Does FICO see large payoffs as a negative?

[tavalon]

I'm getting a hefty bonus and want to pay most if not all of my credit cards off. I just wonder how that effects my score? For the last year, I've been paying well over the minimums on all of them, by paying an amount weekly. I'm at about 50% utilization.

Thanks for any thoughts or communications.

Terri

[OmarGB9]

No! It's actually a good thing! Especially if you're sitting at 50% UTIL right now. Pay those puppies down and watch your scores soar.

[NoAnchoviesPlease]

Your score should improve as they report, unless you max one card with a BT from another. (Oops, learned my lesson there.)

Remember that alerts on any monitoring site (including MyFICO) may be delayed or even come in out of order, so don't be surprised if you pay off, statements cut, and it takes a couple of days to see score differences. 

Also worth noting that, if you have a Chase account that you pay off, it seems to report within 3 business days of a zero balance, even if it's outside statement cycle, and without you having to ask. For others, probably 1-5 business days after statement close/1-3 days after statement cut. Some CC banks will let you call in for an out-of-cycle update, if you're eager to see the update. 

Good luck, and congrats on the bonuses. 

[Anonymous]

OP, are you serious...?

[SouthJamaica]

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@tavalon wrote:

I'm getting a hefty bonus and want to pay most if not all of my credit cards off. I just wonder how that effects my score? For the last year, I've been paying well over the minimums on all of them, by paying an amount weekly. I'm at about 50% utilization.

Thanks for any thoughts or communications.

Terri

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No, paying off revolving accounts is a huge plus. You will probably see a major upwards bounce.

[bdhu2001]

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@tavalon wrote:

I'm getting a hefty bonus and want to pay most if not all of my credit cards off. I just wonder how that effects my score? For the last year, I've been paying well over the minimums on all of them, by paying an amount weekly. I'm at about 50% utilization.

Thanks for any thoughts or communications.

Terri

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Everything that the other posters stated was correct, but remember you want to have a small balance report on at least one card.  This is best done by paying entire balance listed as due by date, but continuing to use card or paying entire current balance and continuing to use the card.

[Zarr]

The original poster has a legitimate question. When I look at my FICO Score Simulator, it recommends that my "Best Action" is to pay my $1,575 balance down by $65/month over 24 months, which would improve my score from 791 to 846. If I look at paying down the entire amount of $1575 in one payment, the simulator shows that my score would remain at 791. The additional problem with the scoring of paying down the full balance is that once the balance is at 0, even a small increase (even $100) tends to drop the score. The score seems to be very heavily weighted towards consistent and repeated decreases, and not as heavily weighted to the actual amount decrease or balance. Are others seeing similar behaviors?

[Anonymous]

Hey Zarr.  Great post.

Here's the thing.  Suppose you have 10k as a total credit limit, 5k in CC debt, and right now you are making minimum payments.

Suppose further that the simulator is mentally comparing two courses of action:

(a) Pay off 99% of the debt tomorrow.

(b) Pay off the 5k debt in equal payments over the next 24 months.

The simulator will be right in saying that (other things being equal) you will end up with a better score with option B.  Why?  It's because, although (A) and (B) are identical in having the debt paid off, in (B) all of your accounts are also two years older.  So the simulator correctly says that (B) will give you a better score (since you will have an AAoA that is two years higher).

In fact, the strategy of paying a credit card off slowly over time involves you being what is called a Revolver -- someone who carries a balance from month to month and pays interest on it.  Right now there is no FICO penalty for doing that, but in the future it appears likely that lenders (some more than others) will penalize you for doing that.  For example, Fannie Mae is requiring that mortgage lenders begin penalizing people for being revolvers (starting in July of this year I believe).

[Zarr]

Thanks for the thorough reply, CreditGuy! That all makes a great deal of sense. Actually, I pay my balances off completely every month. I essentially use my cards for convenience, cashback rewards, and for taking advantage of a small amount of “float” from my credit card companies (using them to carry my debt for a few weeks every month). Based on the Credit Bureau reporting cycles (around the 25th of the month) which do not coincide with my credit card companies’ billing cycle, my bureau reporting each month always shows a balance. If I ever need to use my credit score (which is rare, mostly for a refi to reduce a mortgage rate, or to finance a real estate investment), I’ve tried to pay down my balances by making extra payments to the credit card companies just before the 25th of the month. For the reasons that you’ve stated, that seldom has a major impact on my score in the near term. Is there any rule-of-thumb for the optimum percentage or or the time period over which I should pay down the balance to raise my score in a matter of a few months? Thanks again for the advice!

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@Anonymous wrote:

Hey Zarr.  Great post.

Here's the thing.  Suppose you have 10k as a total credit limit, 5k in CC debt, and right now you are making minimum payments.

Suppose further that the simulator is mentally comparing two courses of action:

(a) Pay off 99% of the debt tomorrow.

(b) Pay off the 5k debt in equal payments over the next 24 months.

The simulator will be right in saying that (other things being equal) you will end up with a better score with option B.  Why?  It's because, although (A) and (B) are identical in having the debt paid off, in (B) all of your accounts are also two years older.  So the simulator correctly says that (B) will give you a better score (since you will have an AAoA that is two years higher).

In fact, the strategy of paying a credit card off slowly over time involves you being what is called a Revolver -- someone who carries a balance from month to month and pays interest on it.  Right now there is no FICO penalty for doing that, but in the future it appears likely that lenders (some more than others) will penalize you for doing that.  For example, Fannie Mae is requiring that mortgage lenders begin penalizing people for being revolvers (starting in July of this year I believe).

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[Anonymous]

Sure, the rule of thumb (for optimum CC balances) is to do both of these:

      (a) Make sure that all of your cards (except one) are reporting $0

      (b) Make sure that the remaining card is reporting a small positive balance on it

The goal with (b) is for your total utilization to be greater than 0 but less than (say) 5%.  Less than 8.9% is probably fine, but the simplest thing is just make sure the card is reporting a small dollar value like $10.

You can do this all at once, no advantage to anything gradual.

The key is knowing when your cards report to the bureaus, since FICO goes by what is reported.  Make sure you get a card's balance the way you want it a good week before it is supposed to report.