Are You One of the 20% of People Making this Credit Card Mistake?

What are you doing to build your credit score? If you’re carrying a balance on your credit card thinking it will improve your score, you’re not alone. A recent article by CBSNews Moneywatch reports that about 43 million people, or 1 in 5 who use credit cards, say they have carried a balance to increase their credit score. The problem is that not only does this not help your credit score, it can actually hurt it! Carrying a balance and just making the minimum payment is actually hurting you in a couple of ways.

Cost #1- Paying interest on the balance. By carrying a balance on your card month to month, you’re borrowing money from the credit card company and they’re going to charge you interest on that loan, probably at pretty high interest rates. The interest is added to the balance and it continues to compound. So it’s costing you more and more money every month until you pay off the balance in full.

Cost #2- Credit score. If you’re carrying too large of a balance, it could actually lower your credit score. One of the main factors that does impact your score is your credit utilization ratio; the amount of credit you’re using as a percent of the credit available to you. For example, if your card has a $1,000 limit and you are carrying a $600 balance, your utilization is 60%. Lenders would like to see this number at or below 30% so the higher the ratio, the riskier you appear and the lower your score. With a lower credit score you’ll get worse offers for things like home or auto loans, credit card rates and insurance. Why? The lender considers you as a higher risk and may question your ability to make your payments on time. That means higher rates for you.

So what does improve your credit score? Start by paying your bill on time and in full every month. Read more about the top factors that affect your credit score here.