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I am looking for details on how to build and raise credit score as fast as possible. I have done some research already, but I am foggy on a few points.
Details about me and my financial situation aside, let's talk in general. Here are a couple points that can apply to anyone:
- Maintain a balance on your cards much lower than your combined credit limit. Some say 30% of your limit, others say 7%. Testing some of those online score estimators, it seems that a balance of 1-9% is ideal for your credit score. Is this correct?
- Pay off your balance in full, but not immediately. Most people agree that using a credit card like a debit card (immediately paying off the card after every purchase) can actually hurt your score, as there needs to be a constant balance: so just let the debt accrue and pay off the full balance a day or two before the due date.
These two points make some sense, but they also conflict slightly. Over the course of a month, what combination of purchases, credit utilization, and credit card payments, all together creates a perfect score increase for that month? Consider this hypothetically: if someone truly does not desire to use credit for any reason other than to "get the highest score," like a game.
Compare the following scenarios. Let's assume that 7% is the gold-standard credit utilization.
- On the first day of the month, 7% of the limit is charged to the card. One day before the due date, the balance is paid in full. Wait two days, and repeat.
- Over the course of the first two weeks of the month, 80% of the limit is accrued on the card. At that point, a balance is paid such that only 7% of the limit remains. One day before the due date, the remaining balance is paid in full.
- As in (2), 80% is accrued over two weeks, but instead of paying down to 7%, it is paid in full. No other charges are applied to the card before the due date.
- Starting from the first day until the day before the due date, a constant flow of charges are applied to the card such that on the last day, 7% of the limit appears as the balance. It is then paid in full.
- Similar to (1), 7% of the limit is made in purchases on the first day. In a more realistic situation, more purchases are made occasionally throughout the month such that the utilization goes above 7%, but that surplus utilization is immediately paid off after every purchase (on the same day) such that the utilization goes back down to 7%. At the end of the month, the remaining 7% is paid in full.
I suppose where my confusion truly lies is in the details of the mechanics. How would these scenarios rank, in order from most improving to least improving (and why)? Is there some other scenario that could improve the score even more?
Is there a particular set of days throughout the month where the credit card companies report to the credit bureaus? If so, what relevant information do they send? Do they only care about the current balance at the time of the report, or some aggregated daily average since the last report? Does the total amount of charges applied matter, or just your daily utilization (as in Scenario 1 versus Scenario 5)? Do they track the daily utilization continuously throughout the day, pull its current value at a particular time during the day, or take an average of its value for that day?
Again, first think of this as a game. If your only goal was to get the highest score every month, what would your battle-plan be given unlimited resources and the ability to control your credit card balance at every minute throughout every day? (Feel free to also include other aspects beyond just the utilization and payment schedule if you believe it would help)
This is a purely mathematical optimization problem. Unfortunately, the FICO credit score algorithm is not publicly available (among other variables with the credit card companies and credit bureaus), so we have to guess.
Note that this question is merely to try to understand the mechanics of the system, not a legitimate plan for controlling one's finances. By better understanding the system, a more sophisticated financial plan can be devised for real life.