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.
[Related Article:Can You Really Get Your Credit Score for Free?]
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.