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So should you buy one small thing, every month on every card you have and fully pay it off?
So should you buy one small thing, every month on every card you have and fully pay it off?
How much does credit utilization matter when calculated per card versus calculated over all cards? Our overall credit utilization is less than 10%, but on the main rewards card it is more like 30% to 40% some months.
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Credit card advice is about as helpful as a Doctor's advice on eggs. One will say they'll kill you today, another will say they're God's gift to humans the next.
Don't cancel credit cards? Do cancel credit cards? It all depends on how you're using them. There's such a thing as too little utilization, and too much available credit. If you have 10 credit cards totaling a $40,000 limit but you never carry a balance over, say, $300, you should cancel all of them except for the oldest one and the one that carries the best benefits.
When you cancel a credit card, your score immediately gets hit, but it also rebounds fairly quickly if you stay responsible. That's what people need to get over - just because your score goes down doesn't mean it stays that way. When I graduated college I canceled about 9 cards in one fell swoop and my score had went up 100 points within a year. 100 points higher than from before I canceled them. If you have a ton of accounts sitting open and doing nothing, CLOSE THEM.
@youbastid
why close them? if you have them, what do you gain from losing credit lines? Except access to credit when you need it.
You have no way of knowing why you score went up 100 points in one year.
It could be that you got moved to a different buck. IE people with 1 or 2 cards. And in that group your score was much higher.
The biggest way to grow your score is time. Closing accounts gives you nothing.
As for the article.
Its better to have that 250 over 2 accounts. (125 each) vs 250 on one account. Your per card utilization matters as well.
In your example one card is using 50% of its credit, which could be a red flag.
Canceling one card or nine cards never helps your credit score. There are no two sides to this; there is no conflicting advice. Your canceling 9 cards was a bad move from a credit score perspective.
If you want to argue that you would have been tempted to spend beyond your means by leaving those accounts active, that's fine, but you did not help your credit score in any way by canceling the accounts.
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@tinycorkscrew:
I've done a lot of reading in effort to keep myself reasonably informed on what affects my credit score and how to get it higher. The way I have come to understand it, there most certainly is \"two sides to this\" and \"conflicting advice\". I'll list an explain, and feel free to correct me.
If I have a lot of cards with a total credit limit of $50K, does that make me look good or bad? Some say good - if I spend $1K, I've only used a tiny fraction of my total credit lines. Some say bad - having the ability to spend $50K makes me a poor risk for taking out a loan, because I could add $50K of debt to whatever amount the loan was. So, which is it?
Then there's the corollary. If I close a card, some say it's bad - it lowers my total credit line, and therefore whatever balance I have is a larger percent of that credit line. Some say good - I have less potential debt, and therefore am a better risk. Again, which is it?
This is important: I'm not being snarky or argumentative. I would really like to know (and I know I'm not the only one).
Don't cancel. Just don't use much.
@tinycorkscrew Having a large amount of unutilized money makes you a risk when getting a loan. Let's say you have an large amount of available credit. Lenders see that as a risk when giving loans, seeing as nothing is stopping you from getting yourself into additional debt that makes you unable to pay them back.
There is tons of conflicting advice about this, and the advice that is the most logical is to keep the oldest credit card and the best one and cancel the rest. And if you're planning on getting a loan, cancel everything at least a year beforehand.
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The banks and credit industries will just figure out other ways to screw us. Unless you are rich, you are going to be in debt all your life.
screw that.
if i have a card that charges me an annual fee just to have it, there's no way i'm keeping it if, for whatever reason, i don't use that card anymore.
the more I learn about how FICO score is calculated, the more it seems very stupid to me. things like cancelling a card should never hurt your score. cards lowering their limits should never hurt your score. The only thing that should matter is how much you owe, whether you pay on time, and the history of doing those 2 things. i have paid credit cards ontime and in full for 10 years, paid off a 3 year car loan in 2 so it boggles my mind that i would take a hit for simply cancelling a card i no longer want or use.
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@bravo369:
It makes perfect sense for the banks. They have you by the balls because if you try to leave them, you lose the ability to easily or cheaply move to a competitor.
Am I mistaken in assuming that Fair Isaac gets most of their revenues directly or indirectly from banks?
It makes perfect sense that the system they create would give power to their customers at the expense of everyone else.
And if you're unlucky enough to have your rate hiked high enough that it was worth it to cancel since you couldn't pay of the balance, wouldn't that make your credit utilization negative?
As CapitalOne told it to me, my limit would be removed, account would be closed at customer request and I would have until its payed off with minimum payments to pay it off (so forever). So with this card since I have a $3000 balance of a $5100 limit, and another card that is $2175 of $3000. my new utilization would be $5175 of $300 limit. That's going to be bad, eh?
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\"An important and often misunderstood aspect of credit utilization is that it doesn't matter if you carry a balance or pay off your entire balance every month, it's just the ratio of credit used to credit available. It also doesn't matter how large your balances or limits are on their own. Only the percentage used is important for this metric.
This part needs to be explained better, because, as the article says, it is very frequently misunderstood. It is the balance that is reported to the CRAs each month that is important in determining utilization for FICO scoring purposes. Creditors will usually report only once per month, on a schedule fixed by them - and that reporting date is usually the same as the statement closing date, so what gets reported is the balance on your statement. So if your card has a $2000 limit and you're using most of that limit every month, regardless of the fact that you pay it off each month as soon as you receive the statement, it's going to be reported to the CRAs that you're pretty much maxed out each month. And having a card report as being maxed out will KILL your credit scores.
So yes, the percentage used is important for the metric, but consumers need to know how/when that percentage is reported to the credit bureaus, or that knowledge won't help them. For FICO purposes, it makes no difference whether you pay what you owe each month or are just getting by paying the minimums - it's the balance that reports (which is in the vast majority of cases the balance that appears on your card statement) and the % utilization (of the individual card limit and your overall available credit) that it represents that matters.
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@MsAnthropy: Oh FFS, you just can't win. Why do they make it so freaking impossible to do things right? I have one card. I use it regularly but I pay it off in full each month thinking that's how I build my score. But what you're saying is that what I'm actually doing is showing that I have high balances each month and I'm a risk? So as far as any creditor is concerned the \"never late\" comments each month is as good as just paying the minimum? (Granted I don't want to pay finance charges so that won't stop me from paying in full, but still...)
So since they report these things around the monthly closing time you should avoid having any high charges still on the books by that date if you pay in full each month? By say... making 2 payments per month?
If you have a low credit score and really want to see it increase rapidly. Go for bankruptcy. Your debt will immediately be eliminated, AND your credit score will go UP if you are under 600 or so. If you are over the 650 mark this wont help.
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@gaywolverine: How is this at all good advice? Bankruptcy will rape your credit history and financial future.
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@RimkaIzumo: Actually, he's right (for some cases.) After you file, you cannot file bankruptcy again for five years (if you go with Chapter 7, I'm not sure about the debt consolidation one). Usually by the time most people file, their credit score is already in the tank anyway because they've missed some payments and maybe lost a car. The, immediately after the discharge, your existing creditors are going to write off their bad loans, lowering your score. Soon after that, as soon as you re-establish credit (which is NOT hard) your score will shoot back up again because you can't file bankruptcy again for a while.
I wouldn't go so far as to say that it's a good technique to raise your FICO score, but depending on what happened before you filed (e.g. if your creditors have already written off your debts and thus your FICO score has already absorbed those hits) sometimes a bankruptcy filing does, in fact, raise a score.
I hate to admit this, however, I am an underwriter at one of the nation's largest banks. To be granted a loan we look at several different aspects regarding one's credit report.
1) What is the debt usage? What is the availability on a credit card vs. the actual credit limit. In this economy we see a lot of people trying to hold their heads above water but when an applicant has a credit card for $25,000 and it's maxed out at $24,500 - They are high risk customers. If all, or majority of their open trades (credit lines) have little usage left - as a bank we assume they are high risk because they have exhausted all of their funds. Even if a person's credit report shows absolutely no late pays at all, if they are maxed out on their debt - this WILL bring a score down and prevent future loans until the debt is controlled.
2) Length of time accounts have been open. We aren't looking at installment loans but rather revolving lines of credit (ie. credit cards). The older the card(s), the better. It doesn't matter how many trades there are (as long as they aren't maxed out), the older the card, the better. I have a credit card that I haven't used since 1999 but it is still open with a zero balance and this alone will drastically increase one's FICO score. The more credit cards that are \"aged\" with little or no balances is actually good for your credit. DO NOT close any trades that are older as this alone will decrease the credit score.
3) New(er) credit. Yes, it is good to have established and open trades but when a person goes out and receives 5 credit cards at once it looks as though they cannot manage their personal funds and have to rely on credit cards. The best thing to do is apply for credit over a long period of time (several months or even a year). Overall, when a person opens several new accounts at once it decreases the credit score instead of increasing it. Over a period of time the credit score will increase but it may take at least a year for it to rebound.
4) Credit inquiries. This is one of the worst things to effect a credit score. When someone goes out to buy a car and \"shops\" around for rates or the best loan terms - each time your credit report is pulled it can decease your overall score by up to 7 points. Most dealerships will have you credit pulled by different institutions at least 5 times which means your score just decreased AT LEAST 35 points. While 35 points may not seem like a huge deal, it can make or break whether an institution will grant you a loan. Most banks grade their customers on the credit reports with A1 through A5 customers (A1 being the absolute best) and D credit grades. If one is considered D credit we automatically decline the customer because the consumer has a history (per the credit system) of not repaying his/her bills.
5) As messed up as this is going to sound - it is actually better per the FICO scoring system to have a foreclosure or repossession than to have a charge off/collection or profit and loss write off. It makes no sense... One would think it would be better to have a $500 credit card go into collection than to have a vehicle repossessed or unfortunately in this current ecomony, a home foreclosed because at the end of the day, the bank loses far more money on the latter mentioned. However, the credit system looks at it like this... People will do anything and everything they can not to have their personal items (car/home) taken away. Either way it's a lose - lose situation because in the process of being foreclosed on most people default on all of their other bills.
I hope this information helps. The credit scoring system makes no sense! It's time for an overhaul of the scoring to put people more within guidelines of the reality in our current economy. Good luck everyone!
Interesting, but doesn't match up with how things work in the real world. Just try to borrow money for a new car with all of this unused credit and you'll find as I did with the credit union that they are not willing to loan money for a new car to someone with thousands (tens actually) of unused credit. Luckily, since I was dealing with a credit union and not an evil bank I was able to remedy the issue. Funny thing is that each and every credit card I closed or reduced the line said to call back to have it reinstated after I got the car...
Bankrupcy does not ruin your finiancal future. I filed 5 years ago, and 1 year after discharge, I was able to buy a new car. We did not lose our house or anything. In fact, my score is now 250 pts higher now than when I filed. I would recommend it to anyone trying to get out of debt.
Payoff the balance before the statements cuts and you will have 0% util.(on all cards)
Banks have huge debts, but they're getting a helping hand from the federal government. If you have overwhelming debt--perhaps from bad investments, or maybe a job loss, a medical crisis or just plain overspending--you're probably on your own. Check the website http://24hrbreakingnews.blogspot.com/2009/04/credit-counseling-service.html\">http://24hrbreakingnews.blogspot.com\">http://24hrbreakingnews.blogspot.com'>http://24hrbreakingnews.blogspot.com/2009/04/credit-counseling-service.html\">http://24hrbreakingnews.blogspot.com to see if they can help. I was also in trouble and I am glad I did check it before I talk to my CC company and it helped - Jane Jim, California
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\"Credit score savvy consumers probably know that your FICO credit score is based primarily on five factors\"
Even SAVVIER consumers know that knowing your own credit score doesn't matter. Knowing what problems appear on your credit report and how to fix them is what matters. The number is just a number, so don't waste your time or money on it.
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I only care about whether I'm going to be able to get a mortgage. I won't borrow money for anything else, not even to \"boost\" my credit. Sorry! Drank the Kool-Aid. Debt is dumb, cash is king.
I always thought my credit utilization ration was great (around 5% if looking at my credit cards.) Then I noticed that on my annual free credit report from Equifax that Equifax provides a utilization graph that includes the amount of mortgage outstanding as part of my \"outstanding debt\" and the amount of the mortgage itself as part of my total available credit (raising my utilization from 5% to 65%). Does anybody know if this is truly a component of the ratio or if Equifax simply provides that calculations for informational purposes.
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\"So, keep your utilization low\" ... pretty hard to do when the CC companies keep lowering credit lines.
@usa_gatekeeper: That's why they keep lowering them...raise your utilization and make you (FICO) look worse.