No debt. Dropping credit score. What can we do to keep our credit score up?
December 18, 2008 9:55 AM   Subscribe

No debt. Dropping credit score. What can we do to keep our credit score up?

My wife has no debt. She has paid off her student loan and carries zero credit card debt. She probably charges about $1500 a month to her card for every day things and then pays it off in full. She has three credit cards but only uses one for the most part.

Over the past year her credit score has dropped from the low 800s to the mid-to-low 700s. What can she do to keep it from dropping further? Is it a good idea to carry a small balance on her card from month to month? How much is enough? $10? And for how long? Any other strategies for keeping the credit score from dropping further? We're looking into applying for mortgages soon, so this is why it is of particular concern. And if you ask me, it seems pretty crazy that someone so responsible with their debt can have a dropping credit score.
posted by nomad73 to Work & Money (25 answers total) 9 users marked this as a favorite
 
And if you ask me, it seems pretty crazy that someone so responsible with their debt can have a dropping credit score.

I don't have an answer to your larger question, but, basically, if you pay your debts before interest accrues, credit card companies label you a "deadbeat". You're not profitable, if you're not paying vig.
posted by Blazecock Pileon at 10:12 AM on December 18, 2008


I would suggest talking to her bank, or banker if she has a relationship. If not, could you consider opening an account at a credit union? I think they're friendlier in general, and more interested in serving their customers. I think they also offer better overall terms for mortgages, so she could approach them with her interest in establishing a credit building relationship for a possible future mortgage through them.

If she were to talk to a loan officer, they may be able to make some pertinent suggestions which might even include taking out short term loans and paying them back.
posted by davidaugust111 at 10:13 AM on December 18, 2008


I always thought that paying your bills on time was a good thing? It shows that when you borrow money you always pay it back. Do you have any other monthly bills? As long as you pay them off your score should stay the same if not go up. I would see if you have any out standing credit bills that you forgot to pay off or an open account somewhere.
posted by Mastercheddaar at 10:13 AM on December 18, 2008


It could have dropped because she paid off her student loan. If it no longer counts as an active account, the average age of her accounts could have gone down, which hurts your credit score. One thing to remember is that the amount on the statement of your credit cards is what is reported to the bureau, not what has interest assessed to it. So if she has allowed her statement amounts to go up, that could hurt her credit score by increasing the debt to available credit. To make sure it appears to the credit bureaus that you don't have much balance, you need to make sure you have almost nothing on the card when the statement date is (she might already be doing that, but "paying off in full" can mean either way).

Depending on how you get your credit score, they say things that are "hurting" your score. But who really knows because it is a big secret how all of the different scores are kept. (This is based on what I've read and heard from either my own reports or talking to bankers.)
posted by skynxnex at 10:17 AM on December 18, 2008


I would not worry about it until you talk to a loan officer or mortgage broker. They will have the best advice for you as they are also interested in you getting the best score that you can so that you can cut the best deal that you can and buy that house already.

Don't try to game it based on random advice -- just go talk to a broker.
posted by amanda at 10:26 AM on December 18, 2008


It could be that even though she pays her $1500 in full every month, she's carrying a large balance on her card. There's something I read about the ratios of available credit to used credit that affects a person's credit rating. So even if you pay everything off in full, they still note that you're using a huge portion of your available credit.

I'll see if I can find that article online.
posted by anniecat at 10:27 AM on December 18, 2008 [1 favorite]


If you have no debt, and plan on keeping no debt, who cares about a credit score? I am trying to get rid of all my debt, and once I do, I will never buy on credit again - I'd rather go without. At that point, my credit score doesn't matter.
posted by Ikazuchi at 10:28 AM on December 18, 2008


If you have no debt, and plan on keeping no debt, who cares about a credit score?

A better credit score gets you better terms on a mortgage, which can mean significant savings over the life of the loan.
posted by Blazecock Pileon at 10:35 AM on December 18, 2008


Is it a good idea to carry a small balance on her card from month to month? How much is enough? $10? And for how long?

No, that won't help at all. What you want are on-time payments, as long as you aren't late there won't be a difference between carrying a balance and not carrying one.

From wikipedia, here are the components of the FICO score:

* 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
* 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
* 15% — length of credit history
* 10% — types of credit used (installment, revolving, consumer finance)
* 10% — recent search for credit and/or amount of credit obtained recently

I'm actually not sure how the "types of credit used" one works, but in general you want on time payments, low debt (for you, just the credit card balance before you pay it off) versus high limits, a long history, and no recent hard credit checks (which will happen when you apply for things like credit cards or loans). When you actually apply for something important like a car loan or mortgage, pay your card off and don't use it until your application is processed, so that no debt will show up on your report.

I don't have an answer to your larger question, but, basically, if you pay your debts before interest accrues, credit card companies label you a "deadbeat".

That doesn't have any affect on your credit score though. A credit score is a measurement of risk, not a measurement of how profitable you will be. One of the big errors of the subprime crisis was assuming that the profitability of low credit score borrowers would outweigh the risk.

Depending on how you get your credit score, they say things that are "hurting" your score.

Second this, I've used myfico in the past and they do this as part of their standard package, where are you getting the credit score from?
posted by burnmp3s at 10:35 AM on December 18, 2008 [2 favorites]


How much is enough? $10? And for how long?

You're unlikely to find an absolutely exact answer, because:

1. it's proprietary and not public info, and
2. it's a moving target

I wouldn't worry about it too much at this point--in fact, overreacting could worsen your situation. You're probably fine from the sound of it, especially keeping in mind that you're ultimately compared to everybody else in the market, and "everybody else" may have a more rapidly dropping credit score than you have.

The best answer will come from a good mortgage broker, someone who will pull your credit report, sit down with you and go over any trouble points or spots for improvement. They tend to know what Bank X is looking for this year from people in your market, which is more useful than general 'how do I improve my FICO' help.

(Or, basically, what amanda said.)
posted by gimonca at 10:48 AM on December 18, 2008


Depending on your credit card, you might be able to ask for an increase in the limit.

If you get this increase your score may go up (because then you are regularly using a smaller percentage of your available credit).
posted by nat at 11:01 AM on December 18, 2008


The reason for the drop may be the limit on the card, as nat alluded to. Get the limit raised so your proportion of balance to credit limit is smaller. Even though she is paying it off every month, the credit card company is still reporting a balance to the credit agencies once a month. For this reason, I wouldn't try to carry any balance from month to month. It will only cost you extra interest and you will receive no benefit to credit score.

But the big picture is this: The difference between mid 700's and 800 credit scores when it comes to mortgage pricing is trivial at best. There is zero difference if you're considering FHA. If conventional, then you're probably making a sizable down payment and it won't matter with them either, as credit score hits to rate usually don't come into play unless you're over 80% loan to value.
posted by curlyelk at 11:17 AM on December 18, 2008


thank you all. very helpful advice. i wasn't expecting the "talk to your broker" answer to come up as much - i sort of thought that there wasn't much room to "negotiate" these things, but what do i know - i have no experience since i've never had a mortgage. in any event, it's good to know that that's an option.

I believe she received her score from Experian, if that makes a difference.

Thanks again.
posted by nomad73 at 11:35 AM on December 18, 2008


We're looking into applying for mortgages soon, so this is why it is of particular concern.

I've had a credit card for years, and always paid on time. I don't have any consumer debt - never have had. And I didn't have the least bit of a problem getting mortgages either of the two times I bought a home. You're worrying pointlessly.
posted by orange swan at 11:41 AM on December 18, 2008


basically, if you pay your debts before interest accrues, credit card companies label you a "deadbeat".

Sure, but your credit score does not in any way reflect the interest you pay. There is no way for a lender to tell whether you are paying interest on any of your debts just from your score or even your full report.

Even if you pay off an account each month, depending on when they report and when you pay, it may still appear as though you are carrying a balance. (That is, you run up $1500 in charges, they report the $1500 balance, you pay it off and run up another $1500, they report the $1500 balance, you pay it off, lather, rinse, repeat.)

Asking for a raise in the limit of existing accounts is absolutely the way to go.
posted by kindall at 11:57 AM on December 18, 2008


First, get current copies of all her credit reports and make sure that nothing bad was posted to her report in error. Also check to see if her credit limits have been lowered (a LOT of card companies have done this lately without warning) which would make any balance on her bill look worse in terms of utilization percentage (balance/limit).

Credit scores don't distinguish between balances that are carried from month-to-month vs. paid off in full every month. All credit scores care about is how much is on your card relative to your credit limit at the end of the billing period, since that's what the credit card company reports.

Utilization between 0% and 10% of your credit limit is ideal. So if you have a card with a $5000 credit limit, you want to have more than $0 but less than $500 on your card at the end of your billing period. You want to do this on EACH card.

Here is the easiest way to do this:
1. Set up at least one small recurring monthly bill to be auto-paid from each charge. Like, your cell phone to card A, your cable bill to card B, and your car insurance to card C.
2. Set up your cards to all autopay in full every month.
3. Instead of charging other things to your credit card, charge them to your debit card, so the only thing posting to your credit cards are those small monthly charges.

If you do that your cards will report low utilization and on-time payments and your credit score should rise. Yes, you give up taking advantage of the float and any reward points for that $1500 she was charging to her card every month, but it saves you from remembering to have to log in and pay down your balance before the end of your billing period, and you only have to do this until after you purchase your house.

Recommended reading:
Your Credit Score
Mortgages For Dummies
Personal Finance For Dummies


Responses to some of the other advice and information/misinformation given here:

"if you pay your debts before interest accrues, credit card companies label you a "deadbeat". "

False. That has nothing to do with your credit score.

"It could have dropped because she paid off her student loan."

True, this is very possible. Credit scorers like to see a mix of types of debt, both revolving (credit cards) and installment (student loans, car loans, etc.).

"Don't try to game it based on random advice -- just go talk to a broker."

Actually, a lot of brokers don't know crap about how credit scores work, and will give you terrible advice, like suggesting you close open accounts. (DON'T CLOSE ANY ACCOUNTS!)

"If you have no debt, and plan on keeping no debt, who cares about a credit score?"

OP wants to get a mortgage. Mortgage interest rates are HUGELY influenced by credit scores. The difference can be tens or hundreds of thousands of dollars over one's lifetime.

Insurance rates are also affected by credit scores. So even if you never plan to carry debt ever again, if you plan to purchase car insurance, you want to have a good credit score.

"Get the limit raised so your proportion of balance to credit limit is smaller."

Normally I would suggest this too but the credit market is so tight right now that very few people are getting approved for credit limit increases, and many are actually having their credit limits abruptly slashed without warning despite always paying on time and having good credit. A limit increase request might trigger a "hard" credit pull, which will knock points off your score, and since your chances of actually being granted the limit increase are so small right now I don't think it's worth the risk. Since OP's fiance doesn't carry a balance she can adjust her utilization percentage in less risky ways (use her debit card instead of credit card for most expenses, or pay off most of the balance before the end of the billing period).
posted by Jacqueline at 12:20 PM on December 18, 2008 [4 favorites]


People way over think the FICO thing. If you are above 720 or so you will get the best mortgage rates available. No need to worry about it. Consider a credit union for a good mortgage value.
posted by JackFlash at 1:55 PM on December 18, 2008


Actually, a lot of brokers don't know crap about how credit scores work, and will give you terrible advice, like suggesting you close open accounts. (DON'T CLOSE ANY ACCOUNTS!)

Having actually worked in credit before at more than one company, and having sat on the other side of the table as a customer working with a good mortgage broker (emphasis on good), I'll restate that a good mortgage broker can give you excellent advice.
posted by gimonca at 3:27 PM on December 18, 2008


"Actually, a lot of brokers don't know crap about how credit scores work, and will give you terrible advice, like suggesting you close open accounts. (DON'T CLOSE ANY ACCOUNTS!)"

Okay, conversely, Jacqueline, a lot of brokers do know what they're talking about. My broker suggested various things (did not suggest closing any accounts) and by following their advice (which essentially boiled down to fixing some minor dings and getting those reported) our credit score was lifted above 720 and opened up some more options for us and slightly better rates.

You have to talk to a broker eventually. Get a recommendation. Feel free to talk to more than one -- in fact, this is your first house so you'd learn a lot by talking to a couple. Things are tough right now and I can't guess the odds of being able to secure a loan. If you have good credit and a down payment then perhaps your odds are very good. But, you need to talk to a lender at some point so go for it and get their advice.

I'm going to go out on a limb and say that the poster has good credit and that with a down payment they will be able to get good rates and secure a loan. So, go ahead and go talk to a lender.
posted by amanda at 3:31 PM on December 18, 2008


Chiming in to support the credit union thing.

Credit unions have no incentive to bleed their customers dry for the benefit of their shareholders, because every credit union customer is a shareholder.
posted by flabdablet at 4:04 PM on December 18, 2008


A contrary view on credit unions: ours sold our mortgage. I think (though I don't know) that this is fairly common, since many credit unions don't have the capital to retain their mortgages. The sale included a no resale clause, but that didn't prevent the buyer from being snapped up by a larger company. We've had no problems, but I regret not having gone to the local mutual savings bank, which keeps its own mortgages (and is in great financial shape right now).

My advice would be to find a bank (or credit union, if they exist) that will keep and service the mortgage. That way you know who owns the mortgage (not trivial, given the securitization craze) and, therefore, whom to approach if you ever have problems.
posted by brianogilvie at 5:05 PM on December 18, 2008


Seconding- don't worry about it. It's not like a performance review or a test score where perfection is possible. As long as you are on the low risk end of the scale, you are fine. If a lender says your score is too low, ask them to reinvestigate or find another lender. I wouldn't be surprised to find that a mortgage broker might try to sell someone a higher rate simply because they believe they can convince them that 750 isn't a "perfect" score and that the best rate isn't available. When in reality, they are just selling you a more profitable loan.

(Credit unions have different ownership structures, but still have the same fiduciary obligation to their shareholders and operate in the same marketplace as commercial banks. So they won't necessarily be appreciably different. My experience has been that they are usually less well-run than good banks on average, and have different regulatory oversight. Who the board of directors is and what their goals and direction are is very important to find out before entrusting them with your money.)
posted by gjc at 5:26 PM on December 18, 2008 [1 favorite]


A contrary view on credit unions: ours sold our mortgage. I think (though I don't know) that this is fairly common, since many credit unions don't have the capital to retain their mortgages. The sale included a no resale clause, but that didn't prevent the buyer from being snapped up by a larger company. We've had no problems, but I regret not having gone to the local mutual savings bank, which keeps its own mortgages (and is in great financial shape right now)

I don't think this is very common. It sounds like what happened was that your CU was "swallowed whole", not that the CU you started your loan with sold it off. There's a difference--and I think the former isn't nearly as common as the sale of loans in the bank-mortgage market.

We have mortgages with two different credit unions and both keep their mortgages. We have previously had mortgages obtained through brokers which were subsequently sold. I remember in each transaction seeing a paper that stated what percentage of loans from the lender were sold. For the CUs it was zero, for the broker it was 100%.
posted by Sublimity at 6:21 PM on December 18, 2008


@Sublimity: no, our credit union still exists and was not snapped up by anyone else. They were quite open about their intention to sell the mortgage, which is why they had the no resale clause. But they're a small credit union serving the employees of five colleges and universities in rural western Massachusetts. They simply don't have the capital to keep mortgages. Our mutual savings bank does. Maybe this is a peculiarity of rural America.
posted by brianogilvie at 7:46 PM on December 18, 2008


GJC brings up a good point which is that you should go in informed and know as much about the process ahead of time as possible -- there are books and there are a lot of threads here about buying a house. Go in knowing how much money you think you want and at what rate. Your broker or lender will tell you what they're offering. You can press them for a better deal. It *is* a negotiation and you are able to walk away from a deal that you don't like. I'm guessing that a good borrower right now may be pretty valuable to a lender so don't feel like you don't have leverage.

Anyway, good luck!
posted by amanda at 11:54 AM on December 19, 2008


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