's stuck with me. Anyway, after having the conversation again a few weeks ago and remembering it this morning I decided to check the internet for the answer.

Not surprisingly (to me), the answer appears to be no. Paying off your bill every month in full does build credit since the company is floating you whatever amount you spent for around thirty days (until your statement and due date arrive). Anyway, this is neither here nor there, but just thought it was a useful piece of knowledge (that miraculously doesn't seem to be on Snopes.

Tags: creditcards, finance


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COMMENTS

1marc

yeah i wonder this too, especially since a lot of times i'll make payments before the end of the month (for no reason in particular) so even my end monthly statements are real low, even if ive spent $1k total that month.

April 29, 2009

2Taylor Davidson

"Good credit" comes from a variety of factors; paying on time, paying a % of your outstanding or monthly balance, whether your balance goes up or down, whether you're looking for new credit, what kind of credit you already have, etc.

No, there is no need to carry a balance to build good credit; instead, you're demonstrating to companies that you NEED or USE credit and that you could be a source of income for them.

Any company that grants credit merely uses FICO as a base, mixing their criteria and business goals into the ring to make an individual credit decision; and in this odd way, any particular company's decision on whether you have "good credit" depends on the aggregate decisions by other companies, creating this aggregated notion of your credit-worthiness.

(btw, I've worked in the credit card industry and know just a wee bit about this...)

April 29, 2009

3Matt Daniels

I asked the same question to the risk folks at American Express once.

It is the amount of your credit limit that you use. If you have 4 credit cards with $2000 limit each, you are scored against how much of the $8000 in credit you use per month. That's why having multiple credit cards, especially one that you keep dormant, helps you out.

April 29, 2009

4Kyle

I've heard canceling your credit cards can hurt your credit score, but I've never heard paying you balance has any ill effects.

Fun fact: According to a Frontline piece I saw a while back, folks who pay their balance every month are known as "deadbeats" in the credit card industry.

April 30, 2009

5Anonymous

Good to know!

Does it hurt your credit to open a card and cancel it once you receive it in the mail? (You know when you can get 15% off for opening one at a store and you just can't help yourself?)

May 4, 2009