Utilization has no memory... But should it?

[Anonymous]

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@Anonymous wrote:

Also back on topic with the original thread discussion, we all know that if all of your accounts report a 0 balance and you have 0% utilization your scores take a hit.  This happened to me last week and all of my scores dropped 14-20 points.  I find it amusing that the reason for the drop is "no recent credit card use" when in the last 3 weeks I put $4k in transactions through revolvers

If utilization had some sort of memory, even if it was slight, we wouldn't take a score hit for reporting 0% utilization if there was in fact very recent usage.

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You are absolutely right.  Again this is an artifact of the fact that the CRAs databases for many decades had no ability to track the history of amounts owed (or amounts paid).  Because of that, FICO could only rely on the most recent snapshot of whatever your current balances happened to be.

As an example, suppose Bob and Scott both had $0 balances for all cards.  In Bob's case it's because he had not used his credit cards for three years.  In Scott's case he had used them frequently, with amounts owed and payments, all the way up through last week.  The CRA data gave no way to distinguish Bob from Scott, so FICO had to treat Scott as if he were Bob.

So it's not that FICO didn't want to remember; it was that it couldn't remember (due to the limitations of the CRA data).

I expect that glitch to be fixed in future models (FICO 10 or later perhaps) but those will take time to get released and then after that to get adopted.  Until that happens, we can cover our bases pretty easily by just letting one card report any time we have an important credit pull.

Nice observation, though, BBS.

[Anonymous]

Good to know that future models could improve upon this.

It would seem that through reading the replies in this thread that everyone with the exception of the person from Post Number 2 seems to be open to the idea that utilization should have some sort of memory and that in the future models may in fact adjust to make this happen.  I like the different ideas that have come up regarding different data points that could be used such as spends, interest paid, utilization trends, etc.

[Thomas_Thumb]

I would like to see utilization as a ratio of actual monthly spend to credit limit as opposed to being based on some point in time statement balance. That puts everyone on the same footing and negates some of the gaming - IMO. The revolver/transactor behavior would be helpful as well (this was discussed in some other threads as was trending). 

Here a couple links for you:

A. Trending

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Utilization-per-card-or-overall/m-p/43716...

B. Transactor/Revolver

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Utilization-per-card-or-overall/m-p/43715...

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Utilization-per-card-or-overall/m-p/43727...

[sarge12]

The way I see it, debtors fall in three basic catagories:

1)  People in this catagory PIF every single month, never paying interest and reaping every reward their cards have to offer. Though they represent almost no risk to the creditor of default, they also are not very profitable for the creditor either. Creditors would love for those in this catagory to cancel their cards, but they are so responsible that any AA creditors may take might even be met with a lawsuit. Creditors will likely not lose massive amounts on them either.

2)  People in this catagory sometimes pay the minimum payment, sometimes more. They take on debt, but are aware enough to stop short of extreme problems. They consider debt as just a fact of life. They are not very high risk to creditors, because they can recognize there are limits. If this is you...Creditors love you!!! Just threatening to close your card may prompt a creditor to beg, plead, and offer some special perk just to keep you. You are the ones that keep them in business, and they know it!

3)  People in this catagory may even think they are doing OK for a long time. They meet their bills for a long time, but kind of just ignore the fact that their debt load is creeping up every single month. They have such high limits that they are sure they can pay it down later. They wind up always paying only the minimum, and even then they barely make ends meet. A bit later they can no longer even make the minimum payments every time, so then they get hit with AA, increased interest rate, and CLD! Barring winning the lottery or inheriting a huge sum, those in this catagory are almost certain to wind up in BK! Creditors hate you, and you are who the scores attempt to identify.

Now the tricky part for creditors is to use utilization, along with all the other metrics to identify people that will wind up in catagory 3, while still not causing any harm to those in catagory 2. If they started using utilization history, it would mostly harm those in catagory 2. Those in catagory 1 keep such low utilization that historical utilization would also look good. Those in catagory 3 are going to show extreme utilization using the current point in time method due to their massive debt. The one who would be worst affected would be the credit card issuers best customers...it will never happen!!!!

[Anonymous]

I don't completely agree with Category 1 always being less profitable than Category 2.  If you're talking someone in Category 1 that only puts a swipe or two on their card per month with small purchases, sure.  However, there are plenty of people in Category 1 that can run $3k, $5k, $10k through their card per cycle that can generate as much or more revenue for a creditor than someone in Category 2 that may be paying small to moderate amounts of interest per month but aren't putting very many new dollars through the card per month.  People in Category 2 also represent a significant increase in risk IMO, as anyone that's carrying balances verses those that aren't carrying balances is in a much tougher place should they lose their job or income source.  Basically, those in Category 2 possess debt while those in Category 1 do not.  As debt increases, so does risk.

[sarge12]

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@Anonymous wrote:

I don't completely agree with Category 1 always being less profitable than Category 2.  If you're talking someone in Category 1 that only puts a swipe or two on their card per month with small purchases, sure.  However, there are plenty of people in Category 1 that can run $3k, $5k, $10k through their card per cycle that can generate as much or more revenue for a creditor than someone in Category 2 that may be paying small to moderate amounts of interest per month but aren't putting very many new dollars through the card per month.  People in Category 2 also represent a significant increase in risk IMO, as anyone that's carrying balances verses those that aren't carrying balances is in a much tougher place should they lose their job or income source.  Basically, those in Category 2 possess debt while those in Category 1 do not.  As debt increases, so does risk.

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Swipe fees represent a very small amount over the rewards paid to the debtor. My DC card pays 2% to me. If the swipe fee were to average 3%, which I doubt, that does not leave much profit.

[sarge12]

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@Anonymous wrote:

I don't completely agree with Category 1 always being less profitable than Category 2.  If you're talking someone in Category 1 that only puts a swipe or two on their card per month with small purchases, sure.  However, there are plenty of people in Category 1 that can run $3k, $5k, $10k through their card per cycle that can generate as much or more revenue for a creditor than someone in Category 2 that may be paying small to moderate amounts of interest per month but aren't putting very many new dollars through the card per month.  People in Category 2 also represent a significant increase in risk IMO, as anyone that's carrying balances verses those that aren't carrying balances is in a much tougher place should they lose their job or income source.  Basically, those in Category 2 possess debt while those in Category 1 do not.  As debt increases, so does risk.

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And then there is this

http://money.howstuffworks.com/credit-card-debt1.htm

[sarge12]

From cheatsheet.com via copy and paste

7. “Revolvers” keep credit card companies in business

Credit card companies call cardholders who carry a balance every month “revolvers,” and these customers are a major source of profit because they are constantly paying interest. “Transactors,” on the other hand, are customers who pay their credit card bills in full every month, avoiding interest charges. These customers have also been called “deadbeats,” since they offer little benefit to the credit card company. In many cases, it’s the revolvers or subprime customers that banks will target because they generate significant returns.

[Anonymous]

I'm not arguing any of the links that you posted.  My statement a few posts back however stands.

If I'm in Category 1 and putting $5k per month through a card even with percentages you quoted I'm probably making the credit card company $50/mo.  $50/mo with next to zero risk.  There are plenty of people in Category 2 that are paying $50/mo or less in interest, and they are a greater risk than those in Category 1.

There are also plenty of people in Category 1 that don't care about rewards.  You're assuming maximum rewards by deducting 2%.  Perception can be skewed since so many people on this forum talk rewards and chase rewards but keep in mind there is a huge percentage that don't.  For 15 years I had one credit card, put a healthy monthly spend on it and it wasn't a rewards card.  My father is also one of them.  He doesn't even have a rewards card but he puts thousands on his card(s) per month.  He doesn't care about rewards; in his opinon who cares about 2%.  So he's in Category 1 and 3% (your figure, could be more) of his spend is pure profit for the credit card company with next to zero risk.

I'm not saying that Category 1 is more profitable than Category 2 all the time or even the majority of the time, but a good portion of the time they can be.  And with far less risk.  That was my only point.

[sarge12]

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@Anonymous wrote:

I'm not arguing any of the links that you posted.  My statement a few posts back however stands.

If I'm in Category 1 and putting $5k per month through a card even with percentages you quoted I'm probably making the credit card company $50/mo.  $50/mo with next to zero risk.  There are plenty of people in Category 2 that are paying $50/mo or less in interest, and they are a greater risk than those in Category 1.

There are also plenty of people in Category 1 that don't care about rewards.  You're assuming maximum rewards by deducting 2%.  Perception can be skewed since so many people on this forum talk rewards and chase rewards but keep in mind there is a huge percentage that don't.  For 15 years I had one credit card, put a healthy monthly spend on it and it wasn't a rewards card.  My father is also one of them.  He doesn't even have a rewards card but he puts thousands on his card(s) per month.  He doesn't care about rewards; in his opinon who cares about 2%.  So he's in Category 1 and 3% (your figure, could be more) of his spend is pure profit for the credit card company with next to zero risk.

I'm not saying that Category 1 is more profitable than Category 2 all the time or even the majority of the time, but a good portion of the time they can be.  And with far less risk.  That was my only point.

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There will always be outliers in any data set. Certainly there are some transactors...called deadbeats by credit card companies...that do indeed make the banks money. Roughly 60% of the public are revolvers, and all except those who declare BK and such, are profitable. Some of them very profitable. In an age when tying money up in cd's yeild less than 2% interest, the default rate on most cards is >25%....Even low interest cards are 6.99%. That is nearly 7 times what the banks will pay a depositor in interest, and that is a low interest card. As a matter of a fact, by the time most people declare BK due to credit card debt, they have in the preceding years paid more interest on their cards than the creditors lose in the BK. I stand by my conclusions, we will have to agree to disagree!