How is this possible? I paid down one of my credit cards to 1% utilization - Score Dropped!

[RicHowe]

I find it fascinating that FICO would say that "People with low balances on their revolving and/or open-ended accounts are generally less risky to lenders," as if someone with 0% util is riskier? As long as the tradeline shows activity or paid as agreed (which means there were transcations and payments during the billing cycle), one would think 0% util would be optimal.

[Anonymous]

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@RicHowe wrote:

I find it fascinating that FICO would say that "People with low balances on their revolving and/or open-ended accounts are generally less risky to lenders," as if someone with 0% util is riskier? As long as the tradeline shows activity or paid as agreed (which means there were transcations and payments during the billing cycle), one would think 0% util would be optimal.

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I half agree with your stance on this issue above.  The current FICO algorithm isn't able to look at activity such as transactions/payments during a cycle.  All it looks at is what balance is reported.  If it sees $0 reported, it has no idea if you have been sitting at $0 for months with no usage at all, or if you've had activity (swipes & payments) and simply paid them all of and reported $0.  Since the algorithm can only look at a single momentary snapshot in time, it needs to see a balance to know activity exists.

Where I tend to disagree is that 0% would be optimal.  No usage at all shows no ability to be able to manage revolving accounts.  There's no way to know if someone is able to spend/pay on time if a balance doesn't exist.  If 0% utilization is "better" than 1%, what's the purpose of having revolvers at all if they aren't being used?  Not having them at all would result in a further scoring ding due to a less than ideal credit mix. 

FICO likes to see the ability to properly manage different types of credit.  If a reported balance doesn't exist, there's no way that the algorithm knows that you are sufficiently managing your different account types.

[RicHowe]

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@Anonymous wrote:

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@RicHowe wrote:

I find it fascinating that FICO would say that "People with low balances on their revolving and/or open-ended accounts are generally less risky to lenders," as if someone with 0% util is riskier? As long as the tradeline shows activity or paid as agreed (which means there were transcations and payments during the billing cycle), one would think 0% util would be optimal.

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I half agree with your stance on this issue above.  The current FICO algorithm isn't able to look at activity such as transactions/payments during a cycle.  All it looks at is what balance is reported.  If it sees $0 reported, it has no idea if you have been sitting at $0 for months with no usage at all, or if you've had activity (swipes & payments) and simply paid them all of and reported $0.  Since the algorithm can only look at a single momentary snapshot in time, it needs to see a balance to know activity exists.

Where I tend to disagree is that 0% would be optimal.  No usage at all shows no ability to be able to manage revolving accounts.  There's no way to know if someone is able to spend/pay on time if a balance doesn't exist. 

I understand your point; however, by "optimal" I mean to say if 30% of your score is determined by util, then 0% util should net 100% of the available points - hence optimal.

If 0% utilization is "better" than 1%, what's the purpose of having revolvers at all if they aren't being used? 

That is precisely my point. The revolvers ARE being used. Ideally one pays all revolvers in full to avoid interest. The only difference is if you pay in full by the statement date to post a zero balance or pay in full after a balance is posted. Posting a balance shouldn't prove you are more or less risky than someone who uses a revolver and pays in full and posts a zero balance. I completely understand and agree with you that the current algorithm cannot score what it cannot assess, but that is what prompted my rhetorical question.

[Anonymous]

Right, they're being used, but the FICO algorithm doesn't know that.  If it thinks they aren't being used ($0 reported balances across the board) it's as good as them not existing at all.  We can't change how the algorithm works, as you are aware.  It's fine to say that you disagree with the design, but within the set of "rules" that they system operates it makes perfect sense why 1% utilization is optimal [over 0%] and why 100% of the points associated with the 30% slice of the FICO pie are given when utilization extremely low, but non-zero.

[Anonymous]

I’m glad i posted in this thread. I’m still in the learning stage when it comes to building credit. You were correct, i was specifically referring to the amount of available credit. Thanks for pointing out about utilization being the influencing factor.
That’s good to know that i can allow a balance of $800 to report on this card with out being concerned of my score dropping.
Out of curiosity, Are there any benefits to allowing $800 to report as apposed to say $80?

[HeavenOhio]

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@brickie74 wrote:
Out of curiosity, Are there any benefits to allowing $800 to report as apposed to say $80?

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Not as far as scoring goes. The benefit is that you can be more flexible in your use of the card on the days near the reporting date.

[Anonymous]

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@RicHowe wrote:

I find it fascinating that FICO would say that "People with low balances on their revolving and/or open-ended accounts are generally less risky to lenders," as if someone with 0% util is riskier? As long as the tradeline shows activity or paid as agreed (which means there were transcations and payments during the billing cycle), one would think 0% util would be optimal.

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Hi Ric.  I think in general your reasoning is good.  It's just that you are starting from some mistaken premises.  I'll list them below.  You write:

(1) "As long as the tradeline shows activity or paid as agreed (which means there were transcations and payments during the billing cycle)...."

and then in a later post

(2)  "if 30% of your score is determined by util..."

Paid as agreed (as an account status) indicates that the creditor hasn't reported your account as late recently.  A person who hasn't used his card in a couple years will have the same status as someone who has used it each months. 

And as far as item #2 goes, not all of FICO's "Amounts Owed" category consists of credit card utilization.  That is one factor and an important one -- but there are others which have nothing to do with credit cards in that category.

Nice comments by BBS.

[Thomas_Thumb]

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@HeavenOhio wrote:

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@brickie74 wrote:
Out of curiosity, Are there any benefits to allowing $800 to report as apposed to say $80?

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Not as far as scoring goes. The benefit is that you can be more flexible in your use of the card on the days near the reporting date.

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^ Agreed

Key is too keep overall (aggregate) utilization below 9% and individual card utilization under 29%. If you have one card at $10k CL, with an $800 balance, individual & aggregate UT is 8%.

If you had 2 cards at $10k CL each and balance still reporting on one card, your highest individual would still 8% but, aggregate drops to 4%. In this case you could report $1600 on one card and $0 on the other => highest individual UT = 16% and aggregate UT = 8%.

Key point: If you only have one card individual UT% = Aggregate UT% and aggregate UT% needs to be kept under 9% which restricts individual UT% accordingly.

I let charges report "naturally" in statement balances and then PIF before due date. This typically translates to an aggregate balance between $600 and $4800 with $1200 being average. I don't experience any score drops because aggregate utilization stays under 4% and card with highest UT is now kept under 29%. There really is no need to restrict yourself to reporting a micro balance.

[Anonymous]

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@brickie74 wrote:

Out of curiosity, Are there any benefits to allowing $800 to report as apposed to say $80?

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Perhaps there is.  I started a thread on this earlier in the week, regarding "high balance" listed on your credit report for different accounts.

If you have a credit card with a $10k limit that's been open say 2 years and the "high balance" reported on the card is $80, the perception by other creditors looking at your report may be that you don't use the card much.  Of course, the lender with which you possess the $80 high balance can see all of your spend/payment patterns.  Outside creditors looking at you can't take much away in terms of your spend.  Perhaps the person spends around $80/month, pays it off, spends another $80, PIF, etc.  Or, maybe they spend $5000-$6000 per month on the card and bring the balance down to $80 and allow only that to report. 

Some theorize that a higher reported "high balance" can be a very favorable look, with one important asterisk:  It's only favorable for someone that has a perfect payment history (clean report) and currently has a low balance.

So, going back to your original question, could there be a benefit of allowing $800 to report over say $80?  Yes, because an $800 reported "high balance" can be seen on the account, but if you have a currently low balance it lets other lenders know that you can take on a $800 debt and pay it back.  The higher the "high balance" the more it shows you can take on a larger amount of revolving debt and pay it off.

[Anonymous]

Hi Brickie.  Regarding BBS' comments about the "high balance" field:

(1)  There is no known FICO scoring advantage to having a large dollar value for the HB field.  (EXcept for the weird corner case of an Amex charge card -- not a credit card -- and even still it has to be a very old scoring model.)

(2)  If there is an advantage, it might be (as BBS suggests) that some creditors might (quite apart from your FICO score) look at it when reviewing your report.  There's no evidence that any of them do, but it is conceivable that some might.

(3)  The HB field refers to the highest balance your card has ever had in its entire history.   You don't need to keep reporting that high balance each month.  For example, if five years ago your balance was once $8362, then your report would list that as its HB even if every month since then the most you have ever done is buy the occasional hamburger and pay it off.  I am pretty sure you were asking if there was a value in keeping a higher balance on your card each month.

(4)  Under no circumstances is it ever wise to increase spending on a card in pursuit of a greater HB if that might involve spending a dime more than your would if you used only debit cards.  The harm that you do to your wallet will be greater than any hypothetical benefit to HB.