True or false: Keeping credit card balance is good for building your credit score

For this week’s Reality Cheque, we’re seeing if a balance on your credit card is good for building your credit score.

We all want an excellent credit score. After all, a high rating begets a world of options when you’re looking at credit cards and loans, including lower interest rates. But, truth is, keeping a balance on your cards won’t get you there. 

So, where did this myth come from? It may have started with consumers confusing activity (which is good for your credit score) with keeping a balance, which is good for credit card companies’ profits—through interest costs—but can get awfully expensive for cardholders. 

“I don’t think it’s ever good to be carrying a credit card balance,” says Michelle Robertson, a.k.a. Ms. Money and Math, a financial advisor in Collingwood, Ont. “Not at the expense of 19.99%.” Instead, she says, pay your bill off every month, on time, so you’re not incurring any extra fees. And, if you can’t pay it in full, always pay the minimum amount as outlined on the bill so you don’t get any negative reporting to the credit bureaus.

How can you boost your credit score? 

What does increase your credit score when it comes to your credit cards? Number one: Pay off all your bills every month. That means everything from your cell phone bill to utilities. 

Next: Like wine and cheese, age matters. That means, the older your credit, the better it is for your credit history. Sometimes, says Robertson, it makes more sense for your finances to switch to different cards, and that’s OK. But don’t cancel an old card with good payment history because it matters—unless it’s because you can’t afford the annual fee card.

“Having cards for a longer period of time does give you some benefits,” she says. “My personal credit score should probably be much higher, but I do cycle through cards, because at different times in my life, different cards make more sense.” But don’t hold on to a card with a fee attached just because you’ve had it for a long time—the potential credit score boost isn’t worth it, she says. 

Use your credit, and keep it diversified

The next factor to keep in mind is your utilization percentage (how much credit you have access to versus to what you’ve used), which you should try to keep under 30%. “If you have a credit card limit of $10,000, the credit scoring systems want you to only be using $3,000 of that,” says Robertson. 

Even better, be strategic: If you find you’re using your card for $3,000 of purchases every month, but only have a $4,000 limit, ask your bank to increase it to $10K to improve your utilization ratio. 

It’s also good to have a mix of different types of credit. Instead of having, say, six different cards, use a couple of cards and a line of credit. “Even if you’re not using a line of credit, don’t shut it down,” says Robertson. “It doesn't cost you anything to have it.” And don’t cancel any no-fee credit cards, since they improve your credit history—just don’t use them. 

Another thing to keep in mind is the number of credit checks done on you. Every time you apply for a loan, mortgage or credit card, the lender does a credit check (a hard inquiry). It’s a totally normal part of building your financial picture, but if you have too many checks close together, lenders might see that as a sign you’re looking for credit in a hurry or stretching your budget too thin. A few inquiries are no big deal, just space them out when you can. 

How to start out with credit? 

What about if you’re just beginning your credit journey? For lots of young Canadians, the world of mortgages and car loans may feel impossibly far in the future, and not something worth thinking about. But, back to Robertson’s earlier tip: Credit age matters, so start early, and be responsible about how you use credit. Start with prepaid credit cards, she suggests. 

“Starting to build your credit score up with one card and showing that you are a good credit holder is going to be really useful down the road.”