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.
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.
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.
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.
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.
- 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
- Bargaineering: Don’t Carry Debt To Improve Your Credit Score; Jim Wang
- Bank Rate: 10 Best Credit Card Moves in 2010; Leslie McFadden; 2009