@Anonymous wrote:
@Subexistence wrote:Ok so from what I understand, there is a tradeoff between a higher score and higher credit card benefit. For example if I never made a loan(hence no inquiries) and used only 1% of my total credit(lower utilization rate) then I could easily reach and maintain a score in the 800s but the score won't be useful because I never even took advantage of my score to get a cheaper loan. However if I go the other way and instead used like 90% of my credit and took advantage of my credit score to get cheaper loans, then my credit score would drop until it's no longer useful enough to derive those benefits.
So then what is the optimization equation for the most ideal score to maximize benefits?
This is assuming I pay back in full.
You sound like you may be fairly new to the forums. Welcome!
There are a few different issues that may be mixed up in your post. I will do my best to see if I can figure what they might be and separate them.
(1) What credit card utilization will make my score the highest? Is it 1%, 90%, or some ideal point in between?
Your score will be optimized by having a very low utilization. You begin starting to get a scoring penalty when your utilization goes over 8.99%. FICO will round all percents up, so even if you have one card with $4 on it and a total credit limit of $30,000 FICO will consider that as 1%. You will also get a scoring benefit from having most of your cards reporting at $0. Finally, you will benefit in the long run from having at least three credit cards. More than four is fine, but it won't in itself help your score.
(2) What is the relationship between having a high credit score and having loans?
By loan I am guessing you mean an installment loan, like a car loan, student loan, personal loan, or mortgage. If you have a low credit score, it is hard as you can probably guess to be approved for loans and when you are, you have to pay higher interest rates.
But to obtain a very high credit score, you need to have loans (in good standing) on your report. For FICO 8, you need open loans and the scoring model likes it best when they are mostly paid off (but not quite).
(3) If I have a number of loans on my credit report, will that lower my score, so that the score becomes no longer useful?
Not at all. It will be good for your score. There is in fact an easy way to add a loan to all three reports, to do so in a way that FICO will like a lot, and which will only cost you a couple dollars a year. You can read about it here:
I hope that answers the questions it seemed like you may have had.
Thank you for your reply. Sorry if my post was not very clear. The main issue is should I get a really high score I never use or a medium high score that I use a lot. I hope that clarifies this a bit.
Starting Score: Ex08-732,Eq08-713,Tu08-717
@Subexistence wrote:Thank you for your reply. Sorry if my post was not very clear. The main issue is should I get a really high score I never use or a medium high score that I use a lot. I hope that clarifies this a bit.
Do both /shrug. Plenty of people leverage their credit reports on a regular basis and are still north of 800 at least on the modern algorithms. Lenders don't seem to care much currently either though that can change on a dime if we get another financial crisis.
End of the day if leveraging your credit report will either save you or make you non-trivial money, do it and don't look back or worry about the credit implications regarding it. Actually when I think about your question again after sleep and decent food, think it's really that simple... if you don't leverage your credit to further your financial goals, you're doing it wrong.
@Revelate wrote:
@Subexistence wrote:Ok so from what I understand, there is a tradeoff between a higher score and higher credit card benefit. For example if I never made a loan(hence no inquiries) and used only 1% of my total credit(lower utilization rate) then I could easily reach and maintain a score in the 800s but the score won't be useful because I never even took advantage of my score to get a cheaper loan. However if I go the other way and instead used like 90% of my credit and took advantage of my credit score to get cheaper loans, then my credit score would drop until it's no longer useful enough to derive those benefits.
So then what is the optimization equation for the most ideal score to maximize benefits?
This is assuming I pay back in full.
That's an interesting way to look at it.
I don't play in a clean bucket and my opinions may change with that if I get gold-plated someday, but because my score isn't anywhere close to optimal in the absolute sense I tend to err towards not leveraging my credit report unless I actually need it... then again in most cases I can't really damage my report now unless I take a negative so other than particular lender UW it shouldn't rationally be much issue.
This is a somewhat recent theory as I sort of blithly leveraged my credit report post mortgage thinking "eh, I'm done;" however, suddenly I could really, really, REALLY use a Chase Sapphire Reserve and I'm a little worried my file doesn't support it. There will be an little bit of the Art of the Deal I suspect with Chase to achieve that.
If you're doing something different like gambling with other folks' money (taking out 0% or 1% convenience checks for 20-25K let's say and either investing it or doing something like paying down your mortgage for a more conservative option) you don't typically get those offers until you're at the point you don't really need them credit wise, and actual loans are pretty FICO neutral all things considered, maybe 30ish points for terrible installment utilization on FICO 8.
Right now most things UW at a 740 or lower so I would suggest 740's something of a sweet spot where it won't be your FICO score which gets you kicked out of the pool, it's income and everything else that goes into a decision. That said if you're clean it's not that hard to get into the 800 scoring ranges on recent FICO models, and more buffer more better... someone with that file can play harder than I can, I'm still babysteppin' comparitively.
Hello,
Thanks for the response. It seems like you suggest 740 for optimization and you also explain tha even when you thought you didn't need a high score anymore since you paid off the loan, you found out you still needed high score for an unexpected credit card. I guess I can take from this that a high score is always useful. Maybe in the future once your mortgages are paid off, you can do arbitrage.
@Anonymous wrote:One thing that I think needs to be realized here is that in the grand scheme of things, 800's aren't any better really than say a 760. Anything in that range, 760-850 is just sort of gravy as anywhere in that range can essentially get you whatever you want on the best possible terms. Because there's an optimal range, not everyone needs an optimal profile with single digit utilization, an open installment loan mostly paid off, etc. You can be missing one piece of the puzzle and still be 760+. In fact, you can probably be missing 2 pieces of it and still be 760+ if everything else in your file is near optimal.
Where all of these pieces of the puzzle become more important are for the people out there (and there are plenty of them) with sub-760 scores. Naturally, they (we) want to do everything they can to get into the ideal score range, so micromanaging different profile aspects becomes far more important to them.
Hello and thank you for your response, it seems like 760 it is.
@Anonymous-own-fico wrote:Reminds me of the dog running along down the river jumping in just when the time is right to fish out the floating wooden stick. Dogs know intuitively how to optimize the task.
The good thing about 850 over 760 by the way is that you can go all wild and crazy and still have plenty of cushion, and there is something to be said for that.
Hello,
Thank you for your response. I guess it's true that even though 760 may be optimal a higher score provides more buffer so I can continue to enjoy the benefit of from 760 and aboveif I have an emergency that needs to ding my score.
@Revelate wrote:
@Subexistence wrote:Thank you for your reply. Sorry if my post was not very clear. The main issue is should I get a really high score I never use or a medium high score that I use a lot. I hope that clarifies this a bit.
Do both /shrug. Plenty of people leverage their credit reports on a regular basis and are still north of 800 at least on the modern algorithms. Lenders don't seem to care much currently either though that can change on a dime if we get another financial crisis.
End of the day if leveraging your credit report will either save you or make you non-trivial money, do it and don't look back or worry about the credit implications regarding it. Actually when I think about your question again after sleep and decent food, think it's really that simple... if you don't leverage your credit to further your financial goals, you're doing it wrong.
Yeah that's the problem, isn't it... it seems like the most important lending, the lending some of us really need to have some times, uses the oldest algorithms.
@SouthJamaica wrote:
@Subexistence wrote:Ok so from what I understand, there is a tradeoff between a higher score and higher credit card benefit. For example if I never made a loan(hence no inquiries) and used only 1% of my total credit(lower utilization rate) then I could easily reach and maintain a score in the 800s but the score won't be useful because I never even took advantage of my score to get a cheaper loan. However if I go the other way and instead used like 90% of my credit and took advantage of my credit score to get cheaper loans, then my credit score would drop until it's no longer useful enough to derive those benefits.
So then what is the optimization equation for the most ideal score to maximize benefits?
This is assuming I pay back in full.
Possible "equations" for FICO 8 might be:
1. Revolving credit: have most accounts report a zero statement balance, have one or a few reporting a small statement balance, have no card over 29% utilization, and overall keep revolving utilization below 10%.
2. Non-mortgage open installment loans: have one, and have aggregate utilization at 9% or lower.
3. Mortgage loans: good but not necessary to have an open mortgage loan, probably at least 10% paid off.
Other FICO models might work differently, or even disregard some of the above factors.
Hello,
Thank you for your equations. I probably wasn't clear what I meant by optimization equation. I meant optimization like optimization in Calculus.
Something like define B as benefit, s as credit score, and u as how frequently credit score is used B=s*u
s=1520-u
subsituting s in terms of u yields the equation B=(1520-u)u=-(u^2)+1520u
Bascially your benefit is your score multiplied by usage which is intuitive because both a higher score and a higher usage would increase your benefit.
Your score is 1520-usage because as your usage of your score increases(inquiries, etc) then you score drops. So basically you want to find when B=-(u^2)+1520u is the highest. If you take the derivate dB=-2u+1520 and set it equal to zero then you get the max in this case. 0=-2u+1520 so u must be 760 and therefore s must be 760 to maxmize the Benefit. That's what I meant by optimization equation. Of course the equation I just made out of my head but you get a general sense of what I'm seeking.
@Revelate wrote:
@Subexistence wrote:Thank you for your reply. Sorry if my post was not very clear. The main issue is should I get a really high score I never use or a medium high score that I use a lot. I hope that clarifies this a bit.
Do both /shrug. Plenty of people leverage their credit reports on a regular basis and are still north of 800 at least on the modern algorithms. Lenders don't seem to care much currently either though that can change on a dime if we get another financial crisis.
End of the day if leveraging your credit report will either save you or make you non-trivial money, do it and don't look back or worry about the credit implications regarding it. Actually when I think about your question again after sleep and decent food, think it's really that simple... if you don't leverage your credit to further your financial goals, you're doing it wrong.
Thank you for your advice!