Fiscally responsible adults know that they should never carry credit card balances. However, it is not fully understood why it is so bad by those who lack money management education. This article will explore the myth that it’s perfectly acceptable to carry credit card balances since it’s beneficial for your credit score.
A Little Background
The Alexandrite Group offers anyone who is seeking assistance with their finances, a 20-minute consultation. I recently spoke with a 23-year-old woman, who I will call Nancy (not her real name). Nancy was seeking a money coach because she had lots of costly expenses and not surprisingly a spending problem.
During the call, she asked if she could ask me a question about credit card debt. She has been carrying credit card balances of approximately $14,000 for several years. She moves the balances around to different cards and ONLY pays 3% to transfer the balances. Nancy wanted my approval that this is perfectly fine reasoning.
Without hesitation, I told her, NO, it is never okay to carry credit card balances. It is not a building block towards becoming financially secure.
Why You May Think It’s OK to Carry Credit Card Balances
Nancy justified carrying the balances because she thinks 3% transfer fee is a reasonable amount. $420 ($14,000 x 3%), may not seem like a lot of money. But she had no plan as to how she was going to pay off the balance. Nancy said she had money in the bank but was afraid to use to pay off the debt.
I could not offer further advice to her unless she became a client. It would be irresponsible of me. I have no idea how much she is earning; how much she is spending on monthly fixed and variable expenses; the balances in her bank accounts; other outstanding loans, etc. Nancy’s expensive tastes and overspending, which she admitted, caused her to very hesitant to work with me. Whether she chooses to work with me, finds the someone else, or seeks assistance online, I wish her well and financial stability.
The most important takeaway from this discussion is that she must get rid of the credit card balances.
MYTH: Carrying Credit Card Balances Improves Your Credit Score
Nancy expressed this and I have heard this so many times. It is completely untrue. I have no idea where this rumor began.
The only partial truth is that paying off loans improves your score. While credit card companies are in essence giving you a loan, it is not like a mortgage or an automobile loan. Paying off the balance with minimum payments does not help your credit score.
What is Really so Terrible About Carrying Credit Card Balances?
It does not increase your credit score. It actually can reduce your credit score because it increases your credit utilization rate or ratio, which is 30% of your credit score. The higher the utilization rate or ratio the lower your credit score.
I have seen it too many times to count, one of the first signs of money troubles, begins with carrying credit card balances. Once you have a balance on one card, it quickly becomes two then three then four cards. Soon there are five to ten cards with balances and the monthly minimums which may have started at $50 are now $1,500 and more. It’s a slippery slope that no one should go down.
It is never a good idea to carry credit card balances. It does not offer any advantages whatsoever. It is not neutral and is harmful to your credit score. Once you begin carrying balances, it’s frequently not the end of it. Often it is a sign of financial mismanagement or stress.