There is a common misconception regarding credit scores and credit card balances. By taking a few minutes to read this short post, you may be able to improve your credit score with little or no extra effort.
You probably already know that the credit score is designed to help lenders predict the chance of default when making loan decisions. The amount you carry as a balance on your credit cards is a major factor in the algorithms. It is called credit utilization and accounts for 30% of your score. This makes sense because a person who pays off their credit cards in full every month and does not carry any balances is a much better credit risk than a person who does not have enough money to pay off their credit card balances. Common sense.
Here is the problem. Many people use their credit cards for everything they can, say for airline points or convenience. They get their credit card statement and pay the balance in full every month. Or they set up full balance automatic payments. You would think they would be a low credit risk and have a high score. Most of them do have a good credit score but it is lower than it should be.
This is because the credit card companies report the balance at the end of the billing cycle to the credit bureaus. If you had a $1,000 balance on your statement and paid it in full the day after your statement cycle closed and then had a $0 balance, you are scored the same as if you were carrying a $1,000 balance from cycle to cycle and paying interest.
On the other hand, if you check and pay your balance online two or three days before the statement closing date (not the payment due date), your balance will be reported as $0 and your credit utilization ratio will be very low and your credit score will be higher.
I have tested this on my own and found that my score was as much as 15 to 20 points higher.
Dave Blancett
