Hi all, I am a new member here and pretty addicted to all of the helpful advice I am reading! Here is a question from me:
I've been reading posts here where people say the best way to build credit with your cards is to Max out/PIF every month. But when I went to take out an auto-loan this summer the report they pulled somehow listed 'high balance' for each of my cards, so that even though they currently had zero balance it showed that I had a habit of maxing them out. They said this made me look like a riskier lender because I must be desperate if I am always maxing out my available limit. A branch manager at Citi also told me I may have been denied one of their cards because I carried no balance. She said they WANT you to carry a little balance because that is how they make their money off of you so if you are not carrying at least 5% then why would they give you their business?
So is it better to carry a balance?
How much balance?
Thanks so much everyone. I love this community!
-m
Show maybe 5-10% of your available credit in balances....actually maybe even less is better. Consider your monthly income and expenses and see what's left over. They will pepper you with these kinds of questions. When I was in rapid rebuild mode, I was showing maybe 1%-2% on average...some months were even less. I'm talking like showing $50 in total balances on $12,000-$14,000 of available credit. That's a lot less than one percent. (BTW, my available credit was that high in rebuild mode because I was an AU on my wife's $9,000 CL Chase card from 2001...nice boost in credit limits and AAoA)
What you really don't want to do is show no card usage at all. That's not good either. BTW, what I mean by "show" is what the reported monthly balance to the credit bureaus is. If you charge a ton but pay it before the statement date, it will be like you never did it at all. Back when I was rebuilding, I was charging a lot of stuff and paying it off as I went along multiple times per month and the cards would report a ZERO balance because my statement would be at a zero balance even though I charged $1000 that month. This actually hurt my score a little...well, it did really kill it but it dropped a little because there was no detectable card activity. So, I left a few bucks the next month on a card or two and my score increased. Go figure.
I think there's also some "sweet spot" that I have never been able to figure out. By that, I mean having a little balance showing on some of your cards and zero on others. The utilization might be the same as having all of that balance on only one card and zeros on the rest but it's less advanatgeous for your score....or vice versa. Either way, it's not a big deal in the long run.
Bottom line: Keep the utlilization that shows up on the CC statements extremely low but detectable. Pay as you go and leave some chump change reporting as a closing balance on your statement. THAT is what affects your utilization on credit report scoring. And mind your income and expenses. If your minimums due based on reported balances are too high, a card issuer might be uneasy about your ability to pay.
Start (Sept 2011): low-mid 600s. NOW: TU FICO: 801, EQ FICO 808, EX FICO 798 (PSECU). Goal: Achieved! Now Maintain!
There is a difference between "carrying a balance" and "reporting a balance". For most lenders, the balance that is on the card at the time your statement cuts is what gets reported to the credit bureaus. That balance stays there all month (99% of the time). So even if you we're to pay your card down to zero after the fact, other lenders would not know that.
So here's what you do: only charge what you can afford. There is no need to go into debt if you don't have to. Pay down all balances prior to your statement date. I generally pay to 2-5% usage. So if your limit on a card is $1,000, only let $20-$50 report on your statement date. Then, pay off that amount by the upcoming due date to avoid interest charges (that is called PIF). if you have multiple cards, try to only let one carry a balance.
Doing this should maximize your credit score and will eliminate interest charges (which is important for your wallet).
Good luck. Any more questions, feel free to ask!
Lovie: to add to what's already been stated, some lenders are very specific in their desires, and Citi historically has absolutely wanted it's customers to carry a balance on their cards. This is specific to them, Amex on the other hand traditionally would prefer you don't carry a balance at all month to month.
Everyone else (Chase / BOFA / etc) is somewhere in between, but the biggest thing I suspect is simply to be consistent. When you do something out of the ordinary for your usual pattern, that is a flag when it comes to someone reviewing the file.
To your original question, establishing a high max balance, and then paying it off, I can't help but see as a good thing personally though some underwriters may not agree with me. Not only does it make it look like that you can handle your currently extended credit lines, but also that you use them religiously and banks make some fraction of money on every transaction you make with the card.
End of the day banks want profitable customers, it's not simply a risk analysis. As such, I run my entire financial life through my cards... think over the last six months I've spent a grand total of $37 in cash, and that's because there's one really good hole-in-the-wall restaurant near my work which is cash only and the occasional parking structure fee.
Anecdotal evidence on these forums has shown that charging as much as you want during a statement period, paying all but one card off to $0 before the statement, and letting the remaining card report between 1% and 9% utilization has worked for the majority of lenders during app sprees. Nothing in this world is guaranteed, but this will typically maximize score and show lenders responsible credit usage.
This of course only applies during times where a person wants to look perfect for applications. During other periods it is perfectly acceptable to pay however you want, as long as you pay on time. I see no reason to restrict spending except to a level that is appropriate for your ability to repay. As I mentioned earlier, I also see no reason to pay interest unless necessary for financial purposes.