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Thread: Building credit

  1. #1

    Default Building credit

    I received a Capital One VISA credit card today with a limit of $500. In 2006-2009 I paid the bills using checks, and I was late about 25% of the time. I have been working a stable job for just over a year, and have plenty of cash in the bank. It is my goal to build credit as fast as possible, as high as it will go.

    I've done some rudimentary research and found a few things. Paying your bills on time will help your score, and using too much of your limit is negative.

    I live in a house with 3 guys, so the utility bills are kind of up there. I've discussed moving the bills into my name, but I now realize that with a limit of $500, it will probably not reflect well if I'm spending $300-400 each month. I initially thought that was the objective, but apparently being a low spender is preferable. What does your experience say?

    Another trick that one website suggested was to talk to a bank about the desire to build credit, using a personal loan. I think the idea is that they would loan you the money, which you would buy off using the credit card, leaving you with more credit and the bank with no risk. I am probably NOT understanding this right, and I will have to ask my partner about this idea.

    My partner told me that two things are stopping him from VERY high credit. One is that he has never been in a situation of debt, and so the creditors do not know how he would react (kind of stupid.) The other is that he only had experience with one credit card. Thus, he got two. His financial advisor told him that two is the best number, because three or more raises suspicions of using cards to pay off other cards. Thoughts?

    Any other suggestions on how to build credit are very appreciated.

  2. #2

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    The personal loan thing, you get the loan and pay it off at the bank, NOT with the credit card. Say you get a personal loan for $500 and your agreement with the bank is that you pay back $100 a month. It's your on time payments to the bank that reflect well on you, not that you borrowed money and paid it back with a credit card. You don't even need the credit card to build your credit, really.

    And things like buying a car and making your payments on time reflects well on your credit score.
    Last edited by CuddleWoozle; 18-Jan-2011 at 15:29. Reason: gah! Grammaaaaaar!

  3. #3
    acorn

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    Quote Originally Posted by DLGrif View Post
    Any other suggestions on how to build credit are very appreciated.
    I have never researched my credit rating as I never applied for a loan in my life. I am piss poor, so, in God I trust, all others must pay cash.

    If you get communal bills switched solely to your name, you are asking for serious trouble. For then, you have to factor in their (your friends) money management skills. The trouble will start when one (or more) of your friends has cash flow problems and you do not have enough surplus personal finances to cover the difference. Put more simply, if you and your friends have an argument and they continue to use the utilities without paying their share, will you still be able to pay the bills to stop your credit rating going bad. If there is one piece of interweb advice you should take on board it is, friends and money do not mix, you will always get burned.

    I believe you are right with your uncertainty on paragraph four. I donít understand that either, if it is as it is given - it is definite recipe for financial suicide.

    Attaining good credit ratings is all about creating a good financial history. Bank loan and Hire Purchase repayments must be paid on time, outstanding amounts on Credit Cards should be cleared monthly. Making regular deposits to a Savings Account will be seen as favourable by your bank and can help to secure a loan.

    Never write a cheque (not even post-dated) if you do not have the funds to clear it. Utility bills will negatively affect credit ratings if they have to begin recovery procedures. Never transfer debt to a credit card as with interest charges it is the singular most expensive way to pay back monies owed. Never draw on payments/lodgements to your account until they clear in their own name and not yours (bankers drafts), under no circumstances get this one wrong.

    With a critical eye, your own local banks are a good place to get good information.

  4. #4

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    Quote Originally Posted by acorn View Post
    If you get communal bills switched solely to your name, you are asking for serious trouble. For then, you have to factor in their (your friends) money management skills. The trouble will start when one (or more) of your friends has cash flow problems and you do not have enough surplus personal finances to cover the difference. Put more simply, if you and your friends have an argument and they continue to use the utilities without paying their share, will you still be able to pay the bills to stop your credit rating going bad. If there is one piece of interweb advice you should take on board it is, friends and money do not mix, you will always get burned.
    I feel I should mention that the three guys are my coworker, coworker/secondary manager, and manager/best friend. We all work for the same company, love our jobs, love having money, and have proven to each other to be fiscally and socially responsible. It's good advice, and I thank you for it, but it doesn't apply here Also, if it absolutely had to come down to it, I easily make enough money to pay all the utilities myself. So when I said the bills are "up there" I really only meant "approaches $500".



    Quote Originally Posted by acorn View Post
    Never write a cheque (not even post-dated) if you do not have the funds to clear it. Utility bills will negatively affect credit ratings if they have to begin recovery procedures. Never transfer debt to a credit card as with interest charges it is the singular most expensive way to pay back monies owed. Never draw on payments/lodgements to your account until they clear in their own name and not yours (bankers drafts), under no circumstances get this one wrong.

    With a critical eye, your own local banks are a good place to get good information.
    I am also of the mindset of "buy only what you can afford right now," as you mentioned with your cash thing. I don't see myself having to pay back debt of any kind so long as I have this job, or have begun my second career (it is building momentum currently, not the topic of discussion here). My only disadvantages are starting late and having a history of late payments in the past, which I will seek to overwrite. What I'm getting from your post as a whole is more reinforcement to pay bills on time, to not rely on the card to settle debt, and to check with the banks for information.

    Cuddle, that makes a lot more sense, and sounds like an excellent idea to me. I can easily live with having "extra money" that I can't use, so that seems like a really effective way to reach my goal. I will definitely ask the bank about this.

  5. #5
    acorn

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    Quote Originally Posted by DLGrif View Post
    I am also of the mindset of "buy only what you can afford right now," as you mentioned with your cash thing. I don't see myself having to pay back debt of any kind so long as I have this job, or have begun my second career (it is building momentum currently, not the topic of discussion here). My only disadvantages are starting late and having a history of late payments in the past, which I will seek to overwrite. What I'm getting from your post as a whole is more reinforcement to pay bills on time, to not rely on the card to settle debt, and to check with the banks for information.
    My career to date has been in the building trade, the nature of which makes one an industrial itinerant. Think, short term work contracts and living from a suitcase in foreign cities. [/ about me!]

    [back to you]
    Do know, that + and - credit do not co-exist they are in fact reconciled.

    While you are prepared to listen to this claptrap.

    You then accuse me of negative vibes, when I offer this.


    Now Iíll go the whole hog.



    [/ back to you]



    Please excuse me, while I go stand in a corner and quietly shoot myself.

  6. #6

    Default

    I'm sorry if you felt my tone was offensive or accusatory. I read your whole post and I only responded to portions that I felt needed to be responded to. The parts I did not respond to were "common sense" things that I already understood, but nonetheless they HAD to be said for a comprehensive picture. I do appreciate your advice and knowledge.

    Also, I was not referring to Cuddle's idea of buying a car. I have a car and it will work fine for years. I was referring to his interpretation of the personal loan idea.

    I talked with the bank and they told me that taking out a loan now would be a bad idea, because with bad credit I might get rejected, and that would reflect even more poorly on me. However they did confirm that using only some each month is best (without leaving $500 balance, which is bad) to show activity, and that on top of my credit card I should get a store card from Sears or JC Penney's -- basically confirming the "exactly two cards" idea.

  7. #7

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    Don't get a store card...they are actually seen as worse than a typical credit card. You are also docked when you apply for credit. If you wish to acquire credit, it is best to do it in one 90 day period because that's considered one credit inquiry on you. If you get a new card every 4 months, it will reflect negatively as opposed to getting 10 cards in a month. And the best advise I can ever give you on credit: never borrow more than you can pay off this month and never cosign for anyone(that includes your children).

  8. #8
    Peachy

    Default

    Granted, the American credit system is totally different (took the American credit industry 7 months to figure out I had moved to their country and to bomb me with credit card offers), but the general ideas of how scoring works is the same all over. Scoring is the underlying process that tells financial instutitions how creditworthy an individual is.
    Some basic factors are:
    -/+ age
    -/+ home zip code (if you live in a poor area, even as a millionaire, you're shit out of luck)
    -/+ income level
    -/+ educational level, if known
    -/+ number of bank accounts and credit cards you have (increasing numbers first increase your score until a point where you have more than a reasonable number of cards/accounts, then the scores plummets rapidly because it looks to a neutral observer that you're desparately seeking more credit lines by opening new accounts)
    - being late or defaulting on your previous debt; not sure how the system works, but over here, the scoring institution would only know about it if you actually miss agreed payments, otherwise they can't report anything)
    + having contracts with regular payments (cell phone contract, utilities bills etc.) which you meet on time
    ------------ personal bankruptcy (your score will be so low that even Jules Verne couldn't find it 20,000 miles beneath the sea!)

    Remember:
    - The system isn't easy to tamper with (otherwise the banks would have to improve it), so your best bet in building credit is to be fiscally sound and now blow all your money on unneeded junk, especially at your age where your income most likely isn't that of a 50 year old investment banker. If you have no financial worries yourself, your bank doesn't have any reason to have them either.
    - Don't commit the 'financial crime' of taking out loans or overdrawing your credit card for luxury items, such as vacations, electronics and what not. If you don't absolutely need it (such as a place to live in or a car to get you around), don't buy it on credit. Save and wait.

    Another hint:
    I don't know if that's offered there, but many stores here offer 0% financing on electric or electronic stuff. Once you have saved enough money to pay for the item in cash, buy the item on credit if they let you and then use the saved cash to pay off the debt in the agreed way in a timely manner. That's a nice free way to show the finance world you can pay off your debt, provided you're not weak and use the saved cash for buy more/other stuff and then end up not being able to pay your rates, then it backfires!

    Peachy

  9. #9

    Default

    Things that HELP your credit score

    • Have a lengthy credit history (see below).
    • Have a savings account. Keep money in it (three figures) at all times possible. Protip- find out if it has a minimum balance, and keep that amount basal.
    • Have a credit history with multiple forms of credit (revolving credit, installment loans, etc).
    • Possess titled equity- car, house, etc. This also means you owe no money on it. You don't get the title to your car or the deed to your house until paying off the loan you took to buy it.
    • Have a high credit ceiling (the limits on all your forms of revolving credit, added up).
    • Have a high average credit limit. If you have two credit cards with $1,500 limits and one with a $100 limit, cancel the one with the $100 limit.
    • Have a large amount of available credit. This is money in credit you can get to today, if necessary. If you have a $500 card but have $400 debt on it, you only have $100 available credit.
    • On revolving accounts with high balances, pay well above the minimum monthly payment. Whatever corresponds to 15% is something of a magic threshold that says "I know I owe you a lot of money, but I'm showing you I can afford to pay it back in a timely manner." High balances are bad, but the bad is mitigated if you're actively reducing the amount you owe significantly each month. You need to demonstrate that the need to plunge into debt was short term (car blew up, etc etc) and now you're rectifying the hiccup.
    • Successfully pay off installment loans- these are ones where you get money up front and pay a predetermined amount each month (car, mortgage, personal loan, etc). Banks are more likely to give you money to buy a car if they see you've previously taken such a loan and successfully paid it off.
    • Concentrate your borrowing with one bank, if possible. Banks, particularly small community banks, value repeat business. This will be less true with PNC or Wells Fargo, but will be more true with First Bank of Bumblefuck County.
    • Have a high proportion of good debt. Owing $200,000 isn't looked on so badly if $190,000 of it is for student loans and a mortgage- things which help you improve your equity. On the other hand, owing $200,000 to American Express is extremely, extremely bad.


    Additional note: your credit history is only as old as the oldest item on it. Say you have two forms of credit, a credit card account that's 10 years old and a credit card account that's 2 years old. If you close the 10-year-old card, your credit history is only two years old now.

    Things that HURT your credit score

    • Having too many credit cards.
    • Declaring bankruptcy- this is credit suicide, and is visible on your credit history for 10 years. This is a viable option for some situations, but needs to be a last resort.
    • Applying for a new credit account.
    • Applying for a new credit account and being rejected. This also applies to calling up a credit card company and asking for them to raise your credit limit, and being subsequently denied.
    • Unresolved collections. If you get a collection notice, take care of it ASAP. Usually, collection agencies encourage you to settle with them in a timely manner by not reporting the collection to credit bureaus if you do so. I've had collections due to oversights in the past, and none appear on my credit report because I've taken care of all of them immediately.
    • Making a late payment. The good news is that after 2 years, late payments aren't visible on your credit history (see additional note).
    • Closing a revolving account- in certain circumstances. Closing a $100 Macy's card is unlikely to hurt anything. In most cases, that's actually probably even a good move. But even when you close an account, it still shows up on your credit score at least three years, so the effect isn't immediate. Moreover, what if you pay off a high limit card (say, $5,000) then close it? You just got rid of a lot of your available credit and you got rid of your highest credit ceiling- both of which are good things on your account. This effect is even worse if you close a high-limit account when you still owe a ton of money on it.


    Additional note: if you have to make a late payment, choose carefully which payment will be late. In general, installment accounts are more forgiving than revolving accounts for late payments, so long as it's an isolated incident. Also, if you have a loan with a coupon book, look to see if there's a field that says "late due date". This signals some potential willingness to work with you. It'll probably tell you to add a $10 late fee, but if that's what needs to happen to get the payment in, then consider it. Also, once you decide which bill you can't afford to pay, CALL THE COMPANY. They're usually much more willing to work with you if you're upfront and tell them in advance of the due date you need a few more days. They want their money. If you show through contact and a good payment history that you're a responsible borrower, then they're likely to make accommodations for you for a short-term problem. This works out better for them in the long run.

    In case of an honest and understandable mistake, send them a hard-copy letter. I missed the first three payments on my student loan because when I graduated, I was given a grace period before needing to make payments and was told I'd start receiving bills. Unfortunately, they were sending the bills to my old college e-mail I no longer had access to. When I figured this out in February, I immediately notified them of the problem in writing and sent a payment for the full past amount due including applicable late fees. Late payments are notified on your credit report by time categories: < 30 days, < 60 days, < 90 days, < 180 days. Mine would have been the worst of those. However, they didn't even report it to the credit bureaus and the hiccup has no lasting effect on my finances.

    Myths & Misconceptions

    • Some people think that your credit goes down when you get credit card or loan offers in the mail or when you check your credit score. This is untrue. All inquiries to your credit history are classified as hard inquiries or soft inquiries. Hard ones lower your credit score. Soft ones do not. A hard inquiry is when you request new or additional credit- either asking without being solicited, or responding to an offer from Capital One (I get around 10 mailings from them a month). A soft inquiry is when your credit is checked for any other reason- a background check by an employer, you wanting to be better informed, Bank of America wanting to pre-approve you a home loan, etc. Protip: just about any time you see the word "pre-approval," it likely means it's a soft inquiry, not a hard one. Still, if you're going to Bank of Whatever asking for pre-approval for a home loan, it's good to ask.
    • Also, do not do not do not cancel credit cards unless they have extremely low limits. I discussed this in various points above. It takes three years for your credit history to reflect less credit cards. But the drop in cumulative available credit and in cumulative maximum credit happen immediately. If you don't trust yourself, cut up the cards and throw them out, but leave the accounts open. This also enables you to access those accounts in an emergency, if necessary. It's easier to ask for a card to be rushed to you than to ask for a new account, particularly if you have bad credit you're working to improve.


    ---------- Post added at 03:00 AM ---------- Previous post was at 02:29 AM ----------



    Quote Originally Posted by Iggy View Post
    And the best advise I can ever give you on credit: never borrow more than you can pay off this month and never cosign for anyone(that includes your children).
    Protip: when you co-sign a loan, you legally own the debt. This means on your credit rating, it's as if YOU got the money. If the person you co-signed defaults, YOU default. Be aware of this. That said, if someone you trust (kids) wants you to co-sign, then look at the offers available. My father co-signed on some of my student loans, but if I make payments on time for four years (of 30), he gets released from responsibility.

    More!: If you co-sign for a major loan, like a student loan, make sure the person who took the loan has life insurance and major disability insurance with their estate the beneficiary. There was a case in my state recently where a 20-something year old college kid was killed by a drunk driver. I can't imagine what the parents must be going through with that alone. But to top it off, they had previously co-signed for $200,000 worth of student loans which, now that he's dead, they're the sole owners of. Doing the math, the payments come out to be more than $1,300 per month for 30 years. I understand they'd JUST retired. If you cosign for a major loan, make sure the person who got the money has GOOD life insurance. For someone that age, it probably costs a far more manageable $20/month.

    ---------- Post added at 03:07 AM ---------- Previous post was at 03:00 AM ----------



    Quote Originally Posted by DLGrif View Post
    Another trick that one website suggested was to talk to a bank about the desire to build credit, using a personal loan. I think the idea is that they would loan you the money, which you would buy off using the credit card, leaving you with more credit and the bank with no risk. I am probably NOT understanding this right, and I will have to ask my partner about this idea.
    Three steps:

    1. Ask for a moderately sized personal loan. If possible, secure it with collateral. Moderate depends entirely on what your finances look like, and what size loan a bank is willing to give you without usurious rates. Get a short term, maybe 12-18 months.
    2. Dump the money in a savings account. Don't touch it.
    3. Withdraw money from savings ONLY to make the monthly payments. After X months, your credit report now shows that you took out a loan and successfully repaid it.


    Let's say you got a $1,200 loan with a 12 month term (simply because those are easy numbers to work with). Of course, this being a loan, you need to pay back more than the principle of $1,200 borrowed to account for interest. Let's say that in actuality, you'll need to pay back $115 per month for 12 months. Each month when you write a check and drop it in the mail, transfer $100 of that money from savings to checking. You'll need to account for the other $15 out of your own finances.

    The point of securing it with collateral is that in today's world, unsecured personal loans are risky. Using collateral lowers risk to the bank and makes them more likely to approve the loan (and it may help the interest rate, too). Do be aware that this could mean a lien on your car for a short time, but that'll go away when you finish paying the loan back. If there's any reasonable chance that your car will go kaput before the loan is up, though, this is risky for you. So be careful.

    ---------- Post added at 03:38 AM ---------- Previous post was at 03:07 AM ----------



    Quote Originally Posted by DLGrif View Post
    Another trick that one website suggested was to talk to a bank about the desire to build credit, using a personal loan. I think the idea is that they would loan you the money, which you would buy off using the credit card, leaving you with more credit and the bank with no risk. I am probably NOT understanding this right, and I will have to ask my partner about this idea.
    There is also such a thing as a debt consolidation loan, which it might be talking about. Credit card debt can have high interest rates. Usually there are three rates- a low rate for balance transfers, a medium rate for purchases, and a high rate for cash advances (where you go to a bank and actually make a cash withdrawal on the account, or charges for "overdraft protection"). A debt consolidation loan is when a bank loans you the money you owe for the purposes of paying off debt. These were in vogue back in the 80s, but are less common today. The philosophical issue is that if you're looking for help getting out of debt, a bank may be reluctant to essentially take the debt you're suggesting difficulty paying off. When they're good is when you're on the "debt treadmill" that is, you aren't making purchases to go further into debt, and you're making payments each month well above the minimum, but you have usurious interest rates that mean for every $1 you pay off, $0.70 immediately reappears in the form of interest. A consolidation loan will take that debt and give it a solid plan to by paid off in X months.

    This is actually one area that Congress made good progress on recently. Before Congress got gridlocked in healthcare, a credit card reform bill was passed. This did a number of things such as making a standard layout that credit card bills follow to be more understandable, but also made some new rules that credit card companies need to play by. One is that every penny you pay above the minimum balance goes toward high-interest loan. Say you owe $1,000 with the breakdown: $200 with a low interest rate, $500 with a medium interest rate, $300 with a high interest rate. Say the minimum payment this month is $60, and you send $80. That extra $20 is applied wholly to the high interest debt. Furthermore, I actually believe the minimum needs to be split proportionately among all levels of debt. Previously, if you paid $80, that all went toward the low-interest debt. Personally, this has made it much easier for me to work on reducing my (and my fiancee's) cc debt. Cumulatively, this will save Americans billions of dollars per year.

    ---------- Post added at 04:09 AM ---------- Previous post was at 03:38 AM ----------



    Quote Originally Posted by DLGrif View Post
    I am also of the mindset of "buy only what you can afford right now," as you mentioned with your cash thing. I don't see myself having to pay back debt of any kind so long as I have this job, or have begun my second career (it is building momentum currently, not the topic of discussion here). My only disadvantages are starting late and having a history of late payments in the past, which I will seek to overwrite. What I'm getting from your post as a whole is more reinforcement to pay bills on time, to not rely on the card to settle debt, and to check with the banks for information.
    Believe it or not, having a small amount of debt and making payments is better than no debt and no payments. It's fortunate you don't view credit cards as an opportunity to buy things you can't afford now. Consider this type of cc activity:

    1. Make up a budget in Excel or some other spreadsheet program. It can be rough, that's fine.
    2. Choose one budget line which is accounted for by store purchases. It can be gas, it can be groceries, etc.
    3. Always use the credit card for that type of expense. However, keep to your budget as if you were spending the money out of your checking account.
    4. When the bill comes in, pay off the debt nearly in full.


    I say nearly because it'll be easier to budget that way. If you pay it off in full each month, the next bill will come 30 days after the first purchase after paying it off. Paying it down to $20 debt each time ensures that you're going to get the credit card bill on the same day each month.

    I chose $20 for a reason. The minimum monthly payment is formula based, usually X, Y, or Z% of your balance depending on how high the balance is. Larger balances get higher percents. Almost universally, if the formula returns less than $15 minimum, they'll just tell you to pay $15 (all my credit cards use that number). If you owe less, they'll ask for it to be paid in full. Paying the amount you owe minus $20 ensures that if you stop making purchases, you won't end up being asked to pay it off on full, breaking the cycle of monthly payments. Also, assuming you have low debt and only 1-2 cards, you want to make sure you're constantly doing business with them. They'll be more amenable if something comes up and you ask for a raise in your limit. And your credit report will show a nice, green line of PAID ON TIME marks.

    ---------- Post added at 04:19 AM ---------- Previous post was at 04:09 AM ----------



    Quote Originally Posted by Iggy View Post
    Don't get a store card...they are actually seen as worse than a typical credit card.
    Credit is simply a double-edged sword. Used correctly, though, it can be very beneficial. My fiancee used to have a Macy's card. She only bought things on it she had the money for in the bank account. It got her an automatic 15% (I think) off just about everything that she bought with it. And as soon as the cashier handed it back to her, she hand over her debit card and deposit the exact amount of money directly on it. Effectively, she turned it into a "0% interest, 15% off everything, always" card.

    I'm at a very important point of my career. If a PhD program wants to interview me in a month's time, my Macy's card means I can get an interview suit and save a few hundred bucks in the process. Credit is a tool and like any tool, can be beneficial when used properly, harmful when used incorrectly.
    Last edited by AEsahaettr; 19-Jan-2011 at 07:50.

  10. #10

    Default

    Impulse control is the key here, if you have poor impulse control, then getting a credit card is a VERY bad idea, but if you have really good impulse control, you MIGHT be able to use it to build your credit, if you totally understand how everything works (most people dont). If you think you have good impulse control, owning a credit card will prove if that is the case or not.
    There were times when I felt really depressed, all doom and gloom, when I maxed out several credit cards, roughly ten thousand dollars worth of credit, that I now cant make the minimum payments on, and am going to have to consider something like bankruptcy or whatever options are available.
    For me, while being depressed I had very bad impulse control, and didnt totally understand the concept of credit. I should have never owned credit cards, it was a very bad decission, and my credit score is in the dumps as a result of it.

    The most important question you should be asking yourself, is when you see something that you have always really wanted, something you dream of having, are you going to buy it just because you have credit, will you really be able to control that impulse to buy it...

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