Extended payment history or lower utilization question

[Knight302]

   I have been messing around with various credit score simulators and have a question for the credit gurus on the board. The simulators show that by paying down so much per month for 24 months will possibly increase a credit score considerably. However, when you try just immediately paying down, there is a dramatic increase but not as much as the payment history would give.

    I am around 29% useage on my $35,000 limits. I have been carrying balances but every now and then I will pay a card down or completely off and use it again. I am doing this trying to establish a really good payment history to hopefully grow my limits.

   My question is, should I just pay off those balances or continue to carry a balance and go for the history? The reason I ask is because I have had 2 recent CLI denials that say my balances are too high.

   Thanks in advance.

[Anonymous]

The exact same question was posted in the Understanding FICO Scoring section and here's my exact same response:

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@Anonymous wrote:

FICO does not remember payment history other than if you had lates.  That calculator for the 24 month scenario was probably factoring increased account age also which would be realized eventually for both scenarios.  Pay it down with the student loan.  But do not run up credit card debt again.  Sock drawer them until you learn to treat them like cash.  IMO it's only acceptable to carry a balance on a credit card if its an emergency or for something that helps you make money.

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[Anonymous]

Slipper is right. 

The simulator is not really wrong in this case (although it can't be relied on as gospel).  What the simulator is saying is

If you (a) pay off all your CC debt while (b) allowing all your accounts to age for two years

then you will have a better score than if you pay off all your debt now and immediately check your score a month from now.

That's unsurprsing.  Because in the pay-it-off immediately scenario, your accounts are all two years younger.  That's a big difference.

But it wasn't the slowly -paying-it-off that got you the bigger improvement, it was the jumping ahead in time two years.

Now to tackle the question you raise:

I have been carrying balances...I am doing this trying to establish a really good payment history to hopefully grow my limits.... should I just pay off those balances or continue to carry a balance and go for the history?

You don't have to choose.  Use any or all of your cards as often as you need to and pay in full.  You will be establishing a good payment history AND saving yourself a boatload of interest.  (If I read your post right, you are paying interest on an average of $9000 of CC debt a month!)

There's a further hidden expense, and that is that you may be buying things you don't need.  It's a hidden expense because credit cards are designed to make us unaware of the extent to which we are doing that.  In your case you may be feeling a subconscious desire to spend so that you can "improve your credit limits" or "earn rewards" or "establish a payment history."  All of that involves money leaving your bank account and getting you nothing instead of being saved -- towards a rainy day fund, toward a house down payment, and especially toward your retirement.  Every dollar that people in their 20s spend rather than save is a gigantic amount of money they do not have when they retire.

So bottom line, PIF and keep your spending low.  You will still be establishing your credit just as much as if you carried balances or spent a lot.

[Anonymous]

PS.  Just a quick follow up.

You mention wanting to increase credit limits over time.  That's understandable and just a minute I will give you a strategy that seems to work for people here on the MF forum.  (I learned it here, though I have myself never used it.)

But first it's crucial to ask yourself why you want to do that.  Many people believe that FICO looks at how high your credit limits are, and if you can raise those you will be raising your score.  This is untrue.  Overwhelmingly the only thing that matters (as far as CC limits) is your utilization %.  And you can totally control that no matter what your credit limits are -- unless they are incredibly low, which yours are not.  You have in fact 35k as a credit limit -- that's a lot.  Higher credit limits are good only to the extent that they give you some convenience -- they are a terrible idea if they being used to lower one's utilization, which is best addressed by paying off debt and controlling spending.  That said, I think having bigger credit limits is great (as long as they aren't unconsciously inducing you to spend more).

But on to the strategies for getting CLIs (credit limit increases).  These are fine but should only be explored after you have paid off all your CC debt and have been paying all CCs in full for at least three months. 

The strategy I have heard most is to do the CLI card by card.  What you do is your pick a card that you want a CLI on.  Then you move almost all your spending to that card.  (Obviously this strategy doesn't work for a store card like Kohl's or Best Buy, since most of your necessary monthly purchases can't be bought there.)  You run that card close to its credit limit.  (Maybe 80-85%?)  The statement generates with a very high utilization.  A few days after the statement generates, you pay the entire amount off.  Then you run it up very high again.   Be very carefull NOT to max it out -- just close to it.  Do this for a number of months in a row, always paying in full a few days after the statement cuts.  Eventually the issuer will (probably) give you a CLI, because you appear to be a very safe customer who always pays in full, but who might buy a lot more if they expanded your CL.  You may have to give them a call and nudge them to do it (though ask if they can do it without a hard pull).

This strikes me as a very plausible strategy.  But... running up a card close to its CL for many months is only in your interest if you can be certain that all the purchases you are making are things you absolutely need, stuff you'd buy even if you weren't angling for a CLI (cell phone bills, groceries, gas, etc.).  Otherwise the strategy is inducing you to spend which is NOT in your interest.  This strategy is one I don't use because my smallest CL is 10k.  There is no way my necessary CC spending is 7k a month!  I doubt it's even 2k a month.

If you do a search on the forum for CLI strategies you will find out lots more and people willing to talk to you about it who know way more than I do.  Personally I just ask for one when I really want it and take the hard pull.

[Knight302]

   Thanks for all of the information. As for spending money needlessly, that may be the case but I don't buy things I can't use or do not need. I have been working or rebuilding my credit after reconstructive surgery in 2010 that had me out of work for over a year. I had some income coming in from my wife working and small disability checks but often paid my car loan 30 days late (never over that) and was trying to keep up with medical payments. I have since re-established myself and am in much better financial shape than I was before. Trust me, I prefer to pay with cash and do not like paying interest, I have just been at looking at getting my score back over the 730 mark like it was before. I have brought it from the 400's to around 660 across the board now and just want to continue the growth. 

    I had my scores near 700 late last year but found they were making the Dodge Challenger Scat Pack and decided to get one. I thought that auto buying inquiries within a 30 day period would only result as 1 inquiry on my report but that is not the case. My report shows 50 EX inquiries with most of them being from car finance companies. One dealership ran my credit through 11 different finance companies! This was even after I told them I was using my credit union and bringing them a check but they felt they could beat the 2.49% rate they gave me. This brought my scores down and now if I request a CLI I am always told too many inquiries (and one medical collection for $170 that caught me off guard but I paid it as soon as I saw it on my report even though I had no notice of it or I would have paid it through the notice).

    This is why I asked the question about the simulators. I can bring my utilization to zero in a matter of minutes by paying them off. I think I may have been misinformed or misunderstood how the credit scoring system works. I don't need to carry the balances, i just thought that the companies wanted to see they could make money off of you.

    Thanks for the advice. What I glean from all of this is that age is the primary factor with usage being important as long as one uses the cards as a cash element rather than paying interest.

[Anonymous]

So sorry to hear about the terrible stuff you have been through.  That's awful, man.  Truly happy to hear that things have taken a big turn for the better.

As far as the inquiries go, just be very intentional about not applying for any new credit cards for a brief while and all those inquiries will fall off your report.

You have probably already done this, but I encourage you to get copies of your credit reports from the three CRAs.  A great tool in this regard is Credit Karma (you can ignore their scores and any advice they give you -- just use them as a tool to get free reports up to once per week).  Get to know those reports really well, and make sure you know where all your lates are (which accounts and when the last one was).

Overwhelmingly the most important driver of your score is the absence of any derogatories (lates, collections, etc.)  Next important is how much credit card debt you have.  FICO will be happiest with you when you have a little (1-5% util maybe) but still very low.  And you NEVER need to carry the balances, all FICO is looking for is that at least one card is reporting one.

Next important is age of your accounts. 

Allow your accounts to age, pay all your CC debt off, and  watch for the derogs to fall off, and you should be set.  Best of luck, bud.

[Knight302]

   Thanks. 

    I have learned alot in these forums, including your posts. I am 45 years old and regret that it took me this long to understand (somewhat) the credit system and ignorance of my number may have cost me over the years. I have since started educating my children since they are in their early 20's so they can get a grip on their scores now.

   I kow there are many varying opinions on these forums but one thing you said sticks with me. Getting CLI's to reduce utilization is not fruitful in many ways. First you carry a balance and pay interest needlessly. While CLI's are a nice reward, they should not be viewed as credit worthiness or an attempt to make your credit reports look better. In some ways, such as carrying a balance and some of the HP's received when requesting, actually hurt when you do need to apply for credit.

    Here are a few things I have decided because of your post:

1. Pay off my balances and carry only enough on my cards until statements post, then pay them off again.
2. Age gracefully. Allow my current accounts to age and grow and possibly decide which card I like best (based on rewards, cash back, etc.) I prefer to be my primary and use it smartly.
3. Wite to a few of the companies on my report and see what they can do to help. It doesn't hurt to ask to remove some late pays. I am even going to write the director of the collection service and see what they may do for me. The two collections I have are medicl and under the upcoming changes to the law may have to be removed anyway.
4. Consider closing a few accounts. Why do I need a Victoria's Secret card? I don't use it, but under my old philosophy it added to my credit line and helped reduce utilization.
5. Monitor my score and watch it closely to see how these things affect it overall.
6. With my rewards cards, run enough through them to gain the reward and let the card pay me instead of me paying them..
7. Do not apply for anymore credit for the next couple of years. There is a card I want but it requires better credit than I currently have (around 660 across the board). Wait for the improvements and if I still want it, allow my patience to get it for me.

     Thanks again for your advice. I have learned from your post and will thank you again once I see the fruits of my patience and labor and update you on the outcome.

-Frank-

[Anonymous]

The good thing for you is that those nasty inquiries will stop affecting your scores once they hit 1 year. 

As the others have said, stop carrying a balance. Pay all your cards down to zero except for one, and allow it to show no more than 1-9% of that card's CL. 

You can get to 700. Just don't apply for anything until those auto inquiries hit their 1 year mark at the earliest. 

[Anonymous]

Hey Frank.  Good luck with all your plans.  You sound like you will be doing some really good stuff for your yourslef.

Here are a few additional thoughts (in blue boldface) based on your last post (items #3 and #4):

#3.  Write to a few of the companies on my report and see what they can do to help. It doesn't hurt to ask to remove some late pays. I am even going to write the director of the collection service and see what they may do for me. The two collections I have are medicl and under the upcoming changes to the law may have to be removed anyway.

Visit the "rebuilding" forum on this site (after you have pulled your credit reports and you have a good handle on all your negative items as they appear there).  Create a sepearate post in that site explaining exactly what your negative items are and when they are dated.  Then ask the folks there for advice.  They know way more than I do about concrete strategies for maximizing your chance of getting these removed.  What to say, what NOT to say, who to say it to, other techniques, etc.

#4.  Consider closing a few accounts. Why do I need a Victoria's Secret card? I don't use it, but under my old philosophy it added to my credit line and helped reduce utilization.

Personally I think that's a great idea.  If a card is not your oldest card, and it is a store card, and you rarely or never use it, then that strikes me as a GREAT candidate for cancelling. 

[takeshi74]

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@Knight302 wrote:

    I am around 29% useage on my $35,000 limits. I have been carrying balances but every now and then I will pay a card down or completely off and use it again. I am doing this trying to establish a really good payment history to hopefully grow my limits.

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That's not how Payment History works.  As stated above, either you've paid on time for a given month or you're late for each of the accounts you have reporting.  Either you have no derogs or you have derogs that kill your Pamyent History.  If you pull your own reports you can see your Payment History as it is reported.  Payment History is built over time but you don't need to carry balances to build Payment History.  You never need to carry a revolving balance for scoring purposes.

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@Knight302 wrote:

   My question is, should I just pay off those balances or continue to carry a balance and go for the history? The reason I ask is because I have had 2 recent CLI denials that say my balances are too high.

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That's a false dichotomy but it seems like it's based on a misunderstanding of Payment History.  Already mentioned earlier in the thread but you can pay off your balances and build Payment History at the same time.  If you're making payments on time then you're building Payment History.

If your reported utilization is 29% (it may be higher -- check your reports to confirm) then that's probably why you're getting "balances too high" as a denial reason.  Revolving utilization is a significant scoring and risk factor.  General advice is to keep it under 30% but 30% isn't a recommendation for optimal scoring.  It's a maximum as in "do not exceed".  You want your reported utilization to be as low as possible.  As long as you're not reportinng all 0 balances, lower is better.  The general advice for optimizing utilization (i.e. when applying for credit) is to allow only one balance to report at 10% or less.  Number of reported (non zero) balances also plays a role in scoring.

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@Knight302 wrote:

   Thanks for all of the information. As for spending money needlessly, that may be the case but I don't buy things I can't use or do not need.

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Unfortuantely it's not just a matter of use and need but budgeting and sticking to it to avoid incurring debt.  Carrying balances is a problem for many people.  It's certainly understandable that some rely on credit in times of financial hardship but it's a slippery slope and be difficult to overcome.  If you're at a point where you can pay all your revolving balances down without depleting your emergency reserves then definitely do so.

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@Knight302 wrote:

I thought that auto buying inquiries within a 30 day period would only result as 1 inquiry on my report but that is not the case. My report shows 50 EX inquiries with most of them being from car finance companies. One dealership ran my credit through 11 different finance companies! This was even after I told them I was using my credit union and bringing them a check but they felt they could beat the 2.49% rate they gave me.

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Properly coded inquiieis within a given timeframe will count as 1 for scoring purposes but they will report as separate inquiriies.  If you have arranged for your own financing, which is generally recommended, then do not allow the dealerships to run your credit or you're likely to encounter what you experienced.  A single dealer can pull your credit many times.

Thankfully, inquiries are a relatively small factor (despite the obsession over them here and on other credit sites).  Their impact tapers and they fall off relatively quickly.

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@Knight302 wrote:

Getting CLI's to reduce utilization is not fruitful in many ways. First you carry a balance and pay interest needlessly.

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Increased limits and carrying balances are not mutually inclusive.  If one is inclined to carry balances then higher limits may not be the solution to the problem.  Higher limits are only going to come with a better credit profile anyway so if one is carrying balances then the focus should really be on eliminating debt and not limits or even scores.  Those can be tackled later on once budgeting and debt are addressed.

As discussed above one can always manange reported utilization by paying before the report date.  Higher limits really shouldn't be a goal in and of itself (even though it seems to be for many here and on the other credit sites) but if one is seeking higher limits to reduce reported utilization then one needs to have a credit profile to support the higher limits.  SInce revolving utilization is a significant scoring and risk factor then one is unlikely to get higher limits without low reported utilization.  That said, one's entire credit profile matters as well.  Certainly get your Payment History sqeaky clean (100% on time and no derogs) if you're after higher limits.

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@Knight302 wrote:

Pay off my balances and carry only enough on my cards until statements post, then pay them off again.

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FYI -- allowing transactions to post and then paying off by the due date for the cycle the transaction posted is not carrying.  What you're describing is allowing a balance to report.  Carrying is when you don't pay a statement balance in full and leave part of that statement balance for the next cycle.  You definitely want to get to where you're paying every statement in full.

Keep in mind that if you have been carrying balances that it can take a couple of cycles of paying in full to address the residual interest.

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@Knight302 wrote:

With my rewards cards, run enough through them to gain the reward and let the card pay me instead of me paying them..

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You definitely need to be paying every statement balance in full before worrying over rewards.  If you accrue any interest the interest easily kills any rewards.

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@Knight302 wrote:

I think I may have been misinformed or misunderstood how the credit scoring system works. I don't need to carry the balances, i just thought that the companies wanted to see they could make money off of you.

    Thanks for the advice. What I glean from all of this is that age is the primary factor with usage being important as long as one uses the cards as a cash element rather than paying interest.

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You're conflating two different things here.  Yes, creditors want to make money.  However, interest on carried balances is not their only source of revenue.  Additionally, creditors do not generate FICO's and FICO's don't consider how much money you're making for the creditors.

As for factors and their significance, the major items and their relative weights are covered here.  This isn't everything.  It's just a starting point.  Age (Length of Credit History) is really the thrid largest factor with half the impact of the next biggest factor.

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

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@Knight302 wrote:

I am 45 years old and regret that it took me this long to understand (somewhat) the credit system and ignorance of my number may have cost me over the years.

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 None of us started out knowing everything and by taking an interest and paying attention to what's going on with your credit you're already ahead of many people.  I didn't really start digging in until a couple of years ago and I was 39 back then.