Avoid credit reductions and increase your credit score by being a "freeloader"

When Kevin asked me to write a guest post, I wanted to write about things you can do to counteract the new credit card industry practice focused on higher interest rates and lowering credit card limits.  

One thing you can do is to become a "freeloader".  This is credit card companies call someone who uses their cards but never carries a balance. Now, some folks are out there saying that this behavior can hurt your credit score.  Non-sense.  I have not carried a balance in as long as I can remember and my score has been above 760 for over 4 years and probably longer.  The statement “paying off the entire balance in full each month, the credit bureaus don’t see you as really borrowing any money at all” is flawed. Paying off balances before they are due DOES show something about your credit behavior and IS a good prediction of risk.

Let's get technical about this.  There are 2 key dates when it comes to your credit cards.  One is the "closing date" that's the date that your statement balance snapshot is taken.  The other date is the "due date".   That's the date when you must make a full balance payment to avoid any interest charges.   So let's say your closing date is the 15th and your due date is the 28th.   Let's say you use your cards and your closing date balance is $2,000 on a $10,000 limit card and you pay in full by the 28th.    You will have no interest payments and a credit limit utilization of 20% on this card.  

Say your limit is decreased to $5,000 on this card.  What then?   One way to fight this is to start making an extra payment each month.  Heck, you get paid twice per month most likely so why not?  Let's say you make a $1,000 payment on the 14th and a $1,000 payment on the 28th.  Here, the closing date balance is reduced by your early payment of $1,000 so the the closing date balance is $1,000.  That's the figure reported to the credit reporting agencies, so now your credit utilization is $1,000/$5,000 or still 20%.   You've kept your credit limit usage the same, even with a limit reduction.  

Oh, and did I mention you can set your closing dates and due dates with most card issuers?  It's worth calling them all up and getting all your cards aligned so you know all your bills are due on the same day.

Andy Jolls is the Founder and Chief Education Officer and VideoCreditScore.com.  He was the former executive who ran the consumer FICO business at Fair Isaac and has developed over 100 video episodes, lessons and product reviews of credit products.  

Comments

[liz]

Interestingly, American Express lowered my limit 75% supposedly because we always pay off our monthly credit card bills. They were not happy that we did not carry a balance on any cards (or at least this was the explination that we were offered) Funny how responsibility equates to punishment in thier formula.

[RiceCzeks]

"Also, people who shop with a credit card tend to spend more than a cash-only person...it hurts when you let go off cash but not a piece of plastic that has no value. Last but not least what sick individual wants extra bills every month (credit card bills)?"
Dman, your logic is flawed. There are many people who only spend what they can afford, whether or not they use cash or credit. Also, plenty of people who use cash/debit only end up overdrawing and paying hundresd of dollars in overdraft fees a year.
Also, that 1 extra bill a month you are complaining about? It is one of the greatest organizing tools, ever. I pay for everything on my CC (pay it in full every month). I get my statement organized by category, so every month I get a review of my spending habits. It's so easy to see problem spending areas (and stop them before they get bad) and good spending areas when you get a whole month's list of purchases.
With cash, unless you write it all down or save EVERY single recipt, you don't get that same knowledge as you do with a monthly statement. When you're out of cash too soon every month, how do you know if it's because gas prices went up, or because you were eating out too much if you don't have a record of your spending habbits?
On top of that, as a 25yo with 7 years of perfect credit history, I'll probably save thousands of dollars in interest on my morgtage compared to what you'll be paying.

[larry]

what is your score, dman? you seem a bit self righteous. your advice is totally not practical. you cash conservatives think cash is king. you have to play by the rules. the resaon your dad's credit is so high is in large part because he is so old. your advice says nuthin for a 25 year old trying to build credit quickly... you have to play by the rules, new rules. unless you plan to live in a hut henry thoreau style than cash is not king. i suppose you want to start bartering for goods too and go back to the gold silver... bring back debtors prison etc.

[Dman]

This is just mental...if you can afford to pay in full each month, then why mess with credit cards at all? You say reward points? Please, one late payment and most of your rewards for the last 6 months are gone. Cash back? The best cashback is to spend less. For example, a good small car like a Civic will save you a lot more in gas than an SUV driver using a 5% gas rebate card. Also, people who shop with a credit card tend to spend more than a cash-only person...it hurts when you let go off cash but not a piece of plastic that has no value. Last but not least what sick individual wants extra bills every month (credit card bills)? Pay with debit or cash and its a wrap. As for credit score...my dad is 67 years old. The only debt he has had is installment (mortgage, cars, etc) and his score off myfico.com are 810,817 and 812. His credit file is 45 years old and NEVER missed a payment!!!! His oldest tradeline is a 32 year old Sears card (now a mastercard) and he buys a tank of gas every quarter to keep it active and spends the rest of his days paying cash. My point? You dont need plastic to have a high score.

[Larry K.]

this info was very helpful. i too believed that if you paid your bill during the grace period that it reflected poorly on your score. my score has been high but i always thought it should be higher. now i know it is about where it should be since i pay the balance every month... good stuff