@iv wrote:
@Anonymous wrote:
I just struggle with believing that someone that carries zero balances or minimal utilization for months or years that spikes their utilization once should be viewed as being equally as risky [with respect to utilization scoring] than someone that's had extremely high or near maxed out utilization over the course of the same period of time. Conversely, someone that's had extremely high utilization for years that suddenly pays it all off being able to achieve the same score immediately [again with respect to only utilization here] as someone that's proven for years that they can keep their utilization low or at 0 just doesn't seem to make perfect sense when scores are supposed to accurately predict risk.
Can't say I'd agree on that... sudden PIF->Carrying is higher-risk than existing long-term carrying!
Yeah, someone who has had high utilization for years isn't the best credit risk... but years of high util (with no missed payments) is stable. (And making lenders plenty of interest income.) And when they pay it off or down? That's just a straight improvement.
But someone who has never carried a balance before who suddenly has a large increase in util? Yikes. Yes, could be a large one-time purchase that will be PIF, or could be taking advantage of a 0% offer... (and with most folks around here, that's exactly what it would be). But - it could also be a bustout, or just a sign of sudden financial distress. Either way, it's not stable. And unstable == risk.
Really, someone who was able to PIF for years suddenly carrying balances is a big red flag for the average consumer account...
You know what I'd personally consider a good scoring metric? Amount of interest paid in the past two years, as a percentage of average balances. It's not reported by lenders, and it won't be, nor would FICO ever include it in scoring (given that non-delinquent accounts that pay interest are very profitable). But I think that would be a much better measure of financial responsibility... but not a better risk/profit measurement.
Precisely this: lenders of all sorts want predictability, not necessariliy the "best" borrower (however we define that).
My FICO won't take a significant hit over the next 1-2 years, but someone would have to be blind to miss the fact that my financial situation isn't the same as it has been by simply looking at my credit report: my pattern of no debt is changing markedly.
Whether it'll trigger questions or AA hard to say and I'm confident I can deal with that if it comes up; however, when a PIF always borrower suddenly isn't, banks will notice. Actually BOFA denied me my full limit at graduation specifically because I floated a balance for a month trying to show utilization. Lesson learned on that one heh, slightly different scenario but same base principle and any moderately sophisticated AR algorithm written in the last 15 years will notice me this time running up a balance on my HELOC. Actually I guess that is an argument to pickup a student loan or two anyway: see, tuition payments... simple explanation and simple is good when dealing with banks.
@Thomas_Thumb wrote:
@sarge12 wrote:I do not care which method they use....I always PIF every single card, every single month. I am aware though that some people run a balance, not because they can not pay, especially near the last 1/4 of the year. Many have retirement accounts and such that they may not wish to withdraw until the new year to prevent the tax being due this year. As long as the CRA's let everyone know that historical utilization data was going to affect the score, everyone would know in time to adjust their habits accordingly. The way I do it, it would not matter either way. My utilization is actually under 5%...100% of the time. With about 150,000 dollars of credit limits, 5% would be 7500 dollars. I would never allow this much debt on credit cards. The other factor to consider is this. If I only got credit limits because I thought I may need the credit would owing 5000 dollars if I only had 7000 dollars credit limit, make the 5000 dollars any easier to pay off...no!!!! The amount of debt you can repay largely depends on income to pay that debt, and your low utilization does not affect your ability to pay that debt at all. We get CLI's normally not to run up the debt we owe, but solely to make it easier to maintain a low utilization...it's their game, we just play it by the rules they set forth. I could look at someones revolving debt load plotted on a graph for a 1 year period and tell you exactly who was likely to get in credit trouble. It would be the person who's revolving debt load was going up every month. Why?...because they are spending more than they are making every month. If you really want to stay immune to the effects of AA, CLD's and never really have to worry about utilazation, do as I do, treat your credit cards as if they were charge cards.
Yes and No.
A key element in addition to PIF is aggregate credit limit relative to natural monthly spend. Assuming a typical $5000 monthly spend, a person relatively new to credit with $100k yearly income but only $20k aggregate CL would be at 25% utilization. That is well above optimum. To avoid this many play the pre-pay before statement closes game.
I advocate letting all charges post on statements and then paying statement balances 3 to 5 days before due date. That is the only strategy I have ever used. It's simple and maximizes float time on money (other than carrying a balance on a card during a 0% promo period) However, this PIF approach does require having a sufficient total credit limit - total CL of at least 15x typical monthly spend for best results. [for reference my Ag CL is about 40x average monthly spend and staying below my benchmark of 6% Ag UT is not difficult].
A reasonable average monthly spend on credit cards relative to income - depends on a lot of factors. Nonetheless, I'd suggest not exceeding 30% for average monthly CC spend relative to average monthly income as a loose guideline.
T_T, is there any evidence for this "natural monthly spend" theory, or is it a gut feeling?
@Thomas_Thumb wrote:SJ, It's strictly a math thing,
You establish an aggregate credit limit based on some utilization you want to stay below relative to (average spend + natural excursions). If you want to let charges report on statements and ensure maintain aggregate utilization below a given %, then aggregate CL needs to be a certain multiple of average monthly spend.
Take a look at your monthly spend over the last 2 years. Calculate the average and standard deviation. Now add 2 standard deviations to your average spend. That's a good approximation of maximum monthly spend.
Here is an example: Say you want to maintain Ag UT under 5%, your average spend is $3k/month and standard deviation is $1k/month. Then high end monthly spend would be $3k + (2 x $1k) = $5k. So $5k < 0.05 x Ag CL => Ag CL > $5k/ (0.05) => Ag CL should be at least $100k. In this example an Ag UT of $100k represents a 33x multiple relative to a $3k average monthly spend.
As mentioned, my multiple is something over 40x and this allows me to allow all charges to report on statements without concern that Ag UT will exceed my imposed 6% upper limit for Ag UT - except as a self induced special cause.
Looking at Sarge12's data - If his typical monthly spend is $5k, high end is $7.5k and Ag CL is $150k, then he has a Ag CL multiple 30x average monthly spend.
I have many years worth of evidence of not exceeding 6% Ag UT without any pre-pay prior to statements cutting. It looks like Sarge12 has had similar long term success at staying below his 5% Ag UT benchmark.
The "at least 15x average monthly spend" mentioned in my prior post understates what I would (and have) established as a multiple for my Ag CL. I know a multiple of 40x, has proven sufficient for me.
P.S. My Ag UT typically floats between 1% and 3% month to month with an excursion to the 4% to 6% range once a year.
Where is the evidence that FICO takes into account your "average monthly spend"?