Downside to using Cash Back credit cards

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jacksonm
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Downside to using Cash Back credit cards

Post by jacksonm »

I have several cashback credit cards that I use whenever possible, including paying recurring bills that allow it. Usually amounts to about $1k/year in savings and I have never paid a penny in interest because I have all the cards set to autopay in full each month and have never rolled any of them over.

I still think this is a good strategy and will continue to use it but I did just recently run into one downside when I purchased about $16k worth of furniture on a 2% cashback card. Although I was happy to see the $320 deposited directly into my checking account I was soon surprised to discover a significant drop in my credit score. Upon further investigation I believe the reason for this was because the credit card I used had a limit of $20k and so, along with other normal purchases for the month, this brought me to within $800 of the limit.

Having written credit modeling software myself during my programming career I know that percentage of available credit used is a major factor in most of the algorithms (and strangely can trigger unsolicited offers for more credit cards if you haven't opted out of it).

None of the algorithms I coded ever took notice of the fact that the balance was always paid in full (a fact that ought to increase your credit score instead of lowering it IMHO). As a matter of fact, I don't remember that information even being available in any of the data used to compute the score.

Since I'm retired and don't borrow money my credit score isn't that big of a deal to me but if that hadn't been the case I'm thinking it might have been a better idea to take the zero percent 48 month loan I was offered for the furniture. It's hard to predict but I don't think this would have affected my credit score nearly as much, if at all.
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Re: Downside to using Cash Back credit cards

Post by Jack FFR1846 »

If you manage it, there will be no downside.

Example: I recently opened a Citizens Bank Mastercard that normally pays only 1.8% back but until March 31st, pays that 1.8% with every statement and in April pays an additional 3.2% for a total of 5%. There is no limit on rewards.

The catch: To open the card without a hard pull, I had to accept a $13k credit limit. Fun fact....last month, I spent $30k on the card. How'd I avoid getting pinged for being over limit from the company and then on the credit report for being nearly 300% of my limit? I paid off as I spent. I just got my statement this morning, actually online. My statement balance? $87. I plan to continue with this practice as I pay property tax and first quarter estimated federal and state taxes on the card.

It is more work than just letting the card auto pay, for sure. But not much more work.
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medic
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Re: Downside to using Cash Back credit cards

Post by medic »

Or split the purchase onto your multiple cards.
To Jack's point, I've also pre-paid my card and had a credit with them before making a large purchase.
aristotelian
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Re: Downside to using Cash Back credit cards

Post by aristotelian »

Outside of applying for a mortgage, I have never cared about my credit score. What does it matter if Transunion thinks I am a 750 or 780?

Meanwhile, 50% of our annual spending goes through the card, and I find it necessary to get cash back simply to offset the credit card charges that vendors are passing on to the customer.
bluebolt
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Re: Downside to using Cash Back credit cards

Post by bluebolt »

Once you pay it off at the end of the month, your utilization and score will return to where it was before. So, as long as you're not taking out a loan the same month you are increasing your utilization, it's no big deal.
mptfan
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Re: Downside to using Cash Back credit cards

Post by mptfan »

There would be no difference had you used a credit card with no cash back, so that's not a downside to using cash back credit cards, that's an issue with using credit cards.
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N1CKV
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Re: Downside to using Cash Back credit cards

Post by N1CKV »

It's really not an issue. Next month or two your score will rebound. Credit scores are all about the long game.

Example: I maxed out 2 of my cards at the same time once.* My score quickly rebounded and increases were even offered.
*This was a one time thing, my house had flooded with no flood insurance and I was rebuilding myself. I was only using credit cards for convenience (and cash back points, both cards conveniently had 5% categories on home improvement stores...). I paid them off on their respective due dates.

As for "paying off every month", you should know that the balance reported to the credit bureaus are statement balances, so that is not detected. Besides, a customer that pays the bill in full every month is considered a "deadbeat" to credit card companies, they aren't making much money on you compared to those paying interest.
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Re: Downside to using Cash Back credit cards

Post by MotoTrojan »

medic wrote: Fri Feb 07, 2020 12:39 pm Or split the purchase onto your multiple cards.
To Jack's point, I've also pre-paid my card and had a credit with them before making a large purchase.
Pre-paying can help if you plan to spend more than your limit, but in the OPs case their credit score shouldn't have been impacted if they simply paid it before the statement date. The credit bureau should only see that monthly snap-shot, so just pay off all (or leave 10% utilization perhaps) of the large purchase a few days later, but before the statement comes out.
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Re: Downside to using Cash Back credit cards

Post by Sheepdog »

Manage your credit. Pay it off monthly. No downside.

I received $1,303.52 cash back last year from my credit cards. I did not pay any interest, That was my upside.

As fa as credit scores are concerned, that doesn't affect me either as I am retired and do not charge anything which is not paid off monthly. For example, my wife had an almost $9,000 medical bill a couple of months ago which she paid with a credit card. That total monthly credit card bill was $12,000 which was paid off last week. The credit score did drop slightly from about 815 to 775. It will be back up by next month.
Last edited by Sheepdog on Fri Feb 07, 2020 1:20 pm, edited 1 time in total.
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btq96r
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Re: Downside to using Cash Back credit cards

Post by btq96r »

I notice some movement in my credit score based on how much I'm using my card when I check it as well. It's not a big swing, but it lets me know the balance on the card will be taken into account. Whenever I need my credit run for something big (home loan most likely), I'll just not use the credit card for a bit and pay with my debit card until after the credit check. No big deal.
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Re: Downside to using Cash Back credit cards

Post by zrail »

N1CKV wrote: Fri Feb 07, 2020 12:46 pm It's really not an issue. Next month or two your score will rebound. Credit scores are all about the long game.

Example: I maxed out 2 of my cards at the same time once.* My score quickly rebounded and increases were even offered.
*This was a one time thing, my house had flooded with no flood insurance and I was rebuilding myself. I was only using credit cards for convenience (and cash back points, both cards conveniently had 5% categories on home improvement stores...). I paid them off on their respective due dates.

As for "paying off every month", you should know that the balance reported to the credit bureaus are statement balances, so that is not detected. Besides, a customer that pays the bill in full every month is considered a "deadbeat" to credit card companies, they aren't making much money on you compared to those paying interest.
People who pay interest are valuable but the difference is not that significant when you think about the whole picture. Banks make a significant amount from interchange. Think about it holistically. For example, Fidelity makes ~2% from the interchange on every transaction you make on your Fidelity Visa. They rebate that 2% back to you every month if you deposit it in your Fidelity account. You let that money sit in SPAXX or whatever, where Fidelity makes 0.42%, possibly for a very long time. The enterprise value is immense.

Chase Ultimate Rewards likely have a similar value proposition. Chase makes their 2% per transaction and then gets to spend that float on whatever they want because, statistically, people hold onto UR points for a long time.
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Re: Downside to using Cash Back credit cards

Post by sean.mcgrath »

aristotelian wrote: Fri Feb 07, 2020 12:40 pm Outside of applying for a mortgage, I have never cared about my credit score. What does it matter if Transunion thinks I am a 750 or 780?
Your credit score is used for more than just taking out loans. I have a cottage in the US, and was informed last summer that one factor in determining my insurance rates is my credit score. My rates have been rising more than I would expect, and I do wonder whether that isn't a significant reason. I haven't lived in the US for 25+ years, and don't have any debt or credit cards. They view it as a "discount" for better rating, so not having one is an issue.
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SmileyFace
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Re: Downside to using Cash Back credit cards

Post by SmileyFace »

What was the "Significant" drop in your credit score? And didn't it just bounce back the next month when you paid off the $16K?
I can't help but question whether it was really that significant of a drop.
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Re: Downside to using Cash Back credit cards

Post by Jack FFR1846 »

I do watch my credit score. Insurance companies recalculate rates and if I happen to have let the score drop just as they take a look, I'll overpay for the next year.

Another example: My older son has his first credit card from our credit union. In order to get this before he went away for a summer internship, he needed 2 months of checks. But he had not started his job, so he obviously had nothing to show. So I am co-owner on the account. His credit limit? $1,000. So if he buys a new laptop and books for the semester, that can easily be $900, or 90% utilization. That's good for about a 40 point drop in score. (this happened one month)

So indeed, it pays to know what will make your credit score drop and if you can, avoid the drop.
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kerplunk
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Re: Downside to using Cash Back credit cards

Post by kerplunk »

As others have said, your credit score will bounce right back up to where it was -- or possibly higher. If you plan to make more large purchases like that, you may want to ask for a credit line increase so your utilization ratio won't be so high.
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Re: Downside to using Cash Back credit cards

Post by SmileyFace »

Jack FFR1846 wrote: Fri Feb 07, 2020 1:42 pm I do watch my credit score. Insurance companies recalculate rates and if I happen to have let the score drop just as they take a look, I'll overpay for the next year.

Another example: My older son has his first credit card from our credit union. In order to get this before he went away for a summer internship, he needed 2 months of checks. But he had not started his job, so he obviously had nothing to show. So I am co-owner on the account. His credit limit? $1,000. So if he buys a new laptop and books for the semester, that can easily be $900, or 90% utilization. That's good for about a 40 point drop in score. (this happened one month)

So indeed, it pays to know what will make your credit score drop and if you can, avoid the drop.
One work-around is to add him as a user of a few of your credit cards - that will raise his available credit. I think my daughter's credit, who has never owned anything, is now higher than mine. If you don't trust him with your cards you don't need to give them to him - listed him as an authorized user is enough in my experience to boost his score.
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jacksonm
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Re: Downside to using Cash Back credit cards

Post by jacksonm »

bluebolt wrote: Fri Feb 07, 2020 12:43 pm Once you pay it off at the end of the month, your utilization and score will return to where it was before. So, as long as you're not taking out a loan the same month you are increasing your utilization, it's no big deal.
I'm not so sure about this but I'll wait and see. Actually my credit score has been on a downward trend from 815 to 725 for the past six months and credit card utilization is the only dynamic involved. Correlation begins with a major trip to Asia last year also resulting in some high balances along the way.

Also put freezes on all 3 credit bureaus after the free Equifax thing expired. I doubt that would have anything to do with it but you never know.
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jacksonm
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Re: Downside to using Cash Back credit cards

Post by jacksonm »

DaftInvestor wrote: Fri Feb 07, 2020 1:38 pm What was the "Significant" drop in your credit score? And didn't it just bounce back the next month when you paid off the $16K?
I can't help but question whether it was really that significant of a drop.
See my post above this one.
student
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Re: Downside to using Cash Back credit cards

Post by student »

If your utilization is high, then your credit score may drop but it has nothing to do with whether the credit cards have a cashback feature or not. As others have mentioned, you can ask to have credit line increase or apply for more credit cards to get bonus (but it may temporarily decrease your credit scores due to inquires.)
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Re: Downside to using Cash Back credit cards

Post by financeperchance »

You have to pay it off before the statement closing date. The only thing that gets reported to your credit file is what that balance is on that date. To maximize your credit score, you want your utilization to be 1% of your available credit.
lkar
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Re: Downside to using Cash Back credit cards

Post by lkar »

Some cash back business cards do not affect your score.

It is fairly common in the manufactured spending world to split tender across multiple cards and put business cards in the mix for those concerned about credit score fluctuations. Other than possibly having to wait a month if you’re about to do a refi, for occasional big expenses it doesn’t really matter.

I don’t manufactured spend too much any longer but occasionally when working toward bonuses or elite status for spend on cards that affect my credit score, I will see short term drops. It has really never been a problem for anything.
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Re: Downside to using Cash Back credit cards

Post by JBTX »

I recently had some large purchases on credit card - college tuition and taxes. Credit score went down about 20 pts or so. After paid they popped back up. If one really cared then pay off credit card earlier.
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Re: Downside to using Cash Back credit cards

Post by hachiko »

financeperchance wrote: Sat Feb 08, 2020 1:17 pm You have to pay it off before the statement closing date. The only thing that gets reported to your credit file is what that balance is on that date. To maximize your credit score, you want your utilization to be 1% of your available credit.
Many cards only report the statement balance, but not all.
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Re: Downside to using Cash Back credit cards

Post by Katietsu »

financeperchance wrote: Sat Feb 08, 2020 1:17 pm You have to pay it off before the statement closing date. The only thing that gets reported to your credit file is what that balance is on that date. To maximize your credit score, you want your utilization to be 1% of your available credit.
This. If I have a large charge like $8000 on a card with a $15000 credit limit, I pay it down the same or next day. I do not worry about a float. My reported statement balance is small. Part of this is concern about a hit to my credit score. Though, for me, I suspect my debt aversion is a stronger driving force.
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Re: Downside to using Cash Back credit cards

Post by SpaghettiMonster »

Why not pay off the balance several days before your statement date? That should bring your utilization ratio down a good bit.
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Re: Downside to using Cash Back credit cards

Post by grabiner »

The credit score only matters when you apply for credit (or, in some states, for insurance). If you don't need a new loan in February, it doesn't hurt to charge a large balance in January, lowering your credit score in February, and then pay it off in February to get your score back up in March.
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Re: Downside to using Cash Back credit cards

Post by whodidntante »

hachiko wrote: Sat Feb 08, 2020 6:25 pm
financeperchance wrote: Sat Feb 08, 2020 1:17 pm You have to pay it off before the statement closing date. The only thing that gets reported to your credit file is what that balance is on that date. To maximize your credit score, you want your utilization to be 1% of your available credit.
Many cards only report the statement balance, but not all.
This is correct. It's really up to the issuer when, what, and even if they report. Each report must be accurate, but just because someone thinks the issuer has to report the statement balance doesn't make it so. An issuer is within their rights to report the current balance on the first of every month or to report nothing at all for 3 months. Sometimes my credit union skips months, and I have an Elan card that has done the same. There is nothing to dispute because they simply haven't reported anything recently, and the last report they did make was accurate.
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Re: Downside to using Cash Back credit cards

Post by surfstar »

Funny, this thread is click-bait-y. Grabby title and not much significance after. I give it a "meh".
We'd have to replace cabinets and other built-in items to get anywhere close to $16k furnishing our entire home. Maybe a click-bait and humble-brag rolled into one? Well done :beer :P
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Re: Downside to using Cash Back credit cards

Post by JoMoney »

I've had occasions where my score dropped a few points as my usage of available credit was (temporarily) high.
It went right back to where it was after I paid the balance, and despite the point drop it remained in the "excellent" range regardless.
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jacksonm
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Re: Downside to using Cash Back credit cards

Post by jacksonm »

surfstar wrote: Sun Feb 09, 2020 11:26 pm Funny, this thread is click-bait-y. Grabby title and not much significance after. I give it a "meh".
We'd have to replace cabinets and other built-in items to get anywhere close to $16k furnishing our entire home. Maybe a click-bait and humble-brag rolled into one? Well done :beer :P
If it makes you feel any better, the $4k mattress seems to be giving me back pain.
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Re: Downside to using Cash Back credit cards

Post by surfstar »

jacksonm wrote: Mon Feb 10, 2020 12:38 pm
surfstar wrote: Sun Feb 09, 2020 11:26 pm Funny, this thread is click-bait-y. Grabby title and not much significance after. I give it a "meh".
We'd have to replace cabinets and other built-in items to get anywhere close to $16k furnishing our entire home. Maybe a click-bait and humble-brag rolled into one? Well done :beer :P
If it makes you feel any better, the $4k mattress seems to be giving me back pain.
Well I smiled, so I guess it made me feel better - lol :D
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jacksonm
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Re: Downside to using Cash Back credit cards

Post by jacksonm »

Final post, with a picture from Credit Karma worth a thousand words. Took a 70 point hit on my credit score. The other 15 changes were all decreases in balances and inquiries.

Image
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Re: Downside to using Cash Back credit cards

Post by SlowMovingInvestor »

zrail wrote: Fri Feb 07, 2020 1:24 pm
Chase Ultimate Rewards likely have a similar value proposition. Chase makes their 2% per transaction and then gets to spend that float on whatever they want because, statistically, people hold onto UR points for a long time.
Good point -- never thought of that. Of course, in these low interest rate days, we aren't losing much interest on the UR balance by not using a cash card instead of a UR card.
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Re: Downside to using Cash Back credit cards

Post by rich126 »

Not exactly intuitive but a solution is to have more credit cards and higher limits and then you'll have a larger upper limit on credit utilization that you'll never hit.

For example it is better (credit score wise) to have $5,000 in charges when your credit line is $100K (5%) rather than $2,000 out of $5K(40%). They calculate both credit utilization per card as well as overall. My limited knowledge is that they don't like to see that over 30% for a card or overall.

Get more cards with no annual fees and that would help. Or just live with a (likely) short lived hit to your credit score.

Honestly I've never seen so many people obsessed with credit scores. It is one thing if you have miserable credit and you are try to improve it to get a mortgage but for most people it shouldn't be a big issue and certainly not something to check constantly. I probably have 15+ credit cards and my score is quite high. Just pay off the cards when they are due, and in my view it is best to have multiple cards. I'm a person who prefers to spread my risk over multiple accounts/cards/etc.

What happens if you are on the road, have limited cash and one card and it no longer works? I had cards declined because they were worried about a computer purchased that wasn't sent to my home address (I was working on a contract out of state). I saw people having issues with Wells Fargo a year or so ago when they couldn't use their ATM cards one night because Wells had a mishap that deducted bill payments multiple times and accounts ended up going to zero (fortunately that was fixed by the next morning).

And as others mentioned, it has zero to do with a cash back credit card.
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Re: Downside to using Cash Back credit cards

Post by anoop »

The score goes back up as soon as the balance drops, so it's really no big deal. It happens to me every few months because I have a tight credit limit by choice.
Last edited by anoop on Mon Feb 10, 2020 5:51 pm, edited 1 time in total.
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Re: Downside to using Cash Back credit cards

Post by bluebolt »

jacksonm wrote: Mon Feb 10, 2020 4:02 pm Final post, with a picture from Credit Karma worth a thousand words. Took a 70 point hit on my credit score. The other 15 changes were all decreases in balances and inquiries.

Image
Hard inquiries can have a significant (mostly short term) impact on your score.
I've found that CreditKarma weighs inquiries more than they are weighed in my actual score.
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Re: Downside to using Cash Back credit cards

Post by grabiner »

jacksonm wrote: Mon Feb 10, 2020 4:02 pm Final post, with a picture from Credit Karma worth a thousand words. Took a 70 point hit on my credit score. The other 15 changes were all decreases in balances and inquiries.
The change is unlikely to be caused specifically by the inquiry. Credit scoring models have multiple scorecards, and if you move from one scorecard to another, your score may go up or down because you look different on this scorecard.

I have seen this with Credit Karma's simulator and its actual scores. If I increase my credit-card balances by one dollar over an amount which varies from month to month but is usually around $4000, the simulator says that my score will go up by about 12 points. When I opened my mortgage, even before I made the first payment on it, my Vantagescore 2.0 went way up while my old Trans Union Score dropped a few points for the inquiry. When I went from having balances on three of five credit cards to two of five, even with a higher total balance, my old Trans Union score went way up, while my Vantagescore 2.0 dropped a few points as expected.
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Re: Downside to using Cash Back credit cards

Post by tesuzuki2002 »

as soon as you pay it off your score goes back up... I know this from experience I run thousands thru a card every month.
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Re: Downside to using Cash Back credit cards

Post by bayview »

If you are concerned about your score (meaning that you might want to apply for credit soon - get a new credit card, apply for or refi a mortgage, etc), here’s how you handle this:

Don’t wait for your new balance to post each month (the amount due is what is reported to the credit bureaus.) Instead, log into your account 2-3 days before it drops (updates) again and pay it off. This lowers the amount *reported* that you owe. (Note: if you don’t have a large balance that you are carrying, and you pay off all your new charges at once, your credit reports will now show that you owe $0.)

In other words, you want to control the amounts of your balances due that are reported each month.

Consumers with excellent credit who are taking advantage of a 0% interest, 0% initial fee for a balance transfer can get penalized for “carrying a balance”, even though it’s interest free. You have to decide if that might be an issue (again, anticipating possibly applying for new credit.)

In the end, there is no memory for FICO credit scores, as they are simply a snapshot of your credit usage at a specific point in time (the sticking a toe into the fast-moving river metaphor.) If you don’t think you might be applying for credit in the next few months, don’t worry about the utilization factor in your scores. Or if it bugs you that you appear to be someone who heavily uses credit, just pay off your balances a day or two before your credit card statement is due to drop, and you’ll probably (not necessarily; it depends on your “scorecard”) see an increase in your score.

Again:
- if you’re not seeking new credit, this is irrelevant
- If you do want to shine up your score, this is very controllable by you, as described above.
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Re: Downside to using Cash Back credit cards

Post by HappyJack »

So is the conclusion then to make partial payments toward your card before the final statement to keep the total bill down. Then pay the rest off when due?
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Re: Downside to using Cash Back credit cards

Post by grabiner »

HappyJack wrote: Mon Feb 10, 2020 8:50 pm So is the conclusion then to make partial payments toward your card before the final statement to keep the total bill down. Then pay the rest off when due?
This will improve your score, but only for the month in question, so it is only relevant if you care about your score that month, and if the difference matters. If you are planning to buy a home in March, and you make a big credit-card purchase in February, paying it down before the February billing date will prevent the mortgage lender from seeing the big balance. But if you are planning to buy a home in May, you can make the regular payment on the February bill; the mortgage lender will score you based on the April balance which you can keep low.
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