What This New Credit Score Measurement Tool Says About You

What Are Revolvers and Transactors? How Will These Labels Impact Your Credit Score?

There is an old myth which suggests that leaving a small balance on your credit card will actually help boost your credit score. While that may not make a whole lot of intuitive sense, plenty of people continue to believe this is the case.

However, not only is this not true, but due to the credit score measurements guidelines, allowing your account balance to rollover from one month to the next is actually detrimental to your credit score.

Revolvers vs. Transactors

When it comes to card balances, the three credit bureaus, TransUnion, Equifax and Experian, sort cardholders into one of two categories—revolvers or transactors.

A transactor is a cardholder who uses their credit card, but then pays off the bill at the end of each billing cycle, starting each month over with no balance. In contrast, a revolver is an individual who allows at least part of their balance to carry over into the next billing cycle.

Up until a few years ago, whether a cardholder carried a balance from one month to the next was not taken into account by the credit bureaus. However, the three organizations introduced new credit score measurements, along with a distinction between different classes of borrowers, in the fall of 2013.

Now, cardholders who allow their balance to rollover are judged to be a higher credit risk than those who pay off their balance in full.

What Does This Mean for You?

Borrowers who consistently pay off their balance each month in order to avoid debt are in good standing in terms of both finances and credit score. For those who are not able to cover their balance so diligently though—you are likely already experiencing the consequences.

Since the new credit score measurements took effect in 2013, the credit bureaus have been partially gauging your credit score on your ability to pay off the balance of your credit card each month. If you have been keeping a credit card balance without paying off the total each month, it will already be reflected in your credit score.

Additional Benefits for Transactors

Besides having a higher credit score, trying to pay off the balance of your credit card each month will save money in the long run.

Credit card issuers make money from revolvers by charging interest. Transactors, however, do not pay interest, because they do not carry a balance from one billing cycle to the next. This all relates to the basic concept behind credit scores—a gauge of the level of risk one represents to lenders.

While lenders make more money off of revolvers, they also represent a greater risk of accumulating a large balance and becoming delinquent. Transactors, on the other hand, are seen as much more likely to return the money that they borrow.

Now more than ever, it’s wise to try and keep your credit card balance under control. Not only will it save money now and keep you out of debt, but it will make prospective lenders more confident in you, earning you better interest rates on future loans.

Minimizing Debt

Consumers who are interested in improving their financial health should first focus on minimizing their debt load. Not only will this decrease cash flow problems in the future, it will, as we’ve mentioned, improve your credit score.

  • Loan refinancing might be an option. Lowing monthly payment amounts or decreasing the interest rates could help create financial stability.
  • Selling clothes or other household items at consignment shops, garage sales, or online sales pages can generate cash to pay off debt.
  • Requesting refunds for unused items that are still within the returns time limit can provide needed cash too.
  • Downgrading or eliminating unnecessary expenses will make a big difference (cable, gym membership, magazine subscriptions, etc.).

Sometimes, professional help is needed to tip the scales back in your favor. For example, a financial planner could help you create an actionable, achievable, long-term plan.

Also, eConsumer Services® can help consumers get quick and easy refunds for purchases they’ve made. And cancelling subscriptions is extremely simple, thanks to the services provided by eConsumer Services®.

If you need help minimizing your debt, let us know. Fill out a claim form and we’ll help you stabilize your cash flow and debt load.

A credit score measurement tool might label you a revolver, but that doesn’t mean you can’t rise above the negative connotation!