Figuring out an ideal balance to carry on credit cards

Question

Until recently, I was under the impression that it's bad for your credit history to not pay all bills on time and in full.

However, a banker recently told me that it's a good idea to carry a small balance on credit cards even if you have the means to pay them off in full each month. In her words, "it doesn't look good when you use credit cards as cash equivalents." She recommended leaving $40 or $50 unpaid on each bill. She also mentioned that the exact amount to leave depended on the maximum credit line of the card, where the higher the credit limit, the more you should leave unpaid.

myfico.com somewhat supports that claim:

In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all.

A search of this site turned up a recommendation to carry a $10 balance from month to month.

The obvious downside to carrying a balance is that you have to pay interest the following month. (If there are other downsides I haven't thought of, I'd appreciate hearing about them.)

What factors should I look at in my own financial situation to determine whether carrying a small balance on my credit cards would help me, and if it would, how do I figure out how much to carry?

Answer 1

One factor you may be missing is that, even if you pay your balance in full each month, the utilization probably won't be zero, since the reporting period isn't usually lined up perfectly with the due date on your payment.

In short: Your utilization is not the same thing as how much balance you carry over.

My advice would be: don't try carry a balance just to get a minuscule benefit on your credit score (if there is one at all). It is certainly not worth the interest charges you will pay to do so.

I think the advice you quoted is a mangled explanation of something that can benefit your credit. Specifically, don't let your cards go unused for long periods of time, which would make your utilization show as zero. At least a few times a year you should actually use those cards, even just a small amount, to make the accounts show that you are utilizing your credit.

Answer 2

The fact that you pay the bill reliably is going to count more for your credit rating than anything else, even if you are paying it off in full every month. Lenders seem to like to see at least one instance where you charged a large balance, held it a couple months, then paid it off in full... but I wouldn't go out of my way to do that.

Remember that the credit card company is making money on transaction fees as well as interest. If you're pushing money through their system, they're happy. They'd be happier if you were paying them interest too -- reportedly, they actually refer to those of us who pay in full every month as "deadbeats" -- but they aren't going to kick you out or ding your credit rating for it.

The quote you give says that a small balance "may be slightly better". I submit that "may be slightly" is too small a difference to be worth worrying about, unless you have reason to believe that your credit rating actively needs to be repaired. (And as noted in the comments, it's actually stated even less strongly than that!)

Personal recommendation: You can get a free credit report each year from each of the "big three" credit rating agencies. Those reports usually include a brief explanation of what they think the most negative item on your record is. The phrasing of those explanations is often somewhat misleading, but I'd still suggest that you get these reports and see what they think would improve your rating. I'm willing to bet it won't be "doesn't carry a high enough debt balance."

Answer 3

One key point that other answers haven't covered is that many credit cards have a provision where if you pay it off every month, you get a grace period on the interest. Interest doesn't accrue at all unless you rollover a non-zero balance. But if you do, you pay interest on the average balance, not the rolled-over balance, for the entire month.

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You have to ask yourself what you are trying to accomplish with your credit history?

Are you trying to maximize your "buying power" (really, leverage)? Or are you trying to make sure that you get the best terms on a moderately sized loan (house mortgage, car note)?

As JohnFx and losthorse already noted, it's in the banker's best interest to maximize the profit they make off of you. Of course, that is not in your best interest.

Keeping a credit card balance from month to month definitely feeds the greedy nature of the financing beast. And makes them willing to take more risks, because the returns are also higher. But those returns cost you.

If you are planning to get sensible loans in the future, that you can comfortably afford, you won't need a maxed credit score. You won't get the largest loan amounts, but because you are doing the sensible thing and making a large down payment, the risk is also very low and you'll find lenders willing to give you a low interest rate. Because even though the reward is lower than the compulsive purchaser who pays an order of magnitude more in financing fees, the return/risk ratio is still very favorable to the bank.

Don't play the game that maximizes their return. That happens when you have a loan of maximum size, high interest rate, and struggle to make payments, end up missing a couple and paying late fees, or request forbearance which compounds the interest.

Play to minimize risk.

Answer 4

I think this advice to carry a balance each month is nonsense. You're just wasting money that way. Personally, I have always paid off my credit cards every month for as long as I can remember, and my credit score is only 8 points below the max. The bigger factors by far are:

1. having a long history of making payments faithfully and on time,
2. the amount of credit you have available to you versus how much you owe (more unused credit is better, BUT don't just go opening credit accounts willy-nilly), and
3. the length of time each debt account has been open (longer is better).

It might be good advice to charge a small amount each month on your credit cards each month in order to keep seldom-used accounts active (remember, longer payment history is better), but there's no reason not to pay off the balance to avoid the interest charges. In short, the "ideal balance" to carry month-to-month on a credit card is zero.