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Several factors go into determining your credit score, one of them being the balance you carry on your credit cards. Understanding how your month-to-month debt and the number of credit cards you have influences your score can help you build healthy credit and avoid pitfalls.
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Does carrying a balance on my credit card hurt my credit score? It can, if the balance gets too high. You see, your credit score is influenced by how much available credit you have, and the balances you owe on both revolving and installment accounts. Revolving usually means an open line of credit that can be used as needed up to a certain limit, like a credit card, rather than an installment loan, that’s taken out all at once then paid back on a fixed schedule, say a mortgage, for instance. One advantage of a revolving account is convenience. Even if you pay it off, it stays open. So you can use it again if you want without applying for more credit. Revolving accounts are beneficial to have on credit reports because over time, they show a history of how well you manage credit. You’ll probably want some revolving accounts in addition to some installment accounts with fixed monthly payments, like a car loan or a mortgage, to round out your credit report and get a really good score. Different credit scores get calculated in different ways, but if the amount you owe on your revolving debt is more than 30% of your available credit, it may have a negative impact. Now on the other hand, having a bunch of inactive cards in your wallet isn’t ideal either. High, unused revolving credit limits can also hurt your score, because you can get into a lot of debt really quickly with the credit you already have. And carrying high revolving balances increases the chance that you could have trouble paying back any additional credit, and that can have a huge negative impact. But since you don’t need to carry a balance on your cards month to month to show that you’re using them, it’s usually beneficial to try and keep your revolving credit balance as low as possible. The best thing you can do for your credit score is to pay your bills on time, and pay more than the monthly minimum payment whenever you can. There are tools available online that can help you estimate how paying down your balances, closing a card, or opening a new one might impact your credit score. Look for a good credit score simulator online.