How credit card rewards can equal a credit score penalty.

There was an article on the Wall Street Journal's website (Credit Scores: Why the latest fixes won't work) that discussed new consumer protections outlined in the Dodd-Frank financial-overhaul law that takes effect in July 2011. One of the points the article makes is that "Credit scores still don't reflect whether you are making good financial decisions or poor ones." It goes on to mention credit card users who regularly utilize the majority of credit available to them. this group will pay of the entire amount each month, but their intention was to maximize the cash back awards or other incentives offered by the credit card company.

Sam has a credit limit of $1,000.00. His card company offers him 2% back on all purchases. Sam pays bills with his credit card and looks at it as a 2% discount because of the cash he will receive back. He typically spends about $900.00 of his $1,000.00 credit limit each month, but pays off the entire amount as soon as he receives the bill. The problem with this however, is that Sam has a perpetual balance of $900.00 on his account. He is constantly paying bills and making purchases with his card so on a credit report it always looks like he is utilizing 90% of his credit limit. That will work against Sam's overall credit score.

"Amounts Owed", according to, makes up 30% of your overall credit score. It is the second highest weighted factor in the formula determining your score. Many experts will tell you that keeping your balances to 10% of the account's limit is the best way to achieve the highest ranking given for this particular factor. Even though Sam has a great payment history, by paying off his entire debt each month, his credit utilization rate is hurting his credit score.

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