One of the most damaging myths out there is that carrying a balance on your credit cards directly increases your credit score.
An interest-bearing balance does not improve your score. It is not necessary to establish a credit history. It does not give you points with lenders for paying them interest. Here are two of the reasons people believe that it does.
Carrying other types of balances could increase your score
As explained by Experian, a more diverse credit mix could increase your score — provided that you make all of your payments on time. That means having other financial obligations, such as home loans, student loans and so on.
These other types of credit usually require you to maintain a large balance and pay it off in small portions. Doing that for a home loan helps, but only because you are making timely payments on multiple types of debts.
Building up a large amount of credit card debt and then paying it off slowly does not help — it is not necessary to carry a balance on your plastic. You could simply pay it off as your bill comes due.
Paying bills and remaining active are both major factors
Credit reporting agencies get a detailed summary of your payment history. This information becomes a large part of your credit score.
Paying only the minimum balance might seem like a good way to have a more consistent payment history. Therefore, it may seem like a good common-sense method to increase your score. Common sense, in this case, does not apply.
It is perfectly acceptable to go months without a charge on your account. In fact, the less credit you use, the better your score is likely to be. Experian suggests that the best scores come from maintaining 10% or lower credit utilization — meaning that you carry less than $1,000 of balance for every $10,000 of credit limit that you have. As long as you charge somewhat regularly, your account should remain active.
In short, credit card debt generates notoriously high-interest rates. Balances do nothing to improve your score.