Help! I Pay My Credit Cards Every Month But I Still Can't Get a Loan

We recently received the following question from a reader about why her credit score would suffer from “too much credit card debt” when she pays her balance in full every month:

I pay my one and only credit card bill in full every month because I’m adamant about not falling into credit card debt. However, when I went to apply for a new car loan recently the lender said my credit score was low because my credit card debt was too high. How can that be? I don’t have any credit card debt! What can I do to fix this problem? — Jess

Paying your credit card bill in full every month is the single most effective way to manage credit cards and stay out of debt. You may assume that your credit report data would reflect balance changes or payments on your credit card accounts in real time. When you make a purchase on a credit or debit card, the funds are transferred and the purchase is updated and reflected immediately in your account, so why would it be any different with the same information in your credit report?

The credit reporting system in the U.S. operates at a slower pace than the “real time” financial systems we’ve grown so accustomed to.

How the System Works

Your credit score is a snapshot of the information reported in your credit report at a given moment in time. Most lenders, credit card issuers especially, only report updates to the credit reporting agencies once a month, generally coinciding with the date they send your monthly statement. When a lender or creditor reports updates to the credit reporting agencies, the information in your credit reports is updated to reflect the changes. What’s important here is when the lender reports the update.

Paying a credit card balance off in full doesn’t necessarily mean your credit scores will reflect your most recent credit card payment, which may have been what happened during your recent auto loan application. If the credit card issuer had not yet reported an update to the credit reporting agencies, your credit report would show no record of you paying off the balance. Instead, it would show the last balance reported by the credit card issuer.

More than likely in your case, when the auto lender pulled your credit score, your credit report showed the balance from your last credit card statement rather than a paid-off balance of zero. If the reported balance was significant and took up a large portion of your available credit limit, it would have resulted in the exact scenario your lender described with your credit card utilization (or too much credit card debt) being the culprit for a lower score.

So, how long does it take for your credit reports to update and show that you’ve paid a credit card balance in full? Because most credit card issuers only report updates to the credit reporting agencies on a monthly basis, it could take as long as 30-45 days before you see it reported in your credit report. In which time, if you use the card for new purchases, your next statement would reflect any charges in the new balance.

The Solution

Barring a major overhaul of the credit reporting system to enable real-time updates, there are only two ways to ensure that your credit report shows a zero balance the next time a lender pulls it.

After you pay your bill in full, avoid using the card for any new purchases until your next statement drops and the credit card issuer reports the update to the credit reporting agencies. Depending on the monthly billing cycle and when you make the payment, you can expect this to take anywhere from 30-45 days.

Another tactic is to time your payments to coincide with your credit card’s billing cycle. Aim to make the payment 7-10 days before the end of the billing cycle and avoid making any new charges until the new billing cycle begins.

If you’re planning on applying for credit and want to make sure your credit reports are updated to reflect a zero balance, either of these options will work. However, if you pay your balance off in full each month, this isn’t really something I’d worry too much about on a monthly basis. It’s really only in situations where you’re applying for credit and want to make sure you qualify for the best interest rate and terms available that it may become an issue.

Image: iStockphoto

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