Author Topic: Question about credit cards  (Read 3172 times)

mommymustachian

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Question about credit cards
« on: June 18, 2015, 05:31:41 PM »
On my road to FI I've also been trying to build up my crediy score. Once I paid off my credit cards in full I started using them moderately and paying off the full balance on pay day. I was told by a financial advisor that this wouldn't help build up my score because each statement date my balance is 0 and so the algorithims don't register my uber responsible usage. Is he correct? I thought I was being smart by paying it off before I get my statement and accrue interest.

iamlindoro

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Re: Question about credit cards
« Reply #1 on: June 18, 2015, 05:43:20 PM »
Your advisor is incorrect, as what you are doing is the lion's share of improving credit- low utilization, on-time payments, and good account age.  Your utilization is 0 (which is great), and your AAoA (Average Age of Accounts) is constantly increasing.  Your payments are being reported as on-time.  Generally speaking any use of the cards will result in a statement being issued (even if the balance is 0).  The statement being issued results in the reporting agencies being updated and the the accounts being "current."

Some people believe that showing some balance periodically will "help," but all data about this is anecdotal, and the FICO scoring models are not public.  There's never been any official confirmation that showing a balance on a statement has any positive effect, whereas it's known that showing utilization over certain percentages has a negative effect.  If you're at all concerned that one of the many versions of the FICO algorithm (there are about 3 dozen) will hold this against you, you can wait until the statement date to pay off your cards, which will mean the balance as of the statement date will be reported to the agencies.  However, if your credit limits are low and this results in your utilization jumping above 10%, you will see a little hit.  If it goes over 30%, you will see a larger hit until you have a month where the utilization is reported as decreasing.  If it's higher still, you'll see an even bigger hit.

This is one of the big reasons that credit card churning has a net positive effect on credit scores-- your overall consumer credit available goes way up, and generally this has a favorable impact on ratio of utilization.

klystomane

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Re: Question about credit cards
« Reply #2 on: June 18, 2015, 05:45:48 PM »
On my road to FI I've also been trying to build up my crediy score. Once I paid off my credit cards in full I started using them moderately and paying off the full balance on pay day. I was told by a financial advisor that this wouldn't help build up my score because each statement date my balance is 0 and so the algorithims don't register my uber responsible usage. Is he correct? I thought I was being smart by paying it off before I get my statement and accrue interest.

Yes and no.

Say your billing cycle cycle starts on the 1st day of each month, ends on the last day, and payment is due on the 27th of each month. If you buy something on January 1st for $10, the charge will show up on you January statement, usually issued to you sometime after 1/27.

You have until February 27th to pay the $10 without interest. After 2/27, it starts to accrue interest.

In your case, if you are paying off the $10 before 1/27, then the charge does not make it to the statement issued in February - it doesn't show up and looks like you never actually made the purchase.

Actually, it does show up on your February statement as a purchase you made in January, but your payment due will be $0, since you had previously paid it off early and credited your credit card.

I THINK the best way to keep a low utilization ratio in order to increase your credit score is to make one small purchase per month, and pay everything else off early. The small purchase you can pay "on time" the following month.

Another Reader

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Re: Question about credit cards
« Reply #3 on: June 18, 2015, 06:28:14 PM »
The CC companies report to the credit bureaus monthly, usually within a couple of days after the statement closes.  If there is no balance, they will report zero and this will not improve your score.  Let a small amount, less than 10 percent of the limit, roll into a bill.  Pay the bill a week after the close date (during the grace period), and your score will go up.  The ides is to show less than 10 percent utilization across the cards.  No account should exceed 30 percent of the credit limit, as that's a red flag.  Pay the cards a week after the closing date and you will pay no interest and have plenty of time to verify the payment hit the account before the due date.

forummm

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Re: Question about credit cards
« Reply #4 on: June 18, 2015, 06:46:16 PM »
You should be fine. Occasionally a balance will show up on the statement date. The key is to keep your very old credit lines open, have at least 3 active lines open, pay all your bills on time, and keep doing that for the rest of your life. Your score will be excellent.

kpd905

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Re: Question about credit cards
« Reply #5 on: June 18, 2015, 07:09:22 PM »
Just put your cards on autopay after the statement posts.  There is no benefit to paying them off with every paycheck.

stepitup

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Re: Question about credit cards
« Reply #6 on: July 06, 2015, 10:20:24 PM »
Credit card utilization is also a dynamic score factor. By which I mean that it only matters at the instant your credit score is checked; it's not some factor that accumulates points steadily from month to month.

All that is to say that it only will mater what your utilization is at the point your in the market for credit. If your not thinking you'll have a pull anytime soon, I wouldn't worry about it so much.

forummm

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Re: Question about credit cards
« Reply #7 on: July 07, 2015, 05:26:35 AM »
Credit card utilization is also a dynamic score factor. By which I mean that it only matters at the instant your credit score is checked; it's not some factor that accumulates points steadily from month to month.

All that is to say that it only will mater what your utilization is at the point your in the market for credit. If your not thinking you'll have a pull anytime soon, I wouldn't worry about it so much.

Yes, when I was in the market for a loan, I would pay off my CC every week or so just to keep it near $0. But in normal life times I just pay it off shortly after the statement date.

Killerbrandt

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Re: Question about credit cards
« Reply #8 on: July 07, 2015, 06:46:21 AM »
Your advisor is incorrect, as what you are doing is the lion's share of improving credit- low utilization, on-time payments, and good account age.  Your utilization is 0 (which is great), and your AAoA (Average Age of Accounts) is constantly increasing.  Your payments are being reported as on-time.  Generally speaking any use of the cards will result in a statement being issued (even if the balance is 0).  The statement being issued results in the reporting agencies being updated and the the accounts being "current."

Some people believe that showing some balance periodically will "help," but all data about this is anecdotal, and the FICO scoring models are not public.  There's never been any official confirmation that showing a balance on a statement has any positive effect, whereas it's known that showing utilization over certain percentages has a negative effect.  If you're at all concerned that one of the many versions of the FICO algorithm (there are about 3 dozen) will hold this against you, you can wait until the statement date to pay off your cards, which will mean the balance as of the statement date will be reported to the agencies.  However, if your credit limits are low and this results in your utilization jumping above 10%, you will see a little hit.  If it goes over 30%, you will see a larger hit until you have a month where the utilization is reported as decreasing.  If it's higher still, you'll see an even bigger hit.

This is one of the big reasons that credit card churning has a net positive effect on credit scores-- your overall consumer credit available goes way up, and generally this has a favorable impact on ratio of utilization.

+1 to this!! It is a complete myth that carrying a balance will help your score.