topic Re: Paying off credit cards every month is a negative in Understanding FICO® Scoring

Paying off credit cards every month is a negative

Anonymous — Tue, 24 Aug 2010 02:37:01 GMT

I did a FICO score today and one of the negatives said this: "You've made heavy use of your available revolving credit."

Uh yeah, and I pay them off every month on time. Some of us make a decent income and can afford to do this. And this is a negative on my score? Unbelievable.

Re: Paying off credit cards every month is a negative

RobertEG — Tue, 24 Aug 2010 03:27:03 GMT

I would not interpret this as a negative on your score. The comments portion of your CR is merely a general warning that certain practices may, on the average, indicate potentail risk to future credit score. High usage of revolving credit is, potentially, a risk factor for most consumers.

But it is NOT a comment about you, individually. If you PIF each month, those comments have NO relevance to your score. FICO does not score on how much you charge each month, only on the CL vs the reported balance.

Comments do not equal credit score impact.

Re: Paying off credit cards every month is a negative

Anonymous — Tue, 24 Aug 2010 03:37:41 GMT

Paying your CCs off before the due date to avoid finance charges is a good thing, but that does not affect your utilization.

For example, if I have a card with a $10,000 limit and charge $2,000 every month and PIF after the statement is cut, my utilization is 20% -- not 0%.

Since the optimal utilization is between 1% and 9% of both individual cards and your overall credit limits (and to not report a balance on all your cards -- most people here on the forums suggest to only have one CC report a balance), you would want to have a $899 or less statement balance to report. The way you would do that is to make a payment to the card before the statement cuts.

The other option in the above example would be to secure a higher credit limit. If you were charging $2,000 per month and you wanted 9% utilization without paying before the due date, you would need a credit limit of at least $22,223.

I hope that helps.

Re: Paying off credit cards every month is a negative

vanillabean — Tue, 24 Aug 2010 07:05:06 GMT

It can be added that many credit cards unfortunately do not report their credit limits. You may have a credit limit total of $100,000, but the reported total may be $0. So if you charge just one dollar per month, your available credit is negative.

Credit limits not reporting for some of your cards may cause a utililzation of say 90% instead of an otherwise expected utililzation of say 5%. The scenarios are endless. A score report generally does not list how the utililzation is calculated.

Calculating the average age of accounts is easy because everything counts. Calculating the utililzation, monthly balances in percent of credit limits, is not like that. Some count and some do not count, and that provides plenty of entertainment in this forum.

Re: Paying off credit cards every month is a negative

haulingthescoreup — Tue, 24 Aug 2010 17:31:50 GMT

@Anonymous wrote:
I did a FICO score today and one of the negatives said this: "You've made heavy use of your available revolving credit."

Uh yeah, and I pay them off every month on time. Some of us make a decent income and can afford to do this. And this is a negative on my score? Unbelievable.

This means that your statement balances (amount due) are reporting to the credit bureaus. Once they're on your reports, they're used in calculating your util (revolving utilization.) The credit bureaus don't report whether or not you then pay them off in full before the due date, so there's no way of determining whether you're carrying balances (possibly due to money problems) or PIF'ing (paying in full.)

The credit bureaus chose to use this figure for reporting purposes. I think it would have been much more informative to report balances as of the due dates, but no one asked me.

So even though it's dumb, it's easily fixed. Pay all your accounts a few days early, so that all but one reports $0. Let that one report $10, and then don't forget to pay it off. Let all these $0's (and the $10) report, and check your scores again. I think you'll have a nice surprise.

Yes, it's silly. But if you want to make the system work to your advantage, now you know how.

Re: Paying off credit cards every month is a negative

Duke-of-Earl — Wed, 25 Aug 2010 06:48:31 GMT

@haulingthescoreup wrote:
@Anonymous wrote:
I did a FICO score today and one of the negatives said this: "You've made heavy use of your available revolving credit."

Uh yeah, and I pay them off every month on time. Some of us make a decent income and can afford to do this. And this is a negative on my score? Unbelievable.

Yes, it's silly. But if you want to make the system work to your advantage, now you know how.

+1 to both parts of this statement! The silliness factor was much in my mind while signing my name endlessly, closing on my refinance last week: To make this quarter-million-plus mortgage loan work, I had to crap around at the ten-dollar level on my credit cards! But it did work. Thanks to all for recent advice.

Re: Paying off credit cards every month is a negative

Anonymous — Wed, 25 Aug 2010 14:17:22 GMT

I guess to me playing games is not my style. I think this whole scoring/credit system becomes a scam in the end. It's as if they're not telling the entire story. How about having a PIF (Pays in Full) column? That way, the creditors can actually see what's going on and tell the entire story. Another "negative" on my credit report was that I didn't have any revolving car payments. OK, so I paid for my car in cash. And that's a bad thing? In the old days when you could write off any kind of interest (back in the 70s), I could understand having a car loan. Since rules have changed and you can't deduct that kind of interest any longer, why pay it in the first place if you don't have to?

Re: Paying off credit cards every month is a negative

haulingthescoreup — Wed, 25 Aug 2010 17:33:01 GMT

@Anonymous wrote:
I guess to me playing games is not my style. I think this whole scoring/credit system becomes a scam in the end. It's as if they're not telling the entire story. How about having a PIF (Pays in Full) column? That way, the creditors can actually see what's going on and tell the entire story. Great point. See if you can persuade all three credit bureaus to start reporting this. Since they don't report it, the scoring formula can't consider it. If it's not on your reports, it can't be factored in. Another "negative" on my credit report was that I didn't have any revolving car payments. OK, so I paid for my car in cash. And that's a bad thing? In the old days when you could write off any kind of interest (back in the 70s), I could understand having a car loan. Since rules have changed and you can't deduct that kind of interest any longer, why pay it in the first place if you don't have to? Agreed. FICO scoring should take second place to good personal finance practices. Out of curiosity, is this the last or nearly last negative factor in your scores? There are always 4 negative factors listed on the full reports that lenders pull. (We see fewer than four on myFICO score reports as scores rise.) My guess is that the high reported util is a major hindrance to your scores, and the lack of an installment loan isn't that big of a deal. We have members here with long, clean credit, only 3 open CC's, and no loans or mortgages reporting, and their scores are in the 800's.

I hear you about the game playing. And some people are so perturbed about the system that they opt out entirely, choosing to live off the credit grid.

But in anything that we do, there's a certain amount of games going on, and learning how the game is played can make your day go better. At work, it's smart not to cross the receptionist, unless you want to have every nuisance call sent directly to your phone. In relationships, insisting on always having the last word and winning every argument might soon lead to not having anyone to argue with. In football, showing happiness at making a big play seems to now result in a 15-yard penalty for illegal celebration, so it appears that players should now just trudge back to the line of scrimmage and start the next play.

I don't think that the current system of scoring is particularly fair to each individual, but the dreary world of statistics has shown that it's a pretty good risk predictor in general. (And I loved statisics so much that I had to take it twice. ) So if I can learn enough about what the scoring formulas consider, and I can tweak some of my habits enough to make the algorithm "happy", I will certainly do so. I'm certainly happier with my scores now than with the 590 I had in the late spring of 2007.

And I get much better deals, including rewards, on my credit products as a result.

Re: Paying off credit cards every month is a negative

Anonymous — Fri, 27 Aug 2010 14:17:13 GMT

@RobertEG wrote:
I would not interpret this as a negative on your score. The comments portion of your CR is merely a general warning that certain practices may, on the average, indicate potentail risk to future credit score. High usage of revolving credit is, potentially, a risk factor for most consumers.
But it is NOT a comment about you, individually. If you PIF each month, those comments have NO relevance to your score. FICO does not score on how much you charge each month, only on the CL vs the reported balance.
Comments do not equal credit score impact.

I don't think that you want to say it that way. Your FICO score does not taker into consideration whether the reported balance isall being financed or are simply monthly purchases that are PIF each month. Your score is affected by the balance on your CC.

i agree with you though that the comments are often worthless and sometimes even misleading.

Re: Paying off credit cards every month is a negative

Anonymous — Fri, 27 Aug 2010 14:54:32 GMT

I appreciate all the replies here, but ultimately I think two things would make a more realistic "creditworthyness" report.

One, to put another column for those who PIF each month - stating how many months they had PIF.

But the ultimate reality check would be to tie your credit history with your [verified] income.

Now THAT would be the real picture.

Re: Paying off credit cards every month is a negative

GregB — Fri, 27 Aug 2010 15:58:53 GMT

Your FICO score is based upon your history of paying your bills and your responsible use of credit. Income is almost unrelated to that, perhaps no correlation at all. In my experience, a recent large increase in income usually results in credit problems for people.

Most credit applications look at many factors before granting you a loan. Income is usually factored into those decisions along with assets, equity, etc.

People who think that more income will solve their money problems are frequently headed for more money problems - Not including those that have had a recent job loss or big pay decrease.

Re: Paying off credit cards every month is a negative

haulingthescoreup — Fri, 27 Aug 2010 16:11:48 GMT

I agree --any responsible lender will look at your income in addition to your credit report.

I can't even begin to imagine the unholy mess that would result if our income was included on our credit reports. When many of us can't get the CRA's to spell out names correctly or enter the right apartment number or report the proper balance on a Hammers'R'Us store card, what do you think that they would do with salary info??? Imagine changing jobs, or getting a raise, or picking up an additional part-time job, or (shudder) being self-employed.

Income shouldn't be on a credit report. It doesn't predict future credit risk (which is what credit scores are all about, anyway), and it should be evaluated in addition to credit history.

Re: Paying off credit cards every month is a negative

Anonymous — Fri, 27 Aug 2010 16:17:38 GMT

I disagree. Home lending and car loans are typically subject to an income check. How about other cards? Does your department store check your income? No, they don't. The one thing income determines is stability AND ability to pay. Income verification is crucial when it comes to lending. Although you wouldn't know it by the housing mess we're in today...

Re: Paying off credit cards every month is a negative

haulingthescoreup — Fri, 27 Aug 2010 16:25:39 GMT

Of course income verification is crucial. I didn't say that it wasn't. Look at what all those no-doc mortgages did to us.

What I'm saying is that income doesn't belong on a credit report. It should be separately submitted and verified.

If you read here long enough, you'll see plenty of posts from people richer than stink who have completely mishandled their credit. And meanwhile, we have military members, retirees, and others without much income and stellar credit history. They know they don't have money to burn, and they handle it very responsibly.

Yes, it's stupid for lenders to not check income. In fact, the Credit Card ACT requires lenders to determine (in some manner or another) ability to repay debt from loan products, including credit cards. And even before the act passed, many lenders did so, especially credit unions like PenFed and Alliant that require applicants to fax in pay stubs and even tax returns.

But that is separate from a credit report, which is your history of managing credit.

Proof of income predicts ability to pay. Credit history predicts willingness to pay. Two different, and equally important, factors.

Re: Paying off credit cards every month is a negative

Anonymous — Fri, 27 Aug 2010 16:33:52 GMT

I use two credit cards. One is a Sears Gold MC (had that since 1982) which allows me to get nice rewards. And I also have a Macy's Premier VISA card (which also allows me to get nice rewards, discounts, etc.). I've had a Macy's card since they were called Bamberger's. I also have a Nordstrom card, which I barely use. Both the Macy's and Sears limits are in the 5 figures. I applied for a Dillard's card recently and got rejected. Why? Two reasons: I don't have any car loans or mortgage payments (bought my car for cash and home was paid off). So...dinged for NOT having any revolving loans. Dinged again for not having applied for any credit recently.

You damned if you, damned if you don't.

So, having two long term competitive store credit cards, no revolving loans such as car and mortgage actually hurt me. Unbelievable. And my FICO score was in the mid 700s. Go figure. I use both my rewards cards and pay them off each month in full.

Re: Paying off credit cards every month is a negative

haulingthescoreup — Fri, 27 Aug 2010 16:50:32 GMT

Well, OK. We showed you how to fix the score issue earlier in this thread.

Again, we have members here with only two or three cards, NO open loans, and NO open mortgages, and their scores are very, very high, either side of 800.

As always, it is your choice as to whether you want to use the tips provided here.

As for Dillard's, I think they were nuts to not have accepted you. But that's a lender decision, not a FICO scoring issue.

Good luck to you in whatever you decide.

Re: Paying off credit cards every month is a negative

Anonymous — Fri, 27 Aug 2010 16:54:06 GMT

I guess the "fix" is to game the system.

Re: Paying off credit cards every month is a negative

CrdtLrnr — Sat, 28 Aug 2010 18:56:24 GMT

Yup--game the system based on changing (improving) credit management habits using the knowledge gained from this website over time.

Re: Paying off credit cards every month is a negative

Anonymous — Mon, 30 Aug 2010 09:30:27 GMT

Just a couple of thoughts...

1. Paid in Full... One problem with including PIF in the reports to the credit bureaus is that some people could be playing a shell game. Some people might pay off cards in full each month, but accomplish it by borrowing from Card B to pay off Card A just before Card A reports. Then borrow from Card A to pay Card B in full just before Card B reports. Card A and Card B both show $ 0.00 balance but only because of game playing.

I have 2 credit cards that I pay off each month just before they report and my primary card (6.25% and 1% cash back) that I am paying down the balance. I notice that if I pay an extra $1,000 on the primary card it does not help my score. If the balance stays down a couple of months, then I see an increase in my score. This leads me to believe that the formula is slanted as if a large payment is not a "real" payment... Either the money was borrowed from some other source, or, the person paid too much on the card and will have to increase the balance next month to compensate for the large payment. (Yes, the "shoe fits". Sometimes, my budget is tight because I paid too much on the card the previous month.)

2. I believe that it helps to have a small balance report on the cards.

About every 2 or three months, I allow one or the other of the first two cards to report a small balance. This seems to help my score. If cards always report a zero balance, they may be sitting in a block of ice in your freezer... I think I read somewhere in the MyFico site ... maybe that 15 page explanation of how scores are calulated... that the score is based on how you use your credit and talks about unused credit cards. With zero balance every month, it appears card is not being used.

Here is the notation from MyFico on my most recent Equifax score. It was in the "Helping your score" column.

You've shown recent use of credit cards.

Your FICO score evaluates your mix of credit cards [?], installment loans and mortgages. People who demonstrate responsible use of different types of credit are generally less risky to lenders. You helped your FICO score by showing recent use of a credit card.

3. The other item is that you need to understand when your cards report to the credit bureaus. Two of my cards (#2 and #3) report the balance to Transunion on the date the statement is printed. The third card reports the balance to Transunion as of 2 days before the payment is due! If I want the third card to report a zero balance, I have to be sure my payment is applied at least 2 days before the payment is due. (On-line is really nice for tracking this.)

I recently got my Experian report from Annualcreditreport.com, and the reported balances are all over the place... The cards are reporting to Experian on a different date (therefore different amount) than to Transunion. ..... (sigh) OH, WELL...

Soon I hope to have my new mortgage. Then I will pay my bills before the due dates, keep my balances down, and let the dust settle wherever it settles....

But as someone else said earlier in this string... for now, I have to play the game.

Re: Paying off credit cards every month is a negative

haulingthescoreup — Tue, 31 Aug 2010 18:52:50 GMT

@Anonymous wrote:
Just a couple of thoughts...

1. Paid in Full... One problem with including PIF in the reports to the credit bureaus is that some people could be playing a shell game. Some people might pay off cards in full each month, but accomplish it by borrowing from Card B to pay off Card A just before Card A reports. Then borrow from Card A to pay Card B in full just before Card B reports. Card A and Card B both show $ 0.00 balance but only because of game playing.

But lenders can tell when the overall balance stays the same. They're well aware of BT's. In fact, they'll see the balance increase, because there's a balance transfer fee that is added to the balance.

I have 2 credit cards that I pay off each month just before they report and my primary card (6.25% and 1% cash back) that I am paying down the balance. I notice that if I pay an extra $1,000 on the primary card it does not help my score. If the balance stays down a couple of months, then I see an increase in my score. This leads me to believe that the formula is slanted as if a large payment is not a "real" payment... Either the money was borrowed from some other source, or, the person paid too much on the card and will have to increase the balance next month to compensate for the large payment. (Yes, the "shoe fits". Sometimes, my budget is tight because I paid too much on the card the previous month.)

There's no "slant" in the formula, although I can see why you might think this. One part of the formula looks at the actual dollar amount of balances, but the more important part looks at util, or revolving utilization, which is balances owed divided by credit limit. These appear to run in percentage ranges, like 0-9%, 10-19%, 20-49%, and so forth. (Endless argument about what the ranges are!) So you can pay $1000 on a balance, and your total util changes from say 18% to 14%, and so you're in the same percentage range, and there's no score increase for improved util. Then you pay $10 another month, and you go from say 20% to 19%, and bingo, a score increase for a tiny payment.

2. I believe that it helps to have a small balance report on the cards.
About every 2 or three months, I allow one or the other of the first two cards to report a small balance. This seems to help my score. If cards always report a zero balance, they may be sitting in a block of ice in your freezer... I think I read somewhere in the MyFico site ... maybe that 15 page explanation of how scores are calulated... that the score is based on how you use your credit and talks about unused credit cards. With zero balance every month, it appears card is not being used.

Here is the notation from MyFico on my most recent Equifax score. It was in the "Helping your score" column.

You've shown recent use of credit cards.

Your FICO score evaluates your mix of credit cards [?], installment loans and mortgages. People who demonstrate responsible use of different types of credit are generally less risky to lenders. You helped your FICO score by showing recent use of a credit card.

It's not necessarily whether a balance is reported. It can also be whether the card was used during the month. This doesn't show on the reports that consumers can get, but it seems to be reported. It's well established that if ALL cards (two, in your case) report $0, scores almost always drop. That's one reason why many people wind up getting three or four cards, because trying to control the balances reported with just one or two cards can make you crazy. (You also can get dinged for having too many cards with balances. P)

3. The other item is that you need to understand when your cards report to the credit bureaus. Two of my cards (#2 and #3) report the balance to Transunion on the date the statement is printed. The third card reports the balance to Transunion as of 2 days before the payment is due! If I want the third card to report a zero balance, I have to be sure my payment is applied at least 2 days before the payment is due. (On-line is really nice for tracking this.)

I recently got my Experian report from Annualcreditreport.com, and the reported balances are all over the place... The cards are reporting to Experian on a different date (therefore different amount) than to Transunion. ..... (sigh) OH, WELL...

Soon I hope to have my new mortgage. Then I will pay my bills before the due dates, keep my balances down, and let the dust settle wherever it settles....

But as someone else said earlier in this string... for now, I have to play the game.