Speaking of Credit

How leaving a tiny card balance each month affects credit score


Keeping the balance-to-credit ratio low, paying in full and on time is a better way to get the most from your secured card.

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Question for the expert

Dear Speaking of Credit,
Hey I’m 20 years old and I just got a secured credit card for $300 to build credit. My banker told me to spend $200 of the $300 a month. Then pay the balance of $200 but leave around $2-$3, so pay $197-$198. My question is, is that OK or should I pay it off completely every month? Thank you. — Fredd

Answer for the expert

Dear Fredd,
Good idea to build your credit using a secured card. That, and being added as an authorized user, tend to be the best ways available for young people to build credit these days. It’s also a good idea to double-check on that advice you received from your banker, who I’m sure meant well, but whose advice could end up hurting your credit score more than helping it.

I hope you don’t mind if I step in here with some advice of my own.

I can only guess that your banker’s reason for recommending you charge $200 of your $300 credit limit every month and leave a $2-$3 balance is to show plenty of activity or frequent use of the card. While the latter of the two suggestions bears some merit, the truth is that activity or usage has very little direct impact on credit scores.

To some extent the scoring formula, which favors recent activity or usage, sees a $0 balance as indicating a lack of recent activity on the card, although a highly active card can be paid in full with the result also being a $0 balance. Again, the important thing to understand about activity is that there are very few points involved either way, and little reason to worry about whether the balance is $2, $3 or $0.

While a weak argument can be made for leaving a small balance each month, there is no good credit scoring reason to charge $200 on a $300 credit limit, a sum that will raise your credit utilization (card balance/limit ratio) to a dangerously high 67 percent. Short of maxing it out entirely or paying late, putting this amount on a new card is one of the worst things you could do to your score. A good utilization target to shoot for is 25 percent or less, with lower always being better.

Does this mean you can never charge more than 25 percent of your limit? No. You can charge as little or as much as you want, up to the limit, at any time without hurting your score, as long as any amount over 25 percent is paid “early” — within the same billing cycle as the charges, and before the next payment’s due date. This way the next statement balance appearing on your credit report will be below 25 percent of the limit.

To give an example of how paying early works, if you’ve charged $200 since the last statement, which showed a $0 balance, and you pay $200 before the upcoming due date without making any more charges, your next statement — and your credit report — will show another $0 balance. There is no difference in the result or benefit to your score whether you charge and pay $200, $20 or $2 before the next due date, as only the amount you owe on the next statement date matters to the scoring formula.

And speaking of $2, I’ll answer your question regarding paying in full with a yes, it’s definitely OK to pay your balance in full each month. As noted earlier, it might be possible to gain a few more points by leaving slightly more than a $0 balance, as doing so shows the scoring formula that you’ve been using the card. But there are two reasons why I recommend against it:

1. There’s no guarantee. To find out for sure whether your score will or won’t benefit from leaving a small balance, you could pay the balance in full one month, wait about 30 days for your credit reports to update at each credit bureau — Experian, Equifax and TransUnion — and obtain one, two or all three of your FICO credit scores (the score used most of the time, of which there are different score versions at each bureau). Then to compare, the following month leave a $2-$3 balance instead of $0, and repeat the above process. If you haven’t made any other changes to your credit report, such as opening new accounts or paying late, after a few months you’ll be able to see the scoring results for yourself. Personally, I don’t think the possibility of a few more points is worth the hassle, but it’s up to you.

2. If you leave a small balance and then decide not to use the card the following month — say, for example, you decided to curb your spending or obtained a new card with a higher limit — you might forget that you left that small balance the previous month, then miss the due date and cause the account to go delinquent. According to research by FICO, not only will a 30-day late payment remain on your credit report for seven years, but it can lower your score by 60 to 110 points, depending on your prior score and other factors. If you’re willing to take this kind of risk for the possibility of a few extra points, then do so, but please make sure to stay on top of those due dates.

Overall, my advice is to charge as little or as much as you’d like each month, as long as the balance as of your statement date amounts to no more than 25 percent of your credit limit, knowing that lower is always better, and that it’s perfectly OK to pay in full. If you follow this simple way of managing your credit card balance, while never paying late or applying for too many new cards, I wouldn’t be surprised to see you receiving unsecured card offers with higher limits and reward programs very soon.

Good luck building that credit, and keep asking good questions!

See related: Charge a lot? Pay early and often to avoid score damage, Best ways to manage a secured card, Paying, not purchasing, improves credit scores

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