Is it better to

[Tourniquet416]

pay off all your CC in full each month, or pay part of it. Which will give you a better credit score? thanks!

[miracle]

I am not certain on this but I believe it is better to pay it off every month and always try to keep your utilization below 35 percent.

[cabledude]

If you can pay in full I would do it. Don't spend money to try and improve your score unnecessarily. I have paid in full on the majority of my cards over the past year and my score keeps rising and my cards keep throwing me more CLI's and fantastic offers. They don't seem to punish me for PIF'ing.

[miracle]

Also something to keep in mind is that when applying for some credit, they do look at various aspects besides your score. I know one of these things is if you are paying your balances off every month or at least paying more than the minimum due.

[Tourniquet416]

thanks, i'd rather pay off everything each month. no more debt for me.

[the_girl]

Remember too, that cc companies don't just make money off of the interest (although that's highly profitable for them)....they make ~3% off of every purchase you make from a vendor. The vendor pays them this fee for the priv of taking the card.

SO, just because you pay it off every month doesn't mean they aren't making money off of you. Obviously if you use the card alot, they are making 3-5% of your total purchases.

the_girl

[ananias]

Remember too, that cc companies don't just make money off of the interest (although that's highly profitable for them)....they make ~3% off of every purchase you make from a vendor. The vendor pays them this fee for the priv of taking the card.

SO, just because you pay it off every month doesn't mean they aren't making money off of you. Obviously if you use the card alot, they are making 3-5% of your total purchases.

From what you say above, the person who spends $100 every month and pays it off completely, never paying a cent of interest, is generating the issuer a 36% rate of return. The person who carries a large balance and pays the same amount each month in interest, earns them only the stated rate, almost certainly less than 36%.

It's the non-performance fees that make people who carry a balance more profitable in practice than the prompt payers, not the interest rates charged.

[score booster]

Where do you come up with a 36% return? 3% is 3% Someone who charges $100 each month then pays in full would generate $3 every month. Someone who carries a 1200.00 balance @ 18% is generating $18 a month in interest (which would decrease slightly each month providing no further charges are made). So they make a lot more off the balance carrier hands down. Unless its a card fixed at prime. (which probably not many people here have!)

[divemedic]

Your math is wrong. Interest is Annual. Keeping compounding out of this to make it easier, it breaks down like this:

A person spending $100 per month and paying it off before the grace period expires is generating $3 per month times 12 months. That is $36 per year. Equal to 36% simple interest. Every $1000 invested like this earns $360 per year.

The consumer who spends $1800 once earns the 3% once ($54) and carries a balance at 19.8% is paying a periodic rate of 0.05424% per day on the average daily balance which comes to $29.28 per month in interest. Every $1000 invested like this earns about $195., plus the original $54 the first year

To make up for this, the banks charge fees for everything. Late fees, overlimit fees, penalty rates. They nickle and dime the accounts to make up for the difference.

[score booster]

I disagree...You're correct in multiplying the $3 by 12, but you're neglecting to multiply the $100 by 12! You're stating their return for 12 months, but only accounting for one months charge of $100. Where's the other $1100? They generate a $3 return on $100 a month, or $36 on $1200 annually, which is 3% no matter how you slice it. 3% a month can't morph into 36% a year.

[divemedic]

There is no $1200. Since you are paying the debt off every month, they are loaning you the SAME $100 over and over again.

[DocDon]

Remember too, that cc companies don't just make money off of the interest (although that's highly profitable for them)....they make ~3% off of every purchase you make from a vendor. The vendor pays them this fee for the priv of taking the card.

SO, just because you pay it off every month doesn't mean they aren't making money off of you. Obviously if you use the card alot, they are making 3-5% of your total purchases.

the_girl

Almost true. The merchant pays their merchant processor, not the individual credit card issuers. The merchant processors get the rates from MasterCard/Visa, Discover, Amex, and come up with the rates for each merchant. Believe me, Bank One does not get 5% of every transaction.

Heck, you can become an ISO if you wanted to - all you need is to meet their criteria, and have enough capital to buy rates from them. From there, you start selling credit card terminals and setting up merchants to process interchange through you.

[Tourniquet416]

my head hurts.

[score booster]

But Dive they are only making $3 off each $100, not $36.

[DocDon]

my head hurts.

LOL!

In that case, I'll spare you the detail of the entire interchange process - all the steps along the way from the time you swipe your card, to the time you sign the receipt....

[divemedic]

You aren't understanding. We are talking ANNUAL percentage rate. Have you ever gone to a check advance place?

Let's say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash, or you roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge which corresponds to a 390% APR.

Even though you only paid 15% to borrow the $100, you only borrowed it for 2 weeks. That means if you were to do that for a year, you would have earned $390 in interest. All for lending out $100 for a year.

That is why payday advance is so lucrative. For every $1000 invested, you get a return of $3900 every year.

To make it easier to understand the credit card example, if the $100 was never paid back, but instead I loaned it to you and had you give me $3 a month for having it, I would still get the $36. You are confusing percentage earned with annual percentage rate.

Try it yourself. Type in $100 for principal, $3 for cost, 0% for interest rate and 1 for number of months. What APR do you get?

http://www.efunda.com/formulae/finance/apr_calculator.cfm

[jgandino]

Regarding all of this wooblah about credit card companies making money off of your purchases, this isn't true. The credit card processor, the bank, is what charges the store to use the credit card. Most of them are around 1.5% plus a $0.20 or so charge. The credit card company doesn't make hardly anything off of using your card. All these nickle and dime charges people are talking about, late fees, blah blah blah, are there for a reason. If you can't pay your credit card bills on time, then don't use the credit for a while. Most banks include bill-pay for free now, use it, let the bank deal with it if your payment gets their late. Wait until you are in a comfortable position to build credit, then do it.

As I've stated before, paying off you balances every month gets you no where. I'll go into more detail later about credit card agencies posting last payment amounts. Take care and I hope this helps.

Justin

[jgandino]

Regarding all of this wooblah about credit card companies making money off of your purchases, this isn't true. The credit card processor, the bank, is what charges the store to use the credit card. Most of them are around 1.5% plus a $0.20 or so charge. The credit card company doesn't make hardly anything off of using your card. All these nickle and dime charges people are talking about, late fees, blah blah blah, are there for a reason. If you can't pay your credit card bills on time, then don't use the credit for a while. Most banks include bill-pay for free now, use it, let the bank deal with it if your payment gets their late. Wait until you are in a comfortable position to build credit, then do it.

As I've stated before, paying off you balances every month gets you no where. I'll go into more detail later about credit card agencies posting last payment amounts. Take care and I hope this helps.

Justin

[score booster]

You're right Dive, I started thinking in terms of lending a friend $100 on the first of every month and him giving me back $103 the last of the month. It is the same $100! No wonder I got denied that accounting position.

[ananias]

Regarding all of this wooblah about credit card companies making money off of your purchases, this isn't true. The credit card processor, the bank, is what charges the store to use the credit card. Most of them are around 1.5% plus a $0.20 or so charge. The credit card company doesn't make hardly anything off of using your card. All these nickle and dime charges people are talking about, late fees, blah blah blah, are there for a reason. If you can't pay your credit card bills on time, then don't use the credit for a while. Most banks include bill-pay for free now, use it, let the bank deal with it if your payment gets their late. Wait until you are in a comfortable position to build credit, then do it.

As I've stated before, paying off you balances every month gets you no where. I'll go into more detail later about credit card agencies posting last payment amounts. Take care and I hope this helps.

These are the reasons I find what you wrote difficult to believe:

1. If the credit card companies aren't making over 1% from purchases, then how could they rebate that much without losing money?

2. Prior to the 0% balance transfer offers, I never once carried a balance and and didn't bother with credit cards at all prior to the point when they became cheaper than cash due to the rebates. Yet I've never been declined for a card and have 5 to 6 digit credit limits on every card I have.

3. They've reversed every single charge (maybe like five total over all cards) even when the mistake was my own. If they make little to nothing off accounts like mine then it wouldn't make sense for them to be so accomodating to me.

4. The cost of money to the issuers is a function of the quality of their assets (our debt to them) and this means that they pay more for the money they loan to balance carriers (on average) than what they pay for the money loaned to prompt payers.