Tips on building credit

[groman]

@dlack

I’m not trying to bicker with you, but I really don’t think encouraging people to maintain a balance just to increase your credit score is a good idea. By the way, I’m not an accountant, but I’m sure that’s pretty obvious.

However, a customer who always pays off the entire balance every month is the worst absolute person to the bank. Since they are actively using bank’s services without giving them a cent other than processing fees from merchants. This is obvious, and if you want to have a good credit history you should be a good customer, and a good customer generates profit for the bank without carrying much risk. That means paying as much interest as you feel you can afford. Think of it as a “good credit fee”.

[dlack]

@Gfactor

Looks pretty contradictory to me. We need to distinguish between credit reports and credit scores. The *report *may or may not show balance as of the last statement. But Weston claimed that the *score * doesn’t distinguish. If that’s true it’s an artifact of the reporting system. There is no guarantee that it will be that way. And if she is making a claim any stronger than that, she’s just wrong.

I think you’re trying to say that when calculating the score they somehow instantaneously access your current balance, which they don’t do when generating the report (they depend on monthly reports from the creditors). Otherwise your distinction doesn’t make any sense. Again from page 8 of the Fair Isaac booklet you linked:

Your FICO score only looks at information in your
credit report. Lenders often look at other things when
making a credit decision, however, including your
income, how long you have worked at your present job
and the kind of credit you are requesting

Underlining mine.

Also keep in mind that even if they were to start instantly accessing all your current balances, this wouldn’t be zero just because you paid your card in full after your last statement. If you use the card every month you’ve probably accrued new balances since the last payment.

My whole point has been that it’s not useful to carry over a balance from statement to statement, and you seem to agree with me, sort of.

Fair Isaac, the creator of the score says it accounts for 35% of the variance in a credit score. So I guess it depends on your definition of major. It is the most important single factor, but it accounts for less than half of the variance in scores.

Well now, if that were the case, they wouldn’t need to look at the score. Late payments show up on the report. They account for only 35% of the variance in scores. Actually, it’s a little more complicated because creditors can buy scores that are tailored to their needs. There is little information available about how these scores differ from the FICO model.

*Scores *aren’t free, even to creditors. So the fact that the creditors are paying for them suggests that they are interested in a lot more than payment history.

Well, Fair Isaac gives a breakdown for the “general population” and says it’s a little different for people in special categories such as people with a short credit history.

35% - Payment History
30% - Amounts Owed
15% - Length of Credit History
10% - New Credit
10% - Types of Credit in Use

You’re right in that I should have said the major factors are on-time payments and how much you owe. My opinion is that if you keep these under control the rest will fall in naturally. The bottom 3 categories are certainly important and there is good advice about each of them in some of the links given above, but none of those categories have to do with whether someone should pay their balance off every month. I think the best advice is to keep your balance significantly below your max limit and pay it off every month if you can.

1. It’s not my theory.
2. If you want the best score, you’ll need to have three cards.
3. I agree that good credit is not embodied solely in the FICO score, and that there are better uses for the score than simply getting more credit. In fact, it quickly becomes counterproductive. Too many open accounts, balances too high=lower score. And once you get there, it’s harder to fix.
4. The credit industry itself encourages people to get the highest possible FICO score, so it helps to learn as much as possible about how it really works. The model is proprietary, so we only get crumbs from Fair Isaac, and then only when Congress starts talking about regulating them.
   Bicker away, it breaks up my day. It seems to me that there is a cost-benefit analysis that each of us must do about whether it is more costly to have a marginally lower score and pay no interest or have a marginally higher score and pay some interest. The problem is that we can’t reliably predict the effect on our score of any given change in our credit profile because the scoring model is a big secret.

I agree that it’s important to know as much as possible about the system if you want to be financially successful. This is why I don’t like the idea of people being told to pay interest when that only benefits the credit card company. You can have a balance (which might help your score) without carrying over a balance (which costs interest).

[dlack]

@groman

However, a customer who always pays off the entire balance every month is the worst absolute person to the bank. Since they are actively using bank’s services without giving them a cent other than processing fees from merchants. This is obvious, and if you want to have a good credit history you should be a good customer, and a good customer generates profit for the bank without carrying much risk. That means paying as much interest as you feel you can afford. Think of it as a “good credit fee”.

The worst absolute person to the bank is someone who never pays the bank back.

There are specific things a credit card company reports about you which affect your credit score. One of these things is not “how much profit you’ve generated for the credit card company.” A good customer is terms of a credit report is one who pays back what he or she owes and is likely to continue doing so.

You aren’t trying to have good credit in order to impress the people you already have accounts with. You’re trying to show other potential lendors or businesses that you’ll pay them what they’re due.

Also, if I was costing the CC companies money they would cancel my account and only offer me cards with annual fees. Just the opposite is happening. I receive piles of offers, each one more beneficial to me than the last.

[Mama_Zappa]

@groman

However, a customer who always pays off the entire balance every month is the worst absolute person to the bank. Since they are actively using bank’s services without giving them a cent other than processing fees from merchants. This is obvious, and if you want to have a good credit history you should be a good customer, and a good customer generates profit for the bank without carrying much risk. That means paying as much interest as you feel you can afford. Think of it as a “good credit fee”.

That makes no sense at all to me.

I’ve never read anywhere that the bank reports more favorable info on someone who maintains a balance, vs. someone who charges and pays off each month. From everything I’ve ever read, the FICO scoring is based on ratio of balance to credit limit, and on whether payments are made consistently - not whether those payments pay it off in full at the end of the month.

The only way I could see this making a difference is for transactions with that specific bank - i.e. you want a credit limit increase, they look at your payment history, see that you’re a profitable customer because of the interest you pay them, and decide to treat ya realllll nice. Just the same, the “good credit fee” is really wasted money, as you’d likely be treated just fine with that lender anyway.

FWIW - my husband and I are big-time “freeloaders” who use a card for the convenience and the perks, and pay it off each month. Several times, we’ve paid in such a way that our credit card company thought we were about to close the account (i.e., via our credit union’s web page rather than the bank’s web page) - and we’ve gotten panicked phone calls from the CC company - worried they were about to lose our business. Evidently, though we’re not as profitable as someone who carries a balance, they think we’re worth it

One thing to definitely watch out for - regardless of whether you pay in full or carry a balance, is to avoid a lender who does not report your credit info in full. Numerous threads here have blasted Capital One, for example. Their reporting method (not reporting your credit limit, just how much you’ve spent) artificially lowers your credit score and makes it harder to get credit elsewhere.

[Gfactor]

@dlack

I think you’re trying to say that when calculating the score they somehow instantaneously access your current balance, which they don’t do when generating the report (they depend on monthly reports from the creditors).

Nope. They can’t access the balances, except from the credit report. Whether the balance shows as zero, last month’s balance, or some other number will vary based on a number of factors. They include the coincidence of the billing and posting cycles of the creditor with its reporting cycle, and the creditors reporting habits. Therefore, you can’t really be certain what balance will appear on the report. That was my point. Since you can’t be certain what balance will appear, if you believe that showing a balance will yield a higher score, and if you think it is worth paying interest to keep a balance in order to have a higher score, then it makes sense to keep a balance. If not, well, then not.

[dlack]

@Gfactor

Nope. They can’t access the balances, except from the credit report. Whether the balance shows as zero, last month’s balance, or some other number will vary based on a number of factors. They include the coincidence of the billing and posting cycles of the creditor with its reporting cycle, and the creditors reporting habits. Therefore, you can’t really be certain what balance will appear on the report. That was my point. Since you can’t be certain what balance will appear, if you believe that showing a balance will yield a higher score, and if you think it is worth paying interest to keep a balance in order to have a higher score, then it makes sense to keep a balance. If not, well, then not.

But it’s not necessary to pay interest in order to have a balance. Just use the card again (for something you would be buying anyway) after you pay off last month’s balance.

[Gfactor]

@dlack

But it’s not necessary to pay interest in order to have a balance. Just use the card again (for something you would be buying anyway) after you pay off last month’s balance.

You can’t count on that being true. It depends on the creditor. I look at credit reports every day.

[pulykamell]

@Gfactor

Nope. They can’t access the balances, except from the credit report. Whether the balance shows as zero, last month’s balance, or some other number will vary based on a number of factors. They include the coincidence of the billing and posting cycles of the creditor with its reporting cycle, and the creditors reporting habits. Therefore, you can’t really be certain what balance will appear on the report. That was my point. Since you can’t be certain what balance will appear, if you believe that showing a balance will yield a higher score, and if you think it is worth paying interest to keep a balance in order to have a higher score, then it makes sense to keep a balance. If not, well, then not.

FWIW, my credit score shot down 20 points (I subscribe to myfico.com’s reporting service) since one of my credit cards reported a balance of $1200 (which comprises about 15% of my available credit) this month, even though I had paid it off a couple of weeks ago. Evidently, they received information sometimes between my running up the balance and paying it off. That’s the only balance I have. Hopefully, next month, when the balance shows up as paid off, my score will rocket back up.

So, from my experience, it actually seems best not to carry a balance. (Then again, when I paid off a debt by dropping $5000 at once, my credit score dropped by 20 points for a couple of months, so who the hell knows…)

[Gfactor]

@pulykamell

FWIW, my credit score shot down 20 points (I subscribe to myfico.com’s reporting service) since one of my credit cards reported a balance of $1200 (which comprises about 15% of my available credit)

On that card?

this month, even though I had paid it off a couple of weeks ago. Evidently, they received information sometimes between my running up the balance and paying it off. That’s the only balance I have. Hopefully, next month, when the balance shows up as paid off, my score will rocket back up.

Problem is, it’s pretty tough to isolate a single transaction as a cause of a changed score. The passage of time can change your score 20 points.

(Then again, when I paid off a debt by dropping $5000 at once, my credit score dropped by 20 points for a couple of months. . .

Was it an old debt? This source agrees with my contact at the bureau that paying off old debts can cause your score to drop.

This guy , OTOH, says paying off an old debt can only improve one’s score. I asked him for any proof that he might be able to show me. He said he didn’t have any other than his own experience.

so who the hell knows…

Apt summary of this entire thread.

[pulykamell]

@Gfactor

On that card?

No. Total available credit.

I’m sure it’s that single transaction, because I got a warning from myfico.com saying “New balance added to your report -21 pts” or something to that effect. That’s the only difference between this month’s report and last month’s. The passage of time should only help me. The score estimators have me well in the mid-700s if I continue paying off my credit cards for six months. (This transaction dropped me from 686 to 665). It pisses me off because each time I inch towards 700, my score drops 20 points. The first time it was for paying off my $5000 balance. The second time it was for old information being reported to my account.
Oh, well, I’m sure I’ll get there by next year.

[pulykamell]

Oh, and the $5000 debt was a current debt. I’ve never been to collections.

[Gfactor]

@pulykamell

No. Total available credit.

I’m sure it’s that single transaction, because I got a warning from myfico.com saying “New balance added to your report -21 pts” or something to that effect.

Well that’s probably it. If your “balance” (and we see this term is sort of murky") gets up past 30% of the limit on a given account, it can cause your score to drop, even if the balance is a tiny percentage of your total available credit.

It pisses me off because each time I inch towards 700, my score drops 20 points. The first time it was for paying off my $5000 balance. The second time it was for old information being reported to my account.
Oh, well, I’m sure I’ll get there by next year.

Good luck with that.

Oh, and the $5000 debt was a current debt. I’ve never been to collections.

Again back to your pithy summary. Find a justification for that somewhere.

[pulykamell]

@Gfactor

Well that’s probably it. If your “balance” (and we see this term is sort of murky") gets up past 30% of the limit on a given account, it can cause your score to drop, even if the balance is a tiny percentage of your total available

Ah ha! I did not know that individual card limits factor into account. This would be … drum roll please … Capital One’s doing. I purposely ran up the account so my high balance would report and add to my total available credit in lieu of my actual limit. Damn thee, CapOne. Oh well. At least I don’t pay an annual fee on the card.

[Gfactor]

@pulykamell

Ah ha! I did not know that individual card limits factor into account. This would be … drum roll please … Capital One’s doing. I purposely ran up the account so my high balance would report and add to my total available credit in lieu of my actual limit. Damn thee, CapOne. Oh well. At least I don’t pay an annual fee on the card.

Here’s a trick that was recommended to me by a guy who does rapid rescoring. If your score is low because of this factor (balance too high in proportion to limit), ask the creditor to raise the limit. I’ve not seen this done, but the guy says that in a close case it can work wonders. In your case, paying it down should do the trick.

[Spiny_Norman]

I was pretty much in the OP’s shoes - conditional permanent residency in my case - and when, wonder of wonders, a credit card company offered me a whopping $500 limit with a double-digit APR, I jumped on it. That card did most of our grocery shopping and was paid off in full every month.

That seemed to do the trick - the credit line has been increased any number of times since then, more cards with better terms have shown up, and my current FICO is just short of 700. (Or was, before we took out a mortgage. Og knows what it is now…)

I’m sure the credit card companies would prefer we racked up some charges and late fees, but to them. They define the terms themselves, after all.

[Balthisar]

Why “freeloading” isn’t necessarily bad:

Let’s say that my credit card rate is 12.99%. That’s roughly 1.0825% per month for the entire balance that’s carried. Let’s also say that I have only have a $1,000 limit. Let’s also assume that transactions earn 1.5% of everything I purchase*. Who’s the better customer? Someone who charges $900 and pays the minimum every month, and therefore can only charge a very little bit to keep the card close to maxed at $900? Or would it be the person that pays it off every single month, and then runs it right back up to to $900 in the course of the next month? In one month as a non-freeloader, I will have earned the bank the following: Interest: $9.75. Okay, I pay off every month, but since I use the card for everything but the stupid stuck-in-the-19th-century, loser Detroit Edison electricity bill and the similarly-fscking-retarded Consumers Energy gas bill, I run up $900 in a month. I’d be earning the credit card company a nice $13.50. And the good thing is, it’s coming from the vendors’ pockets, not mine! (Yeah, yeah, it’s coming from all of our collective pockets, so, fine. Thanks for your subsidy.)

Okay, I tried the links above. What did the fast food restaurants do? Also, I know that some merchants (like Wal-Mart) have bargained for some better commissions. But with transaction fees being maybe $0.25 and varying transaction rates, 1.5% seems like a reasonable rate. Hell, PayPal charges more than that. Of course if the discounts are way, way less, then my entire theory is blown out the window. Or if your interest rate is way, way higher.

[furt]

CREDITBOARDS has been terrific for me. They are very, very patient with newbies.

[Gfactor]

@Balthisar

Okay, I tried the links above. What did the fast food restaurants do?

They negotiated a lower discount.

Also, I know that some merchants (like Wal-Mart) have bargained for some better commissions. But with transaction fees being maybe $0.25 and varying transaction rates, 1.5% seems like a reasonable rate. Hell, PayPal charges more than that. Of course if the discounts are way, way less, then my entire theory is blown out the window. Or if your interest rate is way, way higher.

Essentially the discount is a lot less because the discount gets divided among various intermediaries. Here:

Credit card issuers (banks) cover their costs (including the interest costs for the money that is paid to merchants prior to the bank being paid by customers), and earn profits, by:
Interchange fees. Interchange fees are charged by the merchant’s acquirer to a card-accepting merchant as component of the so-called merchant discount fee. The merchant pays a merchant discount fee that is typically 2 to 3 percent (this is negotiated), which is why some merchants prefer cash, debit cards, or even checks. The majority of this fee, called the interchange fee, goes to the issuing bank, but parts of it go to the processing network, the card brand (Visa, MasterCard, etc.), and the merchant’s acquirer. The interchange fee that applies to a particular merchant is a function of many variables including the type of merchant, whether the cards are physically present and the card’s magnetic stripe is read, the specific type of card, etc. For a typical credit card issuer, interchange fee revenues may represent about fifteen percent of total revenues.

(Emphasis added).

Credit card

Also, if you make payments on time, but carry a balance, the credit card company isn’t going to keep your limit at $1000. Instead it will continually raise the balance, and offer you inducements to charge more (transfer your balances to us, 1% interest for the first six months, earn airline miles each time you charge) thereby increasing the interest income and the probability that you will pay beyond the grace period, which will give the company even more income from late fees.

I recently represented a guy in a bankruptcy. He had transferred an $8000 balance from one card to another because when he approached the limit on one card, the card increased his interest rate, which made it impossible for him to make the minimum payments. He was fine until the teaser rate period ended and he realized he couldn’t make the minimum payment on the new card either.

If you are interested in the economics of the credit card industry, the book that I mentioned before is a good read.

[Gfactor]

To continue the hijack a little further. Here are some links about the merchant discount, interchange fees, issuing banks and acquiring banks:

http://www.virtualschool.edu/mon/ElectronicProperty/klamond/Overvw.htm
http://www.morebusiness.com/running_your_business/profitability/d912806285.brc
http://www.tsrnet.com/pages/e_services/card_terms.htm

[Aestivalis]

I think it’s safe to say that different creditors look at your report for different things. While a credit card company may want the customer who pays late all the time, they certainly don’t want the customer who doesn’t pay their bills at all. And while credit card companies may not like the guy who pays on-time, every month, the banks who offer auto and mortgage loans are looking for someone with that profile.

Keep in mind that lenders will often buy and sell those loans (revenue streams) to other lenders to assemble a bond that they can offer to corporations looking for guaranteed returns. Clearly they want to offer loans to people who will pay their bills on-time, which will improve their returns.

And this is what the FICO score is meant to reflect; that is, it measures your likeliness to default on your loan. So while carrying a balance may or may not be bad, I think that we can agree that paying on-time will not hurt you. As far as paying in full every month, it hasn’t hurt me, and my score is in the 800s.