More on credit cards and building credit

By Mir
January 24, 2007

Yesterday’s post on the Dos and Don’ts of credit cards prompted this comment from tennessee gal:

Delurking to ask a question. I am still in college and stumbled across your site through a link, but I love the freebies! I currently have no credit in my name and after trying to get my fiance a cell phone with no credit (they wanted a $1000 deposit), I decided I should get a credit card and use it to buy my gas each month. The point is to keep it simple. Something that I would be purchasing anyway, and I know I can pay off with my current job. My question is this: I’ve heard two different theories. One is that you don’t build credit buy paying off your credit card each month, that you should carry a balance on it. The other is that you should pay it off each month and that does build your credit. I am personally a fan of the second one where I pay it off each month and not carry a balance. I talked to Mom about this and she couldn’t remember how she built credit. And there are so many conflicting articles on the internet about this, I wanted to know your thoughts! I have not picked a card to get yet, so any suggestions you have would be welcome. Please help this college student going on the right track! (and I think I’m supposed to say that you are beautiful and ROCK!)

(That tennessee gal… she’s a quick learner. See how she sucks up to me on her very first question? She’s going places, I can tell.)

So how about it—do you carry a credit card balance simply to “build up” your credit?

I’ve heard people say this multiple times, and it’s a very pervasive belief, but I still say no. Obey the Credit Card Commandments and do not carry a balance. Period.

Now. I say “don’t carry a balance” because I believe credit card balances to be the gateway to larger financial problems, in much the same way that most parents think marijuana is the gateway to heroin. In neither case does one necessarily mean the other will follow, but it certainly opens the door. Can you carry a small balance on a credit card and in all other ways maintain a healthy attitude about budgeting and spending? Probably. Will it be harder to do so when you’ve already allowed yourself to accept the reality of either overspending or, at the very least, paying a high interest rate? I think so.

But nevermind all of that. Let’s get to the crux of the question: Does carrying a balance on a credit card somehow magically “build up” your credit in a way that paying off your balances monthly does not?

Kiplinger’s article on Seven Steps to Stellar Credit is a must-read for anyone trying to develop healthy financials, and is crammed full of great information. Including this:

Don’t carry a balance. One of the biggest myths about credit is that you need to carry a balance month to month in order to build a history. Not so. In fact, credit scores don’t even distinguish between those who carry a balance and those who don’t, according to Consumer Credit Counseling Services. Go ahead and use your credit card each month, but stick to smaller purchases you can afford to pay in full. You’ll save money on interest charges and you’ll be less likely to get into trouble down the road.

Are you going to argue with Kiplinger’s? I’m not.

While borrowing money and making the payments on time does strengthen your credit rating, it’s best done in the form of a low-interest car loan or a mortgage. Credit card payment history doesn’t carry the weight that those other avenues do, in terms of “good” behavior, and it’s very detrimental, very quickly, when your payments are late or missed. And the interest rate is going to be so high that you’ll be unnecessarily losing money for what turns out to be no benefit at all. (My personal recommendation for building credit history is to take a car loan when really you intend to pay cash. Make the payments for six months and then pay the balance. Voila; now you have a loan history, and for a lot less money than you would’ve paid on your credit card.)

Learn the Credit Card Commandments. Love them. Live by them.


  1. The auto loan idea works. That is how I got my first actual new car at a decent rate (some 12 years ago). My uncle sold me his car for $1500, which I opened an auto loan for at my local bank. I paid him off in six months, then turned around and sold that car to my fiance at the time (now husband) for the same amount. I then walked into a dealership, with $1500 downpayment and a good car loan history. It worked. The same dealership had turned me down just 7 months earlier.

  2. Thanks for the reference article! All of the media can be very confusing, especially to someone who is just “starting out” on her own. I do have a car already (the smae one my parents bought for me when I turned 16), and I plan to keep it until it dies, but I will definitely keep the advice when I buy my next car. Once again, thanks!

  3. silly question…..

    to pay off your credit card balance, is it still the old “write a check” concept, or can you do it online with a debit card?

    can you tell i am a long ways off from even STARTING my research on all of this???!

  4. One other point that I read about… part of your credit score is determined on your balance-to-credit limit-ratio. So, if you have a $1,000 limit on your CC and your balance is $0, that is GOOD. If you’re balance on the same card is $900, that is NOT good. Just another tip 🙂

  5. Laura: It depends on your credit card company and how you elect to pay, but the bottom line is money coming out of your bank account. The method (paper check, direct debit, whatever) is unimportant.

    Robbi: Another point in the Kiplinger’s article (read the whole thing!) is that you should always have at least 30% of your total credit line available. So yes, carrying $900 on a $1000 limit is a problem. (On the other hand, my rating gets dinged slightly because—due to my flawless credit history—my credit card limits keep being raised, and when I apply for a mortgage or whatever, they’ll see I have $30k of credit available which I could (to their mind) potentially use to get myself deeply into debt in a hurry.

  6. Laura–yes you can pay online with your debit card, but i found that…when you go to your (my!) bank’s page and pay all my bills, the payment date is at least a week out. If i go to my credit card’s page and enter the payment method (checking), I have 3 or 4, they are 1-4 days out, so keep those dates in mind!
    I also built credit through a car loan I paid off with a credit card…the loan was 12%, the credit card was whatever percent, i don’t remember because i didn’t care, BECAUSE, this was 14 years ago before they got wise and started charging fees for balance transfers. we paid off 12,000 in debt in a year by paying as much as we could each month on one card and transfering the balance to the other card every month. If you want to go the loan route, for those of you who already have credit, there are a ton of cards right now that have 0% interest for a year. I’ve got 2 right now =) and have 6 months to get my act together. I have always HATED debt, but kids, school, and finances have forced me into this, but it will be the first thing i take care of when i’m back at work. worst case scenario, i get another 0% card and pay the $75 to transfer for a year (gotta check that transfers are good on this deal too…not just new purchases), which would be cheaper than the interest adding up.
    I have a couple links for comparing cards i’ll post…gotta find ’em =)

  7. I pay my credit cards off monthly, and i use the online bill payment i get from my bank. Checkfree and Yahoo (at least they used to, i havent researched) and most banks offer online bill payment, and many you can receive your bills online too. i love it.

    i think the idea of getting a credit card to use for gas is a great one. it’s stuff you’re going to buy anyway, just keep track of what you spend so you can always pay it off at the end of the month.

  8. The gas card idea is great -my little brother is facing the spectre of no credit history, and I’ve been a horrible boor about saying ‘I told you so,’ since I’ve been nagging him to get some kind of credit card for years.

    And I hear you on the crazy credit limits, Mir! The credit card folks were shocked when I asked them to put a limit on my available credit, and not ever automatically up it, because they almost *never* get requests like that. But I didn’t want my available credit to keep skyrocketing.

  9. sheesh…so PRETTY!! it’s obvious I have much homework to do. luckily you’ve done alot for me!! 🙂

  10. To #*&$ with the credit talk…I’m a billion times more intersted in a seminar in how to teach your readers to suck up to you. You’re obviously qualified to provide such. 😉

    I’m just not feeling the love…I’m pretty! I’m smart! I don’t have a shopping site though….[sobbing into keyboard]

  11. Here’s an alternate trick to establish credit:

    Just out of college, I had zero credit history and a paid-off car. I went to my bank and asked what I needed to do. They gave me a $1000 loan, which I used to immediately purchase a $1000 CD from them (which was the collateral on the loan, since I owned nothing of value and had zero credit). For a year, I paid the monthly payments for the loan. At the end of the year, the CD matured, I had saved $1000 plus interest (minus what I’d paid the bank in interest), and I had enough credit to buy a house.

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