01-04-2013 12:25 PM - edited 01-04-2013 12:29 PM
Lets say there were two different people:
Person number one has two credit cards for twenty years and just occasionally uses his card for small purchases under $10, maybe twice a year. He always pays his bills on time but only charges once every six months. He has maybe charged $500 worth of stuff in his whole life in twenty years of having the credit cards.
Person Number Two also has just two credit cards and also has had each of them for 20 years. He charges everything to his two credit cards and has available balance of $50K on both cards. He keeps his utilization below 30% but has charged hundreds of thousands of dollars on his card over the last twenty years.
Both people pay their full balance every month by the due date. Both only have two credit cards on their credit report, with no other uses of credit. Both got their credit cards the same year. Who of the two men would have a higher FICO score?
01-04-2013 01:30 PM
Points gained would go more to Person #1, all else being equal. Why? Because person#1's utilization would be much lower in your scenario. It doesn't matter how much you charge on a card....it matters how much is reported in relation to the reported CL. The only consideration would be activity. FICO will ignore balances and CLs if a CC hasn't reported in months, though that time frame is uncertain. Ideally you'd want to use it every 3-4 months to keep activity on an unused card and to prevent the creditor from closing it due to non-use.
01-05-2013 09:16 AM
In a practical sense, from a purely FICO perspective, it probably would not matter.
If person 2 has higher interim balances, there is a chance that a monthly balance could report that is very high, thus dinging the score that month.
However, presuming both know the ropes, when either plans to actually use their score to app for new credit or initiate a business transaction, they have the ability get their reported balance to an ideal FICO number for that billing period. Thus, same reported % util. The other months are only academic.
The risk is that if person 2 hits a financial bump in the road, it would be harder to recover. Person 1 has more security with lower balances.
The bigger picture, in my opinion, is creditor view of the two consumers. Person 2 is generating revenue for them, perhaps not in interest, but in fees they collect for each charge transaction. Person 2 would make them smile. Person 1 most likely would not.
That view might effect the consumer's ability to obtain credit limit increases, or produce a decrease in credit limits. It might also, if they are making less on the account than the cost of maintaining it, cause the creditor to close the account.
01-06-2013 02:49 PM
as both posters said it depends when they pay.
you state both people pay before the due date?
but do they pay before the statement date?
if person 1 charged 1$ with a 5k limit. and paid before due date it would report 1 dollar.
if person 2 charged anything more then 4 dollars on a 20k limit and paid in full before due date, essentially would win that utilization game.
credit reports do not take into account spending habits.
correct me if im wrong?
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