What This Means to You

The inner workings of the credit card processing system may not mean so much to any individual cardholder—to you—directly. But a basic understanding of the mechanics should give you some idea of how impersonal the whole system is.

Card issuers (let alone card processors) don’t really care who you are or what your story is. All they care about is that you keep the money flowing through the system—and you do that by paying your bills on time. Period.

With travel and entertainment cards that do not allow you to run up an outstanding balance, a good borrower pays the full amount of what he or she charges each month by the assigned due date.

In the case of revolving credit card accounts, a “good” borrower pays at least the minimum monthly payment indicated on the credit card statement—again, on or before the due date.

While some consumers believe that paying off their revolving credit card bill in full each month makes them a “better” borrower, that depends on your perspective. Certainly, many financial advisers will suggest that you maintain zero balances on your credit cards whenever possible.

But credit card providers make money by charging you interest when you run up a balance. Card issuers like consumers who maintain an outstanding balance—up to a point. And that point is usually about 20 percent of your monthly income.

So, maintaining at least a small balance and then paying it off over time can be better, overall, for your credit rating than paying your bill in full each and every month.

If the “good” borrower pays the right amount on time each month, you’d expect that the “bad” borrower would do just the opposite—and you’d be right. Bad borrowers pay late, if they pay at all.

Next: Conclusion