UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Author: baldguy13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308782  
Subject: How do credit cards affect FICO score? Date: 7/16/2003 10:48 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
My coworker and I have been having a debate about credit card balances and FICO scores.

I was told many years ago that paying off credit cards every month is not necessarily good if you are trying to boost your credit rating because of two reasons:

1. Credit card companies don't make any money off these types of customers.
2. If you have too much credit available to you, FICO can see this as a negative. For instance, if you make $100,000 per year and have $20,000 in available credit via credit cards, that could make you a liability.

Now, I'm not talking about already having good credit. I'm talking about building or rebuilding credit.

I don't think either one of us is completely right, but I told him I would post the question to fellow fools, as the sum is better than the parts.

Thanks for the help.

-Baldguy13
Print the post Back To Top
Author: gapper80 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164776 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 11:02 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
You'd have better luck trying to figure out who killed J.R.

Basically, too many cards is a bad thing, too few is a bad thing, what the numerical value of "too many" is, is unknown.

One note though, if you're making $100K a year and have $20K in available credit, that shouldn't hurt you by any stretch of the imagination. My roomate makes less than $25K a year but has $60K in credit. Dumb decision, I know.

-gapper

Print the post Back To Top
Author: vsqueen Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164780 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 11:08 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 6
I was told many years ago that paying off credit cards every month is not necessarily good if you are trying to boost your credit rating

Carrying a balance on your credit cards from month to month will not increase a FICO score. It will only make you pay interest.

Wendy



Print the post Back To Top
Author: llamalluv Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164784 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 11:17 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
1. Credit card companies don't make any money off these types of customers.

sure they do--they just don't get it DIRECTLY from the customer. Merchants pay fees on every transaction that is run through MC/Visa/Discover/AMEX

Print the post Back To Top
Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164814 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 2:22 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Frissy,

Baldguy13 wrote, 1. Credit card companies don't make any money off these types of customers.

To which you replied, sure they do--they just don't get it DIRECTLY from the customer. Merchants pay fees on every transaction that is run through MC/Visa/Discover/AMEX

Actually, I think credit card companies make more from these types of customers than people give credence. The average merchant fee is probably somewhere around 4% of the transaction. What's more, I've heard that merchants typically wait up to 30 days for payment. If the average pay-it-off-monthly customer buys $1,000 worth of merchandise each month, the credit card company is making $40/month and they're floating most of that on the backs of the merchants, meaning they're not even risking $1,000 of their own money to do it.

For a moment let's assume they are risking their own money. In that case, they're earning 4% with an average duration of 1 month. Earnings of $480 a year in income by loaning no more than $1,000. That's a 48% APR folks. That's a h*ll of a good return on their investment. Even if it costs them a good portion of that 4% to process transactions, a well-managed company should be able to make a killing off of that big a margin -- assuming they can get enough customers to use their cards this way that such a business model doesn't get swamped by fixed overhead.

Shoot, wasn't this the AMEX model for many years? Of course they've typically gouged out larger merchant fees than the competition.

- Joel

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164818 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 2:32 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Baldguy13,

You wrote, Now, I'm not talking about already having good credit. I'm talking about building or rebuilding credit.

Credit scores are all about how much bad stuff you have on your report. Few things actually count as "positives" to increase your score. About the only thing I can think of that's considered a positive is the length of your credit history in its various forms -- which means you have to actually have open credit accounts to accumulate a history.

That means if someone is interested in improving a ruined credit history, that there are few things that can help them except for time and good credit behavior. Failing that, getting "negative" items removed from your report will also usually increase your score; but that's because your effectively undoing the effects of a mistake -- yours or theirs.

- Joel

Print the post Back To Top
Author: baldguy13 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164833 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 3:44 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Everyone,

Thanks for your replies. I don't know if it muddied the waters or cleared them, but it's at least more info.

Joel,
I was under the impression that Visa and MC pay immediately, while AMEX makes people wait. And, the transaction percentage depends on the volume of the vendor. Walmart might pay .1% while Betty's Buttons might pay 5%, but it is available immediately to them. That's why they pay the %. And, if I remember correctly, the percentage is negotiable.

Baldguy13

Print the post Back To Top
Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164834 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 3:50 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
<< The average merchant fee is probably somewhere around 4% of the transaction. What's more, I've heard that merchants typically wait up to 30 days for payment. >>

The small nonprofit organization that I direct pays about 2%, using a third-party processor. We can settle the account and transfer money to our bank account whenever we want -- it appears in our bank account about two days later, which is typical for ACH transfers -- just by calling the processor's automated phone system.

Print the post Back To Top
Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164977 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 10:23 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
baldguy13,

You wrote, Joel,
I was under the impression that Visa and MC pay immediately, while AMEX makes people wait. And, the transaction percentage depends on the volume of the vendor. Walmart might pay .1% while Betty's Buttons might pay 5%, but it is available immediately to them. That's why they pay the %. And, if I remember correctly, the percentage is negotiable.


You may be correct. The last time I dealt directly with credit card payments was in the early '80s. Things may have changed a little and my memory may not be that good -- though I seriously doubt even Walmart pays only 0.1%. The rate is supposed to be based on an estimate of the default/fraud/risk rate (actuarial) for your particular type of business. I imagine Walmart has many risky customers, though they abate this somewhat by having better than average security/authentification policies.

BTW: I heard somewhere a few years ago that the average business paid a bit over 3.5% on a Visa/MC transaction. AMEX was nearly twice that. I'm pretty sure no one pays less than 1%.

- Joel

Print the post Back To Top
Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164978 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/16/2003 10:31 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
TchP,

You wrote, The small nonprofit organization that I direct pays about 2%, using a third-party processor. We can settle the account and transfer money to our bank account whenever we want -- it appears in our bank account about two days later, which is typical for ACH transfers -- just by calling the processor's automated phone system.

If I had to guess, Visa/MC doesn't consider your nonprofit to be a risky business. Back in the '80s I worked for a mail-order software/hardware company. We had 30 day holds on all deposits and Visa/MC changed our rate frequently. I think we probably averaged over 5% plus a per-transaction surcharge.

Of course Visa/MC considered us pretty risky because we never actually had possession of the card. In fact, I remember making changes to our order entry system so we could authenticate cards off-line before the order was shipped. Visa/MC also use a check-digit system that will often catch fraudulent numbers that someone just invents out of thin air by just applying the string of digits to a simple formula. Of course today, authorizations are instant and immediate and sometimes include additional security precautions that make their check-digit scheme pretty meaningless.

- Joel

Print the post Back To Top
Author: mrbol Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 165007 of 308782
Subject: Re: How do credit cards affect FICO score? Date: 7/17/2003 1:40 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0

Credit scores are all about how much bad stuff you have on your report. Few things actually count as "positives" to increase your score.
<I/>

http://money.cnn.com/2002/02/15/debt/q_fivethings_creditscore/

http://www.fool.com/Specials/2001/sp010315.htm

http://www.creditinfoweb.com/credit-score/FICO-score.htm


Print the post Back To Top
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev Thread | Next Thread
Advertisement