Credit Score Q & A

I just received the following email:

I have a question about credit cards. Which is preferable for FICO score and credit-worthiness in general: to pay off the balance of your card each month or to pay a large % of your bill and leave a small amount “running” on your card from month to month?

I pay mine off each month but several people have issued the opinion that it is “better” for your credit to not pay it all, leaving a small amount on each month.

My rationale has been to pay no interest at all but how do the credit bureaus look at it?

Thank you,
Juanita H.

Juanita, you’re actually asking two different questions. The good news is that they both have very straightforward answers.

Your first question is the one you state directly: how does paying off my entire balance or leaving a little bit unpaid impact your credit score?

STRAIGHTFORWARD ANSWER: It doesn’t matter.

Seriously, it doesn’t matter. When calculating your credit score, the formulas do NOT take into account whether you pay the entire credit card balance each month or just pay part of the bill. (You will get a ding if you go over your limit or if you fail to pay at least the minimum payment on time, however.)

The unasked question you’re also answering is “What should I do given this information?”

STRAIGHTFORWARD ANSWER: Pay the entire balance every month. Period.

Then, find the person who told you that you were better served rolling over some interest and punch him. Okay, maybe not that hard, but certainly tell him what the real deal is.

Do you like Q & A? Perhaps we should make this a regular occurrence. What do you think?

“personal finance” “financial education”