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A persistent myth is that carrying a credit card balance will improve your credit score. If you’re wondering: do you have to carry a balance to build credit? The answer is no.

That being said, keeping a balance on a card can impact your credit — sometimes in negative ways. For instance, having a large balance can drive up your credit utilization rate, which impacts your credit score. And if you rack up too high of a balance on your credit card, you run the risk of starting to fall behind on payments.

What to Know About Carrying a Balance on Your Credit Card

When you carry a credit card balance, that means you did not pay off your last statement balance in full. Technically, you only have to make the minimum monthly payment by the due date to avoid a late fee. However, when you carry a balance, you’ll start to accrue interest on the unpaid amount.

Interest can add up quickly. For instance, let’s say you have a credit card balance of $5,000 and your credit card’s annual percentage rate (APR) is 24%. If you were to make monthly payments of $200, it would take you about 36 months to pay off the full amount, and you’d pay a grand sum of $2,000 in interest.

What Happens to Your Credit Score When You Carry a Balance?

Carrying a balance will cause your credit utilization to go up. Credit utilization compares your balance against your total credit limit across all of your cards, and it’s expressed as a percentage. For example, let’s say you have a balance of $1,000, and your total credit limit is $10,000. Your credit utilization would be 10%.

This matters because credit utilization is a major factor considered among popular consumer credit scoring models, such as the VantageScore and FICO, where it makes up 30% of your score. Generally, it’s advised to keep your credit utilization below 30% to avoid adverse effects to your score, though the lower, the better.

Situations in Which Carrying a Balance Isn’t Worth It

Sometimes, carrying a balance can give you a bit of breathing room to pay off a large purchase. But often, it’s not worth the potential effects on your credit score.

Your Credit Utilization Is Too High

If your credit utilization is too high because you’re carrying a large balance, it can hurt your score. Aim to pay off your credit card bill as soon as possible, rather than adding to your existing balance. That way, you’ll give your credit card a chance to bounce back.

Your Interest Rate Is High

If your balance is on a credit card with a high APR, you’ll want to think twice before carrying it. In general, credit cards tend to have higher interest rates than other types of debt, which is why credit card debt is hard to pay off. Plus, credit card interest accrues on a daily basis, so it’s easy for a balance to balloon.

You Can’t Keep Up With Payments

If you’re carrying a high balance, it’s probably best to keep your credit card balance to a minimum rather than adding to it and risking falling behind. The consequences of credit card late payment can include paying late fees, having your account sent to collections, and suffering potential impacts to your credit score.

When Will You Be Charged Interest on Your Credit Card Balance?

The majority of credit cards offer a grace period. During this time, you won’t be charged any interest. This grace period usually extends from the date your billing statement is issued to the credit card payment due date, and it’s typically at least 21 days long.

Once the grace period ends, you’ll be charged interest on your balance. Most credit card interest is compounded daily. In other words, each day interest will get charged to your account based on that day’s balance.

Advantages of Paying Off Your Credit Card on Time

Unsure of whether to pay off your credit card or keep a balance? Here’s the case for paying off your credit card on time and in full:

•   Avoid late fees and other consequences: Should you miss making your credit card minimum payment by the due date, you’ll get charged a late fee. Late fees typically range from $25 to $35. Plus, late payments of more than 30 days can get reported to the credit bureaus, affecting your credit score. You could also see an increase in your credit card APR.

•   Skip paying interest: Perhaps one of the biggest advantages of paying off your credit card balance in full is that you’ll avoid paying any interest. Thanks to the grace period, credit card interest only starts to accrue if you carry a remaining balance after the statement due date. Some credit cards even reward you for paying on-time. If you apply for a credit card with SoFi and get approved, for instance, you’ll get a lower APR after making 12 on-time monthly payments of at least the minimum due.

•   Dodge credit card debt: Paying off your statement balance in full will get you into the habit of only charging your credit card how much you can afford to pay. Plus, you’ll avoid the possibility of debt starting to pile up if you stay on top of your payments.

•   Lower your credit utilization: Another perk of paying off your credit card on time and in full is that it will lower your credit utilization rate. A lower credit utilization rate can positively affect your credit score — a rule of thumb to keep in mind if you’re working on building credit.

What Is the Best Way to Pay Off a Credit Card Balance?

The “best” way to pay off a credit card balance is whichever method works best for you and your unique financial situation. Some common ways to go about paying off a credit card balance, or making it easier to pay, include:

•   Paying promptly in full: If possible, pay your credit card balance in full each month. This will prevent you from paying interest, as well as getting hit with potential late fees if you fall behind.

•   Making early or multiple payments: Another option is to make an early payment. Paying off all or part of your balance before the due date lowers your credit utilization, which in turn can positively affect your credit score.

•   Adjusting your payment date: Reach out to your credit card issuer to see if you can move your credit card payment due date so that it’s easier for you to to stay on time with your payments. For instance, you might set your due date for right after you usually get paid.

•   Considering the debt snowball or debt avalanche payoff method: If you’re staring down a mountain of debt, consider one of two popular debt payoff strategies. With the debt snowball method, you pay off the card with the lowest balance first. Once that’s knocked out, you move to paying down the card with the next-highest balance. The debt avalanche method, on the other hand, is where you start with paying down the card with the highest interest rate. Once you get that card paid off, you focus on the card with the next highest interest rate and so on, until all of your debt is paid down.

Recommended: How Credit Card Payments Work

What to Do if You Need to Carry a Balance

Sometimes it’s just not feasible to pay down your credit card balance in a single month. If that’s your situation, here’s what to do to make sure you stay on top of your debt and can pay it off sooner rather than later:

•   Make at least the minimum payment: Falling behind on your payments isn’t good for your credit score, so make sure you’re at least making the minimum payment on time. This will also allow you to avoid getting hit with any late fees, not to mention the potential danger of your credit card issuer increasing your APR or worse, your account getting sent to collections.

•   Consider credit card debt consolidation: If you’re carrying a balance across a handful of high-interest credit cards, you might consider debt consolidation. With this approach, you’d effectively lump together your debts into a new loan. The potential advantages of doing this include paying it off quicker and saving in interest, depending on the terms of your loan.

•   Look into a debt management plan: Another option is to work with a third-party organization to create a debt management plan. You’d then make a single monthly payment to the organization. The organization might be able to negotiate on your behalf with credit card companies for lower monthly payments or a lower interest rate. A potential downside of a debt management plan is that it might require you to close your accounts until your balances are paid off, which could affect your credit score.

•   Research the option of a balance transfer: When you use a balance transfer credit card to move over your outstanding balances, you might be able to take advantage of a promotional APR that’s sometimes as low as 0%. If you can pay off your credit card before the promotional period ends, it could save you in interest fees. Note that you generally need good credit to qualify though (in other words, if you’re still establishing credit, this might not be the right option for you).

The Takeaway

Carrying a balance isn’t necessary to help build your credit score, and in some cases, it can hurt your score. If you need to carry a balance, make it a priority to at least make your minimum monthly payments, and aim to pay down your balance in full as soon as you can.

Not only can making your minimum payments on time help you avoid late fees, in some cases, it can reap you rewards. With the SoFi credit card, for instance, cardholders can secure a lower APR after making 12 on-time payments of at least the minimum amount due. And on top of that, cardholders can earn rewards on all eligible purchases with the SoFi credit card.

FAQ

Should I carry a balance or pay off credit cards?

Ideally, you should aim to pay off your balance in full each month. That way, you won’t pay any interest. Plus, you’ll lower your credit utilization and improve your history of on-time payments, both of which are factors that determine your credit score.

How much of a balance is ideal for me to keep on my credit card?

The lower the balance, the better. Contrary to popular belief, carrying a balance will not help your credit, so there is no benefit in doing so. You should pay off your credit cards in full as quickly as possible. And if you do need to carry a balance, consider a balance transfer, credit card consolidation, or debt management plan.

Is it advisable to keep a zero balance on a credit card?

Yes, keeping your balance at zero will help you to build your credit or maintain a strong score. Plus, it will keep your credit usage low, and you won’t pay any interest.

What amount is too much of a balance on a credit card?

There’s no specific, one-size-fits-all amount. Rather, a credit card balance becomes too high if it brings up your credit utilization to over 30%, or if you have trouble keeping up with payments.

Photo credit: iStock/Delmaine Donson

¹See Rewards Details at SoFi.com/card/rewards.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Student loans can be used to cover more than tuition and fees. They can pay for lodging, food, commuting, a computer, and study abroad (but not spring break!).

Most qualified education loans can be used to cover the entire cost of attendance — an estimate of total costs for an academic year at a college, as determined by each campus financial aid office — minus any aid you receive.

Let’s take a closer look at what student loans can cover, what they should not, and alternative ways to pay for living expenses.

Books, Yes. New Car, No.

As long as a student is enrolled at least half-time, student loans can cover a range of expenses at a qualified institution of higher education or at a hospital or health care facility that provides postgraduate internship and residency training programs.

What Student Loans Can Cover

•   Tuition and mandatory fees. You can even use private student loans to pay off past-due tuition balances.

•   Room and board. Whether it’s a dorm or an apartment off-campus, the expense can be covered. Board means a campus meal plan or groceries.

•   Transportation. Loan money can pay for maintaining, insuring, and fueling your car or for public transportation fares.

•   Personal expenses. These include cell phone bills, laundry costs, bed linens, towels, a microwave oven, and anything else you normally spend money on.

•   Books and supplies. New, used, or rented textbooks are covered, as are supplies ranging from software to notebooks.

•   A personal computer. You can buy or rent a computer with student loan money.

•   Dependent care. Child care expenses are covered.

•   Loan fees. This includes any origination fee.

•   Study-abroad costs. The Federal Student Aid office lists international schools that participate in the federal student loan program and describes the process.

Other qualified expenses may include utilities and furnishings.

What Student Loans Should Not Cover

•   Travel or vacations

•   Purchase of a car

•   Down payment on a house

•   Entertainment

•   Frequent dining out or expensive meals

•   New wardrobe

•   Small-business expenses

•   Other debt

•   Someone else’s tuition

What If I Use Student Loan Money for Nonessentials?

The use of student loans for nonqualified expenses could be reported to the Office of Inspector General as fraud, or a lender could call the loan balance due immediately. But in general, no one is tracking how you spend loan money.

Both federal and private student loans are disbursed to your school, which takes out tuition and fees, and if you live on campus, room and board. Any remaining money goes to you, so it would be hard for lenders to tell if you’re using the remainder as intended.

It can be tempting to go on a spending spree with your student loan refund, but remember that you will pay, or are paying, interest on that borrowed money.

Federal student loans have annual and aggregate limits that may seem generous, especially for graduate and professional students.

Private student loans can help fill gaps in need. These loans are not backed by the federal government and therefore not subject to its qualification rules. They may also lack the borrower protections available to federal loans, such as deferment. It’s a good idea to obtain a private student loan only after maxing out federal student aid. A cosigner can often help a student qualify.

Recommended: A Guide to Private Student Loans

Other Ways to Cover Living Expenses

Aside from using student loans, there are several ways to pay for living expenses while in school. Here are some ideas.

Part-Time Job

Getting a part-time job can help students make extra money to cover costs. Generally, these side hustles offer flexible hours so students can more easily juggle work and class. Some students may also be able to find a job that’s related to their major or career of choice.

Recommended: Jobs That Pay for Your College Degree

Work-Study

Federal work-study may be offered as part of a student’s federal aid package and is based on financial need. Work-study programs are available to undergraduate, graduate, and professional students, regardless of whether you are a full-time or part-time student.

Becoming a Resident Assistant

A resident assistant (RA) is usually assigned to a particular floor or wing of a dormitory to oversee dorm residents. RAs might lead mandatory floor meetings, organize monthly social gatherings, and referee the occasional roommate disagreement. Not only do you typically get a better room than others on your dorm floor, you also get free housing.

Scholarships

Merit scholarships are often awarded to a student based on their skill or ability for a certain speciality. They’re offered through private companies, nonprofit organizations, colleges and universities, and professional and social organizations. As you’re researching scholarships that you might be eligible for, pay attention to any requirements. Some awards have certain conditions, such as requiring that the money be used only for tuition, while others allow you to use the funds for whatever you want.

Recommended: Grants for College — Find Free Money for Students

Summer Job

As an alternative to (or addition to) a part-time job, you might want to consider a summer job or paid internship. During the summer, students may have more free time to work more hours and rack up cash to help cover their housing and living expenses for the following year.

Selling Unwanted Items

Cleaning out your closet? Selling castoffs on buy-and-sell apps and websites can be a quick way to earn money.

The Takeaway

Student loans can be used to cover housing, food, transportation, supplies, and other college essentials. Funds shouldn’t be used for “nonessential” expenses, like vacations, new clothes, pricey meals, or other debt. In general, no one tracks how you spend loan money. But remember, this is borrowed money that will have to be repaid, with interest. A part-time job, work-study program, and scholarships are different ways to earn extra money for expenses.

To help fill any gaps, there are private student loans, like those from SoFi. The application process can be completed easily online, and you can see rates and terms in just a few minutes. Repayment plans are flexible, helping students find an option that works for their budget.

FAQ

Can you use student loan money on monthly car payments?

No. However, you can use loan money to maintain, insure, or fuel your car, or for public transportation fares.

Can you use student loans to pay for a gym membership?

Student loans shouldn’t be used to cover membership to a gym. Many schools have a gym or fitness center on campus that’s available to students and included in the cost of tuition.

What should you do with leftover student loan money?

It’s a good idea to return the excess money to the lender — it lowers the total cost of the loan. You could also use the funds to pay for qualified educational expenses, like tuition, housing, child care, or transportation.

Can you use a student loan to pay a tuition bill that is past due?

Yes, you can use a private student loan to pay off an outstanding tuition balance. Each lender determines how far in the past a loan can be used to pay an overdue balance, but many will allow loans to cover past-due balances that are 6-12 months outstanding.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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On the popular credit score spectrum of 300 to 850, where does a score start breaking bad? Different sources cite 670 or 630 or 600. But each lender makes its own determination of which credit scores are considered risky.

You usually need a credit score of at least 620 to get a conventional mortgage (one not backed by a government agency), but someone with a credit score as low as 500 to 580 may be able to qualify for an FHA or VA loan.

We’ll sort through the different credit score requirements, and the factors that might cause your score to drop, so you can work on building better financial habits.

Bad or Poor Credit Score Ranges

The most commonly used credit scores are calculated by FICO® and VantageScore®, and the two companies rank scores a little differently.

As you can see, a Poor credit score from FICO is not the same as that from VantageScore. FICO defines Poor as 579 or below (no one has a score below 300), whereas VantageScore’s Poor range tops out at 600.

To complicate matters, lenders may choose from multiple scoring models and industry-specific scoring models. This makes it tricky to know which one you’re being evaluated on. And your credit scores vary — yes, you have multiple scores.

A score in the 600s is typically high enough to qualify for some loans and credit cards. And generally, the best rates go to borrowers with scores in the mid-700s and above.

What’s the nationwide average? “Good.” As of this writing, Americans had an average FICO Score of 716 and a VantageScore of 698.

Recommended: How to Get Approved for a Personal Loan

What Determines Credit Scores?

A credit score is a number that summarizes your financial history in order to help lenders gauge the risk of extending credit. The higher your credit score, the more confident they are that you’ll repay your debt, and on time.

Your credit score is based on factors like how often you pay your bills on time, how many loans and credit cards you have, your debt relative to your credit limits, and the average age of your accounts. It also considers negative financial events such as judgments, collections actions, and bankruptcies.

Not all financial transactions get reported to the credit bureaus. Payday loans, a type of unsecured personal loan, are considered risky for consumers but don’t affect your credit score for better or worse.

Three major credit reporting agencies — TransUnion, Equifax, and Experian — compile the information on your history of borrowing, and then a company like FICO or VantageScore translates that data into a number.

Recommended: Secured vs Unsecured Personal Loans

Why Your Credit Score May Be Bad

If you’re worried about your credit score, it can help to understand what actions, or inaction, count against you. First there are the obvious slip-ups: missed payments, late payments, and defaulting on accounts. Applying for a lot of credit in a short time is also a red flag for lenders.

Other factors may not hurt your credit score, but they won’t help you build a solid credit history either. If they surprise you, you’re not alone.

•   You’re a recent grad. Although age cannot be used against you, younger people generally haven’t been financially independent long enough to have built up a significant financial history. “Credit age” accounts for about 15% of your score.

•   You rarely use credit cards. Paying through money-transfer apps (also known as peer-to-peer, or P2P, apps) is convenient, but using them doesn’t contribute to your credit history. “Credit mix,” or the different types of credit you use, makes up 10% of your score.

•   Your credit limit is low, and you spend almost the limit every month. You may think you’re living within your means, but lenders consider this a risky situation. “Credit utilization” accounts for a whopping 30% of your score.

How Bad Credit Can Affect You

Your credit score is just one factor that lenders consider when evaluating your application for things like a loan, but it carries a lot of weight. Your credit score not only affects your odds of approval for loans and credit cards, it plays a big role in determining the interest rates and repayment terms you’re offered.

Here are some of the things that take your credit history into consideration:

•   Credit cards

•   Car loans

•   Home loans

•   Personal loans

•   Private student loans

•   Federal PLUS loans

•   Car insurance premiums (in some states)

•   Homeowners insurance

In addition, your credit history may be weighed during a job or rental application.

Nonprime borrowers — generally defined as those with credit scores from 601 to 660, and who have negative items on their credit report — typically don’t get the lowest rates or most ideal terms when procuring a home or car loan.

For example, the interest rate on a subprime 30-year mortgage can be double or triple the average rate. A bigger down payment is usually required, and the repayment term may stretch to 40 or even 50 years, so the amount of interest paid over the life of the loan can be extraordinary.

Building Your Credit Responsibly

Millions of Americans have no credit score because they don’t have enough of a history to calculate one. If this is your situation, you have a couple of options. You may want to consider taking out a secured credit card that will allow you to access a modest line of credit by putting down a deposit.

You can also ask a friend or family member to add you as an authorized user to their credit card account. An authorized user can use the account but does not have any liability for the debt.

If you fall into the so-called bad credit score range, remember that it isn’t set in stone. There are steps you can take to help build your credit. It won’t happen overnight — any promise of a quick fix could be a scam.

But with a sustained effort, you may see a change in six months to a year, according to the Consumer Financial Protection Bureau (CFPB), a government agency. Here are some ideas to add to your Financial Adulting checklist.

Pay Bills on Time

An effective way to improve your creditworthiness in the eyes of lenders is to pay all your bills by the due date, every single time. If you have been late with any payments, consider getting caught up.

If you tend to forget bills, consider brushing up on how autopay works and set up payments through an app, an online bank account, or the entity billing you. Putting reminders on a paper or electronic calendar can help as well.

Pay Attention to Revolving Debt

Remember “credit utilization”? It’s generally a good idea to use no more than 30% of your total available credit. The CFPB says that paying off credit card balances in full each month helps to keep the ratio low and strengthen a credit score.

Credit utilization involves credit card and other revolving debts, not installment loans like mortgages or student loans.

Check Credit Reports and Scores

Between identity theft and plain human error, it’s worth reviewing your credit report for any unfamiliar charges or records, since the information in your credit report is used to generate your credit scores.

You can order a copy of your credit report from each of the three major reporting agencies for free at AnnualCreditReport.com. Look for mistakes in your contact details, accounts that don’t belong to you, incorrect reports of late payments, or accounts you closed being shown as open.

Credit reports do not show credit scores. How to get credit score updates then? A few options:

•   Buy your FICO Score from myfico.com.

•   Get your FICO Score for free from Experian.

•   Look for your scores on a loan or credit card statement.

•   Sign up for SoFi Relay, which provides weekly credit score updates and tracks all of your money in one place at no charge.

Closing and Opening Credit Cards Carefully

The average age of your accounts plays a role in your credit score, so you may want to keep some of your oldest cards open, even if you don’t use them often. Remember that closing cards also reduces your available credit, affecting your credit utilization ratio.

Opening cards affects your credit score as well. Every time you apply, the credit card company runs a hard inquiry on your credit, and your score takes a slight hit. Applying for a bunch of cards in quick succession can make it look like your financial situation has taken a turn for the worse.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

The Takeaway

A bad credit score is defined differently by individual lenders and credit bureaus. But a score in the 500s will make it difficult to qualify for a conventional mortgage, and can cost you money through higher interest rates. But with time and dedication, the tide can be turned.

If you’re struggling to reduce high-interest credit card balances or other debt, an unsecured personal loan may come in handy. SoFi fixed-rate personal loans can be used for almost any purpose.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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