The internet is indeed an ingenious invention and it has made our lives significantly better in unimaginable ways. Yet, it comes with a few drawbacks. It’s the birthplace of urban myths, false speculation, and blatant lies.
Here, in this post, we rip open the truth behind one such urban myth — that a balance on your credit card improves your credit score.
According to a recent report, one in five credit card user falsely believes that they can boost their credit score by having a balance on their credit cards.
Well, the short answer is No. and here’s why:
Your credit card balance is the amount you owe your credit card company. Apart from that, the balance also has an impact on your credit scores and ratings.
Here’s A Quick Explanation Of The Link Between Your Credit Scores And Your Credit Balances
A credit score is a number assigned to an individual by the credit bureau. The number depends on several factors like your credit history, your credit card balances, loan outstanding and other debts that you owe.
Factors like the credit balance, credit limit, credit utilisation ratios, payment history are a part of your credit report and are used to calculate your credit score.
Each of these elements is given a different weight during the calculation of your Credit Score. For instance, your payment history accounts for 35% of your credit score, whereas the length of credit history accounts for 15%.
High Credit Balances And Your Credit Scores
The second biggest factor in determining your credit score is known as credit utilization or the level of your debt. This is nothing but the ratio of the amount of credit card balance you have to your available credit limit.
A low credit utilization ratio denotes that you are not hungry for credit and thereby improves your credit score. On the other hand, higher balances and higher credit utilization ratios mean that your credit scores take a hit.
So, What’s A Good Credit Card Balance?
Simply put, the absolute best balance you can have is 0 INR. However, unless you lock your credit card in a safe, it’s impossible to maintain a zero balance at all times. The next best option is to pay off all your outstanding credit card balances before the account statement closing date. This is the date that your credit card agency passes to the credit bureaus. So, if on this date, your balance is zero, then it means you’re good to go.
Coming To The Question, Does Having A Credit Balance Improve Your Credit Score?
That’s false. In fact, it can even impact your credit ratings negatively. Habitually maxing out your credit card limits and consistently maintaining outstanding balances on all your credit cards is sure to pull down your credit scores.
So, Is There Any Other Way To Improve Your Credit Score?
Glad you asked. Instead, of maintaining a balance on your credit card for the sake of improving your credit score, there are other smart ways to achieve it.
Take a small business loan from digital lenders like Indifi and make sure to pay it off in time. This way, your credit utilization ratio increases.
By repaying the loan in time, you prove that you can handle credit responsibly, which in turn boosts your credit ratings and scores.