Minus 13 points for paying off card?

[Anonymous]

I recently received an alrert that my credit balance has changed. I auto pay my Capital One credit card every month. In the alert it said that my ballance went from $54 to $0. It also said that because of this my score was decreaced by 13 points!!! This was Equifax. This seems very odd to me that I would be penalized so severly for something that seems to me to be a positive thing. And not a very big change mind you. I think this is an error and a no brainer error. What do I do? 

[CH-7-Mission-Accomplished]

That's the way it works.

[StartingOver10]

To expand just a little bit from Ch 7 Rebuilding's reply to you:  FICO does "punish" you if you show zero balances on each credit card by dropping your score.  

That is why the advice here is to let one balance report. The 1% to 9% of the individual credit line suggested has been around a while and some people experiment with the size of the balance they let report. Others experiment with the number of cards reporting a small balance. look in the Understanding FICO scoring section to see more detailed answers, but the short answer is this: don't let all your balances report as zero. Have one report a small balance and you will recover your points.

[Anonymous]

Thank you for taking the time to answer. So.. a zero balance means I'm not using credit and using credit is what pays points. Well, as long as it's under 40% of the max or there abouts. So I should pay MOST of my bills but not completly? No, just when it comes to credit cards. Humbug.

[takeshi74]

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@Anonymous wrote:

This seems very odd to me that I would be penalized so severly for something that seems to me to be a positive thing. And not a very big change mind you. I think this is an error and a no brainer error. What do I do? 

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Learn about how credit is assessed and scored versus relying on assumption and "no brainers".  Also set a higher threshold of at least 20 points if you're going to worry over score.  13 points isn't severe.

As stated above, if all your cards report 0 balances there is a scoring hit.  Make sure you understand the impact of revolving utilization, which falls under Amounts Owed below:

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

...as well as the general suggestions for max utilization, optimizing, etc.

Also always consider the specific scoring model and CRA.  Which scoring model are you referring to?  Which of your creditors use that score?  Are you also monitoring your scores with the other CRA's?

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@Anonymous wrote:

Well, as long as it's under 40% of the max or there abouts. So I should pay MOST of my bills but not completly? No, just when it comes to credit cards. Humbug.

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No.  You don't want to exceed 30% but that's far from ideal.  That's just a suggested max.  Ideal is under 10%.

You also need to understand the difference between allowing a balance to report and carrying a balance.  You never need to carry a balance for scoring purposes.  You can pay a statement balance in full and still have a balance reporting.  It's a matter of timing payment(s).  Whatever your balance is on the report date is what will be reported.  Adjust the balance if desired and then pay the statement balance (or remainder) in full by the due date.

I wouldn't suggest worring over 13 points.  As your reported balances change your scores will fluctuate as your revolving utilization plays a part in scoring.  However, its impact is determined by your current revolving utilization.  Your prior revolving utilization does not matter.

It's a bit easier to avoid having all 0 balances if you have more than one card.  At least 2-3 are generally suggested for scoring purposes.

[Anonymous]

Hi Nathaniel.  Double plus to everything Takeshi said.

Here is an example of carrying a balance and how it is different from reporting a balance:

     * You make a bunch of charges on a credit card.

     * Then a week later (say on the 3rd) your statement prints and it says you have a balance of $400.  That's the amount you owe.  The due date will be (say) on the 28th.  This is also the amount that is reported to the three credit bureaus.  They report this roughly around the same date as the statement printed.

Carrying:

     * On the 15th suppose you pay $100.  This is more than the minimum payment but less than the amount owed ($400). 

     * The difference is $300 and that is carried over to the following billing cycle.  You will get charged interest on that $300.

Paying in full (as opposed to carrying)

     * On the the 15th suppose you pay $400.  This is the full amount you owed on the last statement.  Therefore you are paying no interest.

Note that when people pay in full (or PIF) that still typically means that they are reporting a balance.  Furthermore, the thing that you are paying in full is the amount on the last statement, which means the act of paying in full doesn't necessarily mean that the balance on your card has gone  down to $0, since you may have charged something since the new billing cycle began.

The bottom line advice for you would be this:

     *  Spend a lot of time researching how credit cards, credit reports, and credit scores work.

     *  Aim to gradually obtain at least three nice credit cards that you like and you think you would have a use for.  Even more than that is fine (4-6 cards total) if you are sure you will be very comfortable managing them.  Having three cards is ultimately pretty important for developing a high score.

     *  Long term strategy: set up all cards to automatically pay (called autopay) from your checking account.  Use them naturally.  Don't worry about their utilizations as long as you are keeping each one < 50%.  It is strongly in your interest to get in the habit of paying in full for every card on every month, though you do not absolutely have to as long as you make the minimum payment on time.  (Still PIF always is by far the best.)

    * Short term strategy: when you need to get a bunch of extra FICO scoring points, pay all of your cards down to $0 and keep them there -- except one.  With that remaining card, let it report a a smallish balance, maybe $20 or so?  In the next 30 days, your FICO score will go up to about the highest it can be at that point.  You only have to do this in rare situations, however,  You don't have to do it every month.  Only when you need to get your scores in tip top shape for some particular reason.

[Anonymous]

I did not expect such a conversation. Thank you all! I have a credit card I always carry a balance on, the Capital One card I've been paying in full and a store card ( Best Buy ) that I only use often enough so they don't cancle the account. Iv'e always paid the store card off immedietly.  Does the store card count as a regular credit card? It does report. I purchased my first home this year and my credit is good, I just like to see the numbers go up  

[Anonymous]

Congrats on your first home purchase!  Hope you will be able to stay there for a while and that you are happy there.

You write:

"I have a credit card I always carry a balance on, the Capital One card I've been paying in full and a store card ( Best Buy ) that I only use often enough so they don't cancle the account."

Just so I am clear, does that mean you have three cards?

       * a credit card I always carry a balance on

       * the Capital One card I've been paying in full

      *  and a store card ( Best Buy ) 

I encourage you to read through the previous post I made that explains the difference between carrying and reporting and PIF-ing.  A helpful goal for you would be to always PIF (which means allowing your cards to report but never carrying a balance).  You may not be able to do that right away if you have a card that you are carrying a huge balance on.  But it would be a good goal to work toward.  Another helpful goal would be to eventually have 3-4 major credit cards in addition to your store card.

You ask whether the Best Buy card counts as a regular credit card.  For FICO purposes, yes.  There won't be any difference between a store card and a major credit card (like a Chase VISA, say).  But some industries (e.g. like companies that sell auto insurance) will charge you higher premiums if they pull your credit reports and see that you have multiple store-only cards -- their own research has convinced them that people with lots of store cards are higher risk (I guess for auto accidents?).  Frankly I wouldn't worry too much about that.  The best choice might be to keep the store card open but develop a long term plan for adding a couple more major credit cards (Chase Visa, Citi Mastercard, Amex Bluecash, whatever, there are dozens and dozens of choices).  That way if your auto insurer looks at your credit profile it will see one where most of the revolving accounts are major cards.

Good that you are aware of the fact that issuers can close cards if a long time goes by where no charges are made.  If your BB card is a "pure" store card (it does not have a VISA or Mastercard or Amex logo on it, and it can only be used at the store) then typically stores will not cancel unless a REALLY long time goes by.  At least a couple years (assuming you have in fact used the card before).  If it doubles as a VISA/MC/Amex, then you might have to use it a bit more often to be safe (every five months?).  Is this a pure store card?

[Anonymous]

Thank you for your reply. Yes, 3 cards. BB card is store only card.  At the same time I made this post I contacted FICO Support. Their responce was that they wouldn't look into it unless it was 15 points or more. They also said that the alert was for the balance change but that there may have been something else they re-evaluated at the same time. Blah Blah Blah. I didn't miss a payment, card balances only went down and there was only 1 alert. I think 13 points is a lot but that's just me. Somehow I doubt I'll get those points back by carrying a balance on the next cycle. I received a letter 2 days ago. My Mastercard, the one I carry a balance on, they informed me of a $1500.00 Increase in credit due to flawless payment history and something like 10 years being a valued customer. I think that will gain me a couple of points but certainly not 13. 

[Anonymous]

Happy to help, Nathaniel.  :-)

Just to be 100% clear.... as far as you can tell, when you appeared to lose 13 points, did that that coincide with all your credit cards reporting a $0 balance?

If the answer is yes, then we can tell you here what happened.  As CapTool and myself and others have said, it is because all of your credit cards were $0 at that point.  FICO doesn't like that.  But as we've also said, it's no big deal, because as soon as you show a balance on at least one card, you will get all those points back.

Congrats on receiving a $1500 credit limit increase!  That's great, pal.  It will not, however, improve your score (not in itself).  That's a common intuition that people have about scoring.  They figure that when creditors give them big CLIs, FICO would interpret that as meaning they are much safer credit risks and would give them a score boost.  That does not in fact happen.  Here's an example.  Suppose Bob and Fred have identical credit profiles: same age of accounts, same number of cards, etc.  Bob has 4 cards with a credit limit of $1000 each.  Fred has 4 cards with a credit limit of $20,000 each.  Both guys keep the amounts their cards reporting at about 5% (it could be another number, as longs as it is the same for both guys).  Both Bob and Fred will have the same score: FICO will not give Fred even a tiny extra bonus for having received big credit limits.

It sounds like you have the myFICO monitoring service -- is that right?  It's a great tool for some people, but is not the right fit for everyone.  I can tell you more about that if you like.

The long game for you should involve eventually adding another major credit card or two, allowing your cards to report balances naturally and then paying in full after the statement prints, and then, whenever you really want to say how high your score can go, bringing all cards to $0 except one with the remaining card having a balance of maybe $20 or so.  Over time, your cards plus your mortgage will get you a score that will climb up well above 800.