Does Paying in Full Help Your Credit?

[Your payment history is the most important part of your credit profile, so consistently paying your bills on time will help your credit scores.

But bills — and credit scores — are about more than meeting deadlines. While you don’t have to pay your credit card bill in full to get the positive history that comes with paying it on time, getting in that habit may help your credit, and certainly can’t hurt.

Punctuality Is the Credit King

The way credit scoring models work, paying at least the minimum amount due on your credit card bill by its due date can help your credit, because your payment history is an important factor in your scores. But if you continuously carry a high balance on your credit cards, or even just charge large amounts and pay them off in full, this could have a negative impact on your credit utilization ratio.

Experts recommend you use less than 20%-25% of your available credit — generally, the lower, the better for your credit scores. That’s because one of the major factors credit scores consider is the ratio between your balances and your available credit (your “utilization ratio”). From that perspective, if you are consistently only charging amounts you can pay off in full each month, you are less likely to run into a problem with high utilization, provided of course that you have high credit limits and don’t charge very large balances.

Here’s the problem you may run into, though. If you use your credit cards heavily every month, then paying your entire credit card balance in full won’t necessarily improve your scores. In fact, you could be paying your bills in full and on time and still have scores lower than you’d expect. Most issuers report balances to the credit reporting agencies on the statement date, but you will typically make your payment by the due date — which is later. That means your credit reports could show a balance, and your credit scores would reflect that accordingly. (There are some recent attempts by credit reporting agencies to report how much of the balance a consumer pays off each month, but this hasn’t been widely incorporated into credit scoring systems yet.)

Good credit requires balancing the many factors that contribute to it, and you can see how your behaviors translate into your scores by looking at where you stand using a free tool like Credit.com’s Credit Report Card. The tool shows you your grades in the categories like payment history and debt usage, to give you an idea of where you can improve your habits and build your credit.

Other Benefits

Since behavior is the basis for good credit scores, paying your entire credit card bill in full can be a good habit to develop. Paying your bills in full also means you don’t accrue interest on credit card purchases, and those savings allow you to work toward other financial goals, like owning a home or saving for retirement.

Rewards credit cards are also great options for people who don’t carry a balance (these cards can carry higher interest rates), so your regular purchases can produce additional savings. Most of all, paying your credit card balances in full keeps you out of debt.