Credit card myths?

[chris p bacon]

 Most people want to borrow something, some time. Whether for a house, or a car, or a holiday.

 

 

Going OT a bit,   I get the first two but I've never understood why people borrow for a holiday. I have someone work for me who had a Holiday in the US on a credit card, his 14 days of fun took 2+ years to pay off, I thought he was mad (and I know what he's paid, he could have easily paid with a months take home) I reckon he paid at 30% more than he actually spent.

[Metr0Land]

Not in the slightest. Unless you want to borrow at some point in the future. Most people want to borrow something, some time. Whether for a house, or a car, or a holiday.

 

 

Something people who don't use credit very often might overlook is the 'pay nothing for 6 months' type deal on big ticket items.  There'll be a credit check somewhere in the background, even if you intend to pay in full at the expiry of the free period.

[JJGraphics]

It's easier to deal with fraudulent transactions on a credit card. With a debit card the fraudsters can take your money out of your bank account (which can mess up your direct debits, mortgage payments etc) until the bank sorts things out. With a credit card they are taking the bank's money, so the impact on you is less. I always use my credit card online, if if it means coughing up a quid or two more.

 

Absolutely agree.

 

My Debit Card stays in a drawer at home and rarely sees the light of day unless I need to withdraw cash from an ATM.

[GeoffAlan]

I stopped using my 2 credit cards a couple of yrs ago. Paid off they sat in my safe until I might need them. One came up for renewal last month and I got a letter from them, saying they'd send me a replacement if I wanted one, but not unless I replied asking for it. I didn't. But I've just spent some money on one other card, due for replacement in a couple of months, to avoid losing that one. I feel having a credit card as a back up is useful.

[cctransuk]

We clear ours every month - we have a direct debit to transfer the full balance from our current account.

 

We have encountered no adverse effects, to the best of our knowledge.

 

Regards,

John Isherwood.

 

 

There are credit cards, and then there are credit cards! Shop around, is my advice.

 

We have a Barclaycard which charges no monthly fee, and pays a credit of 1.5% or 0.5% of the total spend monthly, depending on the category of transaction.This month, the total credit was approximately £24 - though we do use the card for everything.

 

As we clear the balance each month we pay no interest, so Barclaycard are effectively paying us to use their card. They get a commission from each retailer, of course.

 

Regards,

John Isherwood.

[Super D]

Definitely, clear the whole balance.

 

But don't hide the cards away either. Keep using them at a low level, such as filling up with

petrol, and payment off in total each month. That is the best route to a high credit rating.

Paying off your balance each month does not improve your credit rating - quite the reverse.

[eastwestdivide]

Something from Tesco Bank on "credit card myths":

https://www.tescobank.com/credit-cards/guides/credit-card-myths/

where they say

a) two of the myths are:

"Leaving a small balance each month will help my credit score"

"Paying off my credit card in full every month improves my credit rating"

 

and

b) not a myth: "Your credit score mostly depends on whether or not you've missed payments in the past, and, if you have, then it could take up to six years for these to clear"

 

[royaloak]

Paying off your balance each month does not improve your credit rating - quite the reverse.

You are basically saying that paying off my credit card every month is damaging my credit rating, Proof please?

 

Because everything I have read states the complete opposite!

Edited March 16, 2018 by royaloak

[Mark Saunders]

Paying off your balance each month does not improve your credit rating - quite the reverse.

 

But it does improve your bank balance!

[chriswright03]

You are basically saying that paying off my credit card every month is damaging my credit rating, Proof please?

 

Because everything I have read states the complete opposite!

Another myth.  There is no proof.  Paying it off each month cannot damage your credit rating but it does show that you are credit worthy.  Quite a lot can affect your credit rating including applying for another credit card because it can look like you are spending beyond your means.  However after a short while your credit rating will go back up when it is seen beyond doubt that you are not spending beyond your means and still paying off what you owe.

 

We only ever use Barclaycard and use it for most stuff except supermarket food purchases.  We always pay it off at the end of the month and benefit from cash back.  In fact I had more cash back from it last year than interest from my ISA!  It makes sense to me to take advantage of the cash back offer rather than pay by debit card where there is no incentive.

 

So back to the question by the OP.  Pay it all off every month and never pay any interest at all.

 

How someone can actually state that paying it off every month damages your credit rating baffles me.

[JJGraphics]

Paying off your balance each month does not improve your credit rating - quite the reverse.

I do not think that is the case. Running up a debt and showing the ability to pay it off is the way a credit rating is improved.

[phil-b259]

Another myth.  There is no proof.  Paying it off each month cannot damage your credit rating but it does show that you are credit worthy.  Quite a lot can affect your credit rating including applying for another credit card because it can look like you are spending beyond your means.  However after a short while your credit rating will go back up when it is seen beyond doubt that you are not spending beyond your means and still paying off what you owe.

 

 

How someone can actually state that paying it off every month damages your credit rating baffles me.

 

I think the logic is that people who pay off their card cost the bank money while those who don't generate income for the bank in interest charges.

 

Thus, if you are a bank, the most profitable customers to have on your books are going to be people who don't pay off the balance each month (but who are not in the situation where they are struggling to pay anything at all, obviously).

 

Its what might be called the 'Goldilocks' position in bank lending terms.

 

So if you have a good credit score by paying off all your credit cards in full all the time, it could work against you in the sense that you do not represent a 'profitable customer' for the bank and as such they are less inclined to want to offer you the best deals as it won't generate them much income.

[PaulCheffus]

So if you have a good credit score by paying off all your credit cards in full all the time, it could work against you in the sense that you do not represent a 'profitable customer' for the bank and as such they are less inclined to want to offer you the best deals as it won't generate them much income.

Hi

 

However why would I want their best deals as I don’t pay interest anyway due to paying the card off in full each month.

 

Cheers

 

Paul

[njee20]

Yes, the idea that paying it off worsens your credit rating is daft.

 

Various things worsen your credit rating:

- missed payments

- lots of applications

- high cost short term credit applications ('payday loans')

- exceeding credit limits

 

If you have a good credit rating then paying your balance will likely not improve it, rather it'll keep it constant. If you have a very bad credit rating then it could be improved by making on time repayments.

 

Any bank which seeks to penalise customers with a good credit rating is pretty daft. I'm not aware of anyone who prices in that way.

[cctransuk]

The idea that paying off your CC balance monthly damages your credit rating sounds to me like a good conscience-easer, invented by those who can't or won't pay it off monthly !!

 

Regards,

John Isherwood.

[chriswright03]

I think the logic is that people who pay off their card cost the bank money while those who don't generate income for the bank in interest charges.

 

Thus, if you are a bank, the most profitable customers to have on your books are going to be people who don't pay off the balance each month (but who are not in the situation where they are struggling to pay anything at all, obviously).

 

Its what might be called the 'Goldilocks' position in bank lending terms.

 

So if you have a good credit score by paying off all your credit cards in full all the time, it could work against you in the sense that you do not represent a 'profitable customer' for the bank and as such they are less inclined to want to offer you the best deals as it won't generate them much income.

That logic is flawed.  Banks give out credit cards to make it easier for people to buy things when they don't have the cash.  They do this in the full knowledge that many, if not most will not be able to pay the full balance off and will incur interest charges.

 

If you are in a position to pay off the card at the end of every month it is highly unlikely that to do that you will keep a bundle of cash under your mattress.  More than likely the money to pay it off will be kept in the very bank where the card was issued and therefore earning the bank interest on a daily basis.  Therefore you are a profitable customer.

 

Having checked my credit score a couple of times in recent years I can say it has not changed by my insistence of paying off the card every month in full.  The statement saying it 'could' work against me or anyone else in that position is right in as much as it could if the banks thought the way you suggest but they don't and it doesn't.

 

In effect a credit card and the offers they have are just loss leaders.  Much the same as someone offering a magazine free for three months but taking your direct debit details in case you don't cancel.  They know many people will either forget or just not bother to cancel.  Same as Insurance companies trying to do you a favour by getting you to agree to continual direct debit to save you the hassle of making sure your insurance doesn't lapse.  Once more they know a high percentage of people will just go with that rather than check to see if they are being ripped off.

 

For the avoidance of doubt.  Paying off your credit card in full each month does not make your credit score worse.

[caradoc]

Paying off one's credit card balance in full every month (as I and many others here do) surely proves that the individual makes efficient use of their card, by obtaining the benefits without having to pay extra (ie interest) and can therefore be trusted to manage their finances correctly ?

[jjb1970]

Banks and financial service companies aren't charities and make money from lending (amongst other things). Therefore it is logical that their most valued customers would be those paying interest but who are also low risk. Money has a price like anything else.

[caradoc]

Banks and financial service companies aren't charities and make money from lending (amongst other things). Therefore it is logical that their most valued customers would be those paying interest but who are also low risk. Money has a price like anything else.

 

Agree absolutely, but I had always assumed that 'credit rating' was based on a person's likelihood, or not, to be able to pay back what they had borrowed, through whatever means, rather than their profit value to the lender ?

[jjb1970]

Agree absolutely, but I had always assumed that 'credit rating' was based on a person's likelihood, or not, to be able to pay back what they had borrowed, through whatever means, rather than their profit value to the lender ?

Indeed, a fair point. I suspect their is an inter relationship in that credit rating will be based on risk and willingness to lend will be influenced by profit to the lender, with the two things being connected.

[jjb1970]

I am not against credit and when used sensibly it is a powerful tool and financial lubricant, whether to facilitate major purchases/investments such as taking a mortgage to buy a house or to assist with short term needs. However whilst it is not really for me to judge others I must admit I d look at some of the things bought on credit and how people run up huge debts and find it all a bit bonkers. Holidays have been mentioned, I knew a bloke who managed to fund a gambling addiction on credit for quite a period, which was very sad.

[njee20]

What about toy trains? Sure many people are using credit to fund purchases!

[jjb1970]

What about toy trains? Sure many people are using credit to fund purchases!

I'm sure some are, it's not something I'd run up credit for but if others do then it's their call.

[The Stationmaster]

Going OT a bit,   I get the first two but I've never understood why people borrow for a holiday. I have someone work for me who had a Holiday in the US on a credit card, his 14 days of fun took 2+ years to pay off, I thought he was mad (and I know what he's paid, he could have easily paid with a months take home) I reckon he paid at 30% more than he actually spent.

 

Just after I retired I was given a 'free' session with a 'financial advisor' and he went through all the incomings and outgoings and one of the questions he asked was about any outstanding loans to pay for holidays.  I asked him if he was joking as I said that if I couldn't afford to go on holiday then I wouldn't go, it had never even occurred to me to borrow to pay for a holiday and he told me that 'lots of people' take out a loan to pay for a holiday.

 

As JJB has said credit does have its place for certain things and it can be handy - at a cost - for spreading costs instead of paying for something in a lump but that's about it.  I use my credit card for occasional purchases but mainly for vehicle fuel and pay it off every month so it usually works out as a free loan.

[jjb1970]

I should clarify that using a credit card and paying it off in full at the end of the month is very different from the sort of credit I've been talking about which incurs charges and is generally used to spend beyond immediate means. That can also make sense for some big ticket items or if you get a 0% offer.