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Ask Creditnet: Carry a Balance or Pay in Full?

Dear Creditnet: I have finally received my first credit card for bad credit after bankruptcy. My question is do I charge $400 to the card and make minimum payments over time to establish a track record, or do I charge $40 to $50 monthly and pay off the entire balance?

Answer: While I think it's great that you were approved for a new credit card, it worries me that you're asking this question. I hope that going through a bankruptcy at least taught you a few things about responsible credit card use. If not, here are some things to keep in mind before activating your new card. First, you should always pay credit card balances in full. Carrying a balance from month to month is simply not an option. That's how you need to look at it.  If you're living within your means and only purchasing what you can afford to pay off each month, you'll never have to worry about finding yourself in a bad debt situation again. Second, it's a credit-scoring myth that only paying the minimum due on your credit card will help improve your FICO scores faster. That's just not the case. The only thing paying the minimums will do is pad the pockets of the credit card companies as you pay extra interest charges. Always pay in full—no questions asked. Your credit scores will improve over time as you continue to build a positive payment history. You don't mention what credit limit your new card came with, but let's assume the limit is $400. The last thing you should keep in mind is that credit-scoring models care a lot about what percentage of available credit you use each month. If your total available credit is $400, then you shouldn't be spending more than about $40 on the card each month. Once you reach the $40 limit, use a debit card or pay cash for the rest of your purchases until you're able to pay your balance down, increase the card's credit limit, or add to your total available credit with a better rewards credit card.

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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Kevin @Debteye's picture

I remember reading somewhere that the credit card companies target consumers fresh out of bankruptcy because they seem to have the same spending habit. Can you validate this? I wish I can remember where I saw this.

Joshua Heckathorn's picture

I don't know if anyone has done more recent research, but I remember a study done back in 2007 by Katherine Porter at the University of Iowa. Google it and I'm sure you can find it- it was called something like "Bankruptcy Profits". She basically found that the credit industry sees bankrupt families as lucrative targets for lending and that post-bankruptcy solicitation has grown substantially in recent years.

Kevin @Debteye's picture

Thanks! I researched it and it was a good read!