“John, I have budgets $1,000 for Christmas shopping. I’m very good at sticking to my budgets so I have no doubt that I’ll cap out at $1,000.
But, I also know that spending $1,000 on my credit card can lower my credit score.
I don’t want to obsess over my credit score but I was wondering if there’s anyway to protect it from the damage that will be caused by the new $1,000 of debt.”
Wow, what a great question. Talk about having a plan of attack!
And thankfully the answer to the Minter’s question is yes, there is a way to insulate your credit scores from not only the $1,000 you’ll spend during the holidays but this will also work any other time of the year.
First Things First
First things first…go grab one of your credit card statements. You’ll need it as I explain the strategy. When you find a statement look for two dates; the payment due date and the statement closing date.
The payment due date is obviously the date on which the credit card issuer wants at least the minimum payment due.
We’re not worried about that date for this strategy. We’re focused on the statement closing date.
The statement closing date is the day when your credit card issuer aggregates all of your charges for the billing cycle. The sum of the charges (minus payments and credits) is your balance due for that month.
So, if your statement closing date is January 30th, then all charges that occurred in the 30 days going back to December 30th make up your statement balance.
And, your statement balance is what’s reported to the credit reporting agencies.
That’s why your credit card accounts never show a zero balance on your credit reports even if you pay your bill in full each month.
You’d have to pay off your card’s balance and then stop using the card for one full billing in order for your statement to actually a zero balance.
Where the Strategy Comes In
There’s another way though and that’s the strategy. If you were to pay off your balance BEFORE the statement closing date then you won’t have a balance ON your statement.
Follow me…your statement balance is a combination of (charges + fees + interest) – (payments + credits).
If you can make all of that equal $0, then not only will your statement balance be $0 but the balance reported to the credit reporting agencies will also be $0.
Because your balance is reported as being $0 to the credit reporting agencies, your shopping and credit card usage activity will never make it to your credit reports.
This is how your protect your scores while still using credit cards. Credit scores can’t consider a balance that’s not on a credit report.
Be Careful: It’s Not Foolproof
Still, this strategy isn’t perfect.
First off, you forego the grace period by paying your card in full by the statement closing date.
Still, if you need 21 days (the minimum required grace period thanks to the CARD Act) in order to pay your bill then I’d suggest credit cards might not be for you.
Another small problem with the statement closing date strategy is if you figure your math wrong you still may be left with a balance that triggers a statement.
That means you’ll have a small balance on your credit reports and have to make a payment by the actual due date.
This isn’t a huge problem because the balance will likely be so low relative to your credit limit that the impact to your credit scores will be minimal.
John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.