You can collect plenty of free goodies if you pay your monthly expenses with a credit card. Air miles, discount points and even cash are among the many baubles the card companies will dangle in front of you to get you to use their cards. If you reach for the prizes, though, make sure you don't fall off a cliff. Using credit to pay your expenses will only benefit you if you have the discipline to pay off your card balances every month. If you don't -- and most people don't -- you might fall into one of the traps that can quickly jack up your expenses and damage your credit score.
Credit Score Basics
A credit score is a number that financial institutions use to help determine whether to give you new credit and loans. Your credit score is a based on a variety of financial information, such as your debt payment history, your total amount of debt, the types of debt that you have and the length of your credit history.
Paying monthly expenses with a credit card can potentially hurt your credit score if you allow the balance on your credit card to creep up over time. According to the Fair Isaac Corp., a company that helped create formulas used to calculate credit scores, about 30 percent of your credit score is derived from the amount of debt that you owe. Your credit score tends to suffer if your total debt increases and if your credit card balances are near your credit limits. Using cards to pay monthly expenses can increase total debt and bring you closer to your credit limit if you fail to pay your balances off at the end of the month.
Debt payment history is the most important component of your credit score. The Fair Isaac Corp. says that your payment history accounts for about 35 percent of your score. If you use credit cards to pay monthly bills, your total debt can accumulate quickly due to the high interest rates that credit cards charge unless you pay the bill in full each month. This can lead to a situation where you have difficulty affording the minimum monthly payments on the card and you may eventually make late payments or miss payments, damaging your credit score.
Frequent use of a credit card can help your credit score, so long as you pay the card faithfully each month and your total balance does not increase over time. About 15 percent of your score is based on the length of your credit history, so establishing a long history of credit use and responsible payment helps build your credit score. Paying monthly bills with your credit card is not guaranteed to hurt your credit score, but avoid letting credit debt accumulate and making late payments to prevent a negative impact on your credit.
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