Creditors use your credit report, history and FICO to analyze:
1. Risk potential
2. Profit potential
Risk obviously deals with: "will you pay pay as agreed" meanin not late and will pay according to terms.
Profit deals with: "will you result in useage that derives adequate revenues to justify the CL"
Your CR also reports your historical balances and your actual payment amount last month. So, if you had $2000 in charges, but paid $2000, they will see $0 balance with a payment amount of $2000.
If they see a historical $0 balance, current $0 balance and small or no actual payment.....why would they issue the card? Unless it has a nice fat AF, they stand to make very little, if any, profit. Issuers have a cost associated with issuing and maintaining new accounts.
There is only one reason for issuing credit: return on investment. Which has 2 objectives:
Rule #1: First and foremost, get the return OF principal (meaning they don't lose the capital extended)
Rule #2: Maximize the return ON principal (meaning use of capital to derive the best profitability).
Moral of the story: Show that you pose little or no risk (sterling CR & FICO), but that you also present profitability. Report a balance at all times that is 1 - 9% of total CL's on 1 (no more than 2) accounts. The reported balance can still be PIF by due date to avoid any interest accrual.
FINALLY I have one last little dittie to throw at you, which some may say sounds crazy, but hear it out. Never pay cash for an automobile. Always finance it. Never pay more down that you absolutely have to, borrow all amounts you can, including TTL as long as the rate is not jacked by the amount.
Sounds crazy right? Well, here is my theory. Save your cash and/or down payment. Borrow the full price or as much as possible. Obtain the loan. Then apply your cash down to the loan. This lowers your balance to original loan amount ratio, which is good, or pays it off after the loan is secured, thereby providing a positive, paid in full TL.
If you were paying cash for the vehicle, obtain the loan, then pay the loan off. Yes, for the best history and AAoA, you can argue 12 payments or 24 payments before paying off. That would be the "ideal" credit scenario, but is not the ideal "financial" decision. If you have the cash, then saving the interest (3.99 or higher) is a better return than what banks or CU's will give you to save it.
Having obtained the loan (as long as you are not going to kill AAoA), then paying it off, even if immediately, still provides a positive TL which shows a large loan amount obtained, through a prime or preferred lender, that was paid in full (without refinance incurring new loan) in short order, demonstrating liquidity.
This is still positive. Provides additional credit reference. Cost you virtually nothing (autos do not have closing costs related to the loan....TTL applies even to cash purchases).
Disclaimers: You should not do this if you have too many new accounts, very short AAoA, are seeking or will be seeking a mortgage within 6 to 12 months, have far too many inquiries or any other scenario in which a new loan will negatively impact you. With that said, if you have stable credit, are not shopping new credit and have a moderate to well aged AAoA, then by putting a new auto loan TL on your CR every 5 years is a good idea just to keep that portion of your credit mix well lubricated and with recent enough history to keep your CR and FICO well tuned. Do not do this every 12 months or in some manner that will kill AAoA, etc.
Why do this? Because when you do want a loan or need a loan, you will be in prime circumstances and of credibility to your prospective lenders that they will line up to serve your needs. This is "exercising" your creditbility and credit in a manner to provide better future options, not because of current need.
Message Edited by txjohn on 05-16-2009 08:41 AM
