I have a question about what is better for your credit. A little over 3 years ago, I tried to get a loan for a motorcycle. My credit score was right around 700 at the time. But when I tried to get a loan, they said that I didn't have enough credit. At the time I had two credit cards, one of which was about a year and a half old. The other was pretty new. I was told like many other people that it was best to get a credit card, and pay off the ballance every month, so that is what I did for the life of both cards. The loan officer at the motorcycle shop said that when you are trying to establish credit that it was not the best thing to do this, because the credit card company would report a 0 ballance to the credit agencies and it would look to them like you never use the card. He explained that it was better to show that you could make monthy payments on cards. And that the best thing to do was take 2 or 3 months to pay off a purchase, but you should make more than the minimum payment each time. I have great credit now, I keep a small ballance on my credit cards. My fiance just got her first credit card about 7 months ago and I told her to follow this same method, she already has a score over 700. Anyways, I have friends that think im crazy because all they have ever heard is that its best to pay off your cards each month, so I thought I would see what others think as well. I understand the concept behind debt to income, and why its important to pay off your cards, but im more interested in knowing what the best way for a person just establishing credit to get a high score and prove themselves credit wise.
Two of the major factors in calculating a credit score are length of credit history and payment history. The credit history notes payment. For example, if you had a AMEX Gold Card that required balance payment in full each month, you would *not* be undermining your credit worthiness. It's important that your payments be timely and paying in full each month is not a negative. IOW, it's more helpful to have 24 months of timely payments than 6 months of payments. IMHO, to carrying an unnecessary balance is just letting a third-party make easy interest income off of you.
FICO can only see what is in your credit reports. It doesn't necessarily know that your last monthly payment partially paid off your card, or you are totally paying off your cards every month and the current balance is new purchases after paying off last month. Assuming you have no negative information, no collection accounts, paid or not, no lates ever, paid as agreed, then on each account FICO can only know credit limit, current balance, highest balance, last monthly payment, and when opened. Based on this, you will look the best with respect to a given account when you have a high credit limit, high highest balance, low or $0 current balance, low or $0 monthly payment, and long history. The details of month to month usage that produced this snapshot are lost and unavailable to affect FICO given only a single credit report pull. Have I missed anything?
So what if you charge something to your card, and pay it off before the grace period is over. An extreem example being I buy something today, and log in online tonight and pay my ballance off right away. Would that payment even show up with the credit agencies? This is sort of what I was doing. I would actually pay off my credit cards about twice a month, just loggin in online. I remember looking at my credit report, and where it shows payments it looked as if I made a lot less payments than I realy did. Once I started leaving a ballance on my cards (im talking small ballances here, never over $200) it showed every payment that I made.
It would likely report the last payment made, which may or may not be the sum of 2 payments made in the same month. It would also likely report the current balance at whenever they sampled your data for submitting. Whether this is before or after your payment I have no idea. The distinction is probably minor as long as you are only using a small part of your credit limit.
Most credit repair websites suggest buying some jewelery around the cost of your credit limit with a 30 day money back guarantee, once you do that and return the item towards the end of the 30 days your credit report will show a high credit limit, highest high balance you've had and a zero balance which is the best for your FICO score.
