There are different consumer finance viewpoints about carrying a monthly balance on credit cards.
Does it help or hurt your credit worthiness?
The subject is a follow-up to a recent reader call-in program that the Beacon Journal sponsored with local financial experts who took phone calls and offered advice.
Previous columns and stories on the subject are online at www.ohio.com/betty or you can find that specific column at http://tinyurl.com/financialmyths .
Brian Gibson, branch manager of a Fifth Third Bank location in Twinsburg, asked specifically about this Myth/Fact that I covered.
• MYTH: Carrying a balance each month on your credit cards means you have good credit.
• FACT: Having no balance and showing a history of paying your balance builds good credit.
Jay Seaton, area president of Apprisen, the former Consumer Credit Counseling Service of Northeastern Ohio, said this is one of the biggest misconceptions in the industry. People mistakenly think, “I don’t pay my credit-card bills off because then they won’t know what kind of credit I have. The real fact is that it’s exactly the opposite. What you really want to do is pay everything off,” Seaton said.
On the other hand, Gibson said he was always taught that paying off the balance works against the whole point of using credit and doesn’t help you build your credit score.
Gibson said keeping large balances on your credit and not paying them off would work against your FICO credit score but wondered how paying them off each month was any different from using a debit card.
I did some online searching and found some confusing answers.
That led to interviewing Anthony Sprauve, director of public relations for myFico.com, the consumer arm of the company that invented the FICO score, to ask the question. FICO is the most widely used credit score.
The bottom line from Sprauve? “There is no benefit to carrying a small balance if your goal is to improve your credit score. Carrying a balance doesn’t help or hurt you unless the balance is high,” said Sprauve. “Paying off your balance every month is a good thing.”
There could be confusion about when creditors report activity to bureaus.
Say you have a $3,000 balance on a monthly credit-card statement and you intend to pay it on the due date.
The credit bureau might report that $3,000 balance for the month or your balance might be reported as $1,500 on a particular day.
What’s important is that you don’t have any past-due balances, showing in the last 30, 60 or 90 days, Sprauve said.
What’s also important is the ratio of your debt to your available credit, both for individual cards and overall assets, Sprauve said.
Again, consider the example of a person who charges $3,000 a month and intends to pay it at the due date.
If the overall credit limit for that card is $5,000, that person is using a high ratio of the available credit and that will hurt the credit score, even if the balance is paid off, Sprauve said.
In that scenario, Sprauve said to consider making two payments a month. Pay what’s due halfway through the month so that when the creditor reports your balance, it is not a high amount.
“You get credit for carrying a low balance and using a card. That’s a good thing and you’re not incurring any interest charges,” said Sprauve.
But suppose the person with a $3,000 balance due also has a $20,000 card limit. That person is using a small percentage of the available credit, so making two payments that month would not have an effect, said Sprauve.
Seaton, the credit counselor, said he had never heard of that suggestion, but agreed it could be a good idea. However, Seaton said that would work for someone who is sophisticated with their finances and who would have the extra cash flow halfway through the month to make that payment. For others, that could be difficult, he said.
Sprauve said the FICO score covers debt ratios for individual cards and overall ratios of debt compared to overall available credit.
For the credit score, “the difference between paying off and carrying a balance is minimal. It’s more important to pay all of your bills on time every time,” he said. That makes up 35 percent of your FICO score. The second most important part, or 30 percent of your score is keeping balances low on amounts owed. (See chart accompanying this story.)
Seaton said he understands that some consumers, like me, use a credit card to earn free rewards and still pay off the bill monthly. (I take the cash rewards or apply a credit to my balance.)
But Seaton said he doesn’t “chase” points on the credit score or try to apply for more credit or do things to raise his score.
MyFico recently released key habits of people with the highest credit scores in the nation — scores of 785 or higher out of a possible 850.
More than 50 million people, or 25 percent, rank as high achievers.
Ironically, according to MyFico, these high achievers aren’t debt-free. They typically have seven credit cards, including open and closed accounts, have an average of four credit cards or loans with balances and one-third have total balances of $8,500 or more on nonmortgage accounts. Ninety-six percent had no missed payments (or if they did, it occurred more than four years ago). One in 100 high achievers had a collection listed and one in 9,000 had a tax lien or bankruptcy.
High achievers seldom opened new accounts.
Seaton said he wasn’t surprised that the high achievers weren’t debt-free, though he was surprised at the $8,500 number.
Betty Lin-Fisher can be reached at 330-996-3724 or firstname.lastname@example.org. Follow her on Twitter at www.twitter.com/blinfisher and see all her stories at www.ohio.com/betty.