One of the basic factors in computing your credit score is the ratio of your overall credit to the amount of credit that you’re actually using. While it’s not the most important factor, it’s significant. The most important factor, of course, is how you pay your bills. Late payments will hurt your credit score more than having too much credit.
Still, that ratio of debt to credit is important. One of the ways that you can improve your credit score is by lowering it. You can do that by paying down your credit cards, or even by paying off your credit card balances each month.
A good theory
Now, you would think that, no matter how much you charge on your credit cards, as long as you pay off your balance each month you will be golden. If you’re not carrying a balance, you ‘re not accruing interest charges and you’re obviously not living above your means. Creditors should be able to see you as someone who’s not using much of her available credit.
Unfortunately, this isn’t always the case.
Timing is everything
You see, there’s a specific process at work here that you need to be aware of. Banks pass along your account information, including information about balances and limits, to the credit bureaus. They do this, on average, about once a month. When they make that report, they let the credit reporting agency know whether the last payment was on time and what the balance was on the most recent statement.
If the statement balance was high, you might be in trouble.
Let’s assume you run up a balance of $5,900 on a credit card with a $6,000 limit. Maybe you went out of town on vacation, and used your card frequently to earn airline miles or something else. On the 30th of the month, the bank reports your payment being on time and your balance of $5,900.
You pay off your entire balance of $5,900 on the 1st. It’s too late – the credit reporting agency now believes you owe almost all of your available credit.
To do it right, you need to make sure to either pay off your balance fast, hoping that it doesn’t happen during the statement cycle, or not run up as much, even if you intend to pay it off.
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