Editorial Policy

Does Heavy Card Use Hurt Credit Scores?

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By Eva Norlyk Smith, Ph.D.
December 23, 2011

QDear Eva,
Please help me settle a bet with my wife. I use my credit cards for everything so that I can build up rewards points, so the balances are usually pretty high and close to the credit limit. I pay the cards off every month, but my wife says my credit score’s still affected because the agencies just see the high balances. I say that shouldn’t matter because I pay them off. Who’s right? We’re buying a new house soon so we’re trying to build our scores. Thanks. — Carl

AHi Carl,
I hate to break this to you, but I’m going to have to side with your wife. And not just because we girls have to stick together!

There is a good chance that your credit score is being affected by your high credit card balances — even though you pay the balance off in full each month.

This can be a problem, too, if you’re about to buy a house. Any fallout to your score will affect your mortgage rates. And even if you are in the high range of credit scores, a 20-point difference in scores can add up to thousands of dollars over the life of the loan. (To find out how much is at stake for the loan amount you are targeting, check out this mortgage cost calculator from myFico.com.)

I know this seems unfair. Obviously, you are a responsible credit user and conscientiously pay your balance off in full each month. Unfortunately, however, limitations in the way the credit reporting system is set means that some consumers may be rated inaccurately at times and high-volume credit card users, such as you, are particularly vulnerable. Ask Eva

At the heart of the issue is the way credit card data is reported to the credit rating agencies. Banks typically report once a month. Some report even less frequently than that. Some card issuers report shortly after the statement closing date, meaning right about the time they send you your credit card bill.

As a result, an amount that’s often close to the highest balance of the month ends up being reported to the credit rating agencies, not the balance reflecting the monthly payment!

The fact that you pay the balance off in full a week later does not get picked up by the FICO scoring system. So if your balance is anywhere over 30 percent of the credit limit on your credit card, it will affect your credit utilization ratio and possibly pull down your credit score.

The easy way around the issue would be to pay the balance in full just before the statement closing date. That way, the balance reported to the credit rating agencies would be more likely to reflect your payment.

Unfortunately, it’s not always that easy. Reporting patterns vary between card issuers. According to CreditCards.com, for example, Chase reports the balance and payment history on the 13th or 14th of each month. Bank of America reports balances 30 to 45 days after payment is received. American Express, Citi and Wells Fargo report the numbers listed on the cardholder’s monthly statements.

So, short of putting your rewards credit card in the drawer, what can you do to protect your credit score prior to applying for a mortgage? Well, by being proactive, you can likely minimize the damage — or even avoid it entirely.

Here are a few suggested steps:

1. Sign up for a credit score monitoring service. That way, you’ll know where you stand and can track the changes over time as you change your payment patterns. Plans for the FICO score monitoring service at myfico.com start at $4.95 a month. And in your case, that small monthly cost will be well worth it since you’re applying for a mortgage and will need to know your FICO score.
2. Call your card issuer. Find out when they report statement balances to the credit rating agencies. Then make a habit of paying the balance off before that date.
3. Alternatively, pay your credit card bill more frequently. For example, you may want to pay it down two to three times a month. Keep the balance under 30 percent of the credit limit at any given time.
4. Expand your credit horizons. To give yourself a bit more wiggle room, consider asking your card issuer if you are eligible for a credit limit increase. This will help improve your credit utilization ratio as well. Just make sure that the card issuer doesn’t have to pull your credit report to give you an answer, as this could pull your score down by as much as five to eight points.