Many self proclaimed financial experts and Guru’s claim that one needs to carry debt in order to improve your credit score. This is actually a rather big misconception. While yes debt can sometimes help improve your credit score, you do not need to carry a large debt load to have a great credit score. Some of these experts even recommend obtaining an auto loan or carrying a credit card balance forward, rather than paying off the credit card bill in full each month. The truth is you do not need to carry a balance forward to improve your credit score, just paying it in full and on time every month will do the trick. While carrying a revolving balance month to month can technically improve your score, so will paying it off in full each and every month for the life of the credit card. To be sure credit card companies would prefer that you do carry a balance each month, as they can then make money off you in interest.

It is technically correct advice about carrying debt balances, as you do need to take out credit to build credit, but the advice is also financially incorrect. Would you want to spend $125 dollars when you could spend only $100? Every time you leave a balance, interest continues to accrue. What really matters to creditors is punctuality of payment in the past, which is actually roughly 35 percent of your FICO or credit score. So while carrying a balance forward and paying on time can indeed show that you can manage credit and be responsible with your payment history, there is one other factor to take into account. When you leave a balance your credit utilization climbs upwards, which can lower your credit score. For example lets say you have a $1000 total credit limit, and you put $600 on your credit card, then you pay off $100 of this when your credit card statement arrives. This means after paying that $100 you are left with a balance of $500. This $500 balance means you now have a credit utilization rate of 50%, which is 20% higher than it should be, which will result in you losing points off of your credit score, until the balance dips below $300 or 30% of your available credit.

Now if you want to do really well, take into consideration that your balance is reported to the credit card companies when your credit card statement closes, not when you decide to pay it off. So you could charge that $600 per month, but pay it off in full each month. What will happen is you will always show a balance of $600, but you will also be avoiding any interest what so ever simply by paying off your entire statement in full each month. This way you get the advantage of a balance, but without the penalty, which is the interest. All the creditors care about is that you pay on time every month, and that you can manage the credit that you do have. If you want to do even better, do not charge $600 of your available credit, but stay under $300, using the example of having a credit limit of $1000, and pay off the balance in full every month, this way your credit utilization stays below the threshold, and you still have a balance reported, but avoid having to pay any interest. It is the best of both worlds, combined into one simple credit building tactic, which you can use as your secret credit building weapon.