Does using a credit card actually build up your credit score or do you have to incur charges by not paying it off for X amount of time to help with your credit rating?
If I'm paying it off every month and using it for everything I buy, am I doing myself a disservice?
If I'm paying it off every month and using it for everything I buy, am I doing myself a disservice?
Not from a credit score perspective. Your credit score is more a measure of how reliable you are with your debt payments and how much you use what credit is given to you. Low utilization and timely payments (of at least the minimum balance) are good - late payments and high utilization are bad.
Use it for what you need, and pay it off every month and you'll be fine.
I say for only what you need, because many people fall into a trap of overspending just to "earn miles" or build credit. If you were going to spend that money anyways, then using credit cards may have a minor benefit, but studies show that people tend to spend more (not per item, but overall due to impulse buys, lack of awareness vs. cash) when using credit cards. It makes no sense to spend more that you would otherwise just to get 2% back in rewards.
Does using a credit card actually build up your credit score or do you have to incur charges by not paying it off for X amount of time to help with your credit rating?
No. Absolutely, unequivocally NO. Anyone who says that is lying or repeating "conventional wisdom".
If I'm paying it off every month and using it for everything I buy, am I doing myself a disservice?
Possibly.
It depends on the ratio between the card balance's and the card's credit limit.
For example, if the credit limit is $12,000 and the balance is $3,000 then the "usage rate" is $3K/$12K = 25%.
Conventional wisdom is that any usage rate over 30% reduces your score, but have never seen confirmation from the scoring agencies.
I use my card for almost everything, and pay zero interest even though it's a high rate card. To keep the usage rate low, (and because it simplifies my monthly cash flow), I pay my card multiple times per month so that the usage rate on the bill is less than 2%.
I would like to expand upon the utilization aspect that RonJohn mentions in their answer. Utilization isn't as big of a factor on your score as paying off the bill on time it does have a high affect on your score along with any derogatory remarks (like accounts in collections).
One problem with the utilization rate, which you do want to keep below 30%, but close to it if you can, is that you don't really have a good way of knowing when the card issuer will actually submit your utilization amount to the credit bureaus. It could be at any point in your billing cycle. If you constantly pay the card off as you spend on it, you're almost certainly going to end up with a low utilization reported.
If you have a card that you're using for monthly consistent bills like utilities or subscription services, figure out at what point in the month the next payment is going to push you over your 30% threshold, and make sure you're paid down before that happens. Just don't push it to the last day payment is required before you start getting interest.
There are a couple of things here...
More about utilization... Say you get a brand new credit card with a credit limit of $100 and it goes like this... I have marked any event that changes your utilization with the utilization after that event:
Brand new card, cycle starts, utilization: 0 spend $10, utilization: 10% spend $20, utilization: 30% New cycle, you get a bill for $30 spend $10, utilization 40% pay $30, utilization 10% spend $20, utilization 30% Actual bill due date -- but already paid so no interest is accruing pay $20, utilization 10% New cycle, you get a bill for $10 credit limit increased to $200, utilization 5%
Credit issuers want to be sure that you they'll get their money back that they're lending you. Showing that you can make regular payments goes a long way to help build up their confidence. The algorithm that determines your credit score tracks revolving credit accounts (like credit cards, where you can continually borrow more and can pay it off on whatever schedule) separately from term accounts (where you borrow up front and then pay off according to a fixed schedule) but the way they're combined is complicated. My credit score didn't shoot up until I showed a solid history of paying both kinds of accounts off, with no lateness or missed payments. That's more important than whether or not you pay interest.
Looking over my credit history there is zero interest on it (while I have paid interest in the past I paid those things off long enough ago that they have aged off the report), but our scores are about 800. Thus you certainly don't have to pay interest to have a good score.
I always get something of a ding on it because of a lack of variety, but clearly that's not enough to hurt me. (In practice, above 740 it doesn't really matter.)
