Get the most bang for your monthly payment buck

This post originally appeared April 13, 2017 on as “‘How and when to pay new cards to boost credit score

By Barry Paperno

Dear Speaking of Credit,
I have a couple of open credit card accounts that, in my mind, should be paid off as soon as possible. However, I’ve been advised that leaving them open, paying a little more than the minimum due and paying a few days earlier than the due date each month will increase my credit score. It was further explained that anything less than a year of credit reporting is not beneficial. I can pay off my store card account next month (and was planning to do so), but was advised to leave it open until at least September, which was when the account was opened. Which would you recommend for the best result and outcome for me? – McLean

Dear McLean,
I hope you don’t mind me using your excellent question to point out how the truth about credit scoring is often mixed with some long-held misconceptions. When acted on, these misconceptions can not only prevent your score from rising, but actually send it down.

Let’s look over the scoring issues you’ve raised to see whether you should be:

  • Paying a little more than the minimum due.
  • Making your payment a few days earlier than the due date each month.
  • Concerned that less than a year of credit reporting is “not beneficial.”
  • Paying off the store card next month and, as advised, leaving it open.

Paying a little more than the minimum due
As you know, the more you pay on those open cards, the more your balances drop. You might also know that those lower balances will reduce the credit utilization ratio that measure credit usage – in other words, the amount of credit you’re using compared to the total credit available to you.

  • Naturally, the more your utilization ratio drops, the less risk you present as a borrower, and the higher your score will climb.
  • Paying the minimum payment on time each month is certainly enough to maintain a positive payment history. However, you will have to pay much more than the minimum – all the way up to a total payoff – before making the kind of utilization dent that can raise your score.

Making your payment a few days earlier than the due date each month
Paying down much more of the balance is likely to provide a much lower utilization ratio. If you pay, however, much more and do it sooner – such as before the prior statement/closing date – you can make for at least a couple of additional scoring pluses:

  • When carrying a balance from month to month, paying before the prior statement/closing date leads to lower finance charges thanks to a lower average daily balance earlier on.
  • When paying the statement balance in full each month, paying early in this way can lower the balance that directly impacts your utilization ratio and more quickly help your score.

Concerned that less than a year of credit reporting is “not beneficial”
No doubt, a recently opened account of any kind can knock some points from your score because it lowers your “average account age” – the total months of all accounts on your credit report from the open dates to the present, divided by the number of accounts. But there can also be a brighter side to having new accounts on your credit report:

  • A new card’s credit limit is added to the overall “total credit limits” portion of the utilization factors that measure your overall card usage (total balances/total credit limits). The higher this denominator is, the better the overall utilization ratio your score will see.
  • Should your credit report show any past late payments, a new card with a positive – though short – history can help your score by raising your proportion of good (paying on-time) to bad (late-paying) accounts.

Paying off your store card next month and, as advised, leaving it open
Your question implied that paying off a card might automatically close it. On the contrary, there is nothing to prevent you from paying off your card and leaving it open well beyond its first birthday. Cards are different than loans in this respect. Paying an installment loan in full will automatically close it, while a card can remain open with a $0 balance indefinitely.

A to-do list of recommendations for you
Here are a few tips that will help you increase your credit score while better managing your card payments:

  • Since you’ve said you can pay at least one credit card off entirely, there’s no good (scoring) reason to wait. Or, in the absence of any other card balances, stop just short of paying every bit of the balance, leaving about 1 percent utilization on one card each month to show some recent activity along with the low debt.
  • Don’t simply make your payments a few days before the due date each month – pay weeks earlier than that. That is, pay for purchases before they appear on the statement. Getting a jump on your balance in this way can lead to lower statement balances – and higher scores more quickly – than if you wait for charges to post before paying.
  • Don’t close either card – keep them open and active instead. In addition to the scoring benefits of open cards already mentioned, the longer both credit cards are allowed to remain on your credit reports the more good they can do for your average account age and other factors that consider the length of your credit experience. By keeping an account minimally active with a charge or two every few months, you can prevent the lack of activity from causing the card company to close the card, and eventually drop it from your credit reports and scores.

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