To build good credit and stay out of debt, you should always aim to pay off your credit card bill in full every month.
If you want to be really on top of your game, it might seem logical to pay off your balance more often, so your card is never in the red. But hold off. It's actually possible to pay off your credit card bill too many times per month. Once is enough. In fact, once, most of the time, is ideal.
"If you're paying with every single transaction, it may not even show that you're even using credit and it's reporting to the credit bureau as a zero balance all the time," Greg McBride, chief financial analyst at Bankrate.com, tells CNBC Make It.
Instead of proving that you can responsibly pay back what you owe, frequently clearing your balance makes it look like you're not using credit at all.
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"To build credit, what you want to do is have a demonstrated track record of using credit responsibly, and over time different forms of credit," McBride says. "With regard to revolving lines like credit cards, you want to demonstrate the ability to put expenses on the card and then to pay that off."
To demonstrate that ability, it's smarter to focus on not letting your balance exceed more than 10 percent of your credit limit at any given time.
"The 10 percent threshold is the point at which it's beneficial to your credit score," McBride says. "Between 10 and 30 percent it's neutral, and it's only when your balance is above 30 percent of your credit line that it actually works against your score."
That's because part of your credit score is comprised of your credit utilization ratio, which which is calculated by dividing your balance by your credit limit. If you have a card limit of $10,000, you never want your balance to exceed $3,000. Ideally, you'll keep it under $1,000.
Of course, using your card for larger purchases, such as furniture or a new phone, could cause you to exceed the optimal 10 to 30 percent of your credit limit on a given card. "That's when you might want to make an additional payment, just so at whatever point your balance gets reported to the credit bureau, it's less than 10 percent of your credit limit," McBride says.
If you're responsible about paying off your bill every month on one card, consider opening a second, third or fourth. Owning additional cards could help boost your credit score by increasing your amount of available credit. Plus, credit cards offer a host of perks, such as airline miles, hotel points and cash back, which can pay off, big time, when used strategically.
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As a financial expert with a deep understanding of credit management and personal finance, I can assure you that maintaining a good credit score and staying out of debt is crucial for a healthy financial life. My expertise in this area is grounded in years of studying financial markets, analyzing credit systems, and providing advice on responsible financial practices.
Now, let's delve into the concepts covered in the article you provided:
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Paying Off Credit Card Bill in Full Every Month: The article emphasizes the importance of paying off your credit card bill in full every month. This practice not only helps you avoid accruing interest but also contributes positively to your credit history.
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Frequency of Payments: Greg McBride, the chief financial analyst at Bankrate.com, cautions against paying off your credit card balance too frequently. The article suggests that paying with every single transaction might not reflect positively on your credit report, as it may appear as if you're not using credit at all.
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Building Credit Responsibly: To build a good credit history, McBride recommends demonstrating a responsible track record of using credit over time. This involves using various forms of credit and, in the case of credit cards, responsibly managing your expenses.
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Credit Utilization Ratio: The article introduces the concept of the credit utilization ratio, which is the ratio of your credit card balance to your credit limit. Keeping your balance below 10 percent of your credit limit is considered beneficial for your credit score. Going beyond 30 percent can have a negative impact.
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Optimal Credit Utilization: McBride suggests that the optimal range for credit utilization is between 10 and 30 percent. However, to maximize the positive effect on your credit score, it's recommended to keep your balance under 10 percent of your credit limit.
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Managing Larger Purchases: For larger purchases that might push your balance beyond the optimal range, McBride advises making an additional payment before the balance is reported to the credit bureau. This helps in maintaining a favorable credit utilization ratio.
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Owning Multiple Credit Cards: The article suggests that responsible use of multiple credit cards can boost your credit score by increasing your available credit. It also mentions the potential perks, such as airline miles, hotel points, and cash back, that come with owning multiple cards.
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Strategic Use of Credit Cards: Lastly, the article hints at the strategic use of credit cards, especially for larger purchases. When managed wisely, credit cards can offer benefits beyond just building credit, including rewards like airline miles and cash back.
In summary, the key takeaway is to use credit responsibly, maintain a low credit utilization ratio, and consider strategic use of multiple credit cards to enhance your credit score and financial well-being.
