Question of the Week

"Hey Treyton, how bad is it if I don't pay off my credit card every month?"

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I get it, sometimes we run up credit cards a little too far than what we can afford to pay off. It happens, but let me explain the ripple effect it has on your credit score because it may be more costly than you think.

Your credit score is made up of 5 different factors:

• Payment history - 35%

• Credit utilization - 30%

• Length of Credit history - 15%

• Credit mix - 10%

• New credit - 10%

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So for this scenario - let's say you have a $3,000 credit limit, used $2,000 and could only afford to pay off half.

When you go to use your card next month, you would already be starting at a $1,000 balance (which is 33% credit utilization). Any new spending in the next month will only add to this existing $1,000 balance, driving up credit utilization which will cause your credit score to presumably drop the next month.

Speaking from experience, just a high credit utilization alone will cause your score to go down very quick. One time mine dropped 14 points just because my utilization went from ~20% up to 70% one month. It can take months or sometimes even years to build your score back up from significant drops.

Also, if you were to miss a payment, that would hurt your score from a payment history standpoint (which is 35% of your credit score).

Not to mention the interest that would be owed every month that you were to be carrying a balance. This can add up to hundreds, and even thousands of dollars quickly if it's not paid off in full.

To go just one step further, if your credit score was to drop a fairly large amount and you went to purchase a car or apply for a mortgage - that low credit score will cause them to issue a higher interest rate - meaning you would have to pay more in interest over the life of the loan simply because of your credit score. On large purchases such as a home, this can sometimes lead to paying over $20,000 in additional interest.

Since payment history and credit utilization are the two biggest factors that play into your credit score, not paying off a credit card balance in full will have a significant impact on your credit score as well as cause you to pay more in interest.

To effectively use a credit card, it's highly recommended to pay off the balance in full every month to avoid additional costs and damage to your score.

Tip: If you find yourself consistently not being able to pay off a credit card, use a debit card for a month. You'll be able to track spending easier since it's within your bank account and with each purchase, you can see the money coming out of your account.