Zero Utilization Question

[Vulcan1]

I understand that scores are based on your use of credit and how you handle it, not based on 0 debt. But when it comes to CC's I do not understand why a 0 balance would decrease one's score if there is other debt like student loans, car loan, mortgage, etc.. Can someone please explain?

[Vulcan1]

I paid off all my credit cards and had a few negative items removed over the past four months and my scores have gone up significatly. I have read to keep a small balance 1% to 9% utilization but is there a real difference between keeping my CC's at 0 compared to say 5%?

[simplynoir]

There are two kinds of debt the bureaus look at for scoring purposes: revolving debt and installment debt. Revolving debt is debt that is incurred through a line of credit such as a credit card and HELOC in which you can keep drawing from that LOC as much as you want and pay it back to open it up again. Rinse, repeat. Installment debt is the amount owed from a fixed amount such as a car loan or mortgage. As you pay it down it the balance gets lower and shows your ability to handle large amounts since typically installment loans are things that last years unless it's paid off early

That's why it penalizes you when you have $0 balance on all your cards because FICO 8 needs something to score. You can call it counter-intuitive but that's how it works til future scoring models don't make as much as a factor

[Anonymous]

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@Vulcan1 wrote:

I paid off all my credit cards and had a few negative items removed over the past four months and my scores have gone up significatly. I have read to keep a small balance 1% to 9% utilization but is there a real difference between keeping my CC's at 0 compared to say 5%?

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Most likely yes. Back in September I switched which card (out of 2 cards on file) was reporting a small balance with the other at zero. (This is AZEO, or 'All Zero Except One'.)

In the screenshot below, you can see drop in score from the first card reporting a $0 balance, with the second one still at $0 and not reporting yet. Then the second card reports a balance and the score goes right back up.

[jamie123]

I have tested this too. If I let all my CCs report $0, I lose 18 points versus having 1 card report a $3 balance. Yes, letting $3 report on one card gains me 18 points!

Imagine how much interest that cost me in the past when I wasn't as credit literate? Back in the day, I would pay all my cards to zero before applying for auto loans. I thought I was doing great and here I was lowering my score before apping for a loan!

[Revelate]

It’s function of what’s in the data set for the past 25ish years or longer TBH.

Essentially the algorithms look for revolving activity, and unfortunately they define this as a non-zero balance on any revolver which counts under a given algorithm. If you don’t have any balances reported FICO makes the assumption you aren’t using your revolving tradelines and as a result are at a slightly higher risk to default. It’s minuscule but that’s what the data shows.

Someday they will look at the trended data if that ever comes to be mandated but until then a couple bucks on a single revolver and everything else $0 is optimal when it comes to FICO optimization.

Regardless of how /eyeroll worthy it is.

[Vulcan1]

Thank you all for the explaniations and experiance, this helps me.

[Anonymous]

If you are not actively managing revolving debt, how can your management of it be evaluated? Since the algorithm does not use trended data, it simply sees your current revolving utilization; it doesn't know whether or not you just used your cards and paid them off or if its been a year.

Gotta show activity for it to be evaluated by the FICO algorithms.