Last week we saw we do not always get what we pay for. How much were you able to save buying generic? This week let’s look at a common myth about credit ratings.
Myth #2 – “Carrying a balance on my credit card will improve my credit rating.”
First, let’s start with an explanation of why a credit rating or credit score is important. When you apply for a credit card, a car loan, a mortgage loan or any other type of personal loan, lenders want to understand the likelihood of you paying back the loan on time. This is known as “credit risk.” To help lenders understand the credit risk, most will rely, in part, on a credit
report from one of the three major credit reporting agencies. This report gives a credit rating or credit score that helps the lender understand if you are a good credit risk and will pay the debt back on time. This makes your credit score very important.
Your total debt owed, including the balances you carry on your credit cards, does affect your credit score. However, in addition, your credit report contains a variety of information about the debt you own. It includes both positive and negative information.
Your credit rating takes into consideration:
- Amounts owed
- Payment history
- Length of credit history
- New credit
- Types of credit in use
All of this information is used to calculate a credit rating. Which category is most important depends on the overall information included in each person’s credit report. Therefore, we really can’t measure the importance just one category has on any one person’s credit score. However, the total amount owed, not just on credit cards, will tend to have a strong impact to your credit score.
So then, should you carry a balance on your credit card? Do what’s best for you and your family, at the time.
My husband and I have a credit card that earns rewards points. I love getting things for free. That’s how my husband and I think of our rewards points. They’re free! We use this credit card for all of the things we would normally pay cash for each month. As we’re using the card, we’re earning our rewards points. At the end of the month, when we get our credit card bill, we pay it off in full. That’s right! All of it! Since we only use this card for things we would normally have paid for in cash, it doesn’t create a financial strain on our family. The advantages of paying it off in full each month are we never pay any interest on this credit card, and we earn all of those fantastic rewards points every month!
For larger items we’re not able to pay for in cash, it’s important to not bite off more than we can chew, to “live within our means,” so to speak. Most of us carry a balance on our credit card(s) periodically, if not all the time. What tends to have a greater impact to the overall strength of your credit is the total amount you owe not just what you owe on your credit cards. If the total amount you owe is reasonable for your income, your overall credit will strengthen and have a positive impact on your credit rating. However, if the total amount you owe is not reasonable for the amount of your income, it tends to create a strain on your overall credit position and could ultimately cause your credit rating to go down.
When my youngest son was in third grade he got a fortune cookie that read, “Live within your means.” He asked me to explain what it meant to him. I told him it meant that he should only buy the things he can afford. In a typical third grader response, he rolled his eyes at me and said, “Well, how am I going to buy something if I can’t afford it?”
My response is, “WOW! Great fortunes make great fortunes!” Live within your means!
Although we can’t always pay cash for everything and will periodically need to carry a balance on our credit cards and get a loan to buy those larger ticket items, it’s important to keep your total amount owed within an amount you can afford, to live within your means.
For items my husband and I aren’t able to pay for in cash, we use another card with a lower interest rate. Since the interest rate is lower on this card, we feel we’re able to carry a balance while we pay off the debt over time. Using the lower interest rate credit card for the larger items saves us money and helps us to better, “Live within our means.”
So, whether you carry a balance on your credit card or pay your balance off in full each month, it’s also important to remember to “live within your means” and “pay your debt on time.” All of these things have an important impact to your credit strength and your overall financial well-being.
Arvest has a variety of credit cards
offering generous credit lines and competitive rates, valuable benefits and rewards, and local friendly customer service.
Next week we will wrap up our series on financial myths with myth # 3, “I’m young – I really don’t need to start saving for retirement.” And, “I’m old – it’s too late for me to start saving for retirement.”