Why Credit Bureaus Are Biased in Favor of People Who Use Their Cards
For most adults who are out of school, there's only one "grade" left that really matters in your life: Your credit score. A good one can save you hundreds of thousands of dollars over the course of your lifetime, and a poor one prevent you from living the life you want to.
In this clipfrom Motley Fool Answers, Alison Southwick, Robert Brokamp and Fool alumna Dayana Yochim explain why keeping your credit card accounts active even with just a few small transactions each month makes lenders and the credit industry see you more favorably than people with no revolving debts at all.
A full transcript follows the video.
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This podcast was recorded on July 12, 2016.
Alison Southwick: This comes from Lauren, and she asked us this question over Twitter. Again, you can follow us on Twitter @AnswersPodcast. She writes: "If I pay off my credit cards and stop using them, will this affect my credit? Will my score drop because I'm not using them?"
Dayana Yochim: Yes, possibly. We talked about this earlier. The credit bureaus need something to be reported in order to score you.
Alison: Be it good or bad, they need to know something about you.
Dayana: Yes. They need to know you have a pulse and you're doing something. Paying them off, great. You're debt-free. That just means that the credit utilization part of your score, which is 30%, looks great. You've got a lot of credit available to you and you have no debt.
That's fine, but going forward, they want to see a consistent use of credit. So, you want to use your card once a month. Just pay it off, but put something small on there so that it gives them some good news to report to the credit bureaus, and you're looking shiny, new, responsible, and awesome.
Robert Brokamp: I've done a little bit of reading about this. People say, "I want to build a credit score but I don't want a credit card," and there are ways to do it. But the bottom line is to get a credit score, you have to have credit. It's basically a score that says, "If you borrow money, you are going to pay it back." And that's really the best way to demonstrate that you can do it.
Dayana: Actually borrow money and pay it off.
Robert: Exactly.
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