topic Re: Ambiguity in Credit Cards

Ambiguity

Anonymous — Thu, 11 Apr 2013 15:35:56 GMT

In calculating FICO score, does the timing matter? Consider these 2 scenarios:

1) Currently I carry a balance of $5,000 & my utilization ratio is 70%. Every month I pay the minimum balance & my utilization after 2 years is 60%. At that time, I pay off almost the entire balance & bring my utilization down to 2%.

2) Currently I carry a balance of $5,000 & my utilization ratio is 70%. I pay off almost the entire balance today & bring my util down to 2%. I keep my util at 2% for 2 years.

After 2 years, will my FICO be the same in both the scenario? Assume all other factors stay the same i.e no impact of inquiries, no payment delay etc.

P.S: This question is very important for me so please answer only if you're sure. Thanks!

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 15:40:05 GMT

As long as all payments are on time, FICO scoring does not account for utilization history, only current utilization. So, in theory, both scores would be the same or very close (Once the statement cuts and the new balances are reported).

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 15:43:00 GMT

@Anonymous wrote:
As long as all payments are on time, FICO scoring does not account for utilization history, only current utilization. So, in theory, both scores would be the same or very close (Once the statement cuts and the new balances are reported).

Yes. No-one here (probably) knows the exact calculation used to create the actual score, but it IS based on the data in the credit report, calculated each time it is pulled. You can see that there is no utilization history in the report.

Re: Ambiguity

dddewdrop — Thu, 11 Apr 2013 15:43:51 GMT

They should both be all things equal the same for your score. There is no memory in the score. So it is the same to pay it all now and keep it at 2% for 2 years and to keep it at 70% for 2 years and pay it off a month before as far as util%. As the poster before stated, it is a snapshot that is scored, not some sort of cumulative average of utilisation %.

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 15:52:37 GMT

+1, your score should be the same in both scenarios, theoretically. But there are other factors that will play a role 2 years from now that may result in a higher score in 2 years from now, such as an increase in good payment history. So if you pay it down to 2% now, you will have X score. In 2 years, you will have X score plus 10-20 pts for history. If you wait 2 years to pay it down, you will have X score plus 10-20 pts for history. Same thing if nothing else on your report changes.

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 15:52:54 GMT

So saying "keep util low" isn't always true, correct? I mean I can take advantage of balance transfer offers offering 0% interest, carry a balance in low interest cards all the time... And whenever I intend to apply for new credit or CLI, I simply pay off my balances.

Why not take advantage of free interest?

So I can stay in the garden with high util?

Re: Ambiguity

MazdaSpeed — Thu, 11 Apr 2013 15:58:24 GMT

@Anonymous wrote:
So saying "keep util low" isn't always true, correct? I mean I can take advantage of balance transfer offers offering 0% interest, carry a balance in low interest cards all the time... And whenever I intend to apply for new credit or CLI, I simply pay off my balances.

Why not take advantage of free interest?

So I can stay in the garden with high util?

as long as you stay in the garden you will be unaffected, before you want to apply for something else, pay down your debt and make sure it reports the lower balance before applying, could take a month or 2 to update

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 15:59:39 GMT

Sounds great 😃

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 16:00:28 GMT

@Anonymous wrote:
So saying "keep util low" isn't always true, correct? I mean I can take advantage of balance transfer offers offering 0% interest, carry a balance in low interest cards all the time... And whenever I intend to apply for new credit or CLI, I simply pay off my balances.

Why not take advantage of free interest?

So I can stay in the garden with high util?

Yes, there is lots of talk about keeping util low, but as a few posters do point out, this only matters if you are going to apply for something. The only reason I can think of for always keeping util low is just in case a great very limited time offer comes out (so you can't wait a month to fix util) but this is unlikely.

So, yes, taking advantage of 0% offers makes sense (but carrying a balance on any non-zero card doesn't, if there is an alternative). And, as a smaller effect, PIF before the due date is also losing any interest the money might earn, and doing it before the statement cuts magnifies this. (One of the selling points of ccs originally was the float it gave you!)

Re: Ambiguity

MazdaSpeed — Thu, 11 Apr 2013 16:07:31 GMT

Also remember that on this forum most people believe having all of your cards besides 1 report a 0 balance and the 1 remaining card reporting at between 1 and 9 percent utilization

Re: Ambiguity

dddewdrop — Thu, 11 Apr 2013 16:08:18 GMT

The other thing is that if you keep your balances low you will be more attractive to other credit card companies. They will be more likely to compete for your business id it appears that you dont really NEED them. Also keeping balances low should insulate your from a Credit Line Reduction. If you carry very little balances then it is seen as the credit card companies need you and compete over you whereas if you carry high balances it is seen as you needing the credit card companies and they are more in the driver's seat. That being said, if you do have a very low interest rate locked in then that should factor into your decision as well. The advice to have utilisation percent <9% is to optimise your score right before you are applying for something.

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 16:13:51 GMT

@dddewdrop wrote:
The other thing is that if you keep your balances low you will be more attractive to other credit card companies. They will be more likely to compete for your business id it appears that you dont really NEED them. Also keeping balances low should insulate your from a Credit Line Reduction. If you carry very little balances then it is seen as the credit card companies need you and compete over you whereas if you carry high balances it is seen as you needing the credit card companies and they are more in the driver's seat. That being said, if you do have a very low interest rate locked in then that should factor into your decision as well. The advice to have utilisation percent <9% is to optimise your score right before you are applying for something.

Don't credit card companies like AMEX/Chase have their own internal algorithms to access your risk to them, so having a high balance on a card for an extended period (6months-1 year) might send them red flags

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 16:25:02 GMT

I like to keep Util as low as possible while in the garden because I want to know where I truly stand all the time, rather than have to pay down balances to see my true score. My Util is currently at 25% and I am taking advantage of 0% APR for 24 months on a large BB purchase. I know if it were at 9%, my score would be a little bit higher but with 25% Util, I at least have a good idea of my score at 9% Util. It is harder to estimate that at 75% Util.

Re: Ambiguity

dddewdrop — Thu, 11 Apr 2013 16:41:47 GMT

@Anonymous wrote:
@dddewdrop wrote:
The other thing is that if you keep your balances low you will be more attractive to other credit card companies. They will be more likely to compete for your business id it appears that you dont really NEED them. Also keeping balances low should insulate your from a Credit Line Reduction. If you carry very little balances then it is seen as the credit card companies need you and compete over you whereas if you carry high balances it is seen as you needing the credit card companies and they are more in the driver's seat. That being said, if you do have a very low interest rate locked in then that should factor into your decision as well. The advice to have utilisation percent <9% is to optimise your score right before you are applying for something.
Don't credit card companies like AMEX/Chase have their own internal algorithms to access your risk to them, so having a high balance on a card for an extended period (6months-1 year) might send them red flags

They may have their own algorithms but they simply don't have access to multiple credit reports of people's so they will not have the data in front of them as to what your balance was on each credit card every month. There is no way for them to track that info from a person who isn't even their customer unless they pull every one in the public's reports multiple times. It costs these companies money each time they pull a report so they have no incentive to be tracking random people's card use over an extended period of time so I don't see how they could tell whether this guy was paying his bill in full every month or not.

Re: Ambiguity

madmann26 — Thu, 11 Apr 2013 16:49:28 GMT

I'll weigh in, (my thinking may or may not be correct, if fact, it's probably wrong)

FICO likes to score based on your ability to pay your bills on time, over time. In short, if you don't ever, ever carry a balance, then there is no way to score you because FICO doesn't "know" that you are using your credit wisely. (this is were reporting a $0 balance on all cards can be bad for scoring purposes)

I agree with everyone else. Keep a small balance on one card, pay it down over time and when it gets to 1%, charge it back up to 9%, pay it down again. Rinse and repeat.

Re: Ambiguity

Anonymous — Thu, 11 Apr 2013 17:05:54 GMT

@madmann26 wrote:
I'll weigh in, (my thinking may or may not be correct, if fact, it's probably wrong)

FICO likes to score based on your ability to pay your bills on time, over time. In short, if you don't ever, ever carry a balance, then there is no way to score you because FICO doesn't "know" that you are using your credit wisely. (this is were reporting a $0 balance on all cards can be bad for scoring purposes)

I agree with everyone else. Keep a small balance on one card, pay it down over time and when it gets to 1%, charge it back up to 9%, pay it down again. Rinse and repeat.

Depending what you mean, it's probably wrong!

The key point is to never pay interest if you can possibly avoid it. So you don't "carry a balance", what everyone is talking about is SHOWING a balance on a single card, between the time the statement cuts and the due date. Before the due date, pay in full. Then your credit report shows that you were using credit responsibly, you have a non-zero balance and no late payments.

The report doesn't distinguish whether you paid in full or not, so there is no advantage in not doing so, again, unless you have a 0% period, do not carry a balance past the due date.

Re: Ambiguity

dddewdrop — Fri, 12 Apr 2013 10:45:08 GMT

@Anonymous wrote:
@madmann26 wrote:
I'll weigh in, (my thinking may or may not be correct, if fact, it's probably wrong)

FICO likes to score based on your ability to pay your bills on time, over time. In short, if you don't ever, ever carry a balance, then there is no way to score you because FICO doesn't "know" that you are using your credit wisely. (this is were reporting a $0 balance on all cards can be bad for scoring purposes)

I agree with everyone else. Keep a small balance on one card, pay it down over time and when it gets to 1%, charge it back up to 9%, pay it down again. Rinse and repeat.

Depending what you mean, it's probably wrong!

The key point is to never pay interest if you can possibly avoid it.

I would say that is one of the key points but not the key point. Other equally or more important points are how to generate the best fico score while keeping your account active. When we are talking about the interest on a relatively small amount of money for one month. Me inost people with rebuilder cards have a CL of less than 1000 dollars and if they are keeping their utilisation below 9% then te interest involved on $90 dollars being borrowed for less than 1 month is really a small dollar figure and should not be one's focus. People engaging in credit rebuilding are not doing so to save 5 or 10 dollar on interest out of principle. Most people are rebuilding their credit so that they can be approved for a mortgage or car loan with much bigger money at stake. I think most people would be willing to pay a couple bucks a month in interest to improve their score. Of course it makes sense to avoid interest fees if possible but I wouldn't say they are the key to this strategy.I What is key to the concept is not going into debt while rebuilding credit by charging a bunch of stuff on your new rebuilder card while being sure to use the card some minimum amount so that your credit report reflects that the card is active.

Re: Ambiguity

Anonymous — Fri, 12 Apr 2013 11:18:56 GMT

@dddewdrop wrote:
@Anonymous wrote:
@madmann26 wrote:
I'll weigh in, (my thinking may or may not be correct, if fact, it's probably wrong)

FICO likes to score based on your ability to pay your bills on time, over time. In short, if you don't ever, ever carry a balance, then there is no way to score you because FICO doesn't "know" that you are using your credit wisely. (this is were reporting a $0 balance on all cards can be bad for scoring purposes)

I agree with everyone else. Keep a small balance on one card, pay it down over time and when it gets to 1%, charge it back up to 9%, pay it down again. Rinse and repeat.

Depending what you mean, it's probably wrong!

The key point is to never pay interest if you can possibly avoid it.

I would say that is one of the key points but not the key point. Other equally or more important points are how to generate the best fico score while keeping your account active. When we are talking about the interest on a relatively small amount of money for one month. Me inost people with rebuilder cards have a CL of less than 1000 dollars and if they are keeping their utilisation below 9% then te interest involved on $90 dollars being borrowed for less than 1 month is really a small dollar figure and should not be one's focus. People engaging in credit rebuilding are not doing so to save 5 or 10 dollar on interest out of principle. Most people are rebuilding their credit so that they can be approved for a mortgage or car loan with much bigger money at stake. I think most people would be willing to pay a couple bucks a month in interest to improve their score. Of course it makes sense to avoid interest fees if possible but I wouldn't say they are the key to this strategy.I What is key to the concept is not going into debt while rebuilding credit by charging a bunch of stuff on your new rebuilder card while being sure to use the card some minimum amount so that your credit report reflects that the card is active.

Yes, but I was really just trying to correct the impressions that CARRYING a balance is critical to this process. Paying interest doesn't help get a mortgage etc, so I think my statement that don't do it if it can be avoided is right! But you're right that it isn't the only important consideration.

Re: Ambiguity

dddewdrop — Fri, 12 Apr 2013 11:30:21 GMT

Yes. You are right. Good point. I am trying to rotate through my cards picking one for month that I buy one item with, wait for the statement date to come and go so it will show up when they report, then paying it off. It hard for me because I had such terrible habits in the past. In the past when I was approved for a credit card, I treated it like someone just handed me free money and just charged stuff on it til my limit was reached then forgot about it and just avoided opening the bills. They would just pile up on my desk. The most difficult thing for me has been to resist the temptation to spend money that i don't have since credit cards make it so easy to do. That is defiinately the hardest part for me. On sites like this we glaze over the basics sometimes to get to the fine tuning of things. For me if I can just manage to keep from spending any money on my cards, I am a winner. Fine tuning the situation by making sure they report a small charge each every once in a while is just gravy.

Coming from a place of such utter financial irresponsibility, I have had to really change my thinking and have struggled a great deal to become self disciplined. That for me is the real struggle to keep my cards in my wallet and not impulse buy with them.

Re: Ambiguity

atarvuzdar — Fri, 12 Apr 2013 12:39:06 GMT

I think this may have been eluded to, but I'll add that if you keep your util low by paying down NOW as opposed to later you'll also have a better chance at auto-CLI's and the like during the two-year time period in question. This will make you more attractive to some lenders and will automatically help with your overall utilization %.

In the end, the right answer is whatever fits your particular circumstances best. We can offer advice on this board but what might be right for one person for their particular circumstance and goals may not be right for another person with different circumstances and goals.

ETA: Good luck!