Tips on building credit

[Gfactor]

@Aestivalis

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.

Very interesting.

[Aestivalis]

@Gfactor

Very interesting.

Well, given the factors at play:

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

why should negative behavior be rewarded? And if you were a lender trying to determine the risk for a potential client, wouldn’t you want the scoring to reflect his ability to pay on-time?

Let’s examine Consumers A and B:
A) Consumer A charges $2000 on his credit card and pays the minimum till it’s paid off.
B) Consumer B charges $1000 on his credit card every month, and pays it off every month.

Clearly the Credit Card companies like Consumer A for letting them tack on all sorts of finance charges, but should the Credit Reporting Companies score him higher than Consumer B? Absolutely not. All other things being equal, you know that Consumer B is going to be able to make his credit card payments (and possibly his Mortgage payment) every month, therefore he’s a lower risk.

I say there’s no need to try and game the credit scoring system. The important thing is to make sure that it describes your payment habits accurately. If you buy your report and it says there’s something wrong, by all means fix it. The negative factors that they list are pretty accurate. A few years ago I had a score of 719 or so, and my report said I had too many credit cards. After canceling those cards, and a year or so, my report no longer said that, and my score was around 770.

Scoring aside, if you can’t get a loan for whatever amount and your report is accurate, it’s likely that you can’t actually afford to make the payments. That’s why they ask for your salary too, not just your score.

[Gfactor]

@Aestivalis

Well, given the factors at play:

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

why should negative behavior be rewarded? And if you were a lender trying to determine the risk for a potential client, wouldn’t you want the scoring to reflect his ability to pay on-time?

I would want them to. The question is whether they do.

Let’s examine Consumers A and B:
A) Consumer A charges $2000 on his credit card and pays the minimum till it’s paid off.
B) Consumer B charges $1000 on his credit card every month, and pays it off every month.

Clearly the Credit Card companies like Consumer A for letting them tack on all sorts of finance charges, but should the Credit Reporting Companies score him higher than Consumer B?

Insufficient information given. The FICO model is a statistical predictor of bankruptcy filing. Whichever is less likely to file for bankruptcy, not intuitively or rationally, but empirically, should have the higher score, according to the objectives of the FICO model. I suspect that Consumer C, who pays more the the minimum but less than the full balance or Consumer B will win that contest. I wouldn’t give Consumer A very good odds at all. But I don’t have the data on which Fair Isaac based its model.

Scoring aside, if you can’t get a loan for whatever amount and your report is accurate, it’s likely that you can’t actually afford to make the payments. That’s why they ask for your salary too, not just your score.

Agreed. The score is only one component of any underwriting decision. And many underwriting decision (FHA loans, for example) don’t even use the credit score.