I have a credit rating question - I am mystified on how it works?

Question

...My credit rating has been going continually down, according to my credit monitoring service. It is now only rated as "fair".

I only make credit card purchases when I have enough money in my bank account to pay the bill in whole when the bill arrives, and that is exactly what I do.

I use my cards to buy things on the Internet (usually quite small in amount), and occasionally to make large purchases such as airline tickets (twice in last two years) - for several thousand dollars.

One of my friends told me that making large purchases and always paying the balance in whole is bad - I am supposed to only make the minimum payment every month to have a good credit rating. This makes no sense to me. I would think that paying the balance as quickly as possible would be an indication of responsible financial behaviour and therefore I would be a lower credit risk with improving credit ratings.

Are there any credit card or bank employees out there who can explain this? Thanks.

And yes, I have made payments on time each month. (ran out of characters LOL)

I have only two cards. Honest!

snvffy: this is a finance question. Did you expect it to be exciting? LOL

Answer 1

Your friend is correct. You shouldn't pay of the entire balance every month. By doing so, you are not building any credit. Yes, you have the cards, yes you are paying them off, but there isn't enough time for the purchase and payments to show up on your credit. In order for a credit rating to go up, it can take up to 6 months of on-time payments (depending on the creditor) You pay the full balance off, there is no ongoing payments to report.

It is better to use the credit card for smaller purchases ($300 or less) and make payments for at least 6 months. Do this several times and your credit will start to build up. You don't have to pay just the minimum, but don't pay it off.

Also, get a copy of your credit report and check everything! Even with you paying off the balance each month, your score should not be going down. It probably wouldn't rise, but it shouldn't be dropping either.
You can get a free copy once a year here... https://www.annualcreditreport.com/cra/index.jsp

Hope that helps

Answer 2

You need to take a close look at your credit report and be sure there is nothing in it that could effect your score. Maybe there is an overdue or collection account that was posted incorrectly to your history.

If you want to spend a little money, you can go to http://www.myfico.com and order a score from them. They also include a very detailed explanation of why your score is low, and what you can do to improve it.

I know the advice of only paying minimum payments is wrong. That will completely trash your debt/credit ratio.

I have seen recommendations of keeping a small balance on your account ($5-$10). Don't do this if you keep a high daily average, or if you have annual fees if you keep a balance.

Also consider using your card to pay bills you normally pay cash for (utilities, telephone, etc....). If you are diciplined on paying your bills as you claim, this is a great way to not only improve your credit, but you can get reward points on your card.

Personally, I'm betting something is up with your credit report, so be sure to look into that.

Answer 3

what your friend said is partially correct. you never want to completely pay balances to 0 because in order to maintain a credit score you have to active accounts, however always keep your balances as low as possible the closer you get to your maximum spending limit the lower your score. also some vendors report to the reporting agencies at different times.not all report every month. your score could be very different from one day to the next depending on how the information is being updated.say for instance that you bought a airline ticket and paid the balance off does not mean that the reporting agencies has that information they might be showing a balance until there are notified otherwise. some credit card companies report once every 3 month so you can see the conflict this can cause.check your credit and make sure there no other erronious items that might alter your score and make sure all balances are correct with the reporting agencies.

Answer 4

I wonder what your total credit limit is. Having too much credit available can actually hurt your score. The theory is, if you get in trouble, you might max out everything and dig a hole you can never get out of.
To those who state your creditors don't have time to show a balance: the report includes the 'high balance' on each account. Most only update the account if there is activity that month. Therefore the fact the account status was reported is an indication of use.

Answer 5

The only thing I can see from your description that could be affecting your rating is the large purchases. One of the things considered is how close to the credit limit you get. Even if you pay it off, it's a ding to the rating if you get too close to maxing. That is viewed as a liklihood that some day you might max and NOT pay it back.

What you friend told you isn't right, sort of bordering on stupid. Credit card companies report payment history, high balance, etc., so paying off every month is a GOOD thing. Glad you saw through it.

Answer 6

Sir,
What you are doing is the best time to do.. what the credit card company care for is on-time payments .. and if it is more than the minimum ,, then it is even better.
If you pay the minimum only, you will never pay off your balance, because the minimum payment includes only the interest + small part of the real debt amount.
The second thing.. you need to investigate that.. it is does not sound right.. somebody is playing with your credit score.
I came to USA only 4 years ago with no credit history.. and I made more than minimum payments and exactly did what you are doing .. and my credit score is very good.. some fraud is going on.. somebody may be is using your SSN to get loans and opening credit cards..
go to www.mycreditreport.com, pay 19.99/month and they will pull for you your credit score through the 3 major credit bureaus.. you need to know what is happening,.

Answer 7

Just a guess but I think this is the problem. ( personal experience) When you pay your credit cards in full each month, the credit companies never get the chance to report a balance. By never having a balance reported, it seems you have the available credit but never use it. Credit scoring is a formula that is based partially on how much you charge, and the ability to pay it down. I used a Fico Simulator some time ago, nothing raised my fico except increasing the balance on one of my credit accounts to over $1500. I had for many years paid them off each month. The increase in balance raised my score over 20pts on this simulator.

My guess for your falling credit score is no positive credit patterns, but new inquiries and new accounts being opened.

Answer 8

The only thing I can think of is with you paying every thing off as soon as possible you arent letting the credit agencies see how you actually handle credit.

It is best to get a major credit card and spend some money on it and then make regular payments this way it shows you are repsonsible with your credit.

Answer 9

Make sure you pay the FULL balance and not the minimum. Also, it depends on how much you spend. It's an unwritten rule that you should never spend more than 1/3 of your limit. Like if the limit is 300, don't go over like 100 each month, because you look needy.

Answer 10

I totally agree with Studly, there probably is something going on with your reports.

It could be anything. From a collection being added, whether it is yours or someone elses, to incorrect payment info or even possibly a split file.

You can check with Myfico to see your scores, but I would also suggest ordering your reports from each credit bureau. If you want your free reports, go to www.annualcreditreport.com. That is the only free report site you should order from. It is the governments site, all other free report sites are scam sites.

I wouldn't suggest ordering a tri-merge report from other companys. While tri-merges can be handy, if you already have your true reports, they can be misleading because they are not always accurate.