Credit Scoring Question

Good question. I was a loan officer for over a year and credit reports always mystified me.

IIRC, the sooner you pay off an account balance, the better your score will be. You might want to use that account again and pay it off ASAP as that could help raise your score; however, if you are not going to ever use it again, I would remove the limit and write a letter to the financial institution requesting for the account to be closed.

 

Make sure you check all three credit bureaus also and not just one. You could have several more accounts open that you're not aware of (Experian, Tranunion, & Equifax)

 

your score is made up of many factors......one of which is an "available credit" to income ratio. If you have more available credit than your income might typically support (regardless of the fact that you might not be using that credit line), then the advice to close that account would probably be sound.

If you're not using it, I'd suggest that you take the advice and close the account.

 

This thread at FW.com does a good job of discussing the possible pro's and con's of closing an unused credit card account...

 

Actually, this is not entirely correct. Specifically, I know that mortgage companies and other banks/lenders do not look at total available credit vs. income, but rather, they look at what your fixed payments/minimum payments vs. income is (debt/income ratio).

So its not always bad to have a high balance on a loan or credit card, as long as the minimum payments don't add up to a certange % of your income.

 

I work at a bank.

Its income to payments. Your available balance may affect your actual credit report but not that much. Just for clarity, banks usually have a credit scoring program that they use, which incorporates your "beacon score" from one of the three major credit reporting agencies, but they take into account the score as well as other factors and calculate their own score.

 

Yes, those are important factors, but I think you misread what I wrote.

First of all, mortgage companies and other banks/lenders don't compute your FICA, Beacon or empirica credit score. That's done independently by a credit scoring company. CSC manages the credit files for Equifax for the central region, and I worked there as a trainer. I know a bit about how their beacon score is calculated, and what I said is entirely correct.

If you'll note, I said that ONE of the elements of your credit score is "available credit" to income. The logic behind this is that if you have several credit cards with high limits, yet you're not carrying a large balance on them, you have the inate ability to alter the very same "debt to income" ratio you were talking about. Your current debt to income ratio might be just fine to accomodate that new car loan or home equity loan, but if you immediately go and max out your credit cards after securing that new loan, you might put your debt to income ratio at an unmanagable level. There is an inherent risk in this, and it's part of the calculation in your credit scores. Does it affect you score as much as having a high credit limit that is already maxed out? Of course not, but if your available credit exceeds what is considered a comfortable debt to income ratio (assuming the credit limit could later be maxed out), it can shave points off of your score.

 

What if you max out your credit card every month but you also pay it in full and on time every month?

I'm trying to repair my credit from college and I'd like to be able to buy a house in a year. I have a credit card that I pay all my bills on and it comes close to max'ing out every month. But I pay it in full and on time every month. I've heard that if you don't carry a balance month to month, that may reflect negatively with some agencies.

 

Strangely, the fact that you pay it off every month isn't really reflected on your credit file. Credit card companines report to the credit agencies on a somewhat regular basis. Your balance on the day when they collect the data is the balance that gets shown on your credit file. If they collect the data thirty minutes after your check clears, your balance may only be a few hundred dollars (or however much you typically spend in the few days it takes the check to clear). If they collect the data thirty minutes before the check clears though, you might show a balance that's close to your max.

Your best bet is keep on doing what your doing and make sure you aren't late with a payment.

How long ago were your deliquencies? If they're more than six years old, start disputing them. They should fall off automatically at seven years, but once you get into that sixth year, it's much easier for a file manager to just remove the deliquency than to get the lender to verify it. They aren't paid a fortune, and getting rid of a deliquency that's gonna fall off soon anyway can often be easier than dealing with someone that's pestering them.

 

Mine were from 3 or 4 years ago, but I did pay them all off to a zero balance last summer. I used CCCS for a while, then I got a new job and was able to pay them all in full about this time last year. Since then, I've been paying my one card off every month. I learned from my mistakes.

So would you say I'm on the right track as far as rebuilding my history? Anything else I can do?

 

You're certainly on the right track, but unfortunately, you're going to have to live with results of the earlier mistakes for a while longer yet. It's not the end of the world though. You have a few years left before these items start to drop off, so make the most of that time.

Keep your oldest open accounts active by using them from time to time. Older credit histories weigh more heaviliy in your favor than newer ones. Paying off your card every month saves you money because you avoid the interest, but it doesn't necessarily help your scores.....it doesn't really hurt them either. One thing that is looked favorably upon is the actual use of your available credit. For instance, if you were to make a larger purchase for five thousand dollars, and you paid a thousand dollars a month (plus the interest) such that it was paid off in five months, this would help your score more than if you were to make a thousand dollar purchase every month and pay it off in full every month.

The reason this is looked upon favorably is that it shows that you have the ability to manage credit in a resonsible manner. You've incurred some interest, but you got the debt squared away quickly. The reason that paying off every month doesn't really do anything for you (score-wise) is that because you aren't really using "credit" in the sense that you're borrowing money to make a purchase now (yes, in a strict sense, you are borrowing for the length of your grace period....but not in a manner that causes you incur interest charges).

So....my suggestion would be to see if you can get a card that has an introductory rate that is low or no interest. You may struggle to find one if your scores are low right now, but do some checking. Don't flood your file with inquiries (whenever you apply for credit, your file gets hit with an inquiry), but don't be opposed to getting another card. If you can find one with an introductory rate, make a large purchase of something you've been wanting. Pay it off over the length of the introductory period such that your monthy balance lowers over time. Be disciplined, and don't get yourself into the same spot you were before, but show that you can manage credit and establish a bit more history.