4 ms·

I'm not an expert, but I do know paying off your total credit card debt every month does nothing to help your credit score and, in fact, may even kinda hurt it.

by cubano 11y ago

I'm not an expert, but I do know paying off your total credit card debt every month does nothing to help your credit score and, in fact, may even kinda hurt it. You would be far better off to get 2-3 cards, ring up some debt on each of them, and then make the monthly minimum payment, on-time, for 6-12 months. For sure you would see a pretty big jump in your score doing that.

Vraxx 11y ago
Source on that? I'd want to see some pretty convincing evidence before I'd even consider doing that. For starters you'll be paying interest by doing that, which I guess is a "good" quality from the lender's point of view, but I'm certainly not going to start forking over interest in hopes that it'll improve my credit score.
- etjossem 11y ago
  It's not true. Lenders review the credit report (the "credit score" is a simplification), which includes data on whether you made the full payment or only the minimum. Making only the minimum payment is often correlated with an inability to repay the full amount. Per Experian (2014): People who paid in full were 63% less likely than average to default six months later, while people making a little bit more than the minimum payment were 86% more likely than average to default within six months. Cubano's suggestion is a particularly risky thing to do if you have a history of paying in full. Switching from full payments to the minimum can be read as a leading indicator of delinquency.
  - Vraxx 11y ago
    Thanks for that info. It's also good to know that my BS detector is still in working order.
ldd 11y ago
This is wrong. Factually. Speak with any bank at all, paying your credit card debt will never, ever hurt your credit score. At least here in Canada. source: I know plenty of people that pay their credit card every month, with 800+ scores.
- listic 11y ago
  > 800+ scores. What is this number and how does one get to know it?
  - falcolas 11y ago
    FICO - by paying for it. Some credit cards provide it as a perk, but it's never free to get, and is actually rather hard for you to obtain without some form of credit provider between you and them. You can (and should) get your credit report, but there's no score there.
  - deleted 11y ago
    [deleted]
rmwaite 11y ago
You're right, you're no expert. You are giving extremely bad advice here. If you charge things to your credit card and wait until the statement is generated, then pay in full during the grace period, it will show on your credit report (and thus result in an improvement in your credit score) and will not result in finance charges being imposed (which is always a sign of financial irresponsibility).
dsp1234 11y ago
I do know paying off your total credit card debt every month does nothing to help your credit score This is correct, but misleading[1][2]. A balance is not necessary to gain credit history[0], though a very minimal balance is better than nothing[3]. What matters is utilization rate, which is the ratio of how much credit is used versus how much is available. There is some misunderstanding about "paying it off each month" due to the fact that the CC companies report how much was used during a month not the balance at the end of the month. (ex: with a limit of $1000, $900 was charged then paid off. The $900 is reported, even though it's paid off by the end of the month). You would be far better off to get 2-3 cards, ring up some debt on each of them, and then make the monthly minimum payment, on-time, for 6-12 months. This is some pretty poor financial advice. Paying minimum balances is almost always a bad idea from a financial perspective. The same effect could be had by obtaining one card, using about 5-20% of the available balance each month, then paying it off each month. Using this method, the utilization rate is above 0, but below 30%, the length of the CC history is increasing, and no interest is being paid. [0] - https://www.bankofamerica.com/credit-cards/education/5-facts-about-credit-cards.go https://www.bankofamerica.com/credit-cards/education/5-facts... Myth #5 [1] - http://www.bankrate.com/finance/credit/credit-score-fall-after-paying-loan.aspx http://www.bankrate.com/finance/credit/credit-score-fall-aft... [2] - http://www.creditcards.com/credit-card-news/simon-credit-card-account-balance-score-1508.php http://www.creditcards.com/credit-card-news/simon-credit-car... [3] - http://www.bankrate.com/finance/credit-cards/does-card-inactivity-hurt-credit-score.aspx http://www.bankrate.com/finance/credit-cards/does-card-inact...
falcolas 11y ago
You're partially correct. If you are paying everything off, you will not be rated as high as someone who is carrying a reasonable amount debt every month. Why? If you pay everything off (no interest), the banks make no money, so you're simply not as attractive of a customer to lend money to. So, it's not about the payment, it's about using debt. Other negatives: Reposession, defaulting on debts, bankruptcy, late payments, having monthly payments over some percentage over your income... it varies by provider (and most of it's automated). Source: Worked for a 3rd party which does the actual approval and denial calculations for many different providers.
- etjossem 11y ago
  This does raise a good point: your goal is not the same as the bank's goal. A terrible credit customer (pays credit cards in full every month, never gets a mortgage or car loan) may be the most financially responsible person they ever see. Keep that in mind when striving for a better score.
- derefr 11y ago
  It's not about how much you pay off each month at all. The banks don't calculate credit scores—the credit reporting agencies do. And the credit-reporting agencies don't think that way. The thing about credit event streams is that they're very low-detail: basically they amount to, for each credit instrument you have, a series of {pay-period, code} pairs with nine possible codes, R1-R9. Your score is entirely calculated† by taking (a seven-year sliding window of) those event-codes and applying weights to them. R1, the most-positively-weighted event, just means "paid on time this month." The thing you want to do to build good credit quickly, is to generate as many R1 events as you can. You can carry some of your debt on a card to "stretch" one large charge into multiple R1 events... but a more efficient strategy (that doesn't involve paying any interest) is to simply have several cards, use them all for at least one trifling thing each month, and then pay them all off each month. Three cards you paid off $5 charges on is three R1s, and counts for just as much as one $500 charge you paid in three instalments (also three R1s.) If you want to dig in and see exactly how much information a CRA will give you, here's a Ruby implementation of the Experian Connect API: https://github.com/ehutzelman/experian https://github.com/ehutzelman/experian --- † Well, okay, there's also two other things: 1. a positively-weighted factor for how much unused credit each instrument holds each month. Which usually translates to "you get punished for carrying an 80%+ balance on a credit card." The key with this one is that—all else being equal—it's better to have cards with higher credit limits, because then you're not using as much of each instrument's capacity, and that reflects better on you. 2. a negatively-weighted factor for any "hard inquiries" that the credit-reporting agency had to respond to within some time window. Each time you apply for a credit instrument and the loaning institution asks the reporting agency to calculate your credit score for the purpose of determining credit eligibility, that's a "hard inquiry" event. (You can think of these as their own credit event on a "meta" instrument held by the reporting agency itself.) Unlike normal credit instruments, there are no industry standards on how to set the weights or time-window for the effects of "hard inquiries", but the windows are usually short (~6 months), AFAIK. All else being equal, don't quickly, repeatedly apply for credit: each successive loaning institution will see a lower score. (And note the "for the purpose of determining credit eligibility" bit. There's another kind of event, a "soft inquiry", that happens when you—or some third-party on your behalf—just asks the reporting agency for your credit score in order to know it, or background-check you, or whatever else. I'm pretty sure none of the big three CRAs in the US give any weight to a "soft inquiry" event.)

by cubano 11y ago

Vraxx 11y ago

Source on that? I'd want to see some pretty convincing evidence before I'd even consider doing that. For starters you'll be paying interest by doing that, which I guess is a "good" quality from the lender's point of view, but I'm certainly not going to start forking over interest in hopes that it'll improve my credit score.

etjossem 11y ago
It's not true. Lenders review the credit report (the "credit score" is a simplification), which includes data on whether you made the full payment or only the minimum. Making only the minimum payment is often correlated with an inability to repay the full amount. Per Experian (2014): People who paid in full were 63% less likely than average to default six months later, while people making a little bit more than the minimum payment were 86% more likely than average to default within six months. Cubano's suggestion is a particularly risky thing to do if you have a history of paying in full. Switching from full payments to the minimum can be read as a leading indicator of delinquency.
- Vraxx 11y ago
  Thanks for that info. It's also good to know that my BS detector is still in working order.

ldd 11y ago

This is wrong. Factually. Speak with any bank at all, paying your credit card debt will never, ever hurt your credit score. At least here in Canada. source: I know plenty of people that pay their credit card every month, with 800+ scores.

listic 11y ago
> 800+ scores. What is this number and how does one get to know it?
- falcolas 11y ago
  FICO - by paying for it. Some credit cards provide it as a perk, but it's never free to get, and is actually rather hard for you to obtain without some form of credit provider between you and them. You can (and should) get your credit report, but there's no score there.
- deleted 11y ago
  [deleted]

rmwaite 11y ago

You're right, you're no expert. You are giving extremely bad advice here. If you charge things to your credit card and wait until the statement is generated, then pay in full during the grace period, it will show on your credit report (and thus result in an improvement in your credit score) and will not result in finance charges being imposed (which is always a sign of financial irresponsibility).

dsp1234 11y ago

I do know paying off your total credit card debt every month does nothing to help your credit score This is correct, but misleading[1][2]. A balance is not necessary to gain credit history[0], though a very minimal balance is better than nothing[3]. What matters is utilization rate, which is the ratio of how much credit is used versus how much is available. There is some misunderstanding about "paying it off each month" due to the fact that the CC companies report how much was used during a month not the balance at the end of the month. (ex: with a limit of $1000, $900 was charged then paid off. The $900 is reported, even though it's paid off by the end of the month). You would be far better off to get 2-3 cards, ring up some debt on each of them, and then make the monthly minimum payment, on-time, for 6-12 months. This is some pretty poor financial advice. Paying minimum balances is almost always a bad idea from a financial perspective. The same effect could be had by obtaining one card, using about 5-20% of the available balance each month, then paying it off each month. Using this method, the utilization rate is above 0, but below 30%, the length of the CC history is increasing, and no interest is being paid. [0] - https://www.bankofamerica.com/credit-cards/education/5-facts-about-credit-cards.go https://www.bankofamerica.com/credit-cards/education/5-facts... Myth #5 [1] - http://www.bankrate.com/finance/credit/credit-score-fall-after-paying-loan.aspx http://www.bankrate.com/finance/credit/credit-score-fall-aft... [2] - http://www.creditcards.com/credit-card-news/simon-credit-card-account-balance-score-1508.php http://www.creditcards.com/credit-card-news/simon-credit-car... [3] - http://www.bankrate.com/finance/credit-cards/does-card-inactivity-hurt-credit-score.aspx http://www.bankrate.com/finance/credit-cards/does-card-inact...

falcolas 11y ago

You're partially correct. If you are paying everything off, you will not be rated as high as someone who is carrying a reasonable amount debt every month. Why? If you pay everything off (no interest), the banks make no money, so you're simply not as attractive of a customer to lend money to. So, it's not about the payment, it's about using debt. Other negatives: Reposession, defaulting on debts, bankruptcy, late payments, having monthly payments over some percentage over your income... it varies by provider (and most of it's automated). Source: Worked for a 3rd party which does the actual approval and denial calculations for many different providers.

etjossem 11y ago
This does raise a good point: your goal is not the same as the bank's goal. A terrible credit customer (pays credit cards in full every month, never gets a mortgage or car loan) may be the most financially responsible person they ever see. Keep that in mind when striving for a better score.
derefr 11y ago
It's not about how much you pay off each month at all. The banks don't calculate credit scores—the credit reporting agencies do. And the credit-reporting agencies don't think that way. The thing about credit event streams is that they're very low-detail: basically they amount to, for each credit instrument you have, a series of {pay-period, code} pairs with nine possible codes, R1-R9. Your score is entirely calculated† by taking (a seven-year sliding window of) those event-codes and applying weights to them. R1, the most-positively-weighted event, just means "paid on time this month." The thing you want to do to build good credit quickly, is to generate as many R1 events as you can. You can carry some of your debt on a card to "stretch" one large charge into multiple R1 events... but a more efficient strategy (that doesn't involve paying any interest) is to simply have several cards, use them all for at least one trifling thing each month, and then pay them all off each month. Three cards you paid off $5 charges on is three R1s, and counts for just as much as one $500 charge you paid in three instalments (also three R1s.) If you want to dig in and see exactly how much information a CRA will give you, here's a Ruby implementation of the Experian Connect API: https://github.com/ehutzelman/experian https://github.com/ehutzelman/experian --- † Well, okay, there's also two other things: 1. a positively-weighted factor for how much unused credit each instrument holds each month. Which usually translates to "you get punished for carrying an 80%+ balance on a credit card." The key with this one is that—all else being equal—it's better to have cards with higher credit limits, because then you're not using as much of each instrument's capacity, and that reflects better on you. 2. a negatively-weighted factor for any "hard inquiries" that the credit-reporting agency had to respond to within some time window. Each time you apply for a credit instrument and the loaning institution asks the reporting agency to calculate your credit score for the purpose of determining credit eligibility, that's a "hard inquiry" event. (You can think of these as their own credit event on a "meta" instrument held by the reporting agency itself.) Unlike normal credit instruments, there are no industry standards on how to set the weights or time-window for the effects of "hard inquiries", but the windows are usually short (~6 months), AFAIK. All else being equal, don't quickly, repeatedly apply for credit: each successive loaning institution will see a lower score. (And note the "for the purpose of determining credit eligibility" bit. There's another kind of event, a "soft inquiry", that happens when you—or some third-party on your behalf—just asks the reporting agency for your credit score in order to know it, or background-check you, or whatever else. I'm pretty sure none of the big three CRAs in the US give any weight to a "soft inquiry" event.)