Q&A: How does credit card activity affect my score?

How much you owe at the end of the month and when you pay it is what really matters

By  |  Published: August 10, 2017

Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question

Dear Speaking of Credit
I recently opened a credit card for the first time. I have a $300 credit limit and haven’t been spending more than $25 a month on it.

So, let’s say I make a purchase of $10 on July 3 and pay it off on July 6, and my next statement date is July 28. Would it be beneficial to my credit score to make another purchase of $10 on, say, July 10, and pay it off before my next statement date? – Mitchell

Answer

Dear Mitchell,
The answer to your question of whether your credit score will reward you for that additional charge and payment during the same billing cycle as the prior activity is clearly a big no. But making an additional $10 charge and paying it off before the statement date won’t hurt your score either. It’s just an unnecessary couple of steps for score-raising purposes.

How much does credit activity matter?
For the most part, it’s simply the dollars you owe and the dates you pay – or don’t pay – that matter to your credit score. Neither how often you use your credit cards nor what you use them for has any bearing on your score. Yet even some of the most score-savvy consumers still have trouble understanding the role of recent credit activity on their credit scores. 

While, as you’ll see, credit activity doesn’t play much of a direct part in your credit score, there is an underlying minimum FICO scoring requirement that the credit report contain at least one piece of credit information that was reported to the credit bureau within the past six months. And there is more.

The recency, or “freshness,” of credit reporting information considered by the score is a valuable necessity when predicting a consumer’s future creditworthiness for a couple of reasons:

  • Information describing credit behavior from the recent past, more so than from the further distant past, has been found to most accurately match what a lender can expect to experience in the near future. In other words, we are most likely to continue doing tomorrow what we’re doing today.
  • Since closed accounts with $0 balances are no longer reported to the credit bureau, and since an inactive card will ultimately be closed and no longer reported, we can then deduce that any account recently reported to the credit bureau has been active recently enough to prevent its closure.

Fortunately, it should be easy to grasp how a couple of activity-related credit reporting items are likely to affect your score – trade line reporting date and credit utilization.

When was a trade line last reported to the credit bureau?
The scoring formula’s reliance on freshly reported data extends beyond meeting the minimum scoring criteria. Many dollar-related score factors, such as card balances and payment amounts, only come into play score-wise when their reporting date is of a recent vintage (exact lengths of time vary among the different score factors and consumer profiles). 

Again, much of the importance around recently versus not-so-recently reported payment history and debt amount is based on the assumption that a credit score can best predict future creditworthiness when the consumer has recently demonstrated responsible – or irresponsible – credit management practices.

 

Video: What is your credit utilization ratio?

Credit utilization – 1 or 0 percent?
In one of the quirkier, least intuitive, pieces of the credit scoring puzzle, it can be better for your score to show very low utilization – 1 to 3 percent, for example – on at least one card than 0 percent on all.

The rationale behind this is that typically a balance on a current account indicates activity in the form of recent charging and payments.

In an attempt to place a higher value on recently reported information for the reasons noted above, the scoring formula gives a few additional points for having at least one card with a balance just slightly greater than $0 on the date of the month the card’s activity is reported to the credit bureaus. It’s usually the statement date, but you can call your card issuer and ask.

Of course this is not a foolproof way to measure recent activity, since the balance could have originated from charges made years ago and paid down slowly over time. But such a hit-and-miss way of measuring activity appears to be the best the score can do to measure activity given the limited credit bureau information available.

What should you do?
You can incorporate this “recent activity factor” into your score strategy by leaving $1-$3 on your card as of the statement date – and paying it in full by the due date, to make sure you don’t incur interest and penalty fees. With your limit of $300, this amount will give you the ideal 1 percent utilization ratio.

The question then becomes, just because you can leave a $1-$3 balance throughout the billing cycle and wait to pay it off by the due date to possibly gain a few more points, is it worth your while to do so? While only you know for sure, my suggestion is simply not to bother. Especially since those few points are highly unlikely to make the difference between being approved or denied the next time you apply for credit.

But what if you can’t resist trying? In that case, perhaps the best tactic is to try both strategies:

  • For a few months, leave 1 percent on your card through most of the billing cycle, then pay it off by the due date. See how your score behaves. Remember that you can check your score for free anytime at CreditCards.com.
  • Then pay your card down as soon as you make a charge in order to keep a $0 balance consistently for the next few months, and recheck your scores.

The tactic that produces the highest score wins. Good luck!

See related: Credit limit tricks: Keep a high score while still using your card, How leaving a tiny card balance each month affects credit score

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Updated: 10-17-2017

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