How to pay credit cards and increase FICO score

[Thriftina]

Hello! I am new here and did a search on credit cards, but didn't find what I was looking for on this subject. Here's what I want to know:

Will your FICO improve if you pay off your credit card balance every month?

Right now I am have good credit, but I want to get to excellent credit. Thanks

[red92s]

Hard to say, unless you have large balances outstanding already. If you already have minimal utilization, it probably won't make a ton of difference.

Your billing cycle for your CC may or may not (likely not) align with the schedule that they report to the credit bureaus on. If your account has a balance on $145 on the day the CC company reports it, that's what will be used in tabulation of your FICO, even if you pay your statement in full every month.

[Ima saver]

I don't think it will help much. I pay mine in full every month and my score did NOT go up. However, I still think it is a good thing to do. (pay it off in full)

[boosami]

FICO could care less about the amount you pay each month. The two parts of your credit score in discussion here are:
a) Payment History
b) Credit Utilization

...and FICO considers them pretty much mutually exclusive.

Payment history only reports if you pay on time or not. It does not matter how much you pay--minimum amount or full or 0 if there is no balance. I pay in full each month, thousands of dollars. Joe Blow pays only the minimum. As far as FICO is concerned, our payment histories could be identical--we both pay on time.

Credit utilization is the percentage of debt you have compared to your credit limit. Unless you are doing something drastic, this amount will not change much on a monthly basis, unless you have a very low limit altogether. As another poster mentioned, when your balance is reported to the bureaus is not necessarily in schedule with the FICO reporting.

If you pay on time, and work at reducing your credit utilization, your score in general will go up over time. But it is in not related (other than what is mentioned above) to the amount you pay monthly.

[maat55]

If you have a good score, why buy a better one? I recommend you use credit the way you like to, not in a way to worship FICO.

[Thriftina]

If you have a good score, why buy a better one? I recommend you use credit the way you like to, not in a way to worship FICO.

In my original post that was edited by the moderator I stated the credit card I am looking forward to getting. Basically it will give me points toward free hotel stays with the Starwood affiliated hotels and free flights. In order to get it, I have to have excellent credit, hence why I was asking what could improve my FICO.

Thanks so much for the replies! You all are gems!

[Thriftina]

FICO could care less about the amount you pay each month. The two parts of your credit score in discussion here are:
a) Payment History
b) Credit Utilization

...and FICO considers them pretty much mutually exclusive.

Payment history only reports if you pay on time or not. It does not matter how much you pay--minimum amount or full or 0 if there is no balance. I pay in full each month, thousands of dollars. Joe Blow pays only the minimum. As far as FICO is concerned, our payment histories could be identical--we both pay on time.

Credit utilization is the percentage of debt you have compared to your credit limit. Unless you are doing something drastic, this amount will not change much on a monthly basis, unless you have a very low limit altogether. As another poster mentioned, when your balance is reported to the bureaus is not necessarily in schedule with the FICO reporting.

If you pay on time, and work at reducing your credit utilization, your score in general will go up over time. But it is in not related (other than what is mentioned above) to the amount you pay monthly.

Thanks so much for your reply. Question: I am working toward paying off one credit card totally in March and the others by the summer. I have been reading that closing out accounts could harm the score. If this is true, should I just pay off the accounts, not use them, and allow the credit companies to close my accounts due to inactivity? I am a home owner, paid off one student loan and car, and I own *GULP* 3 major credit cards and 6 non major credit cards. Some of the non major cards are furniture store related, so I could get the deals of 12 months same as cash. I've paid off 2 of them and I really want to close those out (plus the major credit card after they're paid off), since I know I won't be using them.

[boosami]

I have been reading that closing out accounts could harm the score. If this is true, should I just pay off the accounts, not use them, and allow the credit companies to close my accounts due to inactivity?

Yep, that's correct. Usually, credit card companies will not close out accounts due to activity for a looooong time (years). Some people go as far to spend a tiny bit each year on those cards to ensure they stay open. The more available limit you have, the lower your amount debt will look in perspective. Pay 'em off and leave 'em open.

When an account is closed, two potentially negative things happen--one short term, and one long term. Immediately, you lose that available credit amount, which makes your percentage of debt compared to your total credit higher. If that percentage goes up significantly, your score go down. The other potential negative is that 7-10 years after the account has been closed, it will drop off your credit report. This can affect the "average age" of your accounts. If the "average age" goes down significantly due to this, you score can go down. However, the effect will typically be much less than the short-term effects as age does not have as much of an impact as credit utilization.

[Thriftina]

Yep, that's correct. Usually, credit card companies will not close out accounts due to activity for a looooong time (years). Some people go as far to spend a tiny bit each year on those cards to ensure they stay open. The more available limit you have, the lower your amount debt will look in perspective. Pay 'em off and leave 'em open.

When an account is closed, two potentially negative things happen--one short term, and one long term. Immediately, you lose that available credit amount, which makes your percentage of debt compared to your total credit higher. If that percentage goes up significantly, your score go down. The other potential negative is that 7-10 years after the account has been closed, it will drop off your credit report. This can affect the "average age" of your accounts. If the "average age" goes down significantly due to this, you score can go down. However, the effect will typically be much less than the short-term effects as age does not have as much of an impact as credit utilization.

Wow! Thanks so much for the info. I will pay them off, keep them open, then put them in the freezer!

[snafu]

Another CC theory. We have several CC that offer various 'benefits.' If I plan to buy an expensive item [fridge] I check my CC billing date list and use the CC with the longest pay-out date. For example if I were to buy a new fridge 1/29/09, I would use the CC that bills my a/c 1/27, it would miss the January cycle and bill Feb. 26 or 27th.

The bill would be due 3/14/09, due to be paid 3/5/09 without any cost of credit or fee and allow me to divide the cost between 3 pay cycles. The caution is that you must be disciplined and carry out the plan.

[wincrasher]

If you continue to use your cards, and pay your balance in full each month, you are likely to get periodic increases in you credit limit, which, if you have any balances, will help your utilization.

As another has said, use credit cards to spend money you already have and everything will work out in your favor.

[red92s]

If you continue to use your cards, and pay your balance in full each month, you are likely to get periodic increases in you credit limit, which, if you have any balances, will help your utilization.

As another has said, use credit cards to spend money you already have and everything will work out in your favor.

Not necessarily: plenty of people that don't carry balances have had their credit lines trimmed in recent months.

[vonowen]

just an advice... always pay your credit card bills on time in and in full to avoid this huge interest rates most banks are incurring you.