credit cards

Tiny card balance helps credit score

Leslie McFaddenq_v2.gifDear Credit Card Adviser,
I just paid off my only credit card and now have a zero balance! Is it better for my credit score to have a small balance on the card or to keep it at zero?
--Tim

a_v2.gifDear Tim,
Congratulations on getting your account paid off! Now you can focus on using your card to benefit your credit score.

To answer your question, I first want to stress that you don't need to carry a balance to raise your score. You don't get extra points for interest paid. What matters are the monthly balances that creditors report to the credit bureaus. These balances are weighed against your available credit, and this debt-to-credit-limit ratio, or utilization, makes up about 30 percent of your FICO score, the most widely used scoring formula.

Elements of your credit score
Source: myFICO.com

If you charge your card to the limit each month but always pay in full, the score will react as if you've maxed out the card. It's all about the reported balances.

That said, a tiny reported balance can trump a zero balance. "In short, the lower a consumer's credit utilization, the better, but having a small balance is slightly better than having no balance at all," says Barry Paperno, consumer operations manager for FICO, the Minneapolis-based company that created the popular credit scoring formula.

In other words, a teeny charge does a FICO score good. Use the card on an inexpensive item and then pay off the balance when you receive the bill. The small reported balance will help your score, and you'll avoid finance charges at the same time.

This strategy could prove important if you need every point to qualify for a low mortgage rate, for example. Your everyday game plan need not be so restrictive. Try to keep statement balances as low as possible; less than 30 percent of the limit is a reasonable goal. Some experts give higher or lower recommendations. The bottom line is, the less you charge, the more it helps your credit score.

Read more Credit Card Adviser columns.

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