If you have large balances on your credit cards your credit score could be hurt, even if you pay them off every month.
Because of the way account information appears on credit reports, heavy card usage could impact your credit score. The reason for this is based on the reporting process, which works 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 a lender (or you) requests to see your credit score, the current information on your report gets introduced into a credit scoring formula. The issue for heavy charging cardholders is exactly WHEN various lenders report information to the bureaus and the high balance is the culprit for your low score.
Lenders can report more or less frequently however, they usually 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. So, if your card has a high balance at the moment of their communication, that is what will be reflected on your credit report.
To understand how this impacts credit scores, we will give you an example. For instance:
- For the month of September, you run up a balance of $9,000.
- On September 30th, the bank reports your August on-time payment and September balance to the credit bureaus.
- You then pay off your entire balance on the due date of October 1st.
- However, since lenders only report once a month your credit score on October 2nd still shows that $9,000 balance you have since paid off.
Your utilization ratio is the the comparison of your balances to limits and is an important factor in the calculation of credit scores. To preserve your score, experts say that card balances shouldn