I recently started paying my own credit cards and have become a bit confused. I assumed paying the balance was the best way to build a solid credit profile, but my girlfiend says credit card companies frown on that. So should I just pay half or three quarters of the balance? I figure if anyone would know its you guys, thanks…
Credit card companies don’t like you to pay off the entire balance every month because then they usually get no interest from you. Banks that are going to give you a mortgage are quite pleased to see that you are able to pay off your balance every month because it shows that you are not one to overextend yourself.
As missbunny noted, it’s a matter of who’s looking at your credit rating.
If you’re applying for a loan, having made all the payments in full is ideal, as it shows you have a good handle on your spending.
If applying for a job where you’ll handle money, the same applies, as your prospective employer will be secure that you don’t get yourself in over your head such that you might be tempted to abscond with the till.
If you’re applying for more credit cards, they’d like to see that you never miss payments, but that you frequently carry a balance (upon which you pay accrued interest.) It’s that interest by which the credit cards make their money, and if you never carry a balance, they’ll never make a profit on you. (Although they’re happy that you’ll never stiff them.)
Despite the above, it’s not difficult to get credit cards as long as you’ve made payments on time (whether in full or in part). They figure if they keep you as a customer long enough you’ll eventually start carrying a balance, especially if you’re still pretty young. Fiscally responsible kids (including college kide) don’t need to carry a balance. Fiscally responsible adults sometimes do as a way of leveraging big purchases. (Appliances, rent, homes, tuition, etc.; the kind of things kids’ parents pay for.)
–Cliffy
Pay off the credit cards each month. “Building credit” is actually about building a documented payment history, not paying interest to the credit card company.
They most certainly will make money off of you even if you don’t pay interest so long as you use the card, even if it’s not quite as much as somebody paying minimum payment on a $5,000 balance. Credit card companies charge vendors a small fee for each transaction (I don’t know how much this is, but it’s just a few pennies at most).
I can tell you that my wife and I use our card for most of our purchases. Over the last 5 years we probably averaged $1,000 to $1,200 per month on the card and haven’t paid a lick of interest. We simply use it for about everything that we need to spend on anyway (gas, groceries, restaurants, etc.)
We probably throw out 3-5 unsolicited preapproved cards per week.
starfish hit it dead on.
A bit of advice- try to never be late on payments. Even if you never get something sent to collection, the company will report you as having paid late, and that will hamper some credit requests, like cars and homes. Credit cards won’t care as much.
And credit card companies can charge retailers up to 4-5% per transaction, which can really add up! Which is why some of your favorite smaller joints won’t take credit cards! They’d rather risk getting stiffed on the occasional bad check than pay a fee every time someone uses a credit (or debit) card.
Credit card companies also make a profit by charging a fee to the “seller”. I have never carried a balance and I am constantly bombarded with credit card offers. I find it hard to believe I would get so many (about 5 a week at a minimum) if they didn’t see me as being profitable. Sure–I may not pay them lots of interest, but they also know that I’m low risk and unlikely to default on any loans leaving them in the hole.
The fee is something like 75c a transaction (at least that’s what I remember it being when we looked into it for a non-profit I used to work for). If I make 20 transactions a month, that’s $15 for the credit card company. Multiply by thousands of card holders and it adds up.
Anyway, I’ve always paid in full and have been told by numerous places (landlords, phone company, etc) that they’re impressed by my exemplery credit and I’ve never been denied a card I applied for–so I’d keep right on paying the balance in full if I were you.
Real life example; had a guy apply for a mortgage about 9 months ago, his credit score was 619* he was turned down by the mortgage underwriter. He had never missed a payment but only had 2 loans ever, both with the same company. Told him to apply for a few credit cards and pay them off monthly. He got a Sears and a $500 Visa, pays them both off in full each month. Fast forward to this week, I re-ran his credit and he now scores a 795.
A large part of your credit score is driven by your capacity to charge, stated as a % not as a $ so he has 100% available on a limit of about $1500.
Some one else may have 3 charge cards each with a 10,000 limit and carry a balance of $5,000 on each, their credit score will be lower because they only have 50% capacity to charge.
File this under strange but true.
*** credit scores range from about 380 to 830**
Credit suppliers charge the retail store a fee, generally 2% to 5% of the purchase. So they’re happy to have you use them, even if you pay them off without interest charges. In the olden days (late 70’s, early 80’s), it was still legal to charge the customer more if they used a credit card. I don’t think that’s kosher now… but, back then, if making a cash purchase, you could ask the retailer to discount you, and many would.
It has to be somewhat kosher (at least in Wisconsin) because a chain of record stores around here charges more for credit purchases.
Now that I think about it, I think the deal is that you get a ‘discount’ for paying with cash rather than a credit card (don’t remember how checks fit into the picture, though)…
So I guess maybe it is illegal to charge more for credit card purchases, but not to offer a discount for cash purchases? Semantics strike again…
So, Kamikazee, am I correctly divining from your post that, while your actual balances with various card issuers may not be directly accessible to a credit reviewer, the gist of your unsecured debt load is reviewable? That is to say, a reviewer can distinguish from the information available both what you potentially have on tap and how much is left to use?
Ringo
Each account does list the balance as of previous month-end. It is not real time. The credit report also recaps the total installment, and revolving debt and gives a % of available credit on the revolving charge accounts.
K
With very few exceptions, I have paid my credit card bills off completely every month, and when I was getting my mortgage the bank rep said I had one of the best credit ratings they had every seen.
Resident Credit Guy from Trans Union and familiar with a variety of “scoring models”.
For revolving debt (credit cards), scoring is better when you don’t carry high balances. You should pay them off to have the highest credit rating. However, carrying high balances might not be as good as paying them off, but as long as payments are on time and the credit limit is pushed, your score will not be too adversely affected.
I believe FICO or Fair,Isaac (that’s their name) has a scoring model demo on the web where you get a genuine copy of your report and then run in through demos, changing different things and seeing how it affects your credit score. I read about it in some press release, so I’ll see if I can locate it.
Try Web search on “Fair,Isaac scores”. I am pressed for time today, so I won’t be able to pop in later today.
High score? MOST dramatic affect to get a high score: No derog of any type. No collection, write offs, late pays, etc.
High balances and such have small negative affects, but you will still be in a top tier with a fair amount of accounts, paid on time, even if they carry balances.
Too little credit has an adverse affect.
The big adversities: derog, few accounts, short history.
Whoa! First of all at my bank if I don’t pay the whole balance each month they charge a huge amount of interest not on what’s left if I paid part, but the whole original balance! This is, for me, a lot of money. That in no way looks like a way to make a solid credit rating to me & is expensive too. This is of course, in USA.
Handy get a different credit card that deal blows.
I pay off my credit cards every month. I had a really credit score when we refinanced our mortgage this fall. Another point I think you need to be over 3 months late in payments before it adversely affects your credit. I have certainly missed payments to credit cards and the phone company this did not seem to hurt me much.
I asked Cecil. Hopefully he will bestow his infinite supply of information for the good of the teeming million.
Based on the OP, the answer is clearly this:
“Building credit” is not a function of whether you pay your credit card company in small amounts or all at once, as long as you pay on time. The fact that you pay on time has a huge bearing on how your credit score will be calculated, because it has some of the most “weight” in creating your score. Your credit score is created by different models, but one of the most popular is Fair,Isaacn which is run against your credit report when it is pulled.
Credit card companies are in business to sell you money and profit by getting interest paid by you on your debt. They would prefer customers who pay interest over having a whole stable of customers who pay every full balance every month.
However, although credit card companies want to make money via you paying interest, if you pay your balances on time and in full it will have a positive effect on your credit score because the factual record of how you pay your bill will be reported to the national credit agencies, and when someone buys your credit report to review you for your application, a score will be generated. And that score will be more favorable if you don’t carry high balances, have no late pays, and keep revolving debt low.
Your score is not a function of what your credit card company “likes” or “frowns upon”, as long as you follow the rules. Avoid late pays, exceeding credit limits and carrying high balances. If your credit card company frowms on that, that is too bad, because they are frowning upon the very things you must do to establish stellar credit.
Period.
BRAVO !!!**** Philster.
::: throws confetti in the air :::
On a related note, there was an attorney on TV the other morning explaining how to keep debt collectors from calling you, he explained all the Fair credit collection rules, and how to stall the process, how to dispute, how to hamper the collector in many ways. He missed the easiest solution… pay the damn bill. Below is my e-mail to him [end ranting hijak]
"I have no legal question, but do have a concern on your topic of how to make collection companies stop calling you. I have worked in the finance field for over 20 years, and have run across a fair amount of people with collections. You had all kinds of advice for the people that don’t pay their bills on how to stall the collection process. What the heck!!! Nowhere in your feature did you tell people to just pay the bill, either in full or make payment arangements and stick with them. You have done no good service to these people. The collection will continue to haunt them until it is paid. Better to step up and resolve the issue than to resort to legal sidestepping of the problem."
There are those that can’t pay and those that won’t pay. Have sympathy for those how can’t, and have fun with those who won’t.
K