Ask Money

Budgets, credit card debt, and credit scores

Chris Farrell Oct 15, 2010

Question: A friend of mine is starting a new job and wants to budget and save. He is having a lot of trouble conceptualizing the process.

One of the problems has to do with how to account for credit. How should one account for money charged on a credit card but not paid off in a monthly budget?

I told him the best way to deal with it was not to carrying a balance (which is always a good idea anyway). He said he was taught carrying a balance was a good idea because it helps build credit. I always thought as long as you have the card, used it and paid the bill on time (whether or not in full) that was about all the good you could do for your credit score. And since carrying a balance does nothing than cost you money on interest, it’s a waste. Who’s right? Drew, Memphis, TN

Answer: You’re right. You don’t pay interest when you pay off the bill in full. You still build up your credit score with monthly on-time get-rid-of-all-the-debt payments. There is no credit-score or financial advantage to carrying a balance. Carrying a balance is expensive and costs money.

Congratulations on your friend trying to budget and save. The new generation of online services really helps with budgeting.

For example, is remarkably easy to use. Mint aggregates all your credit card, savings, investment, mortgage, auto loan and other financial data. You mine the information to see where your money is going. The web-based budgeting tool sites keep getting better, too. Many banks, credit unions and other financial institutions offer online budgeting programs to customers.

By the way, it’s fine if he prefers monitoring spending with a notebook and pencil, making simple additions and subtractions on a cheap calculator. It’s more than adequate in most circumstances.

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