What actually is the "sweet spot"?

[sarge12]

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@Anonymous wrote:

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@sarge12 wrote:

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Yes...the most important thing for your credit report is paying on time every single month. The second is AAoA...which only time will help, and third is having a good credit mix. That is why you shoot for 3 cards and 1 installment loan. Utilization has a high impact also, but being a point in time metric...just make sure it is good when applying for credit or a job. Read the learn about scores section above...it lays out each catagory, what percentage of your score that involves, and what exactly is in that catagory...look at each section...what is in a score and what is not. Many people believe income is in a score...it is not...but can be, and usually is considered in lending decisions. If you have no income...your score can be 850, and you can be denied credit....but your score will not change due to income, or employment history.

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I disagree with you weighing AAoA and credit mix above utilization with respect to importance.  Yes, you are correct in saying that utilization is a point in time metric, but it's still makes up a slice of the pie that's greater than both AAoA and credit mix combined. 

What's important to understand is that utilization over time data is being compiled as we speak and will be used in future FICO models.  The behavior of a Transactor that pays in full every month and keeps utilization down will be far more favorable than a Revolver that carries balances, even if they aren't huge percentages.  Those that exhibit the behavior of a Transactor are much less risky than Revolvers out there... so while today utilization may be a 'point in time metric" without question in the upcoming years it will be looked at over a length of at least 12, if not 24+ months.  The point is, keep your utilization low not just for now, but for the future.

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BBB...I was basing importance on long term effect of current scoring model, which being a Point in time metric would have no effect on the score if you get it to optimal before the report is pulled. I agree, that if you do not it will have a greater effect than anything in our control except payment history...35% vs 30%. Until when and if there is a Utilization history built into the reports, I consider AAoA more important because opening up a lot of new accounts can lower the AAoA, and nothing you can do to keep it from lowering your score for years as the AAoA gradually increases again. The problem comes in when people have a high utilization, it is usually because they are spending more than they earn, and can't pay it down in a short amount of time. I too am a transactor...and you are 100% correct in the slice of pie, but if you know when you are applying for credit you can at the present time, make sure that whole slice of pie is in the pie pan. I only put it lower in importance because you can immediately fix that before a credit pull.

[Thomas_Thumb]

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@sarge12 wrote:

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@Anonymous wrote:

I just received my first credit card. After seeing my siblings and family struggle and have to deal with bad credit, I decided I'll be nothing like them.  I'm not much of a spender anyway.

I don't know any credit analysts and have gotten a few answers in person and online, so I decided to come here.

I've heard that 30% of your credit line is the sweet spot for optimal credit. I've also heard that 25% is. I want the best credit possible as soon as possible. What really is the sweet spot for optimal credit?

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In order to answer your question as best as my understanding we need to consider what the score represents. The Fico 08 score range that reports is 300-850...do you ever wonder why it starts at 300 rather than 0. Well it is my understanding that the only reason you can not score under 300 is that even though you may actually have only enough points to score 200, the lowest that fico will report is 300, so if you had 200 points it might take a bit of time to get above 300 and actually start seeing an increase. My understanding is that there is enough points to actually score over 850 also...but likewise FICO nerds decided they would only report 850...even if you actually had say 900 points! So if you had over 850, you could probably have an inquiry and still have over the pre-determined 850 points. Now how much over 850 points there is I do not know. Now people on this forum say at least 3 cards and 1 installment loan 9% utilization overall, and no single card over 30% is optimal. I do believe this to be about right, but I also know some who have went over these optimal limits and still had an 850 credit score. Fico scoring is a proprietary system, so no one knows for sure how many points are actually there. I would be interested in hearing from someone else if my understanding is wrong.

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You are correct in stating there is a top end Classic Fico 8 buffer at 850. Best I could tell by testing/comparing against Enhanced Fico 8 is the available buffer is at least 25 points, possibly 30 points. However, there are no reported scores of 300 - so I don't think there is a low end buffer. I look at a buffer as meaning there are multiple ways of achieving maximum points in a category so not all scoring factors need to be optimal. Such a thing does not exist on the low end.

Regarding installment loans - few people with mortgages have a B/L below 9%. Fortunately that threshold does not apply to mortgages. Quite a few 850 profiles with mortgages have reported aggregate installment B/L in the 30% to 70% range. The 9% is derived from short term loans, such as a SSL or Auto loan. The length of active payment history probably comes into play as well.

FYI - Pasted below is data from Experian showing score ranges for the lowest and highest 5%. This data is from 2012 and there has been a significant increase in the % scoring 850 over the past 5 years.

[sarge12]

Thomas_Thumb...I will defer to your greater knowlege on the lower buffer, I have no empirical evidence that anyone has even come close to 300. I always just thought there was probably a buffer on both ends, so I guess I was wrong. I think it may have even been from you that I learned of the upper buffer, and then it made sense how someone could maintain an 850 while still recieving new credit. I will almost always be open to being corrected on a false assumption. Thank you!!!

[Anonymous]

Wow has this thread ever grown in the last few hours.  :-)

Although lots of people are saying great things (TH, BBS, SJ, many others) the person would personally echo myself most in this situation would be Sarge.  I think it is really important that we help our OP understand the difference between short-term strategies (how to squeeze out some extra points temporarily) vs. long-term strategies (how to gradually build his score over time).

Both are important but they do very different things.

A bodybuilder, for example, knows strategies for things to do in the ten minutes before he goes on stage in a competition (and in the three days before, say).  These are short term strategies that help him gain the biggest edge with the basic muscle he's got right then.  But they don't help him gradually gain a lot of high definition muscle in a healthy way in all the right parts of his body.  That requires a different set of strategies, ones designed for the long term.  And the long term strategies might even contradict the short term strategies: they involve doing things that over the next month might involve taking a step back but in the long term mean 50 steps forward.

With that metaphor in mind, we need to help our OP underrstand that there isn't a best utilization in terms of what will help him grow his score over time.  (As long as his util isn't crazy high.)  He doesn't need to spend a lot on his cards -- that never helps his score (short or long term) though it won't hurt his score if it is done carefully.  Neither however is it important for him to keep his utilization very low as a long term strategy.  The "less than 9%" rule is a short term strategy for gaining extra points before an important credit pull.   Like a bodybuilder or wrestler eating almost no carbs and doing a lot of cardio in the few days before he competes.

A number of people here can lay out a simple straightforward plan for our OP to develop as high of a score as he can in a fairly short time period.  We've had at least two threads about that in the last few weeks.  He'll help us do that best if he tell us the time period he has in mind -- and why he's got that particular time period in mind.  If, for example, he chooses the time period of "nine months" it should be because he plans to buy either a house or a car then.  If he doesn't think he'll need a score for anything, he'll do better to choose a longer time frame -- the plan we give him will be able to accomplish more for him the longer he gives us.

[Anonymous]

My two cents.  Get 3 quality cards, card that you want to keep. I like the cash back kind.   I pay in full each month  and make payments usually  biweekly to keep my % use down below 9%.  At our house and biz we run everything practical through a reward card.  Personal rewards we use for date night money. The biz rewards we use toward  an event for the associates each year.  (I wish it paid for it  all but it certainly helps a little)   I like things like the 5% Discover deals and the 6% Amex grocery money.  It is free money.  It takes time to build good credit scores they don't just happen overnight. 

[Thomas_Thumb]

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@Anonymous wrote:

I just received my first credit card. After seeing my siblings and family struggle and have to deal with bad credit, I decided I'll be nothing like them.  I'm not much of a spender anyway.

I don't know any credit analysts and have gotten a few answers in person and online, so I decided to come here.

I've heard that 30% of your credit line is the sweet spot for optimal credit. I've also heard that 25% is. I want the best credit possible as soon as possible. What really is the sweet spot for optimal credit?

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My DD had no credit a year ago other than from paying rent and utility bills. My advice to her was get two credit cards - a Discover card (good for growing CL over time) and a Wells Fargo Visa card (because she banks there). When she got the cards, the key points we discussed were:

1) Always pay statement balances on time and in full to avoid interest payments and hurting your credit due to a late payment.

2) Don't let either card report a balance representing 50% utilization or more (really 49%)

3) Stay under 30% aggregate utilization (all cards combined) at all times.

She wanted a simple plan with flexibility that will allow her to build positive credit history without complicated payments. The above will not optimize point in time Fico score but, that is not what she needed at the time. Her Discover Fico 8 1st reported after 6 months at 720. It's now at 735.

Two cards is a good staring point for building credit. adding a 3rd card a year or two later increases flexibility and depth. I personally don't recommend adding a loan when starting a credit building journey unless the loan is needed for practical reasons. Since you only have one card, add a couple more cards 1st and a loan down the road.

[Anonymous]

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@sarge12 wrote:

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BBB...I was basing importance on long term effect of current scoring model, which being a Point in time metric would have no effect on the score if you get it to optimal before the report is pulled. I agree, that if you do not it will have a greater effect than anything in our control except payment history...35% vs 30%. Until when and if there is a Utilization history built into the reports, I consider AAoA more important because opening up a lot of new accounts can lower the AAoA, and nothing you can do to keep it from lowering your score for years as the AAoA gradually increases again. The problem comes in when people have a high utilization, it is usually because they are spending more than they earn, and can't pay it down in a short amount of time. I too am a transactor...and you are 100% correct in the slice of pie, but if you know when you are applying for credit you can at the present time, make sure that whole slice of pie is in the pie pan. I only put it lower in importance because you can immediately fix that before a credit pull.

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I see what you are saying, but making sure that whole slice of the pie [utilization] is in the pan may be easier said than done.  If someone is already at 1%-9% in aggregate utilization, they're already all set in this category, agreed?  All Transactors by definition will fall into this category.  Where the concern comes is for those that aren't Transactors.  I don't know where the OP falls or plans to fall with respect to that topic.  So, if we're talking about someone that's NOT in the ideal range, they must be at 10% or greater.  Say they're at 19% - A 10% paydown to get them into the ideal range [whole piece of the pie] in dollars can be significant.  My credit lines like many on this forum are around $100k.  There are plenty of people with double that or more.  This would represent $10k in CC debt.  That's considerable and an amount that I think most people wouldn't easily be able to just pay down or off in one shot.  I know I couldn't.  

I just think it's important that newer members here aren't steered in the wrong direction or given a false perception about utilization.  They shouldn't be led to believe that it only matters prior to apping and that for the majority of the year it's not a big deal.  Any number of life changing events could happen suddenly and make it difficult or impossible to pay down utilization, so keeping it in check at all times is recommended.  Teaching Transactor-type behavior is the best bet here.

[newhis]

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@Thomas_Thumb wrote:

My DD had no credit a year ago other than from paying rent and utility bills. My advice to her was get two credit cards - a Discover card (good for growing CL over time) and a Wells Fargo Visa card (because she banks there). When she got the cards, the key points we discussed were:

1) Always pay statement balances on time and in full to avoid interest payments and hurting your credit due to a late payment.

2) Don't let either card report a balance representing 50% utilization or more (really 49%)

3) Stay under 30% aggregate utilization (all cards combined) at all times.

She wanted a simple plan with flexibility that will allow her to build positive credit history without complicated payments. The above will not optimize point in time Fico score but, that is not what she needed at the time. Her Discover Fico 8 1st reported after 6 months at 720. It's now at 735.

Two cards is a good staring point for building credit. adding a 3rd card a year or two later increases flexibility and depth. I personally don't recommend adding a loan when starting a credit building journey unless the loan is needed for practical reasons. Since you only have one card, add a couple more cards 1st and a loan down the road.

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+1

I started with 2 credit cards, Discover IT $1,000 and BofA secured $1,000, 3 years ago. My first FICO was 731. Then higher balance and few new cards my score dropped to 696 at one point, then back to 700+.

DW started with 2 cards, then another 4 months later, her first FICO was 720. Also 3 years ago.

After a while we wanted a car, she was able to get the best rate with 740 FICO

We both are 800 +/- 15 now.

I strongly agree that everyone starting their credit journey need to learn:

- paying in full

- paying on time

- don't go app crazy

- garden between apps (6-12 months)

- don't need a card every 3 months

- don't need 800 score to have the best rates

- keep balance low, less than 30%

- you can maximize your score (for your profile) in a short time by using the AZEO technique (all cards report $0 except one)

- you can get extra points with SSL technique

I still don't know how good/bad will look the SSL technique on manual review. Yes you get extra points, but they can easily identify that you get a loan with the purpose to get extra FICO points. I bet it looks better if you get a car loan and you paid every month without lates. Anyway, the information is here, everyone needs to decide what the goal is, create and follow a plan to get there.

Some people want:

- all cards at $5,000 or more

- 5 cards at most

- at least 10 cards

- higher score the better, at least 800

- others say 775 +/- 15 is enough for my needs

It is easier to have a very good score if you don't have any baddie on your reports. So if you are starting with a clean file, learn and work to keep it that way. Good luck.

[Anonymous]

Thank you very much for the advice Tom Thumb! So you recommend I go ahead and get another card? Won't that look bad that I got two cards in the first six months of credit? I have no idea, that's just what it seems like.

So just clarification to see if I get you. Go ahead and get a Visa with my bank, do all of the appropriate things, and then in six months I should have a good credit score if I do everything well?

Everyone says (including that banker which SouthJamaica said is a rule you shouldn't) that I shouldn't get one. But you have an 850, so you'd know better than anyone!

[Anonymous]

Thank you very much for responding Newhis!

So you also recommend going ahead and getting a second card right away?

Do you have any links and information about the AZEO technique? I Googled it and couldn't find much.

I wondered that about the SSL. I was thinking about just getting a very short term loan like a year and doing it.

You said three years ago so you're still newer to credit. Do you have any advice?

Thank you very much for all of the help!