Better for my credit: regular, periodic payments, or paying off a debt early?

Factual Questions
1

A little over a year ago, I went to Rooms To Go (a furniture store), and bought a few random pieces to decorate my den and bedroom (a dresser, a desk, a coffee table, and a lounge chair). They gave me a promotional financing deal, where I pay 0% interest for 2 years, provided I don’t miss any payments, and pay at least the minimum owed (only $15 a month, I believe) during the promotional period.

I’ve set up an automatic deduction from my checking account, and have been paying $45 a month regularly since the inception of the deal. By the end of the 2 years, I’ll owe less than $100, and I intend to just pay it off in one fell swoop.

I’ve figured this is great for my credit - Although I’m not incurring any financing charges, I’m demonstrating an ability to make on-time, regular payments.

Lately, though, as my wife and I have begun browsing for houses (we intend to buy in the beginning of the year), I’ve been thinking about how to “max out” my credit score.

The balance owed right now is low enough that I could pay it off in its entirety with money sitting in my savings account. This would be a pay-off about 6 months earlier than the end of the promotional period.

Does it make sense to do so? Is it better, credit-wise, to have incurred a debt and then paid it off early, or to make regular, periodic payments without ever being late throughout the financing period?

To make this a more universal question (since Rooms To Go actually gave me a credit card - with regualr, outrageous credit card rates - in case I want to buy more stuff), how would this apply to bigger purchases, such as my car (also 0% financing!), or a mortgage? I financed my car for 5 years - would it look better on my credit score if I paid off the car in 3 years, or would it be better to show that I can make every payment due over 5 years without ever being late?

Thanks to all who reply.

2

Whenever I have checked my credit history, the things mentioned were # of payments missed in the last x years. No mention of how a credit account was closed down (ie by early repayment etc) was made.

3

Credit scores don’t necessarily look for your habits - paying on time or early or periodic or whatever. It’s just an algorithm.

The biggest impacts are caused by being late: don’t do this.

In terms of credit usage, there are a few factors that come into play. One of the primary ones is your debt to credit ratio - that is, how much of your available credit are you currently using.

Higher usage is worse than lower usage - this rule applies both to individual accounts and in aggregate, although the aggregate portion is a larger driver in general, but coming close to maxing out individual accounts is bad. Note that this only regarding revolving credit, rather than installment credit (such as an auto loan).

With installment loans, the only thing that really matters is whether you pay them on time, although you can lose a couple points for having too many installment loans.

So, long story short, you always want to have:

  1. a clean payment history
  2. as little debt as possible
  3. as much unused revolving credit as possible *****

**** in term sof credit score - this is what drives your score up BUT having too much credit can hurt you in on other parts of the credit making decision. Creditors will look at not only your score, but other factors such as debt to income ratios and the like. If you make $30 K/year and have $40K in aggregate credit limits, some creditors will consider that a risk and deny you, even if you have a great credit score.

To answer your question plainly - pay off your debt, but keep your account. This will be best for your credit score.

Also, check the fine print of your 0% interest deal - often times, if you do not pay off the entire debt within the promotional period you will be retroactively charged interest for financing. In this case, you would certainly want to pay it off 2 or 3 months early, just to be safe.

ETA: never cancel your oldest credit card, as average account length and oldest account are also part of the score (this applies more to younger people, but be aware of it regardless)

4

Pretty sure you’re better off paying it. Credit reports have a “revolving balance” section that you want as low as possible. You also want to have your credit utilization as close to 0% as possible. As for paying it off slowly, the only section on there is “earliest line of credit”, which doesn’t go away just because you’ve closed the account.

So pay it off.

5

You might want to read what the experts say about their own systems rather than just read random opinions:
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[li]http://www.experian.com/credit-education/improve-credit-score.html[/li][li]http://www.myfico.com/crediteducation/improveyourscore.aspx[/li][/ul]

6

You may just want to buy your own credit score when it closer to time to buy. You don’t need to max out your credit score as much as possible. There is usually just a cutoff for standard types of loans and you don’t get a free toaster or anything else from having a really high credit score. It could help if your score is very marginal but it is unlikely that one account would have a big impact at all in a positive direction unless you don’t have much credit history besides that.

7

My opinion isn’t random, it’s the same every time :wink:

8

So if I max out my credit card every month, but pay it off in full each time, that will hurt my credit? That would seem to show an ability to cover your debts, in my inexperienced opinion.

Great point, and one I hadn’t fully considered.

9

The algorithm says no :cool:

It’s best not to try to approach it as something that’s reasonable or based on logic. It may or may not be at different times, but that’s ultimately irrelevant.

ETA: and, honestly, maxing out your card and paying it off in full might well generate random results, depending on what day of the month the card reports your status to the bureau and at what time of month you are charging and paying - it’s a snapshot, and it doesn’t consistently happen on the same dates from one lender to another (or even always for the same lender). For this reason, it’s best never to get within 10% or 20% of the max of any card (if you are worried about your score at all points in time, rather than just when doing something in particular - there are benefits to keeping it high continuously though, as lenders do periodic reviews and may adjust your limits or rates based on them).

10

Just want to second this, Circuit City (rest their souls) dinged me for retroactive interest a few years ago.

My situation was similar to yours, 0% for 18 months or something, when that period was up my amount due bounced up several hundred dollars.

It made my brown eyes blue.

11

Well, it’ll show as x months of “pays as agreed” which looks good - BUT, depending on when they do their monthly report to the credit reporting agencies, it might show as “uses 5,000 of 6,000 credit limit” which is bad (shows high debt to available credit ratio).

If you have not already done so, get your free annual credit report for at least one of the agencies, and make sure the furniture company is actually reporting your debt, and how they’re reporting it - installment loan vs. revolving credit; if revolving, what are they reporting as the limit. As a cautionary example, Crapital One bank was notorious for reporting revolving limits incorrectly: whatever your high-water balance is, is listed as your limit (even if your limit is much higher). So if your credit limit was 10,000 and you’d never spent more than 3,000 in a month, your real utilization percentage is 30%; but they’d report it as if you had a limit of 3,000 - making your percentage 100%. Supposedly they’ve corrected this practice.

12

Yep. They count on a certain percentage of people doing this and that’s why they offer such deals. I presume you did in fact pay something late, or whatever?

We’ve only done the 0% deals when we had the cash in hand. When we bought a new washer/dryer, we put the money in a CD that matured a week or so before the final payment was due.

Re the OP: My personal opinion is that you might as well pay the stuff off early if you’ve got the cash. You don’t want anything to get missed if you’re preparing to make a home purchase soon.

13

Resident credit expert here. Darth has the gist of it.

One caveat: It all depends on what you are trying to get.

A late payment (especially a recent one) on one credit card would could cost you a new credit card with a great rate you want (flat-out denial of credit), but the same late payment won’t stop your mortgage from being processed.

If you do all that was mentioned, and use credit in a variety of ways, stay on time and/or pay early, and without burying yourself in debt, you’ll float into a top tier, and it won’t really matter if every iota of your credit is scored every day while your score fluctuates a few points on a regular basis. Who cares if it’s 820 or 800. That’s top tier, so fluctuations don’t matter.

Generally, keep accounts open if you have several. I have three credit cards, and I use one. I keep the others because they help my credit profile, but they aren’t so high in credit limit to hurt an income/debt ratio someone might opt to do.

You want a mix. A mortgage has serious pop. I’d want a mortgage or two, a few installment loans and a few credit cards. That’s a nice mix. I’d like a modest balance on a few things, and also a history that shows I used and paid off a variety of things.

There are a mind-numbing array of possibilities. If you focus on some narrow issues and get hung up on every minutia of how a score changes by the day, you’ll spend so much time on the subject you’ll lose your job and won’t be able to pay your bills and will have real credit problems… not unlike some actual pests that my company has dealt with.

.

14

When I want your opinion, I’ll sell it to you… at 24.99% interest. :wink:

15

I remember hearing/reading that when it comes to a big ticket item like a mortgage, that smaller stuff, that might be important for getting a car loan or a Sears card tends to get overlooked and other factors like career stability come into the forefront. Is this what you’re saying?

ETA, what do you recommend for checking my credit rating? (I’ve been out of major debt for a few years and haven’t checked it 'cuz they keep sending me credit card come-ons)

16

My daughter was all set to pay cash for her car. I convinced her to talk to her bank, and they recommended she take a 12-month loan secured by her savings account (more than enough to pay for the car outright) and have the payments taken automatically. The 12-month period is long enough to make a credit record and the interest rate on the loan is something like 1% more than the interest paid on the savings account, so it’s basically a wash.

17

Not exactly what the OP asked but…“I heard” that credit card companies try to avoid having customers with a record of paying off their balance each month. This was supposedly because the CC companies make their big bucks on the interest of running balances, and not much on annual fees.

This sounds plausible but on another hand everyone I know, whether running big or no balances, is flooded with card solicitations (or at least that was so up until the recession started.)

On the other (3rd?) hand, CC companies make money off transaction fees, which wouldn’t be affected by user’s balances.

Any one heard this or know otherwise?

18

If I can piggyback a question–what about student loans? I own my home outright (inherited) and have a couple of credit cards, but the bulk of my credit report are my student loans–about $38k worth, and I’m only a few months into the payoff. This makes my debt to credit ratio something obscene like 96%, which would seem to not be a good thing.

19

Credit usage is based on revolving debt only, and student loans are installment, not revolving. For the whole debt to credit ratio, as commonly discussed, it’s irrelevant.

That doesn’t mean that student loans don’t matter, they just don’t effect the whole credit usage as we’ve been talking about it. It’s revolving debt vs. revolving credit (revolving means credit cards, essentially).

20

Gotcha. Much appreciated.