How to Fix a Flaw in Unfair Credit Score Reporting

I use my credit card for everything, because I like to fly for free. I also pay the entire balance a couple of times per month and have not paid any credit card interest in over 30 years.

However, the credit score algorithms were treating me the same as if I was carrying a balance and paying interest on it every month. In other words, my score was lower than it should be.

Your credit score is affected most by your payment history, which makes up 35% of the score. The second most influential factor in raising or lowering your score is your credit utilization ratio, affecting 30% of the score. This ratio is calculated by dividing your total available revolving (credit card) limits by your total revolving balances. The higher the ratio, the lower your score.

It is true that people who are not able to pay off credit card debt in full every month are a higher risk and should have a lower score. Statistically, they don’t have as much savings as those who do not carry balances and have a higher chance of defaulting on their loans.

But here’s the flaw in the algorithm: People who are paying their credit card in full every month are being scored the same as people who are not. Those who pay off the balance on time every month should have a higher score.

Luckily, there is a way to correct this wrong. I started experimenting with making my payments at different times of the billing cycle and discovered the solution — and it was easy.

The reason I didn’t know to take advantage of it sooner was due to confusion between three different dates in regards to credit card bills. One is the date your payment is due. This is the latest of the three dates.

The second is the statement date, which marks the end of the billing period, or when the credit card company tells you your balance and the due date. Usually, the due date is a few weeks after the billing period closes.

The third date, which nobody tells you about, is three or five days before the statement date — and that’s when you should pay the balance. By doing so, your balance reported to the credit agencies at the end of the billing period will be $0.

On the other hand, if you get your statement, see the balance and pay it in full that day, the balance will still be reported to the credit agencies, just the same as if you carried it over.

In today’s world of online account access and online payments, you have the tools to correct this unfair and inaccurate flaw in score reporting. By the way, it works even if you are carrying a balance.

The bottom line: Always pay what you can online at least three days before the end of the billing cycle — not at the end of the billing cycle and not on the due date. Your score will go up quickly.

For more tips on improving your credit score and paying down debt, follow the Office of Financial Readinesson Facebook, Twitter, Instagram, YouTube and the FINRED blog.

Written by Dave, an Accredited Financial Counselor who has been helping families plan their finances for more than 30 years.