Credit Card Article

[sweeps]

Deal yourself a new hand of credit cards

thanks Sweeps

I must say I grow more and more tired to see that paying off the balances every month is equated with not overspending and thus the absence of wasteful habits.


they are not the same thing!


the article doesn't make that comparison directly in a statement but it's implied in not bringing up the fact that for many people, regular card use brings that additional risk (even when they pay off the balance every month which seems to be the author's test for control.)

[Bookie]

Enjoyed the article, and I agree with the author -- given the assumptions made.

I also know that for me it won't work. I have credit cards, and I use them in a budgeted, planned out fashion. But . . . using cash, I will always tend to spend less than when I go for the plastic. Somehow, the pain of signing my name, even knowing that I will clear the account at the end of the month, never can equal the immediacy of handing over currency.

It's not that I will spend extravagantly, or evn unwisely, but I will spend more.

[PRICEPLUS]

That was an interesting article. I guess it makes sense for people who use CC's regularly. I am trying to pay off and not use them at all.

[piggybank4]

I guess there's no "system" or "rule" that can bring results 100% of the time, even when someone is completely lacking in self-control or discipline.

No system works for someone a slave to TV ads, who loves to shop, etc.

[disneysteve]

Originally Posted by rexdart

I must say I grow more and more tired to see that paying off the balances every month is equated with not overspending and thus the absence of wasteful habits.

Someone who pays his card off in full each month is living within his means. That doesn't mean he couldn't do better and spend less, just that he isn't spending more than he can afford to, which I think we'd all agree is a good thing. But I get your point. Someone could pay the bill in full each month and still be buying things they don't really need.

[PRICEPLUS]

Amen to that!

[hrbatyfan]

I always pay my credit cards off in full each month, and I have 2 credit cards.

One is a starter Visa card, and the other is an Amex Blue Rewards card. I use the Amex most of the time, unless they do not take Amex.

I am thinking about getting a few more rewards cards to maximize my money, but I have a question about having multiple cards and my credit score.

If I have 4-5 credit cards which I all have the ability to pay in full each month - should I 100% always charge to my best rewards cards and not bother with my older cards (but still keep them open?), or should I at least make one charge a month to all my cards to keep a paying record on them for credit score purposes?

[poundwise]

Originally Posted by hrbatyfan

I always pay my credit cards off in full each month, and I have 2 credit cards.

One is a starter Visa card, and the other is an Amex Blue Rewards card. I use the Amex most of the time, unless they do not take Amex.

I am thinking about getting a few more rewards cards to maximize my money, but I have a question about having multiple cards and my credit score.

If I have 4-5 credit cards which I all have the ability to pay in full each month - should I 100% always charge to my best rewards cards and not bother with my older cards (but still keep them open?), or should I at least make one charge a month to all my cards to keep a paying record on them for credit score purposes?

What one chooses to do is based on a lot of factors. When it comes directly to considering your credit score, however, there are a few truths (more or less) to keep in mind.

Opening new credit card accounts hurts your credit score in the short term. This is especially true if you submit multiple applications and open multiple new accounts in a relatively short time-frame.

You probably knew, or assumed, that.

However, what most people seem to not understand is that keeping card accounts open, but not using them, also hurts your credit score.

Many people will tell you not to close your cards, especially the ones you have had a long time, due to the fact that doing so can hurt your score by lowering the average age of credit accounts. This is true. Closing old accounts has a similar effect to opening new accounts in this regard. However, FICO also states that having open credit and not utilizing it will also hurt your score.

The bottom-line is probably more common sense than anything. Don't apply for lots of new credit, don't hold lots of unused credit cards, don't close credit cards that still have a balance, don't close older accounts until you have more established credit overall, etc.

[poundwise]

As a very general review of the article, I think it is a little excessive. The idea proposed early on of 'loading up on plastic' seems like a bad approach for anyone.

Understanding what is available and utilizing offers that make sense for you may, in fact, be quite wise. However, as I mentioned in my previous post, applying for and opening multiple new accounts, regardless of the rewards they may offer, will hurt your credit score. Especially if you do one of two things in conjunction with that: (1) close old accounts, (2) obtain 4 or 5 new cards but only use 1 or 2.

I think a much better method is to neither be overly concerned with your credit score, nor 'play games' with credit cards, reward programs, balance transfers, etc. Take care of your credit, use cards to manage cash flow, take advantage of a rewards system that works for you, and that's, ultimately, about the best one can do, IMO.

[sweeps]

Originally Posted by poundwise

However, FICO also states that having open credit and not utilizing it will also hurt your score.

Poundwise, do you have a source for this?

[Ima saver]

Well, I did not know that having open paid off cards would hurt your score. We mainly use our cash back card to buy materials for the houses we build, so it is always paid off every month and we never buy anything we don't use in building.

[poundwise]

(from myfico.com, Credit Education)

Length of Credit History

* Time since accounts opened
* Time since accounts opened, by specific type of account
* Time since account activity

(end)

If you are late on a payment, that is reflected in the 'Payment History' portion of your FICO score. One of the components of that is 'Time since (recency of) past due items.' The longer it has been since delinquency, the better it is for your score.

In a similar way, a component of the 'Length of Credit History' portion of your FICO score is 'Time since account activity.' In this case, the longer it has been since utilization of a given source of available credit, the worse it is for your score.

I can tell you that something that began appearing on my report this year that I do not recall seeing before is the "average age."


this is the reason why I think my score went up (rather dramatically) when I closed all but one card. I was already a little over a year into no balances - so utilization ratio was no issue - when I decided to close 2 of my three remaining cards. this caused my average age to change from something like 3.7 years to over 7. this obviously being the time on active accounts as the same report lists my credit history at something around 17 years (which is about right).

this might be involved in unused open accounts affecting your score as they would reduce the average age.

[poundwise]

Originally Posted by Sweepsplayer

Poundwise, do you have a source for this?

(from myfico.com, Credit Education)

Length of Credit History

* Time since accounts opened
* Time since accounts opened, by specific type of account
* Time since account activity

(end)

If you are late on a payment, that is reflected in the 'Payment History' portion of your FICO score. One of the components of that is 'Time since (recency of) past due items.' The longer it has been since delinquency, the better it is for your score.

In a similar way, a component of the 'Length of Credit History' portion of your FICO score is 'Time since account activity.' In this case, the longer it has been since utilization of a given source of available credit, the worse it is for your score.

[poundwise]

Another thing to consider, in regards to having paid-off but open credit cards, is that the 'Amounts Owed' portion of your FICO score includes a component called 'Proportion of credit lines used,' which is described as the 'proportion of balances to total credit limits on certain types of revolving accounts.'

If you think getting that porportion, or ratio, down as low as possible is best, then you are mistaken. Just as having 90% utilization of your credit is a bad thing, having only 10% utilization is also bad, in terms of the effect on your credit score.

At some point, holding open credit lines for the purpose of helping your proportion/ratio is counter-productive. I have seen some commentary as to what level is best according to FICO, but I have never seen FICO detail exactly what that is. I suppose it may vary depending on other factors.

[hrbatyfan]

I was told by someone having lots of credit available, but not used is a good thing. (IE - you have good enough credit to get a large line, but you aren't up to your gills in debt)

I have no idea if this is true, or to what extent. I don't believe the person was recommending getting every card possible and letting it sit dormant to increase my "available and not in-debted credit", but who knows.

From what you guys are saying, though, is that it would be advantageous to keep one of my older cards alive (despite my reward cards being the best one to use) and make one charge/payment per month to keep it current and active.

[hrbatyfan]

Originally Posted by poundwise

Another thing to consider, in regards to having paid-off but open credit cards, is that the 'Amounts Owed' portion of your FICO score includes a component called 'Proportion of credit lines used,' which is described as the 'proportion of balances to total credit limits on certain types of revolving accounts.'

If you think getting that porportion, or ratio, down as low as possible is best, then you are mistaken. Just as having 90% utilization of your credit is a bad thing, having only 10% utilization is also bad, in terms of the effect on your credit score.

At some point, holding open credit lines for the purpose of helping your proportion/ratio is counter-productive. I have seen some commentary as to what level is best according to FICO, but I have never seen FICO detail exactly what that is. I suppose it may vary depending on other factors.

I was not aware of this, thanks for posting.

[sweeps]

From fico.org

Should I close old accounts to raise my score?

No. In fact, it might lower your score. First of all, any late payments associated with old accounts won’t disappear from your credit report if you close the account. Second, long established accounts show you have a longer history of managing credit, which is a good thing. And third, having available credit that you don’t use does not lower your score. You may have reasons other than your score to shut down old credit card accounts that you don’t use. But don’t do it just to get a better score.

Source

[poundwise]

Edit: After posting tonight, I have re-read the thread, including my posts and I wanted to state that I was not correct to write that having old, unused account 'hurt' your score. My assertion could more accurately be stated as having old, unused accounts does not necessarily benefit your score. Now...


Fair Isaac states that closing old accounts will not benefit your score.

However, the same Fair Isaac standards refer to the "Time since account activity" - a component which concerns itself with how long it has been since you utilized the account.

An inactive account (some sources say an account dormant for as little as six months) is ignored by Fair Isaac’s credit scoring system, so you will no longer get the benefit of the payment history and low balance.

Thus, keeping X# of card accounts opened though never used will not benefit your score either. And, ultimately, other factors may kick in such as total number of open accounts, etc.


Let me summarize what I am suggesting:

-- Don't close accounts to try and raise your score, that doesn't work (and may hurt, depending)

-- By all means, hang on to an older account, utilize it - even infreqeuntly - to keep it active

-- Don't keep multiple dormant (unused) accounts open to try and raise your score, that doesn't work either

-- If you are seeking to reduce debt or eliminate holding a number of credit cards, there is no reason not to close accounts as you pay them off and reduce your debt if you keep your credit utilization below 50% (ideally lower), and take into consideration that other points above.


Let me add that much of this scoring mess is unknown. For instance, while Fair Isaac will tell you that such-and-such is a 35% portion of your score and what goes into that, they do not tell you how weighted each of those components may be or how they are calculated into that portion.

I believe chasing an ever-higher credit score is foolish. Essentially, people with highest scores are those who regularly use credit. I have heard that it is even best, FICO-wise, for you to carry balances rather than pay them off each month. If you pay a car loan off early and then buy your next car with cash, your credit score will suffer. Same goes for if you own your house outright. FICO would rather you have a mortgage, or two. At least, so it would seem by many commentators on the subject.

I don't claim special knowledge on this subject and I certainly could accept that I may be wrong about some things. I don't think anybody honestly knows all the inner-workings of a FICO score and how they work out. Fair Isaac keeps that under wraps to protect their system. In fact, I believe there is purposefully little information given out for this reason and also so that people don't easily find subjective ways to manipulate the system.

Ultimately, I would say, handle things with common sense. Sure, know what FICO considers and let that play into things (such as deciding which card to keep or whether or not to apply for new credit, etc.), however, avoid getting caught up in being overly-concerned with maintaining and improving your score.