Author Topic: Pay off everything but $5?  (Read 10148 times)

ichangedmyname

  • Bristles
  • ***
  • Posts: 420
    • Luxe Frugality
Pay off everything but $5?
« on: September 25, 2013, 10:39:03 PM »
I applied for a credit card for the first time. I have non existent credit history so my credit limit is $300. My husband is telling me to use it for gas or groceries but not to pay it off fully every month. His reasoning is that the credit bureau would like to know that I can revolve credit. Pay off everything but $5 and pay interest on that therefore building my credit score.

I don't agree with this. Everything I've read so far is saying the complete opposite. Pay on time, avoid paying interest and build your credit score by being a good consumer.

Thoughts? Just to settle the argument. Thanks :D

travelbug

  • Bristles
  • ***
  • Posts: 261
  • Location: Australia
Re: Pay off everything but $5?
« Reply #1 on: September 25, 2013, 10:45:02 PM »
I have never ever done this, I pay mine off in full each month. I have for 19 years. I am not sure what the credit score would be with $5 plus interest, but I know my CC company treat me really really well and never question if something has to be reversed or anything.

I have not heard of this method.

catccc

  • Handlebar Stache
  • *****
  • Posts: 1681
  • Location: SE PA
Re: Pay off everything but $5?
« Reply #2 on: September 25, 2013, 10:46:22 PM »
AFAIK, this is rubbish.  Personal experience- have not paid a dime in interest in my life, but use CCs for everything, and credit score is excellent.
Pay it all off on time every month.

ichangedmyname

  • Bristles
  • ***
  • Posts: 420
    • Luxe Frugality
Re: Pay off everything but $5?
« Reply #3 on: September 25, 2013, 10:49:55 PM »
Thank you!
Me-2, Hubby- big fat zero :D

athomeintheworld

  • Bristles
  • ***
  • Posts: 299
Re: Pay off everything but $5?
« Reply #4 on: September 25, 2013, 10:58:31 PM »
Have never carried a balance, always paying in full each month.  Recently purchased a house, credit score >800.  You do NOT need to carry a balance or pay interest.  Having the account open and in good standing builds credit.

RootofGood

  • Handlebar Stache
  • *****
  • Posts: 1361
  • Age: 39
  • Location: North Carolina
  • Retired at age 33. 5 years in, still loving it!
    • Root of Good
Re: Pay off everything but $5?
« Reply #5 on: September 25, 2013, 11:04:18 PM »
Keeping $5 balance will also mean your grace period for 0% interest on new purchases is gone.   Under most cardmember agreements, you only get a grace period (aka FREE LOAN FROM THE CC COMPANY) if your previous balance is paid in full each month. 

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27889
  • Age: -999
  • Location: Traveling the World
Re: Pay off everything but $5?
« Reply #6 on: September 25, 2013, 11:06:39 PM »
Pay it off after the monthly bill, before the due date.  You won't pay any interested, but it will show utilization on your credit score.

If you pay it off before the bill even happens, so that the bill is $0, it won't, and in that case your husband would be right.

So pay in full, don't pay interest.

Thank you!
Me-2, Hubby- big fat zero :D

Also, don't keep score in a marriage.

But good job.  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

FiveSigmas

  • Bristles
  • ***
  • Posts: 488
Re: Pay off everything but $5?
« Reply #7 on: September 25, 2013, 11:16:33 PM »
What everyone else has said. There's no reason to keep a balance past the payment due date. It won't improve your credit score.

Keeping $5 balance will also mean your grace period for 0% interest on new purchases is gone.   Under most cardmember agreements, you only get a grace period (aka FREE LOAN FROM THE CC COMPANY) if your previous balance is paid in full each month. 

This is an excellent and often missed point that credit card companies don't make very clear. Do a search for "residual interest" for more info.

Adventine

  • Handlebar Stache
  • *****
  • Posts: 1256
  • Age: 30
  • Location: Manila, Philippines
Re: Pay off everything but $5?
« Reply #8 on: September 26, 2013, 12:31:30 AM »
Nah, just like what the others have said, just pay it off in full every month and your credit score will increase in no time. :)

RootofGood

  • Handlebar Stache
  • *****
  • Posts: 1361
  • Age: 39
  • Location: North Carolina
  • Retired at age 33. 5 years in, still loving it!
    • Root of Good
Re: Pay off everything but $5?
« Reply #9 on: September 26, 2013, 07:34:18 AM »
This is an excellent and often missed point that credit card companies don't make very clear. Do a search for "residual interest" for more info.

I figured this out in an unfortunate way when Bank of America "lost a check in the mail"* (among other sketchy things that happened with that CC).  The payment was late, late fees were assessed, and interest started to accrue immediately as soon as I bought anything. 

A quick calculation says for every $1000 in monthly spending you have, you save $9 per month by graciously allowing the credit card company to give you a free short term loan each month ( $1000 * 1.5 months average interest free period * 7% opportunity cost / 12 months ).  Do this for a year and you have saved over $100.  And who only spends $1000 per month on a credit card?  The savings could add up to many hundreds of dollars per year if you spend a more typical $2000-3000 per month on your credit card. 

On top of that, getting 1% to 2% in cash back or rewards points for your everyday purchases is simple with a variety of credit cards in the market today.  $1000 monthly credit card spending yields another $120-240 per year in cash back. 




* pre-simple internet automated payments, and it was for a card I wasn't going to keep long term, so I didn't do auto payments.

No Name Guy

  • Bristles
  • ***
  • Posts: 450
  • Location: Western Washington
Re: Pay off everything but $5?
« Reply #10 on: September 26, 2013, 08:10:26 AM »
One other side note besides paying it off in full every month on time:  With a limit of only $300, your "utilization" will be high if you come close to the limit.  Don't charge more than about $100 / month, tops, on it.  After say 6 months or a year of perfect, on time, in full payment history, ask for the limit to be raised.

See:
http://www.myfico.com/crediteducation/whatsinyourscore.aspx
and more specifically
http://www.myfico.com/CreditEducation/Amounts-Owed.aspx
Quote
Having a low credit utilization ratio can be better than having a high one, or none at all.
and
Quote
Someone who is close to "maxing out" several credit cards has a high credit utilization ratio and may have trouble making payments in the future.

although some what contradictory to the earlier statements and actually agreeing with what the hubby said:
Quote
In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all.
 

That said, I still wouldn't carry a balance, just as a matter of principal.  Also it sets the habit in your mind of only charging what you can actually pay off in full every month.

galliver

  • Handlebar Stache
  • *****
  • Posts: 1890
Re: Pay off everything but $5?
« Reply #11 on: September 26, 2013, 08:37:58 AM »
And who only spends $1000 per month on a credit card?

Who spends more? Actually, I realize that if the card/account is shared between a couple and there are kids involved it would be more. But I see no reason for a single, frugal adult to spend more on a CC (i.e. in consumer spending) than myself. In fact, there is every reason I should be spending LESS. My total monthly CC bill is probably around $1000 on average (split between two for better rewards)...and that would be including high months like when I buy airline tickets. Things that aren't included: rent and utilities. It would cost me a transaction charge to put rent on there, so it's not worth it, and utilities are in my roommate's name.

Oh, and business travel. That would probably add to it, if you put it on your card and get reimbursed. But these are special cases. "Who only spends $1000 on a credit card?" is still a funny question to ask. Lots of people, I imagine.

travelbug

  • Bristles
  • ***
  • Posts: 261
  • Location: Australia
Re: Pay off everything but $5?
« Reply #12 on: September 26, 2013, 03:07:16 PM »
And who only spends $1000 per month on a credit card?

Who spends more? Actually, I realize that if the card/account is shared between a couple and there are kids involved it would be more. But I see no reason for a single, frugal adult to spend more on a CC (i.e. in consumer spending) than myself. In fact, there is every reason I should be spending LESS. My total monthly CC bill is probably around $1000 on average (split between two for better rewards)...and that would be including high months like when I buy airline tickets. Things that aren't included: rent and utilities. It would cost me a transaction charge to put rent on there, so it's not worth it, and utilities are in my roommate's name.

Oh, and business travel. That would probably add to it, if you put it on your card and get reimbursed. But these are special cases. "Who only spends $1000 on a credit card?" is still a funny question to ask. Lots of people, I imagine.

LOL, I know it's for our business but add two-three more zeros and we do...

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Pay off everything but $5?
« Reply #13 on: September 26, 2013, 04:04:26 PM »
I figured this out in an unfortunate way when Bank of America "lost a check in the mail"* (among other sketchy things that happened with that CC).  The payment was late, late fees were assessed, and interest started to accrue immediately as soon as I bought anything.

Yet another good reason to pay bills online :-)

Quote
A quick calculation says for every $1000 in monthly spending you have, you save $9 per month by graciously allowing the credit card company to give you a free short term loan each month...

Plus another 1-5% on cash-back rewards cards.  Plus the ones with 0% interest on everything for a year or so - out to the end of 2014 on the most recent card.

Quote
And who only spends $1000 per month on a credit card?

Me, most months :-)

For the OP, I've always* paid everything in full each month, and seem to have a high enough credit score (800+ the last time I looked) that they will keep on approving one of those 0% interest rewards every year or so.

*Barring the 0% interest ones, and one time back in the early 90s, when I had to stay in England longer than I had expected, and the British Post Office went on strike :-(

rufflina

  • 5 O'Clock Shadow
  • *
  • Posts: 40
  • Location: San Jose, CA
Re: Pay off everything but $5?
« Reply #14 on: September 26, 2013, 05:02:09 PM »
I agree with arebelspy - that was probably what your husband was thinking of, or possibly advice that he misread at one point. Apparently some people pay off credit cards even before the end of the billing period...

kevin78

  • 5 O'Clock Shadow
  • *
  • Posts: 75
  • Location: Columbus, Ohio
Re: Pay off everything but $5?
« Reply #15 on: September 26, 2013, 07:01:42 PM »
I use credit cards sometimes mostly for the fraud protection and the rewards.  It can be a pain to constantly be making payments but ever since I got out of college and worked full time I haven't paid any interest, always pay the balance.  I probably make a couple payments a month whenever the transactions clear so I can pay it down to zero.

Honestly its kind of a pain, its easier to pay stuff out of the checking directly but then I have to log it in the checkbook and then balance it which is somewhat annoying as well.  I just do what is best for the situation. Buy online, use the credit card.  Buy gas, use the credit card for the rewards.  Buy day to day stuff, use the checking.

RootofGood

  • Handlebar Stache
  • *****
  • Posts: 1361
  • Age: 39
  • Location: North Carolina
  • Retired at age 33. 5 years in, still loving it!
    • Root of Good
Re: Pay off everything but $5?
« Reply #16 on: September 26, 2013, 09:07:31 PM »
And who only spends $1000 per month on a credit card?

Who spends more? Actually, I realize that if the card/account is shared between a couple and there are kids involved it would be more. But I see no reason for a single, frugal adult to spend more on a CC (i.e. in consumer spending) than myself. In fact, there is every reason I should be spending LESS. My total monthly CC bill is probably around $1000 on average (split between two for better rewards)...and that would be including high months like when I buy airline tickets. Things that aren't included: rent and utilities. It would cost me a transaction charge to put rent on there, so it's not worth it, and utilities are in my roommate's name.

Oh, and business travel. That would probably add to it, if you put it on your card and get reimbursed. But these are special cases. "Who only spends $1000 on a credit card?" is still a funny question to ask. Lots of people, I imagine.

We put internet, cell phone, water bill, nat gas bill, and occasionally electrical bill on credit cards.  Electric is the only one that charges a fee.  $2.75 or so.  If I charge more than $275, I break even with 1% cashback.  I spend way more than that each summer on a/c (the South is hot!). 

Monthly charges average to close to $2000 for us.

galliver

  • Handlebar Stache
  • *****
  • Posts: 1890
Re: Pay off everything but $5?
« Reply #17 on: September 27, 2013, 12:19:22 AM »
And who only spends $1000 per month on a credit card?

Who spends more? Actually, I realize that if the card/account is shared between a couple and there are kids involved it would be more. But I see no reason for a single, frugal adult to spend more on a CC (i.e. in consumer spending) than myself. In fact, there is every reason I should be spending LESS. My total monthly CC bill is probably around $1000 on average (split between two for better rewards)...and that would be including high months like when I buy airline tickets. Things that aren't included: rent and utilities. It would cost me a transaction charge to put rent on there, so it's not worth it, and utilities are in my roommate's name.

Oh, and business travel. That would probably add to it, if you put it on your card and get reimbursed. But these are special cases. "Who only spends $1000 on a credit card?" is still a funny question to ask. Lots of people, I imagine.

We put internet, cell phone, water bill, nat gas bill, and occasionally electrical bill on credit cards.  Electric is the only one that charges a fee.  $2.75 or so.  If I charge more than $275, I break even with 1% cashback.  I spend way more than that each summer on a/c (the South is hot!). 

Monthly charges average to close to $2000 for us.

Us implies there are at least two of you, so that breaks down to at most $1000/person. My point still stands that a single person doesn't need more than that. :) And there are single people out there with credit cards! Many of them!

I'm in no place in life to judge, but $275/mo in electricity alone sounds crazy to me! I thought my+roomie's bill was high by this forum's standards at ~$100/mo for a small but old house! And we're smack-dab in the Midwest, so our summers are no picnic (more like a sauna, except this summer) and our winters eat up a pretty penny, too! Still, I don't think we've ever been over $130, and as far as I know, electricity usage doesn't exactly scale linearly with house size, as I imagine yours must be a fair bit larger...

Left

  • Handlebar Stache
  • *****
  • Posts: 1159
Re: Pay off everything but $5?
« Reply #18 on: September 27, 2013, 03:23:49 AM »
i pay off cc twice a month to make it managable. should i be waiting for a $500 bill at end of month instead of a two $250 biweekly payments? didnt know its better to let it accumulate until end of month. As is, monthly bills would be the single $250 instead of $500.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27889
  • Age: -999
  • Location: Traveling the World
Re: Pay off everything but $5?
« Reply #19 on: September 27, 2013, 07:55:58 AM »
i pay off cc twice a month to make it managable. should i be waiting for a $500 bill at end of month instead of a two $250 biweekly payments? didnt know its better to let it accumulate until end of month. As is, monthly bills would be the single $250 instead of $500.

Doesn't matter, as long as you actually get a "bill" for an amount, and pay it off before the due date of that bill.  If you're paying off your balance before the bill even comes (so that it comes for $0), you're not showing credit utilization on your credit report.

But if you are getting the bill, it's the same either way.  Doing the two payments (so only 250 instead of 500) may slightly help, due to lower utilization, depending on the size of your credit limits, but it's not that big of a deal either way, as long as you are getting a bill for some amount.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

RootofGood

  • Handlebar Stache
  • *****
  • Posts: 1361
  • Age: 39
  • Location: North Carolina
  • Retired at age 33. 5 years in, still loving it!
    • Root of Good
Re: Pay off everything but $5?
« Reply #20 on: September 27, 2013, 09:37:42 AM »
Us implies there are at least two of you, so that breaks down to at most $1000/person. My point still stands that a single person doesn't need more than that. :) And there are single people out there with credit cards! Many of them!

I'm in no place in life to judge, but $275/mo in electricity alone sounds crazy to me! I thought my+roomie's bill was high by this forum's standards at ~$100/mo for a small but old house! And we're smack-dab in the Midwest, so our summers are no picnic (more like a sauna, except this summer) and our winters eat up a pretty penny, too! Still, I don't think we've ever been over $130, and as far as I know, electricity usage doesn't exactly scale linearly with house size, as I imagine yours must be a fair bit larger...

Gotcha.  I agree that extremely frugal people won't have more than about $1000/mo on a credit card.  The vast majority of CC users don't fall in the frugal category and spend much more.  Should you?  It's a personal decision, one that could make you wealthy or poor over time.

Let me clarify, our electricity is never $275/mo.  Over the course of the summer it might be $150-175 in the highest month or two.  I can prepay, say, $500, and that will pay for the whole summer's electricity.  I make $5 in cash back and pay $2.75 in fees to do so.  I actually prepay the electricity to meet minimum spending requirements on new credit cards I sign up for, since it is almost a wash. 

1800 sf 40 y.o. house, no trees for shade, for reference.  And I like it chilly. 

galliver

  • Handlebar Stache
  • *****
  • Posts: 1890
Re: Pay off everything but $5?
« Reply #21 on: September 27, 2013, 10:58:47 AM »
Let me clarify, our electricity is never $275/mo.  Over the course of the summer it might be $150-175 in the highest month or two.  I can prepay, say, $500, and that will pay for the whole summer's electricity.  I make $5 in cash back and pay $2.75 in fees to do so.  I actually prepay the electricity to meet minimum spending requirements on new credit cards I sign up for, since it is almost a wash. 

1800 sf 40 y.o. house, no trees for shade, for reference.  And I like it chilly.

That makes a lot more sense! I was wondering if it was a multi-month payment but I felt like power was usually month-to-month and it was implied in your post as such. :)  I can't judge you for liking it a bit chillier, I don't sleep well when it's over 72 or 74 or so. If you wear a sweater indoors in summer, I might have to give you a bit of side-eye, though ;)

Iron Mike Sharpe

  • Bristles
  • ***
  • Posts: 397
Re: Pay off everything but $5?
« Reply #22 on: September 27, 2013, 11:31:06 AM »
I don't spend much most months on my CC, especially since I started getting my groceries at Aldi where I just pay cash.  But it is nice to have the ability to put a lot on there.

I bought a house this Spring and put all of the furniture and furnishings on that.  And then bought a car in August and used the card for that.  Of course I had the cash on hand and paid the card off in full when the statement came.  I'm currently sitting on $320 in Amazon rewards since the beginning of the year. 

The bad thing is that all of my Wants are already accounted for in my budget.  And I don't feel like buying something just for the sake of buying something.  I'm sure in a year or two, I'll cave and get the next generation Xbox...after the prices drop.

RootofGood

  • Handlebar Stache
  • *****
  • Posts: 1361
  • Age: 39
  • Location: North Carolina
  • Retired at age 33. 5 years in, still loving it!
    • Root of Good
Re: Pay off everything but $5?
« Reply #23 on: September 27, 2013, 04:57:24 PM »
That makes a lot more sense! I was wondering if it was a multi-month payment but I felt like power was usually month-to-month and it was implied in your post as such. :)  I can't judge you for liking it a bit chillier, I don't sleep well when it's over 72 or 74 or so. If you wear a sweater indoors in summer, I might have to give you a bit of side-eye, though ;)

For us, 76 daytime, 73 at night (it gets hot upstairs so we crank it down a little to make it comfortable and conducive to sleeping.  I'd sell plasma in order to remain at a comfortable temp if I had to. 

Surprisingly, all of our utilities (internet, city water, nat gas, electricity) all allow prepayment.  So sometimes I'll pay ahead for a few months worth if I need to meet a spending requirement to get a CC bonus (or if utils are 5% cashback that month).  This is totally psychological, but it's nice to not have monthly bills for a few months and watch the savings account balance grow (or at least not shrink).

Charlotte

  • Guest
Re: Pay off everything but $5?
« Reply #24 on: September 28, 2013, 03:50:37 AM »
I pay my cc bill off every month, but when I pull my credit report, it always shows a balance. I believe what is happening is that the credit card company reports once a month during the period between the bill coming and the payment being made. Which is fine with me. It isn't too high, and shows that I use my card.

I believe this is the outcome you're looking for with the "$5".

greenfish

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Pay off everything but $5?
« Reply #25 on: September 28, 2013, 06:00:45 AM »
I work for a credit union as a loan originator. This means I spend my day looking at the credit reports & incomes of people applying for new loans, and explaining how our loans & credit in general work.

Credit cards only report your statement balance (the balance you see on your statement, from the end of the billing cycle), your credit limit, and if you are 30 days + past due to the credit bureaus, not if you are carrying your balance from month to month & paying interest on it, or what your midcycle balances are.

Some lenders won't report an update on your card if you have no balance and no activity, so do try to use the card at least once a month if you're paying the balance off in full.

If your credit limit is only $300, you should try not to charge more than $150 in any given month. People who max out their credit cards are more likely to file bankruptcy, so using a high percentage of your limit is bad for your credit score.

As mentioned by No Name Guy, myfico.com is a great source for credit education - it's where the Fair Issac Corporation posts what's publicly available about how your FICO credit score is calculated.

mm1970

  • Walrus Stache
  • *******
  • Posts: 6644
Re: Pay off everything but $5?
« Reply #26 on: September 28, 2013, 11:23:40 AM »
I applied for a credit card for the first time. I have non existent credit history so my credit limit is $300. My husband is telling me to use it for gas or groceries but not to pay it off fully every month. His reasoning is that the credit bureau would like to know that I can revolve credit. Pay off everything but $5 and pay interest on that therefore building my credit score.

I don't agree with this. Everything I've read so far is saying the complete opposite. Pay on time, avoid paying interest and build your credit score by being a good consumer.

Thoughts? Just to settle the argument. Thanks :D

Shortly before I got married, my husband put my finances in Quicken.  He went through my CC receipts.  And he noticed that I paid off my cc every month except about $20-50.

He says "are you crazy!?!  If you don't pay it off, you pay the interest ON THE FULL AMOUNT, not the $20 or $50".

TheBrassNugget

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Pay off everything but $5?
« Reply #27 on: September 28, 2013, 11:40:15 AM »
I don't believe you need to carry a balance through to you billing period.

I did a fair bit of research a year or so back, looking for ways to boost my credit score to the coveted 800 rating. Hopefully, other readers can confirm this. My understanding is that rating agencies will actually test your balance intra-month, not just at the end of the month during billing. To make matters more complicated your credit score is aided by having a low balance relative to your credit limit. I'd have to double-check, but I believe the magic number is 15%. So, for a balance of $300, you need to keep your balance at under $45 the entire month to earn an optimum score (stinks - I know I started with $300 two years ago myself). When the bill comes, pay the darn thing off. No need to make outrageous interest payments.
« Last Edit: September 28, 2013, 11:48:45 AM by TheBrassNugget »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27889
  • Age: -999
  • Location: Traveling the World
Re: Pay off everything but $5?
« Reply #28 on: September 28, 2013, 08:35:12 PM »
My understanding is that rating agencies will actually test your balance intra-month, not just at the end of the month during billing.

In very rare circumstances.  In general, they use the balance reported to them by the company itself.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Charlotte

  • Guest
Re: Pay off everything but $5?
« Reply #29 on: September 29, 2013, 04:51:38 AM »
I love that I learned something new today!! :)