Smart Borrower Center
Tools to help you borrow better
A: If you play your cards right, a credit-card balance can actually help improve your credit rating. The most important thing is never to be late with your payments.
A lot of factors go into determining your credit score, and your credit card balance is only one of them. Credit scores reflect everything from late payments and loan defaults to bankruptcy and foreclosure. If you are timely with your debt and loan payments, have not declared bankruptcy and have not had any collections or repossessions, then it’s unlikely that carrying a credit-card balance will have much effect on your credit rating.
On the other hand, if you have no credit, or are recovering from bad credit, a credit card could help you build good credit to offset your previous history. Even if you are not earning much of an income, you may be able to get a secured credit card. Be careful about applying for every card you can think of, since credit inquiries are a negative mark on your credit report. Most lenders are deterred if they see more than four to six credit inquiries in a six-month period.
Once you have a card, make small purchases and pay them off immediately. This will help build up your good credit. As you get more stable, you can try making larger purchases and maintaining a balance on your card. Just make sure that you meet your required minimum payment on time.
A word of caution: because the interest rate is high on credit cards, it will cost you more overall if you make only the minimum payment. For example, let’s say you have a balance of $2,000 with an interest rate of 18 percent. If you make only the minimum payment of $40 every month, you will wind up paying $4,927 in interest. Not only that, but it will take you more than 30 years to pay it off. If you double your monthly payments, you will be debt-free in less than three years, and pay $526 in interest.
Dan Moore
Vice President, Product Management