Carrying a credit card balance is no better for your credit score, than paying off your credit card bill every month. To build a strong credit score, all you have to do is carry a credit card, use it monthly, and pay down your credit card balance by the end of each grace period. Carrying a balance from the time of your purchase, and demonstrating an ability to pay down your debt each month will result in an excellent credit score.
Part of what makes a credit card a great tool to build your credit history is that it’s one of the only credit products that allows you to build a strong credit score, without having to pay interest, or unnecessary fees. By paying down your credit card bill each month, you’ve demonstrated an ability to borrow, carry a balance for the month and pay back a debt on time. The advantage is that you get the benefit of building a credit history, while using a credit card as a payment product, not a credit vehicle.
Each credit card in Canada has it’s own billing cycle, the time every month when you receive your bill in the mail. You then have a grace period, with which to pay your credit card bill, usually an additional 21 days, or so. There is no need to pay your credit card bill prior to the end of your grace period, or more than once per billing cycle, unless it helps you budget. If you pay your credit card off immediately after each purchase, the credit card company may not have enough time to report your credit card balance to the credit bureaus. Just make sure to pay your credit card off at the end of your grace period so you get the benefit of your balance being reported to the credit bureaus, without having to pay any interest.
Perhaps the number one strategy to ensure your payments are made on time is setting up automatic bill pay between your bank checking account and your credit card issuer. You can set it up in one of two ways, depending on your preference. First, you can set it up so that you pay the minimum payment, and then manually pay the rest of the credit card bill. This ensures, you’re never late in the eyes of the credit bureaus, and that you retain the benefits of reviewing your credit card statement for any fraudulent charges, before paying the entirety of your credit card bill before the due date. Or you can set-up the automatic bill pay so it pays your entire credit card bill prior to the due date, taking away any risk that you forget to pay your bill on time.
Another strategy to maximize your credit score is to ensure your credit line utilization stays below 30%. For example, if your line of credit is $10,000, try not to carry a balance of more than $3,000. If you have multiple credit cards, and you have to carry a balance month to month, try spreading your payments out among your credit cards, so that your balance on any one credit card does not exceed 30% of your credit line. When you use a significant percentage of your credit line, your credit score declines, because it’s a signal you’re having difficulty paying off your debts, or are at risk of maxing out your lines – an early signal of a potential intent to charge-off your debts.
That said, the big take-away here, is that when you hear advice that carrying a balance helps you establish credit, paying the entire balance of your credit card bill every month qualifies. There is no need to carry a balance from one month to the next and pay interest unnecessarily. The credit card balance you carry from the time of your purchase, to the time you pay off your bill is good enough, and will help you build an excellent credit history and score.