Why paying off credit card balances is more important than ever
Points and miles enthusiasts know that earning and keeping an excellent credit score is an essential part of a successful, ongoing credit card rewards strategy. Good credit is key if you want to be in the best position possible to qualify for future sign-up bonuses, premium credit cards and more.
One smart way to protect your credit scores (and avoid wasting money on expensive interest charges) is to pay off your credit card balances during the grace period every month. This good habit may help you maintain a lower credit utilization rate—especially if you consistently pay off each card balance before its statement closing date. In fact, paying your full credit card balance is so important, it’s one of TPG’s 10 commandments of credit card rewards.
What's changing?
An October 2022 announcement by the Federal Housing Finance Agency (FHFA) has made it more essential for consumers to pay their credit cards in full each month. In an effort to modernize the credit score models mortgage lenders use during the home financing process, Fannie Mae and Freddie Mac will begin using new credit scores: FICO 10T and VantageScore 4.0.
What’s interesting about FICO 10T and VantageScore 4.0 is that both credit score models consider trended data. Trended data takes a closer look at how you have managed your credit card payments over the past 24 months—including whether you’ve routinely paid them in full or revolved a balance.
If you’re someone who habitually keeps a balance on your credit cards from month to month, your credit score might be lower if a lender uses a credit score that considers trended data. For credit card balance revolvers, it might be harder to buy a home in the future.
Related: Credit card strategies for mortgage and home loan applicants
Why are mortgage credit scores changing?
Lenders use credit scores to help manage risk. The purpose of both a FICO and a VantageScore credit score is to predict the likelihood that a consumer will pay a credit obligation late (90 days or worse) within the next 24 months. For mortgage lenders and credit card issuers alike, credit scores help companies determine which applicants are most likely to repay the money they borrow as promised.
Over time, consumer credit behaviors change. Credit score developers like FICO and VantageScore create new credit score models that consider these changes and can produce more accurate and up-to-date credit scores.
You can think of new credit score models like the software updates that your smartphone manufacturer releases every so often. Your smartphone will work without the updates, but probably not as well as it could.
Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have used the same credit score model for the last 20 years: Classic FICO. And even though FICO and VantageScore Solutions have released numerous new credit scores during that period, mortgage lenders couldn’t use them because the GSEs wouldn’t allow them to do so.
Related: Your FICO Score and which credit issuers offer it for free
The credit scores that mortgage lenders use can have a meaningful impact on American families. So, in 2018, Congress directed the FHFA to look into new credit score models that lenders could use to evaluate mortgage applicants. The FHFA and GSEs spent several years validating potential credit score models before finally approving FICO 10T and VantageScore 4.0 for use in mortgage lending.
Two of the most important goals that the FHFA and the GSEs hope to accomplish once lenders begin using the newly approved credit scores are as follows.
- Improved credit score accuracy: According to FICO, mortgage lenders may reduce the risk of loan defaults by as much as 17% by updating to the newer FICO 10T scoring model. Fewer mortgage defaults—foreclosures—should promote a more stable housing market and potentially better interest rates for borrowers all around. (Of course, other factors affect mortgage interest rates as well.)
- More access to homeownership: In addition to trended data, the newer credit score models the GSEs approved also consider rent payment history, utilities, and mobile phone payments (when available on consumer credit reports). As a result, more people may qualify for a credit score and could be eligible to purchase a home in the future. VantageScore says that the credit score changes the FHFA approved could empower millions of credit-worthy Americans to purchase a home.
Related: Tips on how to prepare for buying a home
How does this affect you?
It will likely take several years for the mortgage industry to adopt the credit score updates the FHFA announced in October. In addition to reviewing new credit scores, mortgage lenders will begin to review two out of three consumer credit reports from the major credit bureaus in the future (rather than all three credit reports as is common practice at present).
The delay is good news for anyone currently working to pay down credit card debt. It means you may have a little time to improve your score if you’ve developed some bad credit card management habits.
Related: How to make sure your credit is in great shape for the new year
Bottom line
Remember, credit score models that consider trended data (like FICO 10T and VantageScore 4.0), evaluate your past credit card management habits and not just your current credit utilization rate. That means your credit score might decline if you’ve been revolving a balance over for several months instead of paying off your full credit card balance.
But these credit score models only look back for 24 months. If you can work to pay off your credit card balances now and keep up that good habit each month, you might be able to avoid potential problems in the future.
Even if you don’t plan to purchase a home or refinance now, it’s best to work to earn the best credit score possible. Other lenders and credit card issuers may also use credit score models that consider trended data.
And it’s always wise to maintain good credit so that it’s there to use when and if you need it.
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| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
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Intro offer
Annual Fee
Recommended Credit
Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
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Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.
Rewards Rate
| 4X | Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 4X | Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
| 2X | Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com. |
| 1X | Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases. |
Intro Offer
You may be eligible for as high as 100,000 Membership Rewards® Points after spending $6,000 in eligible purchases on your new Card in your first 6 months of Membership. Welcome offers vary and you may not be eligible for an offer.As High As 100,000 points. Find Out Your Offer.Annual Fee
$325Recommended Credit
Credit ranges are a variation of FICO® Score 8, one of many types of credit scores lenders may use when considering your credit card application.Excellent to Good
Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.