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What does a maxed-out card do to your credit score?

Erica Sandberg

July 25, 2014

QHi Erica,

I have one credit card. I use it for work exclusively. I max it out ($12,500) regularly, but pay it off every month. I have not paid a penny in interest in two-and-a-half years. Is this affecting my credit score? Thanks. –Tim

ADear Tim,

I presume you are asking if your credit behavior is causing your scores to rise or fall. And the answer is: Look up, because that's where your numbers probably are.

From the day you were approved for the credit card, the issuer has been sending a detailed account of how you've been using it to the three major consumer credit reporting agencies — TransUnion, Experian and Equifax.Ask Erica

To know if the way you've been treating your credit card is helping or harming your credit scores, though, you must understand how they function.

There are many scoring models in existence, but the most common is the FICO. It takes the financial information that's listed on your credit reports, inputs it into a mathematical model, and produces a risk score. FICO scores run from 300 to 850, and higher numbers are predictors of less lending risk.

The complicated algorithms employed by FICO rank some credit activity far more heavily than others. In order of importance: payment history (35 percent), credit utilization (30 percent), length of time you had and used credit (15 percent), types of credit in use (10 percent) and pursuit of new credit (10 percent).

So back to what you've been doing with that single credit card. You've paid on time, every time right? In that case, a major part of your score, payment history, is in a perfect position.

Second is utilization, which is the amount of outstanding debt you carry as compared to the amount you can borrow. You're often hitting your limit, but because you pay in full, you're not really in debt, which is great for you financially. No finance fees for you!

I asked Anthony Sprauve, senior consumer credit specialist for myFICO.com, just what the potential negative effect could be. “Because he is maxing out the card every month, he is hurting his score somewhat,” says Sprauve. “One recommendation is to pay off his card twice each month. That way no matter when his credit card company is reporting his balance to the credit bureau, it is likely to be lower than what is being reported under the current scenario.”

Check your FICO scores to see what your charging and repaying behavior is doing to your numbers. Excellent scores are in the mid-700s and above. If they're in this range, fantastic: Keep doing what you're doing. If not, make multiple payments throughout the month. Clearly, you can afford the items and services you're charging, so why wait?

The only other factor that could be dragging your score down is that you don't have a variety of credit in use. It's a minor category, but if your ultimate goal is to increase your credit score, consider adding another credit card to the mix. An additional benefit is that the new line would automatically expand your utilization ratio, so you wouldn't have to manipulate payments on your current card. Once you get that second card, place at least one small charge on it each month and pay it off in full.

Finally, be proud that you're using credit so effectively. Points on a score are nice, but gaining all the benefits of charging while not paying anything extra in interest is even better. That's an A-plus in my book.

Got a question for Erica? Send her an email.