Do you need to carry a balance to build credit?
I often get inspiration for my blog posts from people I interact with. I learn of my readers’ needs through talking with friends, acquaintances, colleagues, and everyone else with whom I have a conversation that involves personal finance matters. In a recent conversation like that, I learned of someone who keeps her credit active by making a large purchase on her credit card and paying the balance gradually, over months, obviously accumulating and paying interests. She learned of this practice from someone else.
You know that I advocate paying off balances before due dates so you’d never pay a penny in interest. Let’s discuss which approach is better for your credit.
Each credit account has a statement closing date on which the creditor communicates to you the amount you owe and the minimum required payment to be made by the next payment due date. The amount you owe at this point is reported to the consumer reporting agencies (CRA’s). As long as you have a non-zero amount when the statement closes, someone looking at your credit report will know that you are using your credit card.
Except in special cases, your account balance gets reported to the CRA’s monthly, at the statement closing date. As soon as the balance gets reported to the CRA’s, you can pay off the balance without affecting what’s been reported. As you know, your credit history is composed of all information reported to the CRA’s. What is not reported does not count, and that is why it is unnecessary to carry a balance.
So all you need to do is to make a small purchase on your card every few months, wait for the statement to close and the balance be reported, then pay off the balance. This way you will show some usage on the card, and not pay any interest.
Equifax and Experian, two of the three CRA’s, have written about this:
“While you do want positive account activity, such as paying a credit card bill on time, there’s no need to carry a balance. Simply paying off a small purchase every month (or every few months) will typically trigger the credit company to report that behavior.”
“Use at least one of the cards to make small purchases each month. However, you should not carry a balance. Instead, pay off the charges each month so that you don’t carry a balance from one pay period to the next.
Making small purchases will keep the card active and keep your balance well below your credit limit. This demonstrates that you consistently manage debt well and can add positive points to your credit scores. Paying the balance in full will prevent paying interest or finance charges on revolving balances.
A combination of using the card but paying off charges to maintain a zero balance will likely improve your credit scores over time.“
In short, carrying a balance does not help you build credit.
Richard (Hiep Tran)