How you choose to manage your credit cards has a considerable influence over your credit scores. When credit cards are managed properly they have a very positive credit score impact. However, when credit cards are abused they can cause damage to your score. One of the myths that can potentially trip up a consumer is whether carrying credit card balances helps or hurts credit scores.
How Credit Card Balances Impact Credit Scores
Credit card debt has the ability to negatively impact credit scores even if the monthly payment is made on time, all the time. But an antiquated credit reporting system only allows credit card issuers to send updates to the credit bureaus once a month. That update is sent shortly after your monthly statement is generated. So, the balance on your credit reports is always you prior month’s balance.
Credit scoring models, like FICO and VantageScore, pay close attention to the balances on your credit card. In FICO’s scoring systems the category that considers debt related metrics is worth some 30% of the points in your score. In VantageScore’s scoring system the same category is considered “highly influential.”
Credit scoring models are built to reward consumers who maintain lower levels of debt and, conversely, penalize those who do not. While all debt has the ability to lower credit scores to some degree, credit card debt is by far the most problematic. Credit card debt is unsecured meaning there is no asset to act as collateral protection the lender. As such, credit card debt is a riskier type of credit to extend.