Another red flag on credit card use
As if you really need it, here's another reason not to carry a balance on your credit card.
Credit bureaus have started using "time series payment data" — basically a record of your payments in the past several years — that potentially could raise a red flag with lenders.
"Traditionally, credit card accounts on credit reports have contained balance information only as recent as your prior month's statement," said John Ulzheimer, a credit expert, who's president of consumer education at CreditSesame.com.
"The addition of time series payment data to credit reports now allows for the reporting of your balances, the amount due on your credit card accounts and, most important, the amount you actually paid," he said.
That means that if you can't pay your full monthly balance, you should pay as much over the minimum payment as you can. Paying just the minimum makes you look riskier from a lender's perspective.
"Even when you control for credit score, if you're paying just the minimum amount on your credit cards and I'm paying multiple times that, I would be far less risky going forward," said Ezra Becker, vice president of research and consulting for TransUnion's Financial Services Business Unit.
A study last year by TransUnion, one of the three major credit bureaus, found that consumers who carry a balance on new bank credit cards are more than three times riskier than those who pay the balance in full every month.
What's more, "revolvers" (those who carry a balance) are five times riskier on existing bank credit cards than "transactors" (those who pay the full monthly balance), TransUnion said.
So how much over the minimum payment should you pay?
"There's no tipping point," Becker said. "For every multiple you pay over the minimum due, the less risky you are, up to the point where you are the least risky and you're paying in full every month."
That makes sense.
"Not only are you minimizing your interest expense, but now lenders will take account that it actually makes you less risky," Becker said. "Now we still say if you have no other option, pay the minimum due. That keeps you in good standing with the lender. But if you have the wherewithal, it's to your benefit to pay more than the minimum."
Expect time series payment data to be increasingly influential.
"This information is so relatively new that credit scores have not yet been built to incorporate that information," Becker said. "We are now just coming out with credit scores that do incorporate the information, and we find that they have massive predictive power improvements over traditional credit scores."
Experian, another credit bureau, said it's been providing time series payment data — what it calls "credit trends" — to consumers for many years.
"However, since the (economic) downturn and additional regulatory scrutiny, almost all lenders now report this information to the credit reporting agencies, so it is transparent and available to consumers on their credit report," said Kristine Snyder, Experian spokeswoman.
The information allows consumers to track the amount of their payments and can help them budget and plan as they pay down debt or choose when to revolve balances, she said.
"The information also provides the consumer tangible proof that they are making payments and shows a trend of responsible use of credit," Snyder said.
The third credit bureau, Equifax, said it provides lenders access to two years of consumer balance, payment and credit utilization data.
The data "gives our customers a window to look further into consumer credit trends so that they can make more informed lending decisions to therefore increase profitability," said John Cullerton, Equifax senior vice president of product innovation and management.
The bottom line for consumers? The assumption that "as long as I make my payments on time, I have good credit" is no longer accurate, Ulzheimer said.
"Consumers who want to earn the highest scores are going to have to start using their credit cards in such a way that it allows them to pay in full each month, rather than simply paying some lesser amount before the due date," he said. "Point being, there's yet another reason to not carry a credit card balance."
Pamela Yip is a personal finance columnist for the Dallas Morning News. Reach her at email@example.com.