I’ve been looking at articles about credit cards and a lot of them say to keep credit card utilization under 30%, ideally under 10%. If that’s true, does that mean cashback should rarely be above $1-2 per month? Is cashback a strange way to lower your credit score in exchange for small amounts of money? I couldn’t find anything explaining the relationship between these two opposite mechanisms of credit cards. Thanks.
In: 0
A few things:
>a lot of them say to keep credit card utilization under 30%, ideally under 10%. If that’s true, does that mean cashback should rarely be above $1-2 per month?
You can payback what goes on the card early. They only check utilization when the statement posts.
Also, utilization has no memory. You can have higher utilization for years, and then keep it low during the month you apply for the home/car loan, and it will give you the full benefit. It’s not like the other parts of credit where you need to build it up over time.
>Is cashback a strange way to lower your credit score in exchange for small amounts of money?
Credit card companies and companies looking at your credit have different goals. For credit card companies, cashback is an incentive for you to use the card more. They don’t really care (directly) about how that affects your credit, as long as you don’t default.
Companies like ones that give car loans want a good credit score because it makes you more likely to pay it back.
You don’t need to minimize your usage. You need to not spend money you don’t have in the first place.
So instead of paying Cash, or using your Debit card, you use you Credit card and then pay it off as soon as possible.
The Credit Card company makes money no matter if you pay interest on your card balance or if you pay it off as soon as you charge something.
They charge a fee for every single usage of one of their cards to the Point of Sale business.
So the more you use your card, the more money they make from these fees.
So they offer cash back so that you use it more.
By keeping your utilization under 30%, that just means don’t charge more than 30% of your limit.
So if you have a $1000 limit, don’t use it for any charges over $300. And if you pay it off that same day, it doesn’t matter either way.
So you could make a $300 charge today. Go home and pay it off, then go out tomorrow and do it again.
You don’t need to minimize your usage. You need to not spend money you don’t have in the first place.
So instead of paying Cash, or using your Debit card, you use you Credit card and then pay it off as soon as possible.
The Credit Card company makes money no matter if you pay interest on your card balance or if you pay it off as soon as you charge something.
They charge a fee for every single usage of one of their cards to the Point of Sale business.
So the more you use your card, the more money they make from these fees.
So they offer cash back so that you use it more.
By keeping your utilization under 30%, that just means don’t charge more than 30% of your limit.
So if you have a $1000 limit, don’t use it for any charges over $300. And if you pay it off that same day, it doesn’t matter either way.
So you could make a $300 charge today. Go home and pay it off, then go out tomorrow and do it again.
A few things:
>a lot of them say to keep credit card utilization under 30%, ideally under 10%. If that’s true, does that mean cashback should rarely be above $1-2 per month?
You can payback what goes on the card early. They only check utilization when the statement posts.
Also, utilization has no memory. You can have higher utilization for years, and then keep it low during the month you apply for the home/car loan, and it will give you the full benefit. It’s not like the other parts of credit where you need to build it up over time.
>Is cashback a strange way to lower your credit score in exchange for small amounts of money?
Credit card companies and companies looking at your credit have different goals. For credit card companies, cashback is an incentive for you to use the card more. They don’t really care (directly) about how that affects your credit, as long as you don’t default.
Companies like ones that give car loans want a good credit score because it makes you more likely to pay it back.
The credit card companies don’t want you to minimize your credit card usage. They want you to use your credit card *all the time*, pay the minimum every month, and rack up gigantic amounts of interest – because that’s how they make money.
*You* want to minimize your credit card usage because you don’t want to be paying gigantic amounts of interest.
All of the rewards are the card company’s way of saying “Look at all the bonuses of using your card more! Go on and use your card more! Use your card a lot! Use your card for *everything* and you’ll get *so many bonuses*!” And it’s true, you will! And the amount of interest you pay will be *far* more than the bonuses were.
The “loophole”, obviously, is to use your card for everything and collect the bonuses…but then pay the *entire* amount off every month, so that you don’t pay interest. This relies on you having that much cash to begin with. The credit card companies are fine with this too, because they’re betting on you screwing up eventually and starting to pay interest sooner or later.
The credit card companies don’t want you to minimize your credit card usage. They want you to use your credit card *all the time*, pay the minimum every month, and rack up gigantic amounts of interest – because that’s how they make money.
*You* want to minimize your credit card usage because you don’t want to be paying gigantic amounts of interest.
All of the rewards are the card company’s way of saying “Look at all the bonuses of using your card more! Go on and use your card more! Use your card a lot! Use your card for *everything* and you’ll get *so many bonuses*!” And it’s true, you will! And the amount of interest you pay will be *far* more than the bonuses were.
The “loophole”, obviously, is to use your card for everything and collect the bonuses…but then pay the *entire* amount off every month, so that you don’t pay interest. This relies on you having that much cash to begin with. The credit card companies are fine with this too, because they’re betting on you screwing up eventually and starting to pay interest sooner or later.
You’re confused. Utilization == using. Utilization is what % of your total available credit is being used at whatever point you’re doing the credit check. That’s it.
You’re confused. Utilization == using. Utilization is what % of your total available credit is being used at whatever point you’re doing the credit check. That’s it.
So first of all, your credit card company doesn’t want you to minimize your credit card usage – it wants you to maximize it. That’s why they give you rewards for using it. The person who doesn’t necessarily want to go all-out on your credit card is you, if you are a responsible individual.
Second, you can do both. The main thing that will hurt your credit score is your outstanding balance. You can (usually) pay off (part of) your outstanding balance whenever you want, so there’s no need for it to ever get very high if you have the funds to pay it off. If you can afford to pay for a purchase by debit card, you can also afford to pay by credit card and simply pay off the resulting debt immediately. So if you can choose between a debit card with no rewards, and a credit card with rewards, the latter is almost always a better choice.
(It’s stupid, really, because ultimately people who don’t have (good) credit cards end up subsidizing this system for those who do – it’s not like credit card companies just give you rewards as a present out of the goodness of their hearts. Plus, as if pricing in the US wasn’t already complicated enough (with tips, sales tax not shown on labels, etc.), it adds more mental calculus to every single purchase you make. Money should just be money – not another product that itself can have different prices or value. I’m glad I don’t have to deal with this nonsense any more.)
So first of all, your credit card company doesn’t want you to minimize your credit card usage – it wants you to maximize it. That’s why they give you rewards for using it. The person who doesn’t necessarily want to go all-out on your credit card is you, if you are a responsible individual.
Second, you can do both. The main thing that will hurt your credit score is your outstanding balance. You can (usually) pay off (part of) your outstanding balance whenever you want, so there’s no need for it to ever get very high if you have the funds to pay it off. If you can afford to pay for a purchase by debit card, you can also afford to pay by credit card and simply pay off the resulting debt immediately. So if you can choose between a debit card with no rewards, and a credit card with rewards, the latter is almost always a better choice.
(It’s stupid, really, because ultimately people who don’t have (good) credit cards end up subsidizing this system for those who do – it’s not like credit card companies just give you rewards as a present out of the goodness of their hearts. Plus, as if pricing in the US wasn’t already complicated enough (with tips, sales tax not shown on labels, etc.), it adds more mental calculus to every single purchase you make. Money should just be money – not another product that itself can have different prices or value. I’m glad I don’t have to deal with this nonsense any more.)
Latest Answers