Doper money whizzes : Is it somehow better for your credit rating to always have a balance, even a very small one, on a credit card? Doesn’t make sense to me, I try to pay mine off every month & want to avoid paying interest & fees. But I seem to recall one of these personal finance gurus, I forget who, saying you should maintain a balance for credit rating purposes. I understand periodically using a dormant card, but not the keeping a balance thing. Any thoughts?
Thanks in advance for the help!
It’s difficult to know for sure what to do to achieve the absolute highest possible credit score, beyond obvious things like don’t make late payments and don’t declare bankruptcy. I’ve read lots of articles that advise different approaches.
However, I’ve never carried a balance on any credit card in my life (i.e. I’ve paid it off in full every month) and my credit score is over 800. Take that as you may. Personally, I don’t worry about it any more.
They need to feel confident that you occasionally need credit. People who don’t are useless to them: they can’t use or invest the money you don’t owe them.
Credit card companies make money on your business even if you pay off your balance every month. The only customers who are totally unprofitable for them are the ones who never use the card at all, hence the general trend to cancel your account if there is no activity for a year or more.
If you never do anything that requires them to send you mail, like having paperless billing and paying on time every month, you are an income source with even a fairly small regular use pattern. I have three cards, one of each major flavor, and generally only use one, which I pay off monthly in full. All three get used at least one month a year, for all my activity, though, just to avoid being canceled. All three have increased my credit limit automatically to levels I personally think are foolish.
I have no idea what my credit score is, though. I was told I would have to pay a fee to be told what number it was, and actually don’t care, so it was not worth it to me. So far everyone wants to loan me more money than I care to borrow, which means that from my point of view, my credit score is infinite.
Tris
I wish people would stop saying this. CC companies get 2-3% on every single transaction. For someone who pays in full every month, the average time the CC company is lending that money is 3 weeks, for an annualized rate of return of 34-50%. The fact that it’s earned as a transaction fee rather than interest is really immaterial.
The issuing company takes a cut, the processing company takes a cut, and the association takes a cut. Then there are gateway companies that will take a cut as well, but many times these will be a subsidiary of the processing company.
And? You can split 35% annualized several ways and still have a perfectly adequate ROI.
Add 18-30% straight to the card company onto that by carrying a balance and its pretty clear that the credit card company would prefer you carry a balance. What bean counter wouldn’t? 
Just because they make money off of the transaction doesn’t mean that they don’t want to make more money; and that they possibly reward people who carry a balance with a higher credit rating. I don’t know if they do and I am still waiting for a factual answer to this myself; although knowing how secretive the credit ratings people are about how they determine scores I doubt if we will get one.
And… it’s useful information, since the public generally has little or no idea what actually goes on behind the scenes. Your post was pretty inaccurate, since it gives the impression that the issuer is the one making all the money, for lending money out. They are making only a slice of the discount fee, and the other parties involved are not lending money out for their trouble.
Then there’s the issue of large volume merchants that you made no mention of, who realistically pay .75% to 1.25% in discounts. It’s really only the small businesses that are paying the full 2-3%.
While this is certainly true, I think the claim about occasionally needing credit does speak to a fairly common misconception people with very limited understanding of credit have. It’s baffling to me but I’ve heard people say “I was turned down for credit! I’ve been paying cash for 30 years! How could I not have good credit?”
It seems obvious to me that in order to have good credit you must have, at some point, borrowed money and repaid it. How long you held a balance may be immaterial but there are a lot of people who think that if failing to repay or paying late is bad, then never borrowing must be good. Never borrowing isn’t a bad thing financially but it’s a great way to ensure you have absolutely no credit history.
In my experience, they reward people who carry a balance with a higher credit limit. You’ve shown that you’ll play the game by their rules that benefit them - here’s some more rope to hang yourself with.
And here I thought the purpose of a credit rating was to gauge the probability you would pay back a loan. Silly me. Like thinking that an AAA rating from a bond rating company meant it was a safe investment rather than that the issuing bank had paid enough for such a rating.
If I understand correctly carrying even a 1 cent balance means that you will pay interest on all your purchases from the day of purchase. Even if it does improve your credit rating (and the agencies will not say if it does) that is a rather high price to pay for a few points on your rating. If this is indeed true, what it means is that they are predicting how profitable a customer you will be, not how safe.
When I first started out in life, I couldn’t get credit. I had credit cards but I paid them off each month. Then someone told me, the companies have to see you can manage your money. So I bought a $500 TV and paid it off over four months. Afterwards the offers started coming in. (This was in the early 80s, before the 00’s credit card offers were commonplace).
Once you get credit established you need to use it. While a few years ago companies would give you a large line and leave it, now they cut it back continually. I saw my $23,000 limit with BoA (which I rarely ever used, maybe twice a year), shrink over a year and now it’s $120.00. Pretty bad from 23K to $120.00 in 10 months and I never missed a payment or was late once.