Written By: Jen Pieson
Paying your credit card balance off in full every month is a great way to keep your credit score healthy. However, did you know that the timing and amount of these payments can materially affect your score?
Your credit score is made up of many factors, which I’ve written about before. One of these factors is credit utilization, which is the amount you owe compared to the maximum amount you are approved to borrow (your limit). Credit utilization makes up 30% of your credit score. Micropayments are smaller, frequent monthly payments, as opposed to one lump sum payment each month.
Let’s look at some examples. Let’s assume that you use your credit card for $2,000 worth of purchases per month, and let’s further assume that your credit limit is $20,000. You’re typically borrowing about 10% of your limit, which is good as far as your credit score goes (the lower, the better!). You get your June statement, which you owe in late July.
Scenario 1: You pay your June amount near the due date, but you’ve continued to use your card throughout July so now you’ve actually borrowed $3,500 against your $20,000 limit. Now your credit utilization percentage is higher than ideal, so your credit score may be impacted in a slightly negative way.
Scenario 2: Consider, instead, that you pay your $2,000 June balance in the end of June, instead of waiting until the due date. Now your credit utilization has remained around 10%, which means your credit score shouldn’t change, at least in the category of credit utilization.
Scenario 3: Now think about micropayments. If you want to bring your credit score up, consider making four $500 payments throughout the month of June, instead of waiting for that $2,000 to add up. Credit card companies are typically quite amendable to multiple monthly payments; go online and give this a try.
My real-life example: In the past several months I had larger-than normal credit card balances, which started at Christmas and continued with two separate vacations’ worth of flights for my family of five. As a result, my normally solid credit score dipped a couple of points a month for five months. This bothered me, and I decided to test the micropayments theory. During the month of May I did just what I described above; I made smaller weekly payments instead of paying my credit card off as soon as my statement was prepared. The result? My credit score went up 20 points in just that one month. And it was totally painless!
If you want to give your credit score a little boost, give micropayments a try. (Or maybe not so little a boost; I’ve read that this tactic can raise credit scores up to 100 points!) If you have any questions please contact your financial strategist. We’d love to hear if you have success with this strategy!