If you pay down all your debts, and don’t have any active accounts, then you won’t have anyone reporting your payment history. This in and of itself will harm your long-term creditworthiness score - there are threads here about someone who had a) gotten into trouble, b) scrimped and paid everything down, c) lived credit-free for years, and d) needed a car loan or whatever and was turned down due to lack of credit history.
So - if you do pay them all down, keep at least one open and use it for a few small purchases every month to keep its payment history active on your credit report. Maybe card A in January, March, May and card B in February, April, June etc.
Beyond that: others have said you might get a temporary “ding” for a sudden paydown, but that should be overcome soon enough by careful management of the remaining accounts.
Asked and answered: your score reflects recent activity, and you don’t have anything reportable, so they can’t easily document that you do pay things in a timely manner.
There are certainly problems with the FICO score etc., including how secretive they are about how it’s calculated, how it doesn’t cover nontraditional borrowers etc, yours is a perfect example of why it is not the right answer for all credit needs. It simply can’t handle situations where the borrower doesn’t have anything that gets reported (hence my suggestion to the OP to keep something active).
I have to guess that for someone who does have stuff reported, it gives the lenders enough of an idea how someone will perform, or it wouldn’t still be used.
If true, that creates a really insidious incentive: to keep people perpetually taking on debt. If you do as I do - pay your bills on time and only take on debt that is absolutely necessary - you have a harder time obtaining credit when you need it. But if you frequently take on debt, for good or for bad, this in itself would seem to be better for your credit.
Sounds to me like an industry that desperately wants people to keep borrowing, no matter what. Then they don’t fully explain how the formula is calculated, and actively work against providing the information to the consumer.
Have I summed this up appropriately, or are there good reasons for things working this way?
I have come up with one advantage of not paying off credit card debt, though I don’t think it applies to the OP. During the housing bubble people ran up credit card debt, got home equity loans to lower their interest rates, and then ran up the credit cards again. Having your cards maxed out at least forces you to pay cash, and limits the increase in debt. If you have debt under control, then paying off cards and using them and paying them off every month works well. We run lots of money through our Discover Card, pay it off every month, get the cashback, and have a really good score - good enough so that the banks wanted to refinance our mortgage even when credit was tight.
The good reason for things working this way - as described upthread - is that in order to have a good credit score, you need to have a recent history which demonstrates that you are capable of borrowing money without defaulting. If you do not have that “good borrower” history - either because you borrowed money and defaulted, or because you chose not to borrow money at all for a very long time - then you will not be judged as a good credit risk. People who borrow money and default are obviously considered bad risks, but people who never borrow money are basically “status unknown,” and a lender doesn’t like to take unknown risks.
So the system is the way it is, not specifically to encourage you to continue borrowing money - it’s just that continually borrowing money is the only way to demonstrate, on a continuing basis, that you are a worthy credit risk.
In my case, I pay damn near everything with a credit card. Gas, groceries, restaurants, everything possible gets paid with a credit card. This is much more convenient than going to an ATM every few days (I typically visit an ATM every few weeks to recharge my wallet with $100 to cover tiny cash purchases here and there). Since I pay my balance off every month, there’s no interest charges for me, and in fact using the credit card is better than cash because I accrue frequent-flyer miles. My ability to reliably pay a large balance in full every month may be contributing to my high credit score.
Then the system is very bad, and I’m one example of why. Whenever I’ve borrowed I have always paid it back. I’m an excellent risk, yet I don’t have “good” credit. It would bother me less if this was just about borrowing for boats or other luxury items. But this factors in the most when it comes to peoples’ homes - the most basic aspect of living one’s life. I think it’s really wrong.
I think everyone - borrowers and lenders - would love to find a way to gauge a person’s credit worthiness without having to rely on a history of borrowing. Borrowers such as yourself who rarely borrow but would be a good credit risk would be better able to borrow money, and lenders would have more people to lend to. It would be win-win.
Unfortunately nobody has come up with a better way, and I suspect there may not be. it’s a bit like getting a driver’s license: you can take all sorts of classes, but in the end you can only get certified by actually demonstrating your ability.
If you want to improve your credit rating, get a credit card and use it. It doesn’t need to cost you anything: there are plenty of no-annual-fee credit cards out there, and if you pay off the balance in full every month, you will never be charged interest. If you don’t want to do this because you are afraid you will screw it up somehow, then you may not be the excellent credit risk you believe yourself to be.
No difference to me. Debt is debt. It gets paid back.
Is anyone seriously defending the credit score system as “Good”, or just an expedient that we’ve ended up with and it is what it is? I say it’s failed people like me who are honest and pay their debts in good faith. It also fails the lenders because this makes me even less likely to undertake borrowing.
Edit: Machine Elf, I just saw your post and I largely agree. But… see below.
Thanks for all the opinions. For the record, I intend on continuing to use my cards and paying off the balances every month. I may even start building balances temporarily and then pay them down when I get my bonus in February. That’s what I did a few times in the past. The one time that I paid off like $25k in one fell swoop (after getting my bonus and tax return), two of the card companies both immediately reduced my limits. Of course, this was in 2009 (right after the credit crisis), which also might explain why they took the opportunity to “right size” me. Of course, this was followed more and more credit card offerings in the mail, some by the same cards that cut my limits.:smack:
The idea that you’ll pay off your balances every month is not supported by the situation you describe in the OP. In other words, sounds like you’re possibly setting yourself down the same path that got you in this situation in the first place. (I don’t recall seeing #'s about how big the car loan is viz the two CC balances, true…)
A car loan is the type of situation I was struggling to explain earlier. The the loan isn’t revolving and money sunk into it is gone forever. It’s one of the downsides to paying cash for a car, the money is sunk into a non liquid asset.
I firmly believe one of the best positions to be in is to have the cash required, but then also get the loan. It requires a lot of discipline not to then blow all the cash on something else. You can then use the cash to make payments if needed, while at the same time having a safety net in case something goes wrong.
If a person was to sink all of their cash into a car, they’d be forced to get a loan (use a credit card) for any emergency repairs. Now they are stuck trying to pay down a far worse loan that they didn’t need to have.
I understand. The car loan has about $25k remaining on it and is far lower than the credit cards. I think its 3% APR vs. 6.2 and 9.8 for the credit cards.
That’s weird. So you have credit cards, you use them, you pay them back in full monthly, and you don’t have a good credit score? If you have a decently long credit history, and low utilization %age, you should have a good score. I have a few friends and family who have never carried a balance, and have scores in 800+. My own score went from 620 to 800 in the period when I paid off my balances completely each month. I have not paid a cent of interest since 2004.
Honestly, I would pull my credit report and even pay for the darned score (which is what I did when I was reworking my credit) and see if there’s anything else going on there. That doesn’t jibe with my experience.
I have lived my whole life paying off credit cards in full and on time. Every utility bill, car payment, etc has always been paid in full and on time. I’ve bought one new car and paid that off a year or so early. Yet, when I later got my mortgage, the lady at the bank looked up my score and said, “Your credit is… not great.” I believe the number was around 650.
That was a few years ago and since I no longer have a mortgage I don’t care anymore. No idea what the score is now, and I’m happy not having to worry about it. But the system rankles me and I’m surprised more people aren’t really mad about it.
Like I said, that seems really unusual and does not jibe with my experience with folks who have credit cards and pay them off in full and on time. shrug I guess it doesn’t make a difference to you right now, but I would have pulled my credit report to make sure there isn’t something wrong with it. I mean, maybe if you have like $300 in revolving credit or something, your score may be a bit low, but if you have several thousand dollars of revolving credit and low utilization, I can’t see why you’d be getting a score of 650. I can think of three people off the top of my head who pay off their balances (at least so far as they have told me) and they all have scores of over 800.
Well naturally it’s not a good idea to pay off a loan if it will leave your liquid assets too low to cover possible emergencies. That’s why I waited until I had enough money left over before paying off my car loan, and then again when I paid off my mortgage.
No. Take the loan, pay them off. Screw the lower credit limit. In fact that is a Good Thing as you then wont be tempted to run them up again. In fact, cut all but one up.
Yes, this results in a small hit to your credit score. Unless you were planning on re-fi or taking our a new mortgage soon, that small hit makes no difference.