The Number One Misconception: Paying Credit Card Interest Improves Your Credit Score
It turns out that the number one mistake people make is that they mistakenly think they need to build up their credit card balances and then pay interest to gradually boost their credit scores.This couldn’t be further from reality!
While paying credit interest itself does not directly impact your credit score, the behaviors associated with high-interest payments can indirectly harm it, not improve it! To understand this, we must examine the components of credit score determination, particularly payment history and credit utilization.
Payment History: The Largest Factor
Payment history accounts for 35% of your FICO credit score, making it the most significant determinant. It reflects whether you pay your bills on time or have missed payments. High-interest payments often occur when individuals carry substantial balances over time. If these balances lead to financial strain, borrowers may resort to paying only the minimum amount due or even missing payments entirely. Missed or late payments can severely damage your score, as they signal financial instability to lenders.
Credit Utilization and Outstanding Debt
Credit utilization—the percentage of available credit you use—plays a crucial role in your score calculation (part of the “amounts owed” category, which accounts for 30%). High-interest rates often result from carrying large balances on revolving credit accounts like credit cards. This increases your utilization rate, which can negatively affect your score. Lenders prefer utilization below 30%, as higher rates suggest over-reliance on credit and potential default risk.
Indirect Impacts of Interest Payments
Although interest rates themselves are not factored into credit scores, they influence behaviors that do. Rising interest rates can increase monthly payment requirements on variable-rate loans and credit cards, leaving less money for timely payments on other debts. If borrowers fail to manage these obligations effectively, their payment history and utilization rate will suffer, leading to lower scores.
Strategies to Mitigate Damage
To avoid these pitfalls:
- Pay bills on time to maintain a strong payment history.
- Keep credit utilization below 30% by paying down balances.
- Avoid accumulating high-interest debt by budgeting carefully and using low-interest financial products.
In conclusion, while paying credit interest doesn’t directly hurt your score, the associated financial strain can lead to late payments and high utilization—both detrimental to your credit health.