A single dollar might be vital to your credit score by keeping your accounts active and reported to the credit agencies. The credit bureaus report anything that lenders send to them, so there is no amount too small for a credit report. In some cases, the credit bureaus have an effective minimum of $0.
Installment Loans
Unlike other types of loans, once you pay off an installment loan the credit bureaus cannot report any more information on the account and consider it "paid as agreed." Thus, it has an effective minimum reportable amount of $0. This can hurt your credit score, because the FICO scoring algorithm counts the mix of loans, such as having a mortgage, credit card and auto loan, when rating consumers as a risk.
Revolving Loans
Credit cards and other revolving loans last for years and sometimes indefinitely. Issuers of cards can report a balance of $0 to the credit bureaus and still have the account count toward your credit score. The danger in this is the creditor declaring the account inactive. An inactive account hurts your credit score, because you lose the credit limit on the card. The FICO formula weighs your outstanding debt to available credit ratio in your FICO score calculation.
Misconception
Consumers should not take out an installment loan just to boost their credit score or keep a creditor reporting to the bureaus. You lose up to five points just applying for new credit and increase your debt-to-income ratio—another important part of your financial profile to future lenders. Also, carrying a balance month to month hurts you. The balance accrues interest, whereas paying the bill off before the grace periods keeps a card active and the balance is reported to the bureaus.
Tip
People wanting to maximize their credit score should use their cards every once in a while to keep an account from becoming inactive, suggests Craig Watts, a spokesman for Fair Isaac. Some credit card providers also charge fees of up to $90 for dormant accounts.
References
- The Motley Fool: Don't Cancel That Credit Card!; Dayana Yochim; 2009
- Credit Net: Paying Off Car Loan Could Hurt Your Credit Score
- Wallet Pop: Ways to Boost Credit Score; Aleksandra Todorova
- Bank Rate: 10 Best Credit Card Moves in 2010; Leslie McFadden; 2009
- Experian. "How Often Is a Credit Report Updated?" Accessed April 15, 2020.
- Experian. "Credit Score Can’t Be Calculated." Accessed April 15, 2020.
- Consumer Financial Protection Bureau. "Who Are the Credit Invisible?" Accessed April 15, 2020.
- Experian. "What Is a Credit Utilization Rate?" Accessed April 15, 2020.
- First General Bank. "How to Read Your Credit Report," Page 1. Accessed April 15, 2020.
- Consumer Financial Protection Bureau. "Credit Score Myths That Might Be Holding You Back From Improving Your Credit." Accessed April 15, 2020.
- National Credit Union Administration. "Credit Card Payments." Accessed April 15, 2020.
- FICO. "Payment History." Accessed April 15, 2020.
- Equifax. "When Does a Late Credit Card Payment Show up on Credit Reports?" Accessed April 15, 2020.
- Consumer Financial Protection Bureau. "What's a Credit Inquiry?" Accessed April 15, 2020.
- Experian. "What Is a Hard Inquiry and How Does It Affect Credit?" Accessed April 15, 2020.
- Federal Trade Commission. "Credit Scores - What Can You Do to Improve Your Score?" Accessed April 15, 2020.
- Time. "This Man Has 1,497 Credit Cards and Near-Perfect Credit Score." Accessed April 15, 2020.
- Guinness World Records. "Largest Collection of Valid Credit Cards." Accessed April 15, 2020.
- FICO. "The Importance of Credit History Length." Accessed April 15, 2020.
- Experian. "750 Credit Score: Is it Good or Bad?" Accessed April 15, 2020.
Writer Bio
Russell Huebsch has written freelance articles covering a range of topics from basketball to politics in print and online publications. He graduated from Baylor University in 2009 with a Bachelor of Arts degree in political science.