topic Re: Myth that paying debt over time helps credit? in General Credit Topics

Myth that paying debt over time helps credit?

Anonymous — Wed, 17 Mar 2021 17:53:33 GMT

Where does this myth come from? What I'm referring to specifically is the paying down of revolving debt. I've heard this from people I know, as well as members of this forum. They wrongly think that carrying a balance (thus paying interest) and paying it down over a length of time is somehow "better" for their credit than just paying it off.

I just ran into this with a guy that works for me the other day. He finally just paid off all of his CC debt and was going to reward himself with by purchasing something he had wanted for a while for $400-$500. He said that his plan was to not use his cards much any longer outside of this single purchase and to pay down that $400-$500 over the next 6 months or so to help "build his credit." When I asked him why he wouldn't just pay it off right away (when financially he admits he can) he stated because it's better for his credit to do it over time. I've had other employees of mine state similar things over the years to which I've corrected them. I'm just not sure where this misconception comes from. Any ideas? All I can think of is that maybe people are seeing ads for self-builder type loans that suggest paying a loan down over time is good for your credit and perhaps they then think revolving debt works the same way? I'm curious to hear opinions on this topic.

Re: Myth that paying debt over time helps credit?

Anonymous — Wed, 17 Mar 2021 18:15:24 GMT

I think it's a logical, albeit wrong, way of thinking about credit?

One would probably assume paying something over a year would build more credit than doing nothing on an open account, though that's wrong.

They probably think that way where you have to put in "work" (balances + paydown) to build it, rather than it building due to open accounts aging + posting a green OK every month on their CR + low utilization points (which would eventually happen too if you paid something down over a year).

A guy I work with says he wish he had a 30+ year TL, when I say his credit would probably jump much higher if he GWed his charge-off & lates on loan. He doesn't know file segmentations like dirty/clean, so whattya gonna do?

Re: Myth that paying debt over time helps credit?

Brian_Earl_Spilner — Wed, 17 Mar 2021 18:20:43 GMT

People believe that showing use, building a history, and making payments every month is what you're supposed to do. People just aren't informed.

Re: Myth that paying debt over time helps credit?

Remedios — Wed, 17 Mar 2021 19:53:18 GMT

It's not a myth, it's a product of articles not differentiating between reported balance and carried balance.

If your friend was to pay off the entire amount, then not use his card next month and they all report $0.00, points are lost.

For anyone who does not hangout on a credit card forum, that would get interpreted as "no balance, lost points, carry balance"

On the surface, it does appear as if a person is being "punished" for having no balances, which ends up equating debt with balances.

If I only had a dollar for every "paid off all cards, score dropped", I'd be able to take @Anonymous out for dinner.

Just tell your friend to be a transactor.

Re: Myth that paying debt over time helps credit?

SecretAzure — Wed, 17 Mar 2021 19:55:38 GMT

I can definitely see how one may come to this conclusion. Even score trackers and simulators give this impression.

For example, I sub'd for one month of myFICO tracking and used the simulator. It showed if I paid down my $105 utilization at $10 per month (which is impossible due to minimums being higher) over a year, my scores would theoretically rise by a significant amount. However, when I changed it to $40 per month, my scores ended up dropping in the same time period due to no actual usage.

As long as not carrying a balance across your entire portfolio drops your scores, there will be more people holding onto this belief. It seems counter-intuitive but so many resources lead one to believe it's true.

I really think that if you have at least one loan of any kind and you have $0 balances across everything else, your scores shouldn't drop at 0% utilization. Or if they have to, not for at least 1 year.

Re: Myth that paying debt over time helps credit?

Girlzilla88 — Wed, 17 Mar 2021 20:13:26 GMT

@Anonymous I do know that some Banks/Lenders like to see payment over time for "Responisbly being able to make a payment for extended periods" Typically it's 6 months, 1 year "threshhold" but I definitely wouldn't unless you want to have it longer, have it longer, I just do it that way of course for my Car (and well my house) ((unless it's on a specific pay plan)) so it can show I can make the payments for extended periods of time longer than 1 year. It is seen as a positive and a lot of places will extend credit if they see you can make over your payment but still keep some balance for longer periods of time because they like that they receive fees on their end lololol. What bank/lender wouldn't be happy about receiving fees if you still made your payments properly Is it better on your end to keep them longer no it's always best to pay it off rather quickly especially so you DON'T pay interest butttttt from the banks side they want to see long term use

Re: Myth that paying debt over time helps credit?

iced — Wed, 17 Mar 2021 20:54:11 GMT

@Remedios wrote:
It's not a myth, it's a product of articles not differentiating between reported balance and carried balance.

If your friend was to pay off the entire amount, then not use his card next month and they all report $0.00, points are lost.

For anyone who does not hangout on a credit card forum, that would get interpreted as "no balance, lost points, carry balance"

On the surface, it does appear as if a person is being "punished" for having no balances, which ends up equating debt with balances.

If I only had a dollar for every "paid off all cards, score dropped", I'd be able to take @Anonymous out for dinner.

Just tell your friend to be a transactor.

This seems like the closest answer I agree with, though I don't know why one would need to distinguish between a carried and reported balance. A balance is a balance in the eyes of a score; the only difference is one accrues interest charges and the other doesn't. It feels to me like PIF is the concept most people don't get rather than balances. Maybe that concept and its benefits are what articles need to drive home more often: get balances reported AND pay no interest -- a win/win.

The one possible exception I see to this is the very occasional card user, though I'm not sure they exist anymore. Does anyone really go a month without swiping, inserting, or tapping a card somewhere anymore? Even as a PIF'er, I find it nearly impossble to not have at least 2 cards report a balance each month, and I only need one to keep my score happy.

Re: Myth that paying debt over time helps credit?

Anonymous — Wed, 17 Mar 2021 21:04:36 GMT

@Remedios wrote:
It's not a myth, it's a product of articles not differentiating between reported balance and carried balance.

Maybe to some degree, but almost everyone I know that carries balances on CCs is incurring more of a utilization-related hit than if they were to pay off all their cards and incur the AZ penalty. Put another way, if they were to pay off their revolving debt that they wrongly believe they're supposed to carry to "build credit" the net change even after incurring the AZ penalty would still be positive.

It's also worth noting that the majority of casual people out there have no idea what their Fico scores are, so the credit decisions they make often just come from what they hear or believe they should do, not because of the change(s) they see to their Fico scores. Us in this forum are obviously a different breed when it comes to this.

I was always raised to believe that if you use a credit card for something you're supposed to pay it off right away. I was told it's good to have credit cards, but not get yourself into trouble with them. That being said, even well before I ever found this forum and knew anything about credit my understanding was paying things off was what you're supposed to do and that carrying balances was a bad thing. I never perceived the carrying of balances to be good for "building credit" which is why I started this thread inquiring where these ideas have come from. I don't think it's any one single place, so that why I'm eager to hear where everyone else believes these things comes from.

Re: Myth that paying debt over time helps credit?

Brian_Earl_Spilner — Wed, 17 Mar 2021 21:06:45 GMT

@iced wrote:
@Remedios wrote:
It's not a myth, it's a product of articles not differentiating between reported balance and carried balance.

If your friend was to pay off the entire amount, then not use his card next month and they all report $0.00, points are lost.

For anyone who does not hangout on a credit card forum, that would get interpreted as "no balance, lost points, carry balance"

On the surface, it does appear as if a person is being "punished" for having no balances, which ends up equating debt with balances.

If I only had a dollar for every "paid off all cards, score dropped", I'd be able to take @Anonymous out for dinner.

Just tell your friend to be a transactor.
This seems like the closest answer I agree with, though I don't know why one would need to distinguish between a carried and reported balance. A balance is a balance in the eyes of a score; the only difference is one accrues interest charges and the other doesn't. It feels to me like PIF is the concept most people don't get rather than balances. Maybe that concept and its benefits are what articles need to drive home more often: get balances reported AND pay no interest -- a win/win.

The one possible exception I see to this is the very occasional card user, though I'm not sure they exist anymore. Does anyone really go a month without swiping, inserting, or tapping a card somewhere anymore? Even as a PIF'er, I find it nearly impossble to not have at least 2 cards report a balance each month, and I only need one to keep my score happy.

The difference is someone on these forums vs someone that doesn't know they can let a balance report and then pay it off before interest hits. The average person just charges a large amount and pays every month.

Re: Myth that paying debt over time helps credit?

Anonymous — Wed, 17 Mar 2021 21:11:55 GMT

@iced wrote:
The one possible exception I see to this is the very occasional card user, though I'm not sure they exist anymore. Does anyone really go a month without swiping, inserting, or tapping a card somewhere anymore? Even as a PIF'er, I find it nearly impossble to not have at least 2 cards report a balance each month, and I only need one to keep my score happy.

This I definitely agree with. I work in the restaurant industry and the amount of CC transactions today compared to 20 or even 10 years ago is obnoxious. A decade ago it was close to 50/50, where currently we typically land around 85% of our transactions being on cards.

Re: Myth that paying debt over time helps credit?

Horseshoez — Wed, 17 Mar 2021 21:18:42 GMT

@Anonymous wrote:
@iced wrote:
The one possible exception I see to this is the very occasional card user, though I'm not sure they exist anymore. Does anyone really go a month without swiping, inserting, or tapping a card somewhere anymore? Even as a PIF'er, I find it nearly impossble to not have at least 2 cards report a balance each month, and I only need one to keep my score happy.
This I definitely agree with. I work in the restaurant industry and the amount of CC transactions today compared to 20 or even 10 years ago is obnoxious. A decade ago it was close to 50/50, where currently we typically land around 85% of our transactions being on cards.

I'd be curious to know what percentage of swipes are Debit Cards vs. Credit Cards. Prior to having my former business partner obtain and use a HUGE amount of credit in my name, I used my credit cards for everything, and then suddenly that was all over (this was long before I filed for Chapter 13). Instead, I switched to a debit card only lifestyle and lived that way until my discharge last year.

One interesting observation I've made between "then" and "now" is, back then, there were few "rewards" available on credit cards (my AMEX Platinum was a penny per dollar as an example), however, there were places which encouraged you to use debit cards via various kick backs and promos. Now rewards credit cards are the name of the game, and I'm able to play it for the first time.

Re: Myth that paying debt over time helps credit?

iced — Wed, 17 Mar 2021 21:37:43 GMT

@Brian_Earl_Spilner wrote:
The difference is someone on these forums vs someone that doesn't know they can let a balance report and then pay it off before interest hits. The average person just charges a large amount and pays every month.

Sure, but in this case the average person wouldn't be impacted by score hits for no balances.

It seems it would be the person who's actively trying to improve their score, pays off all their debt, then wonders why the score dropped. If these articles said something along the lines of "pay off your debt, but only pay off statement balances" or something to the effect that balances good as long as they're paid off and don't leave a $0 balance would work.

My point is that trying to clear up reported vs carried balances would probably muddy the waters further for most people. Then again, they'll probably have PIF-related questions now, too.

Re: Myth that paying debt over time helps credit?

Remedios — Wed, 17 Mar 2021 22:33:15 GMT

Well I think it's because majority of people use credit cards as originally intended (by lenders) ..as loans with less than favorable terms.

Rewards on credit cards in their current itineration are relatively new(ish) concept, and rewards/perks are why most of us use credit cards almost exclusively.

If rewards were completely out of the picture, one would not even need to use credit cards unless they were really concerned about possible fraud with their checking accounts.

So to someone who isn't chasing rewards, the only obvious purpose for CC is either use it as a loan, or let it sit till you need a loan.

As far as scores and general public, I don't know how many of them keep track.

I am profoundly uncomfortable with mentioning money, credits cards, scores and reports with people I do not cohabitate with, so I don't know what the prevalence is, but I doubt majority of people know what their scores are till they actually apply, and from there it either goes into pleasant surprise or rude awakening.

I've never even read an article that doesn't specifically state keep your balances under 30%, indirectly implying everything below that is peachy and deserves "yay you!" which we know from scoring perspective is very far from ideal.

And in the end, all those articles end up trying to collect referral fee.

Re: Myth that paying debt over time helps credit?

KatSoDak — Thu, 18 Mar 2021 14:25:40 GMT

I remember a post that mentioned their mortgage lender told them to charge something then pay it off over time in order to increase their FICO score.

Re: Myth that paying debt over time helps credit?

4sallypat — Thu, 18 Mar 2021 20:39:35 GMT

My mortgage broker trying to get us a home loan said to pay down certain revolving card accounts as much as possible.

He said, not to worry about: store branded accounts, Synchrony, and Comenity cards.

So I followed his advice and paid off most of the revolvers (Chase, Citi, US Bank, Barclays) and my utilization went from 35% to 12% with corresponding scores in the low-mid 700s now.

Have to say, some mortgage brokers know how to pump up scores!

Re: Myth that paying debt over time helps credit?

Anonymous — Fri, 19 Mar 2021 00:59:22 GMT

Leaving higher balances on those store cards relative to the major bank cards to my knowledge results in no Fico scoring gain compared to if you were to pay off the balances on the store cards and leave them on the major bank cards. That's assuming utilization percentages in both examples changed identically. Basically, the type of card as far as I know doesn't matter when it comes to this metric.

Re: Myth that paying debt over time helps credit?

Anonymous — Fri, 19 Mar 2021 01:37:33 GMT

@Brian_Earl_Spilner wrote:
People believe that showing use, building a history, and making payments every month is what you're supposed to do. People just aren't informed.

That's exactly what I used to understand to do. That THAT was what was valued. Perhaps more with the lenders, that doing so was RB Relationship Building, demonstrating a track record of 6 payments 💰 On Time was necessary. I think I gleaned that (erroneously) more about the Buy Now, Pay Later places... I know I definitely saw an ad or citation about how having FreshStart with FH FingerHut and making payments over 6 months raised your score 35 points. (Usually, something like that...).

And in my dedicated couplah weeks here, reading, reading, reading, Inoe learned that carrying a balance with my 2 like that was a slight ding on my credit because they contributed to my Aggregate Utilization being 16-29%. And that each of them made 3 of my Individual Utilizations high. I've paid off both and am waiting for those to update at my reports and those small improvements to reflect in my score. They may only give me a few points, and I'll take 'em. 👊🏻

Excellent point.

Re: Myth that paying debt over time helps credit?

Anonymous — Fri, 19 Mar 2021 06:01:02 GMT

"...around 85% of our transactions being on cards. "

@Anonymous I'm curious if you can break that down further, into what percentage of that 85% is credit vs. debt cards? Completely anecdotal, but it seems I see far more debit cards in use when out and about than credit, and curious if that perception matches reality from the experience of a business owner.

Other than at an ATM for cash, I don't think I've used a debit in at least a decade.

Re: Myth that paying debt over time helps credit?

Anonymous — Fri, 19 Mar 2021 12:49:43 GMT

I don't know of any easy way to decipher between them. The transactions are just broken down by processing network, which doesn't say much.