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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

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The issue is as follows. Many people use their credit cards for everything and everything, such as convenience or airline miles. They pay the entire sum each month after receiving their credit card bill. Or they set up automatic payments for the entire debt. They ought to have a good credit score and pose no danger to lenders, right? The majority of them do have solid credit, but their scores are below what they ought to be.  paper.io 2

That happened to me on a major expense. I put a house renovation on the credit card to get rewards points, paid if full when bill came due, and my credit score dropped a few points. Now, thanks to your post, I understand why. However, within the following 60 days (or less, I'm not really sure on how long, but certainly within 60 days) the score came back to where it was before the purchase.

That's right.  It doesn't take the score down for long in your situation but for the folks who put everything on their cards and pay it in full after the closing date, they have an ongoing and unfair deficit.  It seems like the credit bureaus could fix this.

I agree totally about being unfair Dave, especially when one has a long track record of not carrying a balance on any card. I frankly see credit bureaus as a PITA that serve purposes for merchants and providers rather than the consumer. In fact they can be a nightmare for a consumer when the file and post misinformation and that happens regularly.

This is great info Dave!

I would take it a step further. I log into my credit card accounts every other day and pay everything off in full. This way my balance never gets high and I'm not tempted to spend more than I have in my bank account. It also ensures that my balance is small when the bill due date actually rolls around.

Obviously, this isn't always possible. When I've made big purchases on my card that are hard to pay off in full right away, I still go in at least once or twice a week and chip away at it. For me personally, I find this much easier to manage than keeping track of due dates.

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