Secured or unsecured card? To the score it doesn’t matter.

This post originally appeared April 16, 2015 on as “Your low-limit secured card strategy: Pay the bill early, often

By Barry Paperno

Dear Speaking of Credit,
I just opened a secured credit card. I get $200 credit a month. I just used $87.23. I paid it back within three days. So now I am back at $200. My question is: Should I wait until I get my statement to start using my card again? Will it affect my credit score if I pay off my credit balance that fast? Or should I wait until I get my statement to pay off my balance? Thank you. — Larisa

Dear Larisa,
You’re clearly on the right track toward meeting the ongoing challenge of maintaining low credit utilization (card balance/credit limit, expressed as a percentage) on that low-credit limit “rebuilder” card. Whether paying frequently during the month or waiting until you receive your billing statement before making a single monthly payment, I see no reason why you can’t grow your credit score over time to where you’ll easily qualify for unsecured cards having much higher credit limits, rewards programs and other amenities.

Whenever a credit scoring question includes how often and how much to pay each month, we end up talking about the “amounts owed and  payment history” factors within credit scores. Together, they make up about two-thirds of your score. Knowing what kinds of credit report information the scoring formula considers within these categories can make the difference between a steadily climbing score, which can take you to a higher-limit unsecured card, and an average score, which takes you nowhere.

Completely grasping the payment history portion of your score is easy. The only requirement is that you make at least your minimum payments on time each month. That’s it. You get no more points in this category for paying higher-than-minimum amounts or making more than one payment per month.

The amounts owed category, however, is another story. Here, we have a wider range of opportunities to manage the score, above and beyond the standard basic rules of paying on time each month and keeping balances low. This is where the same charging activity can lead to different scoring outcomes according to how much more than the minimum required amount you pay and how frequently you do so between the statement dates (billing cycle). And with low limit cards, such as yours, how you manage your balance each month can be extra-critical for your score, since the distance in dollars between low and high utilization is much smaller with a $200 limit than with a $2,000 limit.

Becoming familiar with the following facts about how credit scores treat limits and balances can be helpful when looking to maximize your credit score — whether using a low or high limit card:

  • Credit scores make no distinction between secured and unsecured cards, though they may be described as such on your credit report. This means that a secured card has the potential to deliver as many points as an unsecured card.
  • As a rule, the lower the utilization percentage the better, with the ideal percentage lying in the 1 to 5 percent range.
  • While credit scores consider utilization on both an individual and combined card basis, the combined utilization percentage that includes all “revolving” type accounts (bank, retail and gas cards) tends to be most important.
  • The card’s balance and credit limit appearing on your credit report and included in your score typically consist of the amounts reported by the card company to the credit bureau as of the statement date.
  • Only the latest reported balances and credit limits have any bearing on your score. No prior balances, limits or utilization percentages have any scoring impact.

Getting back to your questions, I like your method of frequent payments throughout the monthly billing cycle more than simply waiting for the monthly statement before paying. Not only do multiple payments keep your utilization low by keeping your reported balance down, but doing so tends to free up available credit during the month for those unexpected situations when you’re short on cash and want to use the card.

The following examples point out just a few of the variety of ways you can achieve an excellent utilization percentage of 5 percent as of the statement date — which occurs typically about five days after the payment due date. In each of these simulations, we’ll assume a credit limit of $200, a balance as of the previous statement date of $0, and that your credit report shows only this account:

  • You charge $100 during the month and pay $90 just prior to the payment due date, leaving a statement date balance of $10 and a utilization percentage of 5 percent.
  • You charge up to $200 — maxing out the card — during the month and pay $190 just prior to the payment due date, leaving a statement date balance of $10 and a utilization percentage of 5 percent.
  • You charge $150 a few days into the monthly billing cycle and pay $70 twice ($140 total) prior to the payment due date, leaving a statement date balance of $10 and a utilization percentage of 5 percent.

As these examples point out, when it comes to managing your balance on a low limit card, all that matters when the score calculates your utilization percentage are your balance and limit as of the statement date. How you got there during the month is of no importance.

Now having a good grasp of these scoring essentials, a sensible next step might be to estimate how much you’ll want to charge on the card each month and how frequently it makes sense to pay, considering, for example, how often you’re paid and what kinds of purchases make the most sense to put on the card, such as travel expenses and repair bills.

By following this course, over the next year or two you should easily be able to retire that $200 limit secured card and apply these same score-maximizing principles to cards with higher credit limits that can handle higher balances and less frequent payments without compromising that ever-important utilization percentage.

 Have a question or comment?  Let’s hear it!

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