Pay off the balance right away, or carry it a little while?

April 10, 2010 2:41 PM

Rebuilding my credit and haven't had a credit card for 15 years. Now I got one, and I want to maximize the benefits to my credit score. Is it true that paying it off in full each month is better than carrying a small balance then paying it off?

In the early 1990s, I got in lots of trouble with credit cards - in way over my head and it ended in tears. Since then, I have learned to live on money I actually already had, and have been using a debit card since 1997. I don't know what my current credit score is, and I haven't gotten my free credit reports in a couple years, but I'm meaning to get that done after I have some time with the new card.

I finally decided to get a credit card again to try to work on rebuilding my credit, and because a little more emergency buffer would be nice. A huge factor as well was making sure I could rent a car (I had a nasty experience last year learning the hard way that many car rental places will not rent to you with a debit card).

Luckily my credit union approved me for the card. It has a small limit, just $500 (that is all I asked for), and a low interest rate, 12.99%. I think that my years of steady employment, the fact that I've been a customer for 13 years, and the fact that I had $1000 in savings when I applied really helped.

I have read various things about how to handle a credit card to maximize the benefit to one's credit score, but I don't remember the answer to this question, and my Google Fu is failing me.

Is it better to pay off the card in full every month, or should you carry a balance (a small one, I assume) so that the credit card companies can see that you are the type of person they can make at least a little money off of?

I faintly remember reading somewhere (but I can't find it now of course) that if you always pay it off, the credit card companies will see you as a bad risk since you are never charged a dime of interest.

posted by marble to work & money (12 answers total)

You should use it for gas or groceries or something like that, and pay it in full each month. Try not to spend more than half the credit line. That way you show utilization, but not too much, and don't pay finance charges. (The balance is reported at the statement closing date each month, so it will be reported even if you pay in full.)
posted by Nothing at 2:50 PM on April 10, 2010

the credit card companies will see you as a bad risk since you are never charged a dime of interest

This would be true if you were dealing with a large credit card issuer, such as Bank of America or Chase. In that situation, the bank would use a variety of factors, including how much you have paid (or not) in interest, to decide how to "handle" you. Your credit union likely doesn't make those sort of distinctions for two reasons: 1) You are a long-term customer with a relatively small credit line, so you are low risk to them; 2) Every issuer of a card with a VISA or MasterCard logo receives a couple pennies every time you use it, even if you pay no interest (called an "interchange fee"), so they will earn money even if you never pay interest.

Having a positive trade line (called "TL" if you get into the credit forums) on your report is good, so don't worry about not paying interest. If you have a monthly bill that's always the same amount, like a cable or mobile phone bill, I recommend that you set that to auto-bill your new credit card and pay the card off every month with the money you'd use to pay the other bill.
posted by fireoyster at 3:02 PM on April 10, 2010

What fireoyster said about paying off your card every month. To the giant banks, you'd be a bad customer if you didn't carry a balance because they'd be making less from you. But to a credit union, you'd be fine and a good customer. This would be part of the individual credit union's assessment of your account, not your overall credit score.

If you carry a balance, you'll hurt your score by having a higher than liked utilization ratios. That is, if you have a $400 balance on your card, you're utilization is 80%. Your credit score likes to see than number below 30%. That fluctuates each month based on your balance, so if you had a high utilization in one month and the paid it off, you'd be golden again.

Even if you never use that card, keep it open, age of accounts is a factor in building your score.

You'll hurt your score by having too many accounts. (not having enough is also seen negatively). But the worst thing you can do is miss a payment since that will ding your score for years. Anything else like credit utilization, number of accounts, age of accounts, is minor.
posted by birdherder at 3:22 PM on April 10, 2010

Good on you for getting your debt under control and getting back in the saddle!!! It's awesome to finally get things under control and start owning your nemesii (nemesises?)

I agree with fireoyster in that there are plenty of other ways you can raise your credit score, but if you really want to go the credit card route then don't carry a balance, for the sole reason that you will accrue finance charges. Find a credit card with a low interest rate, yes some still do exist- USAA for one at 7.75%, watch out for monthly charges as well.

Also, you can request a credit increase after about 6 months if you have been on time/charged a good amount on your card.

My suggestion, since you WANT to get back into the credit card game, is to pick something big you were going to buy anyway, and pay for it with the card. Show the card company that you need a larger credit line.

It take a couple of years to build up your score, it's not overnight, but a couple of lines of credit is better than just one. I know because I was turned down for a mortgage because they wanted to see 3 lines of credit that had been established for at least 2 years.

Also, if you are going to get into the game, get a card with some rewards. I don't know if you are outdoorsy, but REI has a card with an APR with around what your credit union has given you, maybe 1 or 2 points higher, but the return is certainly higher (1% on all non-rei purchases and 5% on rei purchases).

Dave ramsay would say "don't play this game, you will inevitably lose" though.
posted by TheBones at 3:29 PM on April 10, 2010

This is from the recent Consumerist article (I don't feel like digging through the site) that quotes an interview with the FICO spokesperson:

"Watts: Pay everybody on time, keep your account balances low on credit cards, take on new credit obligations sparingly, and then continue managing credit for a long time. Typically people who score in the mid-800s have been managing credit for at least a couple of decades."

I'm right at the edge of 800, but I'm under 30. I'm sure part of the reason is that, barring exactly once, I have paid my cards on time and in full every month since 2003.
posted by Weighted Companion Cube at 3:30 PM on April 10, 2010

If you are carrying balances, you are living beyond your means. Don't charge more than you can pay off in full every month (and on time).
posted by SuzB at 3:48 PM on April 10, 2010

Frontline's The Card Game is an interesting look at the current state of credit cards, and how the system is monumentally stacked against us with tricks and traps to extract every possible fee and penalty possible. Such is our lives in the age of Gotcha Capitalism.

Gut instinct advice is stay out of debt as much as possible in this smoking hole of an economy we're stuck with.
posted by Pirate-Bartender-Zombie-Monkey at 4:22 PM on April 10, 2010

For your FICO score, it doesn't matter if you pay in full or carry a balance. What matters is what percentage utilization you have when they report to the credit bureau. The ideal percentage utilization is higher than 0% but less than 10%. So figure out what date your credit card billing cycle closes, and make sure that your balance is between 0% and 10% of your credit limit on that date (log in and pay part of the balance a few days before if you have to).

The easiest way to do this is would be to set up some small bill to autopay to your credit card, and then set your credit card to autopay in full every month, and not use the card for anything else.
posted by Jacqueline at 4:28 PM on April 10, 2010 [1 favorite]

"Big" banks don't necessarily think you're a bad customer if you don't ever carry a balance. I've been using a BofA card for a decade (formerly MBNA) without ever carrying a balance and my credit line on that card is absurd. I also use an AmEx Blue without ever carrying a balance. They make enough in interchange fees to make you worth their while EVEN IF you pay off monthly. (I actually manage all my spending on cards, which is NOT a good choice for everyone, but works well for me, since I spend less when I know that that stupid bill is coming at the end of the month ... whereas cash is already in my pocket so I might as well spend it and forget it!) Both my cards are rewards cards.

My credit score is excellent.
posted by Eyebrows McGee at 4:53 PM on April 10, 2010

To the giant banks, you'd be a bad customer if you didn't carry a balance because they'd be making less from you.

In fact, the industry term for people who pay their balance each month is "deadbeat".
posted by Neiltupper at 5:19 PM on April 10, 2010 [1 favorite]

More and more, people seem to live their lives according to their credit score. You've had credit troubles in the past. That's a good reason to pay off your balance in full every month.
posted by theora55 at 12:55 PM on April 11, 2010

Thanks for all the great info, everyone. I paid it off completely and will do the same each month from now on.
posted by marble at 11:34 AM on April 17, 2010