Personal Finance Tip of the Week, By Financial Fundamentals, LLC of Watertown

True or false: carrying over a credit card balance month-to-month is better for your credit score than paying off your balance?

The answer is ‘false,’ but many people I speak with believe that they need to carry a balance in order to improve their credit score.

Don’t believe that myth! Paying off you balance in full each month is likely to be better for your credit score and will be much cheaper too.Your credit activity is still reported to the national credit bureaus when you pay off your balance in full.

Your activity will demonstrate that you are using credit responsibly and always paying on time, which are the biggest drivers of a high credit score.

Paying off your balance in full has two other important advantages. First, it probably means that you are careful with your charges and keep your current month’s balance low. A low balance translates to a higher credit score, because the scoring system (called FICO) penalizes a high balance in relation to your credit card limit.

Second, it saves you a lot of money. If you pay off your balance in full each month, you will never be charged any interest or other financing charges. Credit card interest can really hurt you financially over time. For example, it can cause you to pay 40% or more for an item than if you had paid it off right away.

So don’t hesitate to pay off your card balance in full each month. It will improve your credit score and your finances. And if you form a habit of saving the money you used to pay in interest, you will steadily get ahead and move toward your financial goals.

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Stephen Barkhuff, CFP(R), CFA is the founder and president of Financial Fundamentals, LLC, based in Watertown, MA. Financial Fundamentals helps couples and singles with modest incomes take control of their financial future. Please feel free to email him any questions or comments.