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I have recently been trying to improve my credit score in hopes of getting a good/better mortgage here in a few months when I become a first time home buyer. My father has been helping me by doing some research on his own too. He said he spoke with his banker (direct contact with a "higher up" in Huntington) that did all the banking for a business he owned years ago.

The banker told him that credit bureaus do not see credit cards as "real credit" until the user misses one (and hopefully only one) payment. Is this true?

KDecker
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    In your second to last sentence, if you substitute "credit bureaus" with "some misinformed bankers", then the statement would be true. – TTT Jul 14 '16 at 16:59
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    I think your father is confused. It can slightly boost your credit to hold a balance on a card (but still make at least the minimum payment every month) vs. paying the full balance every month. Still, probably not worth the interest you'll pay. Missing a payment will definitely hurt your credit. – MooseBoys Jul 15 '16 at 04:47
  • No, only your statement balance is used to generate credit scores. Whether you pay in full only matters for the bank's interest calculation. – Navin Jul 16 '16 at 02:30
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    @MooseBoys - can you offer any backup to that claim "slightly boost your credit to hold a balance" ? – JTP - Apologise to Monica Jul 16 '16 at 20:50

7 Answers7

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K, welcome to Money.SE.

You knew enough to add good tags to the question. Now, you should search on the dozens of questions with those tags to understand (in less than an hour) far more than that banker knows about credit and credit scores.

My advice is first, never miss a payment. Ever. The advice your father passed on to you is nonsense, plain and simple. I'm just a few chapters shy of being able to write a book about the incorrect advice I'd heard bank people give their customers. The second bit of advice is that you don't need to pay interest to have credit cards show good payment history. i.e. if you choose to use credit cards, use them for the convenience, cash/rebates, tracking, and guarantees they can offer. Pay in full each bill.

Last - use a free service, first, AnnualCreditReport.com to get a copy of your credit report, and then a service like Credit Karma for a simulated FICO score and advice on how to improve it. As member @Agop has commented, Discover (not just for cardholders) offers a look at your actual score, as do a number of other credit cards for members.

(By the way, I wouldn't be inclined to discuss this with dad. Most people take offense that you'd believe strangers more than them. Most of the answers here are well documented with links to IRS, etc, and if not, quickly peer-reviewed. When I make a mistake, a top-rated member will correct me within a day, if not just minutes)

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JTP - Apologise to Monica
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    Thanks for the welcome! I am a long time user of StackOverflow so I understand the site mechanics and have been reading into the tags albeit pretty slowly, I have been meaning to step it up some. // One of the reasons I asked this question is because this "advice" does seem extremely nonsensical, I'd like to thank you and the other answers for backing me up and providing some good information. – KDecker Jul 14 '16 at 14:20
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    Perhaps the banker's advice was mis-interpreted. I've known a few brand-new credit card holders over the years - and most have the default assumption that after spending on the credit card, they should go home and pay it off online (the same day even!). From my understanding, things are not reported to the bureaus until the end of the billing cycle. So, my general advice has always been, wait until the bill comes, then pay it off in full (or as much of it as is reasonable, but always more than the minimum payment). – SnakeDoc Jul 14 '16 at 15:13
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    Very kind of you, and of course, that's possible. Thus the advice to K is to make sure Dad heard correctly? I'm not sure any good will come of that. – JTP - Apologise to Monica Jul 14 '16 at 15:32
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    @JoeTaxpayer No no, your advice is good. I just wanted to offer a possible explanation of what the banker meant. Paying off the card immediately and not having it reported to the bureaus would not build one's credit rating. – SnakeDoc Jul 14 '16 at 15:44
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    I only responded to the "misinterpreted" remark, the rest of your comment was 100% right on. – JTP - Apologise to Monica Jul 14 '16 at 15:51
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    @SnakeDoc After seeing the answers and comments I have to assume this is what the banker meant. To make sure to "carry" a balance until it is reported. Most likely the issue came from my fathers understanding of the statement and wrongly assumed it meant to not pay a bill (not sure the correct terminology; "default" on a payment?). I did check my CreditKarma report last month and it did report a balance, but it did NOT report a late payment, just that I have a credit card and I am using it. – KDecker Jul 14 '16 at 16:20
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    @JoeTaxpayer Just a small aside since you mentioned Credit Karma, Discover opened up their FICO score service to non-customers for free: https://www.creditscorecard.com/registration. From what I can tell, this is a real FICO score straight from Experian, not simulated. – Agop Jul 14 '16 at 17:03
  • @Agop - nice find, I added that link to my answer. – JTP - Apologise to Monica Jul 14 '16 at 17:18
  • I would be leery of the term "peer-reveiewed" outside of the process of submitting a scholarly article to a journal. In that context it is used to show the article is checked over by more than just a casual editor. On this site your peers are just yahoos on the internet who are not necessarily authoritative. – Dean MacGregor Jul 14 '16 at 17:21
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    Yes, this is Money.SE, not academics, nor english usage, so I think I'll stick with that phrase instead of expanding it to "reviewed by fellow members." By the way, the top 20 or so, at least, are far from "yahoos". If you don't value the advice here, you have many choices to get advice elsewhere. No need to insult anyone here. – JTP - Apologise to Monica Jul 14 '16 at 17:25
  • @SnakeDoc anecdotal, but over the two months out of the year that my not-yet-paid-in-full CC balance is roughly 50-100% higher than normal (Christmas shopping and the combination of paying my years car insurance premium + repairs from having the car inspected) trigger an ~10 point downward bobble on my score for at least the last half dozen years (my score's grew from ~750 to 800 over the period). An experiment I've considered trying but haven't is to see if paying my balance off repeatedly throughout the month would trigger a similar sized upward bump. – Dan Is Fiddling By Firelight Jul 14 '16 at 18:09
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    @DanNeely - see this other answer to better understand hitting zero usage at billing time. – JTP - Apologise to Monica Jul 14 '16 at 18:16
  • I think it is true that if you never maintain a balance many cards won't increase your credit line. It's possible that this is what the banker was saying and was not understood? – JimmyJames Jul 14 '16 at 18:46
  • I think we can only guess what he might have meant. The story is 3rd hand, Dad telling his offspring what he thinks the banker said. And then us trying to guess what the words actually were. – JTP - Apologise to Monica Jul 14 '16 at 19:00
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    @JimmyJames As an anecdotal data point, I've never carried a balance on any card in my life and I've never had trouble getting my limit increased if desired. – reirab Jul 14 '16 at 21:08
  • You had to request that right? They increase automatically if you carry a balance. I'm not advocating this, just offering it as a possible alternative explanation of what was really meant. As stated in the question, this is some really goofy advice. It reminds me of a guy who once told me that if you don't speed and follow all the other traffic laws, the cops will see it as suspicious and pull you over. – JimmyJames Jul 15 '16 at 12:57
  • @JimmyJames Carrying a balance has no bearing on whether or not you will be offered increases since the whole point of it is marketing-- by pointing out "hey, we're giving you access to MORE money!" they are trying to entice you into spending it (reminding you of its existence if necessary). People tell themselves many lies to make themselves feel better about carrying a balance; there is no legitimate reason to do so. – Ivan Jul 15 '16 at 19:50
  • Avoid carrying a balance is excellent advice. Keep your credit utilization below 10% for a good credit score. – ChuckCottrill Jul 16 '16 at 02:29
  • @JimmyJames "You had to request that right?" True, but that's not a big deal on with the (large) UK credit company that runs my card. The "request an increase" button is right there on the web page where I make my monthly payments, and on the (few) occasions I've used it, it was a matter of answering a few straightforward questions on the web page and the increase being approved within a few seconds. – alephzero Jul 16 '16 at 02:37
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First, a note of my personal experience: up until a year ago, my credit lines were composed exclusively of credit cards with perfect payment histories, and my credit score is fine.

If you mean that credit cards have no impact on a person's credit score until they miss a payment, that is certainly not correct. FICO's website identifies "payment history" as 35% of your FICO score:

The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO® Score.

...

Credit payment history on many types of accounts

Account types considered for payment history include:

  • Credit cards (Visa, MasterCard, American Express, Discover, etc.)

...

Details on late or missed payments ("delinquencies") and public record and collection items

FICO® Scores consider:

  • How late they were
  • How much was owed
  • How recently they occurred
  • How many there are

How many accounts show no late payment

A good track record on most of your credit accounts will increase your FICO® Scores.

Clearly, from the last item alone, we see that credit lines (a category which includes credit cards) with no late payments is a factor in computing your FICO score, and certainly other credit bureaus behave similarly.

Possibly the banker was trying to explain some other point, like "If you're careful not to spend more on your card than you have in the bank, you can functionally treat your credit card as a debit line," but did so in a confusing way.

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apsillers
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  • +1 You can confirm that this is true by looking at your credit report. You'll find all of your lines of credit (at least those that have been open for a few months) on there, even if you've never missed a payment on any of them. – reirab Jul 14 '16 at 21:12
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Not sure what you mean by "missing".

Credit card debt can be paid back in full when you get the bill, or you can "take a loan" and "pay in installments". If you do the latter, and pay back at least the minimum required amount on time, you are not "missing" your payment. Technically, you are taking a small, but expensive loan, and if you pay that loan back according to the terms and conditions that apply to your credit card, this is reported to the credit bureau and improves your credit.

If you are really "missing your payment", paying late (more than a few days), less than minimum or nothing at all, this won't help to improve your credit. A "first-time offender" won't always be reported to the credit bureau, but if he is, it won't be a positive report.

Alexander
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I can't think of any conceivable circumstance in which the banker's advice would be true.

(edit: Actually, yes I can, but things haven't worked that way since 1899 so his information is a little stale. Credit bureaus got their start by only reporting information about bad debtors.)

The bureaus only store on your file what gets reported to them by the institution who extended you the credit. This reporting tends to happen at 30, 60 or 90-day intervals, depending on the contract the bureau has with that institution.

All credit accounts are "real" from the day you open them. I suspect the banker might be under the misguided impression the account doesn't show up on your report (become "real") until you miss a payment, which forces the institution to report it, but this is incorrect-- the institution won't report it until the 30-day mark at the earliest, whether or not you miss a payment or pay it in full.

The cynic in me suspects this banker might give customers such advice to sabotage their credit so he can sell them higher-interest loans. UDAAP laws were created for a reason.

Ivan
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Of course credit cards are viewed as credit. If you're using money on a credit card, you are not directly paying for your transactions on goods/services immediately: this is the act of borrowing credit to pay for them.

Debit cards, on the other hand, work where the funds are taken from an account immediately (or subject to a small delay - but usually no more than 24 hours - depending on various factors).

You should never miss credit card payments, as that will affect your credit rating. If you have unpaid money on your card this is debt - plain and simple.

But to answer your question succinctly - yes, credit cards are a form of credit, as the name suggests. When you apply for a mortgage any unpaid credit (debt) is considered and would adversely affect you if you have such debts. The level to which it affects you depends on the amount of debt.

This is how it works in the UK, but to my knowledge it is the same in the US and most other countries. Please clarify if you think this is incorrect.

  • You make it sound like only the unpaid ammount on the card (outstanding balance) is considered debt. To me it makes more sense (and that's what I've been told by bankers - but who's going to trust them?) to take the full line of credit / the limit of the card into account, e.g. when applying for a mortgage. After all that is the amount of debt that one could easily accumulate. – Ghanima Jul 15 '16 at 23:07
  • @Ghanima - any debt on the card is exactly that - debt. Why would having a higher amount of debt help when applying for a mortgage? What I've been told is that if you had a history of paying off debt quickly and reliably (i.e. every time you received the card bill, paying it off in full) it can improve your credit rating (again, this is in the UK - not sure about USA). But any form of debt is never a good thing! –  Jul 18 '16 at 09:22
  • You get me wrong. I am not saying that higher debt is helping. I am saying that they might assume the highest possible level of debt during calculations - that is the limit of the card not the actual debt (that might be lower than the limit). – Ghanima Jul 18 '16 at 10:59
  • @Ghanima again, in the UK they will tend to go through history of card payments - i.e. what you actually had outstanding, and what you've historically paid off, rather than the limit of the card. Although it is an interesting point that you could in theory get a mortgage deal and then max the card limit. –  Jul 18 '16 at 11:47
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There's a difference between missing a payment and "carrying a balance" (making an on-time payments that are less than the full balance due).

I have heard mortgage brokers claim that, if you have no other credit history, carrying a small balance here and there on a credit card may improve your score. ("Small" is in relation to your available credit and your ability to pay it off.) But actually missing a payment will probably hurt your score.

Example:

You have a card with a credit limit of $1000. In July you charge $300 worth of stuff. You get the next statement and it shows the balance due of $300 and a minimum payment of $100.

If you pay the entire $300 balance in that cycle, most cards won't charge you any interest. You are not carrying a balance, so the credit scores may not reflect that you actually took a $300 loan and paid it off.

If you instead pay $200, you'll be in good standing (because $200 is greater than the minimum payment). But you'll be carrying a $100 balance into the next statement cycle. Plus interest will accrue on that $100. If you do this regularly, your credit score will probably take into account that you've taken a small loan and made the payments. For those with no other credit history, this may be an appropriate way to increase your credit score. (But you're paying interest, so it's not free.) And if the average balance you carry is considered high relative to your ability to pay or to the total credit available to you, then this could adversely affect your score (or, at least, the amount of credit another provider is willing to extend to you).

If you instead actually miss a payment, or make a payment that's less than the minimum payment, that will almost certainly hurt your credit score. It will also incur penalties as well as interest. You want to avoid that whenever possible.

My guess is that, in the game of telephone from the banker to you, the "carrying a balance" was misinterpreted as "missing a payment."

Adrian McCarthy
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  • Yes, that seems a very likely misunderstanding.

    It is a truism that the only way to get a good credit rating is to not need credit.

     – Laurence Jul 16 '16 at 18:03
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This does not directly address the question, but how the Bank views your behaviour is not the same as a credit reporting bureau. If you do not "go deep" on your card at all, you may be deemed not to be exercising the facility, indeed they may ask you to reduce your credit limit. This is not the same as "missing a payment". At the same time, do not just make the minimum payment. Ideally you should clear it within 3 months. Think of it as a very short term line of credit. Not clearing the balance within three months (or turning it over) demonstrates a cash flow problem, as does clearing it from another card. Some banks call this "kite flying" after similar behaviour in older days with cheque accounts. If you use the credit and show you can pay it off, you should never need to ask for a credit increase, it will be offered. The Bureau will be informed of these offers. Also, depending upon how much the bank trusts you, the Bureau may see a "monthly" periodic credit review, which is good if you have no delinquencies. Amex does this as a rule.

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