Medium Balance Low Payments, or 0 Balance 100% Payments?

[Anonymous]

My wife and I are responsible citizens that don't live above our means. We used the old fashioned technique of saving to make purchases, rather than buying them on credit immediately and working to reduce the balance. However we are also landlords and are planning to purchase properties on credit and have the rent pay the mortgage, which means we want to raise our credit score.

That all said, we are free to raise our credit in the 'ideal' way... we're just not sure what that is! Most of the information on the Internet about raising your credit score assumes the readers' credit is poor and offers solutions to reduce the negative effect, rather than giving suggestions for the dream case.  Several years ago I ultimately spent hours researching the best plan to raise my credit and have been doing that ever since, while my wife spoke to the credit adviser at her office who suggested something entirely different.

This was possibly because our situations were very different. Around 4 years ago at the time (about 8 years ago now) she had a bankruptcy and various other collection bills on her report. The bankruptcy and late payments were from her ex-husband that filed them jointly, and one large medical bill was her own. My situation was that about 4-5 years ago I moved from England to the US. While England has the exact same credit bureaus, I still had to start with fresh credit. The situation now is that we both have clean credit reports, aside from my wife who has just two of those old bills that were in collections - the large medical bill and one old phone bill, both now around 7-8 years old.

Our approaches were as follows:

My approach:

Over the last few years I have looked for credit cards that have no annual fee. I then apply for the card, and drop it in the house safe. I actively use just 1 credit card and I keep the balance under 50% of the limit (I have since read 30% is the golden number?). I then wait a while and apply for another card as they are offered to me, and now have at least one card of each type (VISA, Mastercard, Discover etc) for convenience.

My wife's credit advisers approach:

Put a balance of 70% of the limit on the cards with the lowest credit limit and pay the minimum each month. The theory is that this shows you can pay down a debt. Do this for one year, and then switch to paying the balance off at the end of each month.

I can only think the adviser either assumed we were deep in debt and meant to say "keep the balance at 70% *or below*" and "pay *at least* the minimum payment". Or alternatively, perhaps it's a legitimate strategy of repairing debt for those recovering from a bankruptcy or multiple bad entries? So my question is:

Is there any merit to the approach the adviser gave?

[Anonymous]

Hi 94,

Looks like you have been busy building and rebuilding your credit.  Nice work!

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@Anonymous wrote:

.

My wife's credit advisers approach:

Put a balance of 70% of the limit on the cards with the lowest credit limit and pay the minimum each month. The theory is that this shows you can pay down a debt. Do this for one year, and then switch to paying the balance off at the end of each month.

I can only think the adviser either assumed we were deep in debt and meant to say "keep the balance at 70% *or below*" and "pay *at least* the minimum payment". Or alternatively, perhaps it's a legitimate strategy of repairing debt for those recovering from a bankruptcy or multiple bad entries?

So my question is:  Is there any merit to the approach the adviser gave?

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IMO and IMexperience - Nope - there's no merit to the approach the advisor gave.

DH and I are recovering from BK (rather nicely, btw), so we have something in common with your lovely wife.

We follow the standard policy recommended here:  PIF all cards, let one card report less than 9% utilization.  We pay no interest on our cc's.

When we've called in for credit reviews, we have heard nothing but superlatives.  I wouldn't put 70% on any card for any reason, and I would never pay only the minimum payment - both are cause for alarm & AA from the creditors, and both affect FICO scores negatively. 

You'll get no FICO points for paying off the balance slowly and will do quite well to keep the cards PIF.

I would recommend, though, that your wife look into the HIPAA process for removing the old medical bill/collection if it was paid and if it hasn't aged off at this point.

And 94, have you had a chance to pull your current credit reports?  And scores?  If you pull them from this site, they will have some excellent informaton along with a simulator that will show how different actions will affect your scores.  Let us know - you'll get some excellent feedback here.

Hope that helps a bit.

[marty56]

I would just add to beamMEup's great post that you need to know when each of the CCs report to the CRA so you can control the balance that gets reported.  From my own experience,   $1 can do as much harm or good as a full 9% of a CCs CL so be mindfull of that.

[MarineVietVet]

Welcome to the forums.

In addition to the excellent post by beamMeup I will say that you never have to carry a balance to get a good score. All that does is make the credit card companies happy because you are paying them interest every month.

Stick around here and you'll learn lots of things that will help you and your wife.

From a BK years ago to:
9/09 EX pulled by lender 802
3/10 EQ- 800
4/10 TU -772

You can do the same thing with hard work

Credit Scoring 101
Common Abbreviations
Frequently Requested Threads
Whats In Your FICO Score

[RobertEG]

So, your advisor is asking you to charge up debt, only pay the min, and thus pay monthly interest on the balance?

Finacially unsound, and FICO perilous.

% util has absolutely no historical memory in FICO, so no FICO advantage to harm your score now, just to cure it in the future.

To charge up to 70% util potentially raises red flags with the creditor, and regardless of whether you make the min monthly payment, may cause them to consider reducing your CL on the account. That would instantly increase your FICO % util, and thus reduce your FICO score.    Meanwhile, interst payments on the balance continue to accrue.  It just smells of impending risk.

I dont like the recommended credit advisor's approach for any reason I can think of.

[Anonymous]

Thank you all very much indeed for your replies, it's really really appreciated.  We'll definitely be paying the balances in full and keep the balances under 50%. I will have to do some investigating to find out exactly when the credit cards report to the bureaus - I want them to report when the balance is at $0 right?

I do the free credit reports each year at the official site www.annualcreditreport.com, but have never paid to see my actual credit score. I just did some investigation into creditkarma.com which claims to be a free credit score site, and it sounded good.  You don't give your credit card and it's all 100% free.... but apparently they only get the score from TransUnion, and some people have said that it's not identical to their score on Transunion.  In any case, those guys say I have 751 and my wife has 694, make of that what you will!

I know this probably deserves to be in its own thread now, but what is the HIPAA? I skimmed through the wiki explanation at http://en.wikipedia.org/wiki/Health_Insurance_Portability_and_Accountability_Act but it's far from light reading!  My wife certainly hasn't paid off that medical bill (and won't be able to unless we win the lottery), so does it still apply to us?

Thansk again all.

[Anonymous]

Re: RobertEG

I wrote my post as you were posting yours. As there was no merit to her plan, it Must have been that she assumed we were in deep debt.  Ie that even if we can't pay them off, *at least* pay them down to 70% and be sure to pay *at least* the minimum payment each month. I never met the woman myself, but she and my wife got along well so I hope she wasn't just blowing smoke, but rather misunderstood our circumstances.  Either way, that misunderstanding and our credit score ignorance will have cost hundreds of dollars and probably many months of credit building.  Oh well.

Thanks for reaffirming the concensus: high limit + low balance = good credit.

[Anonymous]

To pile on to the other great posts here, not letting a card report more than 10% of the CR, and PIFfing everything seems to have the most positive effect for me.  My scores are mediocre but I've managed (so far) to avoid the AAs that others have mentioned.  I attribute it to very low overall utilization and always PIFfing.

I didn't see anyone else mention it, and you're probably aware of this, but you're entitled to a free credit report every year at  annualcreditreport.com/.

[MarineVietVet]

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@Anonymous wrote:

Thank you all very much indeed for your replies, it's really really appreciated.  We'll definitely be paying the balances in full and keep the balances under 50%. I will have to do some investigating to find out exactly when the credit cards report to the bureaus - I want them to report when the balance is at $0 right? 50% is still much too high. Here is what I recommend for maximum score tweaking. Other people have different advice. You need to see what works best for you.

Optimal credit utilization for FICO scoring purposes seems to be:
Total revolving and individual utilization > 0 and < 9%, the lower the better, and
Reporting a balance on less than half of your revolving TL's, and
Reporting a balance on half or less of all TL's.

I do the free credit reports each year at the official site www.annualcreditreport.com, but have never paid to see my actual credit score. I just did some investigation into creditkarma.com which claims to be a free credit score site, and it sounded good.  You don't give your credit card and it's all 100% free.... but apparently they only get the score from TransUnion, and some people have said that it's not identical to their score on Transunion.  In any case, those guys say I have 751 and my wife has 694, make of that what you will! I use CreditKarma to keep track of some of my information but you can't rely on the scores. They are not true FICO scores.

No one has been able to pull their own Experian FICO score since February of 2009. Creditors can pull Experian and also there is a CU in Pennsylvania that supplies that information to it's members only. You can only buy true FICO scores at a few places. One place is here at myfico. I suggest you do an internet search for "myfico discount codes" to save a little money. You can also purchase your Equifax score at www.equifax.com (If you look hard enough) and your Transunion score at www.transunioncs.com.

I know this probably deserves to be in its own thread now, but what is the HIPAA? I skimmed through the wiki explanation at http://en.wikipedia.org/wiki/Health_Insurance_Portability_and_Accountability_Act but it's far from light reading!  My wife certainly hasn't paid off that medical bill (and won't be able to unless we win the lottery), so does it still apply to us?

Thansk again all.

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[RobertEG]

I agree that, from a FICO scoring perspective, 50% util is much too high, and that getting under 10% is the goal.

But one does not get there instantly.  Even if FICO scored a 70% util identifical to a 50% util (and they dont), my concern is not only a FICO concern.

Apart from of how FICO scores it, when the creditor does any regular, periodic review of your CR. seeing a 70% util will raise theeir eyebrows higher in reconsideration of an adjustment to your CLs than a 50% util.