Whenever you receive a credit card bill, pay it in full. On time, every time.
An unfounded rumor claims that people should carry a balance on their cards from month-to-month to improve their credit. Unfortunately, this is factually and morally incorrect. The “advice” can potentially damage your credit score. Plus, you’ll pay hundreds or thousands of dollars in interest each year. Credit card interest is higher than other types of common debt.
It’s true that there are small tips to “optimize” your credit score. However, they’re often unimportant. Your credit score will be good enough if you manage credit responsibly, and it’s unnecessary to achieve perfect scores. Small amounts of effort may have the greatest impact.
The “carry a balance” rumor may be a misinterpretation of the “all zero except one” (AZEO) strategy.
Card balances are reported to credit bureaus at every account statement closing date. This is when your bank tallies up all transactions so they can send your monthly bill. If you owe more than $0, your credit score may be temporarily impacted. This depends on how much of your available credit was used. This is your “utilization ratio” and it changes every month or so. By most metrics, you should aim to keep this at 1-10% of your total limit. If you’re above that, you can make extra payments before your statement closing date.
For example: if you have a credit card with a $4,000 limit, and you spent $1,000 over the past 2 weeks, that’s a 25% utilization ratio. If you don’t make any payments, and wait until your credit card bill arrives, that 25% utilization gets reported to credit card bureaus. (This isn’t bad per se, since anything under 30% is generally okay. It’s just not ideal.) If you pay your bill in full, then don’t use your credit card at all for the next month, a 0% utilization ratio gets reported to the bureaus. Your credit score can change every few weeks. To keep utilization at 1-10%, if you have a $4,000 limit with a $1,000 balance, you should immediately make a payment of $600 to $990. Then wait for your monthly bill to arrive before paying any remaining balance.
However much you owe on your credit cards, you should always pay the entire amount before you’d get charged interest. Pay by the due date every time. Your credit card balance should always hit $0 at least once per month. Consider enrolling in autopay if it’s available. If you find yourself in a tight spot, paying the minimum is better than making late payments. Or if you have decent credit already, you can give yourself extra breathing room with 0% APR cards.
Now, if you have multiple credit cards, that’s where the AZEO strategy comes in. You’ll pay all of your cards (except one) so they report a 0% utilization ratio (except for one reporting 1-9% utilization). This can potentially help your credit score. You don’t have to use AZEO as it’s just a general guideline, and everyone’s situation is different.
Credit card bureaus (and banks) like to see consistent and responsible credit management. The downside of keeping all cards at a $0 balance is that they don’t show activity. And if you never use a credit card, banks may close inactive accounts. It’s best to make a purchase at least once every 6 to 12 months.
It isn’t the end of the world if a credit card gets closed for inactivity, since it’ll remain on your credit card report for up to 10 years. Your credit score may take a small drop though, both short-term (total available credit decreasing) and long-term (one fewer account once the credit card disappears from your report).
Some banks even “forgive” small balances of $2 or less. If your monthly bill would have a tiny amount on it, the bank can erase that balance and say you owe $0. Some people “game” this by making a small purchase once per month, such as adding $1-2 to an Amazon Gift Card balance. This becomes a “free” $12-24 each year for each credit card. For example, Discover Bank and Wells Fargo may forgive up to $2.
SUMMARY
Try to use less than 10-30% of your total available credit limit. You can make additional payments to keep the utilization ratio as low as 1-3%. Then pay your bill in full whenever it arrives. Never make a late payment and consider setting up autopay. Some credit card activity is generally better than none, to show that you can handle credit responsibly.
Overall, utilization ratios aren’t as important as paying bills on time. Don’t sweat the small stuff.
We’ll publish an article soon with more details on what factors make for a good credit score. Stay tuned!