Carrying a balance doesn't build credit

Carrying a Balance Doesn't Build Credit — Here's Why

Here’s the insider scoop: carrying a balance doesn’t build credit. If you’re not quite sure what a balance is and how it impacts your credit score, keep reading and let the Credit Wizard break it all down for you.

What does the current balance mean on a credit card? Your balance is whatever money you owe your credit card issuer on your credit card bill’s due date. When you make a purchase, your balance increases. When you make a payment, your balance decreases. 

Your balance plays a huge role in shaping your credit history. From utilization to payments to interest fees, your credit card balance has a heavy hand.

There are bound to be rumors about your balance and how you should treat it.

The Rumors

The financial world is riddled with rumors, telling you what you should and shouldn’t do to better your financial standing. Much of the conversation surrounds your credit score because it’s what enables you to accomplish your goals.

Rumors spread because there aren’t many clear guidelines and resources that are made available to the public on what the facts are. It’s often that if you want to know more about what makes up your credit report, you have to do some intense deep-diving research.

We’re proud of you for seeking out more information; it takes a go-getter to do so. We wish the basics of finance were readily available to all, but for now, we can use our platform to dispel some rumors for you! Here are two basic rumors we’re ready to break down:

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#1 Carrying a balance builds credit

You’ve probably heard the phrase “it takes credit to build credit.” This is half-true. On the one hand, you do need credit utilization reported to the credit bureaus, but on the other, bureaus don’t fancy a balance.

Extra is a debit card that helps you safely build credit.1 By connecting the Extra card to your checking account2, you’re only able to spend what you have. Extra reports your spending as credit-worthy purchases at the end of each month, meaning no balance accumulates. 

If you’re using a traditional credit card, in which carrying a balance is possible, it’s not beneficial to keep your balance from month to month. If anything, a balance can hurt your credit score. If you have the funds to pay off your balance in full, you should! (More on that later)

If you can’t pay your statement balance in full, it’s best to keep your credit utilization below 30%. For example, if you have a credit line of $1000, you’ll want to keep your spending below $300. Although it’s okay to have a balance of $300, it doesn’t benefit your score to keep that balance. 

Does carrying a balance build credit? The straightforward answer is no.

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#2 Spending more builds credit faster

This second rumor is a real doozy. It makes sense to assume that credit card issuers will see you as more creditworthy if you spend more. This assumption is dangerous and can really mess up your financials.

Don’t let your credit card bill get out of hand. As mentioned earlier, it’s best to keep your credit utilization below 30%; spending more than that only negatively affects your credit score. If you’re staying on top of anything, let it be your credit utilization, as it has the second-biggest influence on your credit score.

Suppose your spending exceeds 30% utilization because of your expenses. In that case, you may want to apply for a higher credit limit, open a secondary credit card, or pay your bills using the Extra debit card.

“If I spend more, I should build more” makes sense to us, but it’s just not true.


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The Real Truths:

You should pay off your credit card statement balance in full

Should you leave a small balance on your credit card? No, pay that bad boy in full each month! 

It may feel like you’re in the clear because you have under 30% utilization, are making the minimum payments, and aren’t paying interest fees, but there’s a better path to take.

Companies that create credit-scoring models like FICO and VantageScore don’t grant you extra points for carrying a balance month to month, so it’s better not to risk it.

If you pay your entire balance on each due date, it can give you a clearer financial picture and keep everything in check. You don’t want anything to be in question when it comes to your payment history. 

It’s easier to keep records and feel at ease when you know nothing is lingering over your shoulder from the previous billing cycle. 

A balance can lead to a snowball effect that hurts you

We get it; credit cards are like temptresses that can lure you into spending more than you can afford. A balance, especially a small one, can feel overcomeable, but that balance can get you into bigger trouble than expected.

If you don’t pay your credit card balance in full, you may be charged interest. Now, you’re stuck with a balance and accrued interest. You may not have been expecting the additional fees, and now you’re being charged for more than you can afford, and you’re hit with a late payment charge.

The balance, interest fees, and late payment charges can seriously affect your credit score. The snowball effect of balance carrying can hurt your credit history, so it’s best to avoid it altogether.

Balance Breakdown

As we’ve learned, your balance can impact your credit score directly and indirectly. No matter if you’re speaking with your closest friends or family, you should always double-check their understandings with your own research.

You may hear others, but for now, these are the two most common rumors we hear when it comes to carrying a balance that are simply false:

  • Carrying a balance builds credit.
  • Spending more builds credit faster.

Despite these rumors, you can feel confident in these truths:

  • You should try to pay off your credit card statement balance in full.
  • A balance can lead to a snowball effect that hurts you.

Your biggest takeaway should be that you don’t need to carry a balance to build credit. You can safely work towards developing a good credit score by paying off your balance in full each month or altogether avoiding a balance with the Extra debit card.

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