Recently at work someone was talking about how their credit card number was stolen and fraudulent charges were made to it. After some back and forth with Capital One all of the charges were reversed, but then they noticed that the interest charge for carrying a balance popped up. They were frustrated because they had to contact them again to remove that charge. Not a huge deal and once again everything worked out but still an extra hassle to go through. But then someone made a comment of “Aren’t you making a small interest payment every month than? I carry a balance on my credit card to improve my credit score.” A few people (including me) spoke up to let them know you don’t have to do this. You’re basically flushing money down the drain!
I’ve also read this myth across the internet that you need to carry a balance to have the credit card companies report to the credit bureaus. If you don’t have a balance on your credit card it wont build your credit score. These rumors always seem to originate from a friend or a “friend of a friend” and then spiral out of control and get presented as the truth. Both of these are just rumors and they are patently false. The important part with credit cards and your credit score is keeping your utilization down. You don’t need to pay ANY interest to have a good credit score. You might not be the bank’s favorite customer, but they will still make them money for the fees from your card transactions.
The best strategy you can have for building credit is paying off is using your credit card, keeping your utilization low, and paying your balance in full every month. Make sure pay this off before the due date and you will avoid paying any extra interest. Your credit card essentially becomes a debit card that offers extra protections to you and possibly even gives you rewards.
Even if you look at Bank Of America’s site, the bank that everyone loves to hate, they agree that you do not need to carry a balance to build a credit history. Making full payments every month will help build your credit history without carrying a balance and paying interest. The interest you pay to a bank is not even reported to the credit bureaus, only 30 days past due/late payments and your total credit utilization.
The only thing that is being reported to credit bureaus is your statement balance each time your bill comes in. This same amount is what the credit bureaus will see along with your total amount of credit available on that credit card. If you are using any of the sites that offer some sort of look at your credit report, these are really the only things you will see on them! They don’t show how much interest you are paying because it’s not tracked.
So please stop wasting your hard-earned money by paying interest on your credit card balances, it’s not necessary at all. Your credit score will improve with a long history of on-time payments and responsible credit card use. If you aren’t planning on taking out a loan in the near future, there is actually no need to even obsess over your credit score. It is good practice to check for fraudulent activity and check everything out once in a while, though. If you were told this rumor by a friend, let them know that it is not true so that we can reverse this myth into truth.