The persistent falsehood – leave a small balance on your credit card every billing cycle to build a credit score – has no basis in fact. The truth – if you leave a balance on your credit card – you accrue interest on both existing and new charges. This is an expensive practice and will not add any points to your credit score.
When you open a credit card your account activity is reported on your credit report. Activity is reported when you pay the balance in full and when you leave a balance. Payment history, credit utilization, account limit, and date the account was opened are also on the report.
On-time payments and low credit utilization are necessary for a good credit score. A payment that is 30 or more days late will ding your score. Utilization compares your credit limit to your credit usage.
Example: You charge $1,000 on a credit account with a $5,000 limit. Your utilization ratio is 20%.
A credit report will show the highest balance ever charged on each credit account and the current overall utilization ratio on all credit accounts.
There will also be a section called “Hard Inquiries.” A hard inquiry occurs when you apply for credit because the lender will check your credit history. Hard inquiries will stay on a report for two years. Hard inquiries can have a negative impact if you have too many. “Soft Inquiries” occur when you check your own report and have no impact on your credit score.
True steps for building good credit:
- Pay on time
- Keep credit card utilization ratios below 30%
- Avoid applying for too many credit accounts in a short period of time
You can get free credit reports at www.annualcreditreport.com These reports will not include a credit score. However, reading your report will help you better understand the factors that impact your score. Currently, the credit bureaus are offering access to free reports 1 time per week as opposed to 1 time per year.