Expert Q&A

Pay off your balance each month? Your credit report may not show it


A family’s conscientious but high-charging ways could be bad for their credit scores.

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Question for the expert

Dear Credit Score Report,
In our family, we have one main joint credit card, and we each have one personal card. All cards are paid off in full each month. However, since we use our joint card for everything, we often have a reasonably high balance — anywhere from $5,000 to $15,000 with about a $35,000 limit — until the payment due date. Is this hurting our credit score? — Sonja


Answer for the expert

Hey Sonja,
Your credit score could be hurt by large balances, even if they are always paid off, so keeping debt levels relatively low may help your family’s scores.

Due to the way account information appears on credit reports, your heavy card usage  could impact your credit score. A review of your family’s credit reports and scores may confirm this fact. The reason is based on the reporting process, which goes like this: Banks pass your account information, including balances and limits, along to the credit bureaus, which in turn list that information on your credit report. When you (or a lender) request to see your credit score, the current information on your report gets plugged into a credit scoring formula. The issue for heavy-charging — but otherwise responsible — cardholders is exactly when various lenders report information to the bureaus.

Although they can report more or less frequently, lenders typically report only once a month. When that happens, the bank reports if the last payment was made on time and the balance listed on the most recent statement, says Maxine Sweet, vice president of public education for credit bureau Experian.

To understand how this impacts credit scores, an example may be in order. Let’s say that:

  • For the month of June, you run up a balance of $10,000.
  • On June 30th, the bank reports your May on-time payment and June balance to the credit bureaus.
  • You then pay off your entire balance on the due date of July 1st.
  • However, since lenders only report once a month, according to Sweet, your credit score on July 2nd still shows that $10,000 balance you have since paid off.

As you may know, the comparison of your balances to limits — often called your utilization ratio — is an important factor in the calculation of credit scores. To preserve your score, experts say that card balances shouldn’t exceed 30 percent of your credit limits. That means those months when you ring up $15,000 in charges (about 43 percent of your limit) are putting you into the danger zone.

To solve that problem, you can lower the ratio using several approaches:

  • Charge less. There’s just one guaranteed way to reduce your account balance. “The only sure way to get a lower balance reported is to charge less on the card,” Sweet says.
  • Pay more often. During months when your card balance looks set to top that 30 percent utilization ratio, pay off a portion of the balance partway through the billing cycle. That will ensure that whenever the bank reports on your account, you have a less-sizable balance.
  • Request a higher credit limit. If you’ve been a good customer and have a solid income, the bank may grant a request for a higher credit limit. Just be warned that this can trigger an account review which could have the unintended consequence of actually leaving you with worse credit terms.
  • Use those other cards. Put some of your monthly expenses on those personal cards to protect against account closures due to unused plastic. When accounts are closed, it can leave you will less available credit overall, which can be a drag on your credit score.

Of course, in order to make purchases in cash or pay down your balance more frequently, you need to have money available. This may not be possible, especially if you use the credit card to fund purchases now and buy yourself time until a later payday. If that’s your approach, be careful. An unexpected event (such as a sudden layoff or family sickness) could leave you unable to make a card payment that month. Even one late payment could seriously damage your credit. (Leading credit score creator FICO has said that a maxed-out card can reduce a score by 10 to 45 points, while a 30-day late payment can drop a score by 60 to 110 points.)  To avoid that scenario, I’d recommend cutting back on spending in order to both regularly pay down card debt and build up an emergency fund.

Missing a payment on a joint account means the entire family could see their credit scores fall. That why experts instead recommend adding authorized users on an account, since the debt load and scoring damage should only impact the primary cardholder.

For now, though, just focus on continuing your on-time payments, taking on new debt only when necessary and keeping your debt levels low.

Good luck!

— Jeremy

See related: Improving a great credit score comes down to timing, High balance on just one card can hurt credit score, Canceling a card can hurt your credit score, Trying to cut back on spending? Go BIG!, FICO reveals how common credit mistakes affect scores

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