There is a perverse myth that’s taken hold in our recently credit-score-obsessed culture. A myth so upsetting to my delicate feminine emotions, it leaves me longing for the days of fainting couches. This myth is doing damage to the already weakened bank accounts scores of millennials attempt to fatten each month. This myth is my Lord Voldemort, my Lady Macbeth, my Ivan Drago…you get the point.
Myth: Carry a balance on your credit card
NO, God. NO. God, please. NO. NO. NOOOOOO.
There is absolutely no need to carry a balance month-to-month. To clarify, this myth suggests that you are not paying your balance in full. Instead, you pay at least the minimum due or an amount close to the total, but leave a little bit left to carry over.
Origin of the myth (well, my assumption)
Yeah, yeah I know all about making assumptions, but I’m pretty sure I’m right about this one.
There is a general confusion about carrying a balance and having a statement balance. A confusion the banks have no interest in correcting, because you misunderstanding what it means to have a balance verse carry a balance earns them extra money in interest payments.
For the love of God, don’t pay interest to the banks! You can build a strong credit score for free.
Truth: You need to have a statement balance, but pay it off on time and in full
You actually have to use your credit card in order to get kudos from your credit card provider that you’re a responsible borrower. However, the usage doesn’t count if you pay off your purchase the moment it posts to your online dashboard. For example, you just bought dog food in bulk for your adorable little budget buster and charged it on your credit card. It posted to your account three days later and you immediately pay it off.
This instant payoff tactic means that you’ll have charged $0 and owe $0 when your statement cycles. Even though you actually did use your card, if it doesn’t show as owed on your monthly statement then it didn’t actually happen. Consider this the “if a tree falls in the woods” of credit scores.
In the eyes of your credit card provider, this strategy means you aren’t irresponsible nor are you responsible – you just are.
The credit card provider reports to the credit bureau that you didn’t utilize your credit at all – which means 0% utilization. That’s like getting an incomplete on 35% of your credit score because utilization is a major factor in determining your credit score.
So, what’s a diligent millennial hoping to build a strong credit score to do?
The easiest strategy is to make one or two small purchases per month. Then wait until the statement arrives and pay it off in full.
You should be able to tell when your billing cycle ends by looking at your account online or the most recent statement. You can also set up text alerts, email notifications or an old school letter to ensure you don’t miss when the bill comes due. The black belts of budgeting will also feel confident enough to automate their credit card payments, so the bill is paid on time and in full. Automatic is also an easy strategy if you only charge a Netflix subscription and your cell phone bill, so you know exactly how much your statement will be each month.
Solution: Small charge. Wait for the bill. Pay it off on time and in full. Rinse. And. Repeat.
The other tip is to ensure you spend no more than 30% of your total available credit limit per month (that means no more than 30% of the credit available across all your cards). Brownie points if you stay in single digit utilization.
To make this personal, I have six credit cards with the following credit limits:
This equals a grand total of $35,300 in credit available to me each month.
I need have no more than $10,590 across my statement balances to be in good shape. Spoiler: this isn’t a problem.
Most months, I spend less than $2,000 on my credit cards and typically stay around 5% utilization.
Why does this matter?
It matters because I’ve never had another form of credit in my life (no student loans, no mortgage, no auto loan, no personal loan) so this is the only way I build credit. And with this, I’ve managed to be a 700+ FICO credit score, and once even break 800, without paying a penny in interest.
All it takes is making a small charge and paying it on time and IN FULL!