Charge a Lot? Pay Early and Often to Avoid Score Damage

Dear Speaking of Credit,

I have always paid off my credit card balances in full every month, for 40 years. I now find I have actually hurt my score. When they report to the bureau it is a moment in time, in my case that could be $25,000. I charge a lot, but I have it on auto payment so it is paid in full when due. Instead the bureau records it as debt and it is counted against me as high utilization of credit limits. Is there an easy way around this? Realizing this phenomenon, I paid everything early (before due) and my scores jumped 25 points per bureau but this should not be required of me.

Thank you,

- Craig

Dear Craig,

You seem to have a clear understanding of how credit card balances are reported to the credit bureaus each month and how this is causing your credit score to suffer via high credit utilization (credit card balance/limit ratio), despite a long history of paying these balances on time and in full each month.

Consumers who charge high amounts and pay them off can see their scores suffer due to high credit utilization. Before talking about how to get around this obstacle to a higher score, I'd like to describe the factors causing this high utilization and point out some of the pros and cons surrounding these credit reporting and scoring practices.

At the root of what we're talking about here is the credit reporting practice of posting a credit card balance to a consumer's credit report that reflects, most commonly, the balance as of the last billing date, or occasionally, the amount owed as of a point in time during the monthly billing cycle chosen by the lender. This is done without regard to whether the consumer typically pays in full, makes minimum payments or pays an amount in between. It's just a snapshot of how much you owe at a particular moment, regardless of when you pay it. As a result, while consumers who charge close to the credit limit and make minimum-only payments tend to expect higher utilization and lower scores than they'd like, people who charge close to the credit limit but pay in full every month are often startled when their scores are not higher than expected.

Along with you, I scratch my head over a credit scoring system that doesn't differentiate between someone who pays only the minimum and someown who pays in full. Common sense would say the person who pays in full is less of a risk, especially when that history of paying in full goes back decades. Much as the score rewards a long history of on-time payments, since research has shown that consumers who pay on time are less risky than late payers, it seems that the same would also be true to some degree for consumers who pay in full each month.

But, even if a better world existed where paying in full was generously rewarded with zero percent utilization, a credit score would never be able to see into the future well enough to know the amount of your next payment when you have the option to pay any amount from the bare minimum to the full balance. For this reason, as long as the possibility remains that you might only pay the minimum the following month, the score would only be able to reward you for past payments in full.

What can you do to protect your score when charging close to the limit and planning to pay in full? The best single piece of advice I can offer is to keep doing what you're doing: Pay multiple times within the same billing cycle as the charges, to ensure that the next reported balance will be zero or as close to it as possible.

The only other advice I'll add is that if you're currently putting all of these charges on a single card, you can further minimize the impact to your score by opening another card with a credit limit high enough to keep some distance between the balance and credit limit at any given time. In fact, as a total solution, I would recommend both of these tactics -- paying early and often, and on more than one card -- to keep both your individual and combined account utilization as low as possible.

Kudos for maintaining at least 40 years of excellent credit management, knowing what makes your credit score tick and understanding that sometimes we all have to do some those "life isn't fair" things, like paying early when you shouldn't really have to.

Hope that helps! Thanks for writing!