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Downside of maxing out credit card rewards

Using a credit card for all of your expenses in an effort to get the most rewards could reduce your credit scores.

By MSN Money Partner Aug 22, 2012 12:04PM

This post comes from Gerri Detweiler at partner site on MSN MoneyAre you using your credit card to pay for just about everything you can in hopes of maxing out the rewards you earn? While that may be good for your pocketbook, it could be bad for your credit, as our reader "JL Lagistee" is learning. He wrote:

My problem is that I have a rewards card that pays rewards on all purchases, so I charge everything on this card. Consequently my balance on my card is always high. I also pay off all charges in the same month they are charged. So I am never delinquent or miss payments. The credit rating companies downgrade my credit score a couple of points each quarter and never push it up because of this issue.

Image: Creditcard Computer (© Photographers Choice RF/Getty Images)JL monitors his credit scores through a monitoring service provided by his bank, and he is frustrated with the fact that his scores remain stubbornly average, despite his perfect payment history on this current account. According to the credit monitoring service, the balance on his credit card appears to be the main factor contributing to his mediocre scores.


What can he do?


I spoke with JL by phone and learned that he has only one credit card and it has a $2,500 limit. He often charges $2,400 a month on that card in order to earn as many rewards as possible, which means his balance is usually very close to the limit.


JL's "utilization ratio" is very high, explains Barry Paperno,'s community director and a credit scoring expert with many years of experience in the credit industry. (Post continues below video.)

To calculate the utilization ratio, divide the balance on the card by the credit limit. A $2,400 balance on a credit card with a $2,500 limit results in a utilization ratio of 96%. "Anytime you go above 25%, that can be a problem," says Paperno.


He also explains that the utilization ratio is calculated for each credit card on a consumer's credit report, as well as for the total credit card limits and balances reported. Since JL has only one credit card, both his individual and aggregate utilization ratios are calculated for this one card -- and that means both are very high.


Is there anything JL can do to help boost his credit scores while still racking up lots of rewards?


Ask his card issuer to raise his credit limit.

JL is worried it will hurt his credit scores if he asks his issuer to consider him for a credit limit increase. While it's impossible to predict exactly what will happen to his scores with any of the actions we are suggesting here, a single credit check shouldn't wreak havoc with one's credit scores.


When a creditor reviews the credit of a current customer, the "inquiry" that is posted to the credit report is often a "soft inquiry," because it is coming from an existing relationship, rather than from a new lender. Soft inquiries don't affect credit scores. But even if the credit check creates a "hard inquiry" -- which will impact his scores -- over time the improvement in his utilization ratio should be greater than the temporary loss of a few points from a credit inquiry.


Spread his purchases over multiple cards.

Since JL has only one credit card, he would have to get a new card to implement this strategy. And a new card would cause his credit scores to drop a bit in the short term. But overall, two credit cards is not too many, and his credit scores may benefit over the long run from another positive account on his credit reports.


If JL has trouble qualifying for a high-limit, bank-issued credit card, he may want to consider applying for a department store card, Paperno suggests. They are easier to get and will "still be included in his aggregate utilization -- though not with quite the positive impact to his utilization as a bankcard." The limits are often fairly low on those cards, though, so JL should be careful not to charge a lot on the card. 


Try to time his payments and purchases.

The goal would be for his payments to arrive right before the issuer reports his account to the credit reporting agencies so his balances will be smaller. For this to work, he would also have to hold off on making new purchases until the balance is reported to keep that figure down.


This is going to be extremely tough to figure out, though, because most of the time the issuer can't even tell you what date your account is reported to the credit reporting agencies. (Some lenders report balances as of the statement date, regardless of when they actually report their accounts to the credit reporting agencies.) So this approach is probably more trouble than it's worth.

In the end, it sounds like the best strategies are for JL to ask his card issuer for a higher credit limit and to try to keep his balance below 25% of his available credit until he figures out whether that helps boost his credit scores. Keeping his utilization at less than 10% is even better -- but a cardholder can still have a good score with 25% utilization, says Paperno. The added benefit? If he can get his credit scores up, he may get some attractive new rewards card offers in the mail -- and he can then get a second card, improving that ratio even more.

More from MSN Money:

Aug 24, 2012 11:00AM
Could he maybe make more than one payment a month?  If I have a big charge, I will make at least two or three payments that month to get the balance down.  You can make multiple payments before the due date.  I very rarely wait till the due date.
Aug 24, 2012 12:10PM

Here's an easy fix.  Run a credit balance on the card.  If you typically charge $2400/mo, send them an extra payment of up to $2400, then each month send a payment for the amount you actually charged.  When they report the balance to the credit bureau, it will be 0% utilization and you can still collect the rewards.


My rewards card is with Citibank and I typically make an online payment for the full balance 2 days before the statement date so only 2 days of charges ever show up on my balance reported to the credit bureau.

Aug 23, 2012 11:37AM

Protecting your credit is very expensive. Credit monitoring companies charge $15 a month or $180 per year to monitor your credit. Why pay that much when a smart phone app does the same thing for FREE? Check out key word: Alert Renew in the App Store or Android Market Place.


Federal Law entitles you to 1 free credit report each year from each credit agency. There are 12 major or minor agencies and if you check a different one each month, you can easily monitor your own credit for FREE!


Since Alert Renew (the app) prompts you when and who to order from, NO MORE MONTHLY FEES!!

Aug 22, 2012 3:13PM
Very few offers that come in the mail are worth considering. After all, if it's worth a mass-mailing campaign, they're probably planning to make a lot of money off of you. Get out there and apply for the best reward cards yourself (e.g. Amazon, Fidelity, Fannie Mae).
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