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Ask the Expert – Everyday Money illustration pulling cash out of wallet
Robert A. Di Ieso, Jr.

Q: I pay off my credit card in full every month, but when I checked my credit score it said my balance is too high. I don’t get it. Am I being penalized for paying my balance off?

A: Other than payment history, debt is the second most important factor when it comes to calculating credit scores. While credit scoring models look at debt in a variety of ways, one of the most important calculations is your “debt usage” or “utilization” ratio, which compares the balance on each of your revolving accounts, such as credit cards, to its credit limit. (An overall debt usage ratio, which looks at all revolving balances compared to all credit limits, will be calculated as well.) Higher ratios can hurt your scores. In fact, FICO says that consumers with the highest scores tend to use less than 10% of their available credit.
Your credit scores are based on the information that appears on your credit reports at the time a score is requested. In your case, it sounds like your issuer reports your balance before you’ve made your payment, which is not uncommon. Most issuers report balances around the end of the billing cycle, when the statement is generated.

The way around this? Pay faster. Make a payment early enough that it will be credited to your account before the statement closing date (or the date on which your issuer reports). The reported balance will be lower, and so will your debt usage ratio.

One warning: If you pay your entire balance off early and make no new charges before the end of the billing cycle, your credit reports may list 0% utilization. If that’s the case on all of your revolving accounts, you may not earn a top score. With many scoring models you get some “credit” so to speak, for showing at least some level of utilization.

At this point you may be wondering if this means you get penalized for not carrying a balance (and paying interest) on your credit cards. The short answer is “no.” But if this factor is flagged as affecting your credit scores, you will want to be aware of when your issuers report and try to time your payments accordingly. You’ll want at least one revolving account to show some activity, even if it’s for a small amount.

It’s worth noting that if you are a small business owner, this calculation is one reason why you’ll want to consider using a small business credit card, especially if you make lots of business-related purchases or or carry balances. Most of these cards do not report activity to the owner/cardholder’s personal credit reports unless they default. As a result, those balances won’t drag down the owner’s scores. (This chart describes which business cards report to personal.) However, most of these cards do report activity to at least one of the major business credit reporting agencies, and so those balances could affect your business credit scores.

Gerri Detweiler is Head of Market Education for Nav, which helps small business owners monitor and build strong personal and business credit, and create financially healthy companies. She is the coauthor of Finance Your Own Business with attorney Garrett Sutton. She’s been answering credit questions for more than twenty years. Email yours to her at creditquestions@Nav.com.