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oneirix
Posts: 4
Registered: ‎03-18-2013
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Help understanding credit cards & the best way to use them

Hey all! I'm new to the credit card thing (just got my REI Visa in February) and I'm hearing conflicting advice over the best way to use a credit card in order to build credit (plus, I don't understand much of the language surrounding credit and credit usage). I'd like to hear some definitive counsel on how to use a credit card most responsibly and most beneficially to my credit score. My specific questions are:

 

  1. What does it mean to "carry a balance"? Is it a good or bad thing to not entirely pay off a credit card balance when it's due? Some people say to leave like, $10 on, let that accrue interest, and then pay it off next time.
  2. Should I pay off my entire credit card balance before it's due (or by the due date), or should I just pay the recorded balance due? For example, say I have a bill due on 4/10 for a balance accrued from 2/23-3/15 for $150. However since then, I've continued to use my card so now the balance is $230. Should I pay $230, or just $150?
  3. What is credit utilization? When someone says to keep your credit utilization below 9%, what does that mean?
  4. When a bill comes around for a credit card, does that mean that amount needs to be paid down no matter what? Is it best to have an account balance of $0 on the bill due date? Using the previous example, say I have a bill due on 4/10 for $150 with a full balance of $230. I pay off the entire $230 two weeks before the bill is due. Since then, I've accrued a balance of $200. Do I have to pay $150 again on 4/10?
  5. With regular, responsible usage of a single credit card and no outstanding loans or any other types of credit, how much can one expect one's credit score to increase in one year?

That's all I can think of right now. Please let me know if my scenarios were confusing, and thank you in advance for any help you guys might have to offer! :cathappy:


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HiLine
Posts: 2,878
Registered: ‎10-19-2012
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Re: Help understanding credit cards & the best way to use them


oneirix wrote:

Hey all! I'm new to the credit card thing (just got my REI Visa in February) and I'm hearing conflicting advice over the best way to use a credit card in order to build credit (plus, I don't understand much of the language surrounding credit and credit usage). I'd like to hear some definitive counsel on how to use a credit card most responsibly and most beneficially to my credit score. My specific questions are:

 

  1. What does it mean to "carry a balance"? Is it a good or bad thing to not entirely pay off a credit card balance when it's due? Some people say to leave like, $10 on, let that accrue interest, and then pay it off next time.
  2. Should I pay off my entire credit card balance before it's due (or by the due date), or should I just pay the recorded balance due? For example, say I have a bill due on 4/10 for a balance accrued from 2/23-3/15 for $150. However since then, I've continued to use my card so now the balance is $230. Should I pay $230, or just $150?
  3. What is credit utilization? When someone says to keep your credit utilization below 9%, what does that mean?
  4. When a bill comes around for a credit card, does that mean that amount needs to be paid down no matter what? Is it best to have an account balance of $0 on the bill due date? Using the previous example, say I have a bill due on 4/10 for $150 with a full balance of $230. I pay off the entire $230 two weeks before the bill is due. Since then, I've accrued a balance of $200. Do I have to pay $150 again on 4/10?
  5. With regular, responsible usage of a single credit card and no outstanding loans or any other types of credit, how much can one expect one's credit score to increase in one year?

That's all I can think of right now. Please let me know if my scenarios were confusing, and thank you in advance for any help you guys might have to offer! :cathappy:


Welcome to the forums! Sounds like you're very new to credit indeed. If you want to learn some of the basic concepts, feel free to check out my blog: http://hiepsfinance.wordpress.com/credit-builders/

 

 

Let me give you very quick responses:

 

1. Carrying a balance means leaving a balance past the payment due date

2. Always pay off the balance before the due date: http://hiepsfinance.wordpress.com/2013/03/27/do-you-need-to-carry-a-balance-to-build-credit/

3. That's a credit scoring term, determined as the ratio of statement balance to credit limit.

4. The minimum is what you have to pay before the due date. But you should pay off the entire balance before the due date.

5. It varies a lot, mostly depending on your starting point.

 

Valued Contributor
SnackTrader
Posts: 1,566
Registered: ‎09-15-2012
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Re: Help understanding credit cards & the best way to use them

Hey oneirix!

Welcome to the boards, and welcome to the credit game!

I'll try to offer some help here, and may overlap some of what HiLine said.

1. Carrying a balance means not paying off all purchases you make in a statement period by the due date (or end of the grace period). So if you buy $100 worth of stuff, you need to pay all $100 by the next due date in order to avoid interest. If you only make the minimum payment, you will be "carrying a balance" and then pay interest on that carried balance.
2. You should pay off your entire balance whenever you can! But at the very least, I suggest paying it off entirely by the due date. The balance due is only a minimum payment, and paying only that will cause you to pay interest. In your example you should pay $150, but paying all $230 will show very good payment history.
3. Utilization is current balance/credit limit in percentage form. But the trick with utilization is that creditors only know what balance is reported to the credit bureaus, so even if you pay your balance to $0, you need to wait for that to report to the credit bureaus before your utilization is actually 0%.

My post in this thread should help:

http://ficoforums.myfico.com/t5/Credit-Cards/Best-ratio-of-balance-for-multiple-cards/m-p/1898337#M5...

4. In your scenario, you already paid off what was required of you and the remaining $200 won't be due until 5/10. This would be considered paying in full, and I highly suggest following this approach. But whatever you do - ALWAYS pay minimum due by your due date. If you ever have a question about what is due and when it is due, call your lender.
5. I agree that this will vary. But if you have an otherwise clean history, your first card will certainly help your score and will prepare you well for future credit. Remember, it's not all about scores! What is inside your report is just as important, and in general as long as you stay away from late payments, collections, and charge offs you will have a strong score.

Feel free to keep the questions coming. All of these will help others who have similar questions.

In My Wallet: Amex BCP (12/12) $22.200, Cap1 Quicksilver (6/12) $14,000, Chase CSP (4/14) $12,000, Barclaycard Rewards (5/13) $10,500, Citi Forward (12/12) $9,600, Chase Freedom (12/12) $5,000

Last App: April 2, 2014
New Member
oneirix
Posts: 4
Registered: ‎03-18-2013
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Re: Help understanding credit cards & the best way to use them

Thanks so much for your detailed response! I'm still a little bit unsure on some details though. So I get that it's best to pay off a bill in full before the due date no matter what, and that makes sense to me. But in the scenario I laid out, that $150 isn't the minimum payment, it's the full balance due on 4/10 (the minimum payment is something like $30). So would it be bad for my credit to leave that extra $200 that I've accrued until the next payment due date? 

 

Just to be clear (more for myself than for you! These things are hard on my brain), my scenario could go something like this (the dates and amounts are arbitrary):

 

Feb 28 - March 15: $150 on small purchases

March 16: Bill for $150 due on April 10, wth a minimum payment of $30

March 17: Payment of $150 made, account balance goes to $0

March 18 - April 10: $230 made on small purchases

 

So by April 10, should I have that extra $230 paid down? Would I accrue interest on it, even though I paid the bill in full on March 17?

 

I'm sorry if you already answered this question and I just didn't understand it! Really breaking it down helps me. Thank you again!


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oneirix
Posts: 4
Registered: ‎03-18-2013
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Re: Help understanding credit cards & the best way to use them

Thanks HiLine! I appreciate your response. I read through your blog entries and they were very helpful as well! I still have a couple questions though. For one, when is my account activity reported to CRAs? Is there a way to find this date out, or is it just more or less around the time a bill is due? And just to be clear on my point 4. the $150 was the entirety of the bill due at that time, not the minimum payment (the minimum payment is something ridiculously low likw $15). After paying the bill in full weeks before the bill due date, I accrued a balance greater than the original bill, for which I have not gotten an additional bill for yet. So I'm wondering if I'll accumulate interest on that amount, even though I paid the bill in full before the due date?

 

Thank you again! The help I'm getting on these forums is really wonderful. :smileyhappy:


Starting Score: TU 739 EQ 713 EX 731
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SnackTrader
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Re: Help understanding credit cards & the best way to use them

By April 15th, paying down the remaining $230 to between 1-9% of your credit limit will help in optimizing your score. There is really no benefit to doing it by the 10th, since the balance on the 15th is likely to be reported to the credit bureaus for other creditors to see. That would be considered paying the balance down before the statement cuts.

The $230 would not accrue interest until May 10th because it was purchased during the March/April statement cycle.

It's a funny game, since logic would tell you the balance would be reported to the bureaus based on what you paid on the due date. But for most creditors (not all, check with your lender to be sure) they report the statement end date balance to show what was purchased and paid off during that statement cycle.

In My Wallet: Amex BCP (12/12) $22.200, Cap1 Quicksilver (6/12) $14,000, Chase CSP (4/14) $12,000, Barclaycard Rewards (5/13) $10,500, Citi Forward (12/12) $9,600, Chase Freedom (12/12) $5,000

Last App: April 2, 2014
New Contributor
annebythesea
Posts: 96
Registered: ‎04-01-2013
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Re: Help understanding credit cards & the best way to use them


SnackTrader wrote:
By April 15th, paying down the remaining $230 to between 1-9% of your credit limit will help in optimizing your score. There is really no benefit to doing it by the 10th, since the balance on the 15th is likely to be reported to the credit bureaus for other creditors to see. That would be considered paying the balance down before the statement cuts.

The $230 would not accrue interest until May 10th because it was purchased during the March/April statement cycle.

It's a funny game, since logic would tell you the balance would be reported to the bureaus based on what you paid on the due date. But for most creditors (not all, check with your lender to be sure) they report the statement end date balance to show what was purchased and paid off during that statement cycle.

So then a person has, depending on when they made their purchases in the statement cycle, >30 days to pay that charge before the interest kicks in? Sorry, still confused on how the bill due date and statement due date and interest work. 



Starting Score: MyFico EQ 694 (3/2013)
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Valued Contributor
SnackTrader
Posts: 1,566
Registered: ‎09-15-2012
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Re: Help understanding credit cards & the best way to use them

Yes. That is called the grace period.

If you make a purchase on March 16 in your scenario, you would not have to actually pay for that purchase until May 10th. The purchase occurs during the March/April billing period, which is due in May.

Pretty fantastic way to use credit cards. It basically eliminates any timing issues between paychecks and purchases if used properly and paid in full. If you don't pay in full from month to month all of the guidance I just gave you goes out the window. Interest kicks in and it is a tough cycle to break.

In My Wallet: Amex BCP (12/12) $22.200, Cap1 Quicksilver (6/12) $14,000, Chase CSP (4/14) $12,000, Barclaycard Rewards (5/13) $10,500, Citi Forward (12/12) $9,600, Chase Freedom (12/12) $5,000

Last App: April 2, 2014
New Contributor
annebythesea
Posts: 96
Registered: ‎04-01-2013
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Re: Help understanding credit cards & the best way to use them

Wow. Thank you so much for the clarification. As soon as I get the balance paid off on my Citi card, I am totally doing that. I like the idea of having a grace period like that where I can pay it off with the following week's pay check if need be without getting charged interest.

 

Of course, like you said, this means I have to buy within my means. Which, I need to get better at. :smileyhappy:



Starting Score: MyFico EQ 694 (3/2013)
Current Score: MyFico EQ 707 (4/1/2013), EX 734 (4/12/2013 - AMEX pull)
Goal Score: 740+, gardening since: 5/17/13



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HiLine
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Re: Help understanding credit cards & the best way to use them


annebythesea wrote:

SnackTrader wrote:
By April 15th, paying down the remaining $230 to between 1-9% of your credit limit will help in optimizing your score. There is really no benefit to doing it by the 10th, since the balance on the 15th is likely to be reported to the credit bureaus for other creditors to see. That would be considered paying the balance down before the statement cuts.

The $230 would not accrue interest until May 10th because it was purchased during the March/April statement cycle.

It's a funny game, since logic would tell you the balance would be reported to the bureaus based on what you paid on the due date. But for most creditors (not all, check with your lender to be sure) they report the statement end date balance to show what was purchased and paid off during that statement cycle.

So then a person has, depending on when they made their purchases in the statement cycle, >30 days to pay that charge before the interest kicks in? Sorry, still confused on how the bill due date and statement due date and interest work. 


If you carry a balance past the due date, you lose the grace period for the next billing cycle and get charged interest immediately for your purchase. So be careful.

 


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