How does paying before statement build credit?

[loviedovie]

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@SnackTrader wrote:
To the OP, it all depends on what you mean by "building credit".

So, every month you have a card open an pay on time, you add a Month's worth of positive history to your account. Regardless of $0 charged or a million dollars - you get a check mark either way. It is a well established fact that positive payments are not as meaningful for a credit report as a negative payment - but just the same you build credit by paying on time regardless of your amount charged. No one else knows if you used the card or not, they just see that you always made payments on time.

If you are referring to building a relationship with a particular creditor, that's a different story. But - a lender is generally okay with you having their card no matter how much you spend. There's a ton of fixed costs in running a credit card portfolio, so there certainly needs to be a large volume of people holding cards for the lender to make a profit, but each individual is rather profitable once that volume is hit. Remember, interest is only part of the revenue from cards. Swipe fees, cash advance fees, over the limit fees, etc. are also a very healthy revenue stream.

Also - lenders tend to have an "excellence" complex of sorts, and each thinks that once a cardholder has their card it will magically open their world to a new level of spending. And that's rather true, since promotional offers are rather successful in eliciting spending from a consumer. At least they always have been for me and my family

Does this make sense? In summary, responsible credit behavior is really NOT using credit, but rather obtaining it for future use. Notice, you cant get credit when you need it, only when you don't need it. Spending more than you earn just to make the creditor profit is not responsible usage.

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THANK YOU SnackTrader.

This is exactly the kind of answer I was looking for. I can often figure out WHAT to do by reading these posts, but it is hard for me to understand WHY. I like knowing how things work. Also I get happy every time I see your username because of your successes that you shared on here. I love happy stories. Way to inspire people

[AQ]

This makes good sense, but is it not also true that never using a credit card will lower your score, or at least not raise it as much as at least carrying a minimal balance and keeping it paid off or down?

[pdog661]

Hi,

Credit Cards allow you to develop trend lines, and trend lines build credit.

Here is what your credit file is built upon:

31% percent payment history

30% Utilization of revolving accounts (credit cards, HELOC, etx)

15% Length of accounts (AAoA)

14% Type and number of accounts ( this is why a mortgage will typically add a few points to your score)

10% hard inquiries (each hard pull inquire reduces your score)

Credit cards are one of the only lines of credit that effect all 5 buckets.  You can control your utl rate by paying off your cards before the statement cuts. They build your payment history so always pay in on time.  They build your AAoA and each month they are open your length of credit history increases.  Each card will build your AAoA whether or not you carry a balance.  The negative effect will be when you apply, and receive a hard pull on your report. Items like student loans hit 4 of the buckets, but do not show lenders you can manage the Utl rate, and open credit. 

UTL is calculated by dividing your total current balances by your total open credit limits.  Quick example if you have 4 credit cards with a total balance across them of $400.  If those three cards have a $1000 limit each then your total available credit would be 4000, and your UTL would be 10%. 

The best way to use credit cards to obtain a high score is to only have 1 card report a balance, and use 1-9% of the available limit. 

[AQ]

Thanks, bud!

You mentioned student loans...I have several and more to come before it's all said and done.  In the meantime, they are just sitting in in-school deferrment.  Do you know how that affects my score, if any?

[SnackTrader]

Thanks, Lovie. I enjoy sharing any knowledge I have.

Also great job there by Pdog.

Student loans in Deferment still show as positive payment history and help AAoA, but also impact lender criteria of "high loan balances to credit limit". Basically, new loans can be high risk and these loans are certainly risky because you haven't shown your ability to repay those loans through balance reduction. Having student loans won't stop you from gaining credit, but may hold you back a little until you get them paid down to a lower percentage of total original credit.

[BrokaToe]

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@AQ wrote:

Thanks, bud!

You mentioned student loans...I have several and more to come before it's all said and done.  In the meantime, they are just sitting in in-school deferrment.  Do you know how that affects my score, if any?

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From my experience, school loans don't have a huge impact negatively on your scores. For instance, my school loans were in default about a year ago, but my scores were still in the mid 600s. They had several 180 day lates etc. From what I understand lenders do not put near as much weight on school loans being in default as they would a revolving credit card being in collections.

But once I had rehabilitated my school loans those negative tradelines were update to reflect "paid collections" and then the new TLs reported with 11 years of positive payment history in good standing. At that point I got quite a boost in FICO due to the massive amount it increased my AAoA plus all that positive payment history all helped. But if your SLs are sitting stale, they may not impact your FICO in a big way. But as with everything else YMMV

[AQ]

That sounds very logical.  Yeah, if anything they are getting a bit worse since interest accrues on the unsubsidized loans.  I guess in the meantime, just keep paying on what I have.

Thanks for the thorough advice!!

[AQ]

OK, that gets me wondering.  I'm totally ignorant about all this, but...

I defauled on my student loans and then the loans were picked up by the federal government when Obama made that change, or at least this is my understanding.  I rehabiltated my student loans through a consolidation.  I had to file bankruptcy after that, but not on the loans, of course.  I'm out of bankruptcy just a few months and my TU FICO was 641.  My new student loans all look good, but it appears like my old loans are still showing in collections.  My credit report is a mess and it's dizzying for me to just look at it.  However, my credit union (via Equifax) pulled my credit to approve me for a secured loan and secured credit card and they said everything looked good except for something HSBC that should have been included in my bankrtupcy. 

IDK if I need to challenge what my report says on my old loans because i'm not sure what it should say!  :/ 

[nicholasyud]

It's really not important how you spend or paid it as long as you PAID YOUR BILL ON TIME.

Don't mess with this method or limit your spending. Just spend what you can afford and reasonable hmmmm in other hand,

Paid them all off and let $10 report in one card in a month or  two  before you apply for any new credit

[loviedovie]

Thanks Pdog

Also- re: student loans, I really wonder how this will change given the new Pay As You Earn plan... for people who racked up a ton of school loans and headed out into an economy where they are underemployed and can't afford the traditional loan payment amount of 4k or whatever it is a month (given 10 year repayment).. the plan allows you to pay only 10% of your after-tax income, for 20 years. Then whatever is left they forgive that balance, but it is taxed that year as income. 

Anyway under that plan you may have started with 180k in student loans, but since you are only paying 10% of your income which say is 6k per year, you are not even keeping up with the 9% interest. So the loan amount will actually INCREASE every year for 20 years until it is forgiven. 

There are several hundred thousand people in this boat. I would imagine the credit bureaus are going to have to figure out a way to account for this type of thing in their schematic...?