What’s more important to you: paying off credit card debt or improving your credit score? A lot of financial advice makes it seem like you have to pick one, but you don’t. In fact, much of the advice you follow to pay off debt can also improve your credit score.
So why the trick question? Because it’s the type of thinking that you have to either pay off debt or improve your credit score (rather than being able to do both at the same time) that leads to one of the worst pieces of credit card advice you can get. Let’s dive in.
The worst credit card advice you can get
Paying off credit card debt is hard enough without being inundated with bad advice that only puts you deeper in the hole. The following piece of “advice” is one of the absolute worst offenders: telling people to carry a balance on their credit card from month to month to build their credit score.
At first glance, this seems logical. If a credit card company benefits from you using their card, then whoever dictates your score would want to see a balance on the card, right? Not necessarily. In fact, there are a few things wrong with this line of thinking.
Three reasons this advice doesn’t make sense
1. Credit card companies don’t determine your credit score
Credit card companies lend you money, plain and simple. Credit-scoring bureaus (such as Experian, Equifax, and TransUnion) are the ones that score your credit. These are two different types of businesses with two different goals.
2. Credit scores were developed to assess a consumer’s likelihood of repaying on credit
Your score is determined by the things that show whether or not you’re a responsible borrower (this is why it can be hard to get credit when you’ve never had it before). Carrying a balance from month to month shows you’re an active borrower, but it doesn’t necessarily show you’re a responsible borrower.
It’s worth noting that likelihood to repay doesn’t mean an ability to repay. Credit bureaus want to see habits that show you’ll always pay your bills and that you’ll pay them on time.
3. Carrying a balance from month to month is more likely to hurt your score, not help it
One of the most important factors in your credit score is called the credit utilization rate. This is the amount of money you owe versus the amount of credit available to you. Credit-scoring bureaus prefer to see a ratio of 30 percent or less—the lower, the better. Therefore, carrying a balance can actually hurt your score if that balance starts to climb above 30 percent of your total credit limit.
How this advice can prevent you from paying off debt
Besides the fact this piece of credit card advice is not correct, it can also keep you from paying off credit card debt. Here’s why:
Carrying a balance on a credit card from month to month costs you money. That money you pay just to maintain a balance on your card can either prevent you from paying off debt or send you down the path of debt if you’re not already there.
Here’s the deal: every time you still owe a balance after paying your credit card bill, you pay interest on that balance. This may seem like no big deal at first. But if you multiply credit card interest rates (which are currently averaging more than 16 percent) with a few months, suddenly you may have a balance that’s too high to pay off easily. And if you’re in the process of trying to pay off debt, working to maintain a balance will only lengthen your overall repayment time.
The best thing you can do for your credit card and your credit score is to use your credit card and pay it off on time every month. If you can’t pay it off, pay more than the minimum every month. That way you show a positive payment history and the lowest possible credit utilization.
How to distinguish the good credit card advice from the bad
My least favorite part of financial advice that goes wrong is how easy it is to see the logic in bad advice. Luckily, there are ways to distinguish the good advice from the bad. Here’s how:
1. Understand that any financial advice that may lead to credit card debt is ultimately not good advice. Credit cards are a great tool, but only when they don’t cost more money than the benefits they provide are worth.
2. Remember the behaviors that improve your credit score are the same behaviors that indicate responsible borrowing, such as making all of your payments on time and keeping your credit utilization as low as possible.
3. Anything that sounds too good to be true or promises a quick and easy fix is more than likely false.
Finally, if your borrowing practices are stretching beyond what you can feasibly repay, it’s time for a change. Credit can be a slippery slope. If you’re only able to pay your monthly bills when everything that month goes perfectly, then you’re on the precipice. The best thing you can do is give yourself a buffer, both with an emergency fund and by only borrowing what you can easily repay.
Above all, trust your instincts. No one needs a business or math degree to balance a budget. Simply make sure your incoming funds are higher than your outgoing funds each month—which means working to pay off your balances (not maintain them) as quickly as possible. And if you hear advice that sends off a red flag in your mind, think twice before you follow it.
Looking for additional help and advice you can trust? Check out our credit building tools and see how you can build credit that won’t impede with your goal of paying off credit card debt.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.46% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|