Carry a balance, skip a payment to build credit? Never.

This post originally appeared July 20, 2017 on as “‘Q&A: Missing a card payment to build credit is terrible advice

By Barry Paperno

Dear Speaking of Credit,
I am 18 years old and have been approved for a card with a $500 limit. I spoke to an associate with my bank who told me that it would be a good idea to not pay the balance on my credit card for the first month. He said that because I have no credit history, and this is my first billing cycle ever, it would be a good idea to let the balance carry over and then pay it off at the beginning of the next billing cycle. He told me to not even make a minimum payment.

From that point on, he said that I should pay my balance off in full each month, which is what I was planning on doing from the beginning. His reasoning for this was to show the credit bureaus that I at one point had a balance, and then I paid it off, as opposed to always having a zero balance because I’ll pay off the card every month.

I was under the impression that letting a balance carry over would always be a bad idea. Is there any truth to what the associate told me? I only care about what will build the most credit. The interest doesn’t matter to me because I have a 0 percent APR for my first 12 billing cycles. I really appreciate the help. – Zeeshan

Dear Zeeshan,
If that isn’t the worst piece of credit advice I’ve heard in a long time, I don’t know what is. Good for you to be questioning it.

As you’ll see, for the most part your hunches are correct, though you both might be overlooking something in the bank associate’s plan that could void your introductory 0 percent APR rate.

So, let’s take a look at where the bank associate was right, where he was wrong and why, and why your plan is the much better one. Then we’ll consider your best course of action going forward.

Why paying off your balance each month is good
Starting on a positive note, your bank associate correctly advised you to pay off your balance in full each month. In fact, it’s such a good idea that you’ll want to adopt this strategy from the very first month, not after missing your first month’s payment, as he suggested.

Yet, what makes paying in full each month a good idea has nothing to do with his apparent rationale of allowing your prior month’s balance to go unpaid until the following billing cycle to apparently show the credit bureau that you can run up a balance and then pay it. This is simply nonsense that has nothing to do with how credit scores work.

3 ways not paying bill hurts your credit
In fact, this supposed score-raising tactic of showing you had balance and then paid it off is deeply flawed in at least three ways:

  • Your credit utilization will be higher – taking your score in the wrong direction – when an unpaid balance remains than if you were to pay either the minimum, the full balance, or some amount in between by your first due date.
  • You’ll accrue a late payment fee, typically $25 to $35, and most likely some high interest if those 0 percent APR terms require minimum payments each and every month.
  • While being late by a few days won’t be reported to the credit bureau or reflected in your credit score, being late by just a day could hurt a different score – the card company’s “behavior score” – that closely evaluates such credit card activity to help determine future credit limit increases.

How card activity affects credit scores
Perhaps your bank associate’s reason for putting you through all of this unnecessary and expensive trouble is the mistaken notion that carrying a balance from month to month is good for your score. Trying our best to understand such reasoning takes us to a couple of indirect ways card activity enters the scoring picture:

  • Minimum score criteria. You must have at least one credit account reported to the credit bureau within the past six months before a credit score can be calculated. Then, as long as your new card remains open, reasonably active, and paid on time, expect positive monthly contributions to your score lasting well into the future. Without some regular activity over an extended period of time, a card can be closed by the issuer and removed from your credit report and score, usually after about 10 years.
  • Credit utilization. Once you have a score, the only occasion in which a balance of at least $1 might help your score slightly more than $0 will, is via the utilization calculations that make up almost 30 percent of your score. While most credit scores have no way to measure the number and amounts of charges and payments to the card – only the resulting statement/closing balance and payment history – some degree of activity is implied when a small balance greater than $0 appears on the statement. As such, 1 or 2 percent utilization can garner a few more points than 0 percent.

The right score-boosting strategy
My recommendation for building a high score while retaining your sanity is to manage your credit card and score as simply as possible.

That is, just use your card regularly and pay your statement balance in full every month without fail.

Nevertheless, if you have a very low credit limit that can easily be maxed out, or merely feel the need to micromanage your new card for some reason, you can lower the monthly statement balance reported to the credit bureau by paying for current charges before the closing date each month.

Again, you may be able to add a few points to your score while avoiding interest by leaving a balance equal to about 1 percent of your credit limit on the closing date. Then, just pay that and most new charges by the following due date.

Thanks for checking in before embarking on what could have been a disastrous beginning to your credit history. Best of luck!

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