Annoying Myth: Paying off Full Each Month Doesn’t Build Credit Scores – Episode #106
Annoying Credit Myth
This is starting to be a pet peeve of mine. There are so many “so-called” experts out there in the credit space and it’s really starting to annoy me. Why am I so peeved? Well, the lack of good advice is the kicker. The latest – A website written by someone promoting payday loans [generally, I hate anything with 300% interest rates, but hey, that's just me]. Anyway, this guy says that by paying off the entire balance in full each month, the credit bureaus don’t see you as really borrowing any money at all. His article reads as a message to help someone to take on more debt and perhaps find themselves in need of a payday loan package. Perhaps, he just has his facts wrong. But, I find it annoying.
Since I have not carried a balance ever, well as long as I can recall, this means that I must not have a good credit score. Nonsense. In fact, I’ve achieved an 831 FICO in the past few years and currently have FICO scores in 800 range. In all my years at myFICO.com, I never heard this myth to be true. In fact, the card issuers sometimes refer to people who payoff their bills each month as “freeloaders” because we don’t get charged interest or late fees. The reality is the statement “paying off the entire balance in full each month, the credit bureaus don’t see you as really borrowing any money at all” is flawed. Paying off balances before they are due DOES show something about your credit behavior and IS a good prediction of risk. Remember, while credit card issuers want you to be late, no financial institution wants you to default.
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First, great site! Here’s my question for you: Do you pay your bills off in full before the statement cuts or after the statement cuts(i.e. after you get an online or paper bill)?
If you pay your bill after the statement cuts, that means your current balance is reported to the credit bureau’s and it looks like you are carrying a balance even though it’s paid in full. That’s why someone who charges there card up to the limit, then pays in full after the statement is cut, can still appear maxed out….
I think this needs to be included as simply “paying in full” does not mean you will have a high credit score, unless A) pay off before the statement is cut or B) you have a huge credit limit (and your balances never come close to it)
Hey Andy,
I am trying to improve my credit so I can get approved for a mortgage. The loan officer I am working with told me to pay my credit balances down to 30% of their limit and to not pay them off in full. This will help my score I think, because I am close to maxed out on a couple of cards, but are you saying that it would be better to pay them to zero and then leave them open? I am planning on using my tax return money to pay down my balances and just want to make sure I do the best thing to improve my credit.
Thanks,
Andy
J, Here’s what I do. Pay your credit cards every two weeks or every week. This is easier than playing the game of paying off before the statement or closing date. This way some balance is probably reported but 1/4 or 1/2 what it would be. Does this help?
Andy, aim for 10% of your credit limit used. This means that your closing date amount should be $1,000 if you have a $10,000 limit, for example. My score seems to drop 7-10 points when I go above the 10% limit number, but then the points return when I get my credit utilization back down — usually by not reducing usage but pay paying 2-4 times a month versus just once.