Credit card myths?

[Pete 75C]

I have a couple of credit cards and life/growing kids etc has meant that there has been a fair old balance on each one when the monthly payment is due. Not paying them off in full each month is far from desirable but has been a necessary evil recently.

I'm now in a position to clear the balance on both of them and just keep them hidden in a dark wallet for a rainy day.

Is there any advantage to keeping a small balance on them or is it best to clear them in full each month? There is some conflicting advice on money forums and I'm beginning to smell a rat. I'm starting to wonder if the advice to keep a small balance is nothing more than a myth and serves no purpose other than making the card issuer a little richer.

Any thoughts?

[John Isherwood]

I have a couple of credit cards and life/growing kids etc has meant that there has been a fair old balance on each one when the monthly payment is due. Not paying them off in full each month is far from desirable but has been a necessary evil recently.

I'm now in a position to clear the balance on both of them and just keep them hidden in a dark wallet for a rainy day.

Is there any advantage to keeping a small balance on them or is it best to clear them in full each month? There is some conflicting advice on money forums and I'm beginning to smell a rat. I'm starting to wonder if the advice to keep a small balance is nothing more than a myth and serves no purpose other than making the card issuer a little richer.

Any thoughts?

 

We clear ours every month - we have a direct debit to transfer the full balance from our current account.

 

We have encountered no adverse effects, to the best of our knowledge.

 

Regards,

John Isherwood.

 

[jjb1970]

My own view is that the only time that leaving something on the card makes sense is if you take advantage of an interest free transfer offer when you can use it as a short term interest free loan. If you're paying interest I'd clear the balance every month. If you need a loan then credit card interest rates tend to be a lot higher than you can get for a personal loan from a bank or building society.

[Legend]

I clear mine every month . No issues over the last 30 years ! I can't see it makes any sense leaving a small balance

[Joseph_Pestell]

Definitely, clear the whole balance.

 

But don't hide the cards away either. Keep using them at a low level, such as filling up with petrol, and pay off in total each month. That is the best route to a high credit rating.

[njee20]

No reason whatsoever to ever leave a balance on a credit card, that's lunacy. Some people advocate leaving a tiny balance on a mortgage in case you want to draw down on it again - if you have no borrowing a lender may be reluctant to lend to you, perversely.

 

Pay your credit card off in full though if you can and it's the cheapest debt you've got.

[Guest]

Thanks - that's what I was thinking. Leaving a balance on a credit card does appear to serve no purpose. A myth started, no doubt, by the lenders themselves!

[jonny777]

Oh dear. My post is going to be the view of lunacy. 

 

I have had a credit card since the early 1970s and I have hardly ever paid off the full balance in that time. I am well aware of how much extra I pay in order to service interest on my debt, but I am a bit of a spendthrift and if I have a large gap between my balance and credit limit then I tend to spend more. 

 

I could lower my credit limit, but if I need to pay a large amount suddenly then I am stuffed. I regard the silly interest rates as the price I pay for the convenience of having a rolling loan throughout most of my life and I'm sure the credit card company loves people such as me. 

 

My answer to the original question is that I would keep a small balance on the cards because credit reference agencies seem not to like people who have a card and rarely use it. 

[Guius]

The only possible thing on the 'keep a small debit' side of the argument is that, under certain circumstances more credit worthiness (should you require more credit) is apportioned to someone  who demonstrates he/she can regularly make payments, above someone who has no indebtedness and is therefore an unknown quantity. It my seem a counterintuitive view point to hold, but I believe that to be the situation. 

 

Guy

[Joseph_Pestell]

The only possible thing on the 'keep a small debit' side of the argument is that, under certain circumstances more credit worthiness (should you require more credit) is apportioned to someone  who demonstrates he/she can regularly make payments, above someone who has no indebtedness and is therefore an unknown quantity. It my seem a counterintuitive view point to hold, but I believe that to be the situation. 

 

Guy

 

Not at all counterintuitive. That is why I said that one should not hide the cards away but use them regularly before paying off balance each month.

[Dunsignalling]

The only possible thing on the 'keep a small debit' side of the argument is that, under certain circumstances more credit worthiness (should you require more credit) is apportioned to someone  who demonstrates he/she can regularly make payments, above someone who has no indebtedness and is therefore an unknown quantity. It my seem a counterintuitive view point to hold, but I believe that to be the situation. 

 

Guy

Turning over small amounts isn't really going to impress anyone. Best to use it regularly but keep paying it off so that a more substantial track record is created.

 

John

Edited March 15, 2018 by Dunsignalling

[JohnR]

I would say the argument is not that you should keep a balance on the card, but rather that you should spend a small amount each month and clear it in full to help with your credit rating. If necessary, make sure you dont have large credit limits available - providers often increase limits to entice you to use the card, while having a lot of spare credit on a card can count against when applying for other credit (eg car loan, mortgage etc). 

[Mark Saunders]

Pay it off each month if possible and treat it as an interest free overdraft with purchase protection insurance!

 

Mark Saunders

[pete_mcfarlane]

At the risk of pointing out the bl****g obvious, if you can't afford to clear all of the debt on the cards, pay off the one with the higher APR first.  

 

Thanks - that's what I was thinking. Leaving a balance on a credit card does appear to serve no purpose. A myth started, no doubt, by the lenders themselves!

 

I doubt it started with the lenders. How credit cards work (or more specifically, how interest payments work) seem to be a dark art to many people, so it's not surprising that myths like this arise. It's one of the reasons why payday loans like Wonga became so popular - despite their many drawbacks, it's made very clear how much you will have to pay back each month (assuming all goes well and you don't get charged for missing repayments). This is isn't obvious when you borrow on a card.

 

And remember that cards aren't designed for long term borrowing (as the chap from Barclaycard pointed out a few years back to a Commons select committee, and then got ridiculed by the press for saying this....). They're meant to be either paid off every month, or used to spread the cost of unexpected spending (new TV, or your car blows up and needs expensive repairs) over several months. There are often cheaper ways to do longer term borrowing. 

[Reorte]

The only possible thing on the 'keep a small debit' side of the argument is that, under certain circumstances more credit worthiness (should you require more credit) is apportioned to someone  who demonstrates he/she can regularly make payments, above someone who has no indebtedness and is therefore an unknown quantity. It my seem a counterintuitive view point to hold, but I believe that to be the situation. 

 

 

I've heard that said, and it seems to be the case from personal experience. I'd have thought having managed to go a long time without even needing to borrow should be a good sign of low risk (but low profitability for the lender).

[tender]

I buy virtually everything on my card and pay it off 'in full' (as Martin Lewis says) at the end of the month. My card gives me 1% cash back on everything i spend at the end of the year so a nice little Christmas bonus.

[njee20]

I've heard that said, and it seems to be the case from personal experience. I'd have thought having managed to go a long time without even needing to borrow should be a good sign of low risk (but low profitability for the lender).

But the fact you're borrowing at all implies you need the money, and you then have no track record of repaying. Therefore you're a riskier prospect than someone who borrows regularly and repays each month.

[cravensdmufan]

I use my two as much as possible each month as long as I know I can pay them off in full when the statement comes.

 

It keeps your credit rating good.

 

Plus if you buy goods online or holidays etc if things go wrong (such as the company not supplying the goods, or faulty, or if the go bust) then the credit card company refund you....I think!

 

And since recent legislation, traders are not allowed to surcharge you for using a credit card.

[Mad McCann]

I try not to owe anyone money although through necessity I had to use it a few times a couple of years ago and I’d been slow paying it off when I went back temporarily to full time work last year as I wanted to clear the overdraft that had also accumulated first. Once that goal was attained, I transferred the balance to a new card with a long term 0% deal in order to pay it down at leisure.

I have used the card in the last month to pay the deposit on the Rails 812s.

I’m about to clear that but I’m considering pre-loading the card with £10 a week so that the models will esssntially be paid for when dispatch time comes.

Unless anybody sees a flaw in that logic I think I’ll go for it.

 

D4

[njee20]

Have you checked if your provider will actually allow you to have a credit balance? It's not a common thing to do - you'd be better setting up a savings account and sticking the £10 in there. It will earn you very little interest, but it'll be doing something.

[Kickstart]

Have you checked if your provider will actually allow you to have a credit balance? It's not a common thing to do - you'd be better setting up a savings account and sticking the £10 in there. It will earn you very little interest, but it'll be doing something.

 

I have a card which I don't think has any policy about a positive balance. But I have a standing order for the min payment, and with negligible balance that is £5. So it rapidly lands up in credit quite often.

 

Adds up for 6 months to a year, then I buy something on it. Probably putting into debit again for a while.

 

Katy

[antrobuscp]

For us, credit cards are a convenient way of paying a number of bills with one single payment and having a record of the items - the cashback days have largely gone. You also have, in certain circumstances, more protection in the case of problems with the goods and services. Probably 40 years ago, we cleared the modest balances from savings - I'd previously kept cash balances for immediate problems but found I could clear the cards and still have a cushion to cover problems. Since then, the cards have been used for almost all shopping, but have been cleared every month. You have to exercise personal discipline over your spending, but you're financially better off. No downside that I've come across re credit rating - unless you miss a payment, which you could do anyway.

 

Colin

[Derekl]

I use credit cards for virtually all spending, but pay off in full each month. The advantage, as noted above, is that I have a full record of spending should I want to analyse it (which I can't actually be bothered to do, but there we are). Payments of £100 plus have the protection of Section 75 of the Consumer Credit Act which makes the card provider jointly and severally liable with the retailer or service provider if anything goes amiss, as can happen. I hav a good credit rating which I suspect is a result of moderate spending paid off regularly.

[teaky]

I think the 'keep a small balance on your card(s)' idea was correct but is now out of date.  It came about when balance transfers were free.  You could build up a debt on one card and transfer it to another just before payment was due, then to another and so on, circling around and effectively getting a free loan.  The card companies cottoned on to this and introduced balance transfer fees.

 

Other than for short-term convenience, keeping a balance on a card is best avoided due to credit card interest rates being higher than most other forms of borrowing.

 

Using your card(s) regularly and paying them gives you a track record that leads to a good credit rating since you demonstrate the ability to pay off debt.  If you always keep within your means and simply use a card as a cash replacement tool then it should not lead to debt.  If you are not good at managing your expenditure this way then just keep your credit card for emergencies.

 

I am aware that some of this duplicates what others have said in earlier posts but it does no harm to reinforce it.

[Bernard Lamb]

Have you checked if your provider will actually allow you to have a credit balance? It's not a common thing to do - you'd be better setting up a savings account and sticking the £10 in there. It will earn you very little interest, but it'll be doing something.

 

So what happens if you have a small amount on the card for an item you have bought and then get a larger refund?

I have never come across a situation where this has not gone through without question.

I would have thought it was quite a common occurrence.

I am in that situation at the moment where I paid off a card last week just before the monthly payment due by date and now have a refund for a cancelled cinema performance when the projector conked out.

Bernard