There is general confusion regarding the issue of paying credit card balances in full every month.
Sure, avoiding fees and interest is a great concept, but there’s more to the story.
In the mortgage industry, when we review a credit report, our loan decisions are not based solely on the score. We actually read the report. We want to see that an applicant actually uses the credit available to her.
If an applicant is in the habit of sporadically using credit, and then paying the balance in full when she does, then her report—while it may have a good score—may reflect this lack of use of the accounts. We get a bit skittish when we see that.
You might say, “But if I show I use my credit conservatively isn’t that good for the bank? It means I have more resources to pay my mortgage, thus I’m a good risk.” While that’s perfectly logical thinking, you must remember we are rating your entire set of qualifications based on the risk factors for making a loan to you. Therefore, we really do want to see that you use your credit on a consistent basis (and you pay on time, of course).
If you use your card(s) every month, paying them in full as you go, then this isn’t really an issue because we’ll see the activity. It’s those big holes of several months at a time when you don’t use credit that you want to watch for.
That all having been said, truly the only time you want to “worry” about your credit scores and this crazy useage issue is when you are planning on buying a home or a car. Since those are two big purchases, you want to have all your ducks in a row. Otherwise, worrying about your score all the time is a waste of time. Your score will always be good if you pay your bills on time, use your credit wisely and conservatively, and in general maintain an even keel in your credit life.
If you go to my “Links” page, there’s a link to MYFICO.com which explains how credit scores are determined. There are also other good resources there regarding credit.