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: Iâ€™ve heard two different theories. One is that you donâ€™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 couldnâ€™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 Iâ€™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.