Credit Ratings

[hrodbert696]

So my second daughter just bought her first car, with the down payment as a graduation present from us. To pay for the rest we went to the credit union for a loan, and in the process I got to find out about my credit rating. It's.... err... not terribly good. I wasn't too surprised at that, we're digging our way out of some holes. But I was interested to learn more than anyone usually tells me about how they calculate it. I've been making nearly all my payments regularly and on time, which is good (there was one late one from six months ago that dinged me).

But what I didn't know was that the balances on credit cards also count; that your rating goes down if the balance is over 30% of the limit, and again at 50%. That was news to me; I always assumed that if the card gave me X amount as a limit, that I could charge up to that limit and there wouldn't be any ill effects (other than needing to pay interest, of course). But apparently if you want to keep a good credit score, in addition to making your payments regularly, you really need to act as though the limit on the card is 30% of what they allow you. That definitely affects my strategy for paying them down; if my goal is to improve my credit score, the priority will be not so much to pay down the highest-interest one first, but to see which one I can get under 30% fastest, and just pay minimums on the others till it gets there.

Any other insights into how to manage your credit from people's expertise here?

 

[soulman969]

The formulas used can be arcane and somewhat crazy so it can be tough to master some of them.

A good buddy of mine who buys tons of high end gear saw his credit scores go down simply because he wasn't charging enough often enough. He had to begin charging again to get his score up. Then, with a score of 800+ he was denied one dealers credit card even when he'd been approved by two others. So go figure.

I don't use credit cards. Haven't for years. I have reloading debit cards I use if I plan to make payments on 0% interest purchases and have paid off over $6k in purchases with them over the past few years. Despite this no online dealer can get me approved for their card because their bank claims I have no recent credit history. Go figure again. I guess they've reasoned that I'm not a good credit risk simply because I'm unprofitable.

So, the best bet seems to be make consistent use of your cards but not too much or too often and make minimal payments so the banks can make money off you. Paying them off too fast or too often is counter intuitive and leads to a lower credit rating. Also, if you use up too much of your credit line that inhibits your buying power so that will lower your credit score too as will too many credit inquiries when you apply for another card.

The reason I stopped using them is I got tired of playing their game or even trying to figure it all out and finance and investment is my profession. It's an annoyance at times but I get by and prefer my approach. It keeps momentary GAS from biting too hard when I have to plan cash flow for a short term finance.

 

[two fingers]

Edit: Read the last paragraph of this post. I stated incorrectly Ramsey's Debt Snowball Plan. It is corrected further down in the thread. I'll leave the middle of this post as is, incorrect as it may be, so as not to confuse anyone with edited context.


While a good credit rating is somewhat important to many, here's what I would do.

It's what Dave Ramsey calls the "Debt Snowball".

Line your debts up in order from highest to lowest INTEREST RATE. Throw everything you can at the one with the HIGHEST interest rate. Once you get that one paid off, throw everything you were throwing at that one at the one with the NEXT highest interest rate.

Make minimum payments on everything else.

Rather than trying to pay them all off at the same time, focus like a laser beam on ONE debt at a time.

Point is, the MOST important thing is to get the debt wiped out, not improve your credit rating (in my view).

Edit: @loveandbass corrected me a few posts down. So, read further for the explanation. I'll leave this post as is for context.

 

[Oddly]

Best advice I ever got about using credit cards was that when the bill hits at the end of the month, you pay it in full.
I've only got one card, and luckily, I've managed to keep ahead of the damn thing.

I know debt can be a necessary evil, but I am surprised how many, especially, of my American family and friends seem to consider it normal to use multiple cards, and not keep them clear.

 

[garp]

I no longer use credit cards. I have a single charge card on which any balance must be paid in full, and it gets used very sparingly. My job isn't to keep the banks in business, nor is it to provide Experian, Equifax and Transunion with free data that they can sell without compensating me.

 

[viper4000]

Here's a few good tips
-Keep a low interest credit card - charge to it often, keeping the balance less than half of the limit. I know some folks that put everything they pay on a credit card, then pay that thing off every month. These folks have high 700 low 800 scores. I don't like credit cards. Therefore, I make a calculated decision that affects my score, but is better to me financially.
-Doing too many credit approvals (read: approval for a car loan, furniture purchase, in-store card, etc) will decrease your score. This affects younger people as they are preyed upon by credit lenders in all shapes and sizes. This is odd. But it is real. So, don't go over board in one year. They say there is a grace when they see 3 car dealerships checking credit in one week or something like that, but overall best to keep this to a min.
-Paying off is not as valuable as paying on time. Eludes to @twofingers method of decreasing debt. Do what best suits you. I take the Two-fer approach. Pay it off, and pay it off fast, so finance charges are at a minimum, therefore, less money out of the pocket overall. But, for pure score concerns, paying off is not highly coveted.

I got dinged for all 3 when buying a house. 1 and 3 I already knew would be in play, and made a calculated decision. #2 is what surprised me. Merely checking for financing, and not actually getting financing is bad.

 

[guy n. cognito]

While a good credit rating is somewhat important to many, here's what I would do.

It's what Dave Ramsey calls the "Debt Snowball".

Line your debts up in order from highest to lowest INTEREST RATE. Throw everything you can at the one with the HIGHEST interest rate. Once you get that one paid off, throw everything you were throwing at that one at the one with the NEXT highest interest rate.

Make minimum payments on everything else.

Rather than trying to pay them all off at the same time, focus like a laser beam on ONE debt at a time.

Point is, the MOST important thing is to get the debt wiped out, not improve your credit rating (in my view).

Gotta love that guy. Makes millions selling common sense to those without any.

Credit scores formulas are closely held secrets. Sites like Credit Karma can give you some insight on how to improve your score, but it’s still a black box.

 

[James Collins]

The credit limit and 30% thing don't exactly matter. It is more like: how much money could you spend today with no effort. So if you have a credit card with a $30,000 limit that is at $20,000 regularly but you pay the balance every month, you will have good credit more than if you have a $10,000 card maxed out that you pay some amount every month so you can max it out again.

My biggest suggestion would be to pay off your credit card balance every month. You won't get charged interest that way. In fact everything that carries interest over 5% (I use 3% as my limit) should be paid off as quickly as possible. I think many credit cards are 20%. So if you aren't paying everything off your card every month, it is like paying a 20% tax just to own it. In reality, the effective increased cost is probably more than 20% because of compound interest.

 

[T_Bone_TL]

Any other insights into how to manage your credit from people's expertise here?

Stop charging anything on your credit card(s), pay it(them) off completely, and only start using it again if you only buy things that you can afford to pay off in full at the end of the month (or whatever date your bill comes in.) Credit cards are VERY expensive if you use them wrong. And you have evidently been using them wrong.

Not only will your credit score improve, you will have more actual money to actually spend if you are not wasting money on interest payments for buying stuff you can't afford.

I have two no-fee cards. One gives me a small percentage cash-back - $25 for every $2500. The other is handy if for some reason the one gets out of whack (over-excited anti-fraud settings, etc.), plus I had the other first. Neither has ever not been paid off in full. Some very large things have been charged to them, but the money for each large thing was in hand before the item was charged.

I see you posted in the I beat GAS and paid off almost k in debt over 2 years... thread, so you have seen the credit advice in there.

 

[buldog5151bass]

Unless it's a true emergency, other than a mortgage, if you can't pay off the debt at the end of the month, don't incur the debt. Until that debt is paid off, bag lunches, etc. The system is rigged to hook you on credit - don't fall for it.

 

[dwm74]

I'd had perfect credit for over 20 yrs but the economy tanking in the late 2000's took me down with it. Lost it all, started over from nearly zilch, and it has taken nearly 5-6 years to get my rating back up into the 700's.

I have two credit cards. One for online purchases only, the other one is for emergencies like car repairs or home repairs.

If I can't afford something, I have to refrain from buying it until I can afford it. Getting sucked into charging everyday things is playing right into their hands.

 

[T_Bone_TL]

Point is, the MOST important thing is to get the debt wiped out, not improve your credit rating (in my view)

...but if you sort out the one (wiping out the debt), the other (credit rating) will magically follow (so long as you do make all the payments for everything on time.)

 

[GBBSbassist]

Some very large things have been charged to them, but the money for each large thing was in hand before the item was charged.

I think more often than not, this is the type of mindset that separates people with consistently good credit and people who have financial woes.

 

[loveandbass]

While a good credit rating is somewhat important to many, here's what I would do.

It's what Dave Ramsey calls the "Debt Snowball".

Line your debts up in order from highest to lowest INTEREST RATE. Throw everything you can at the one with the HIGHEST interest rate. Once you get that one paid off, throw everything you were throwing at that one at the one with the NEXT highest interest rate.

Make minimum payments on everything else.

Rather than trying to pay them all off at the same time, focus like a laser beam on ONE debt at a time.

Point is, the MOST important thing is to get the debt wiped out, not improve your credit rating (in my view).

I thought Dave ramsey says to attack the highest balance first regardless of interest rate.

 

[Gravedigger Dav]

So my second daughter just bought her first car, with the down payment as a graduation present from us. To pay for the rest we went to the credit union for a loan, and in the process I got to find out about my credit rating. It's.... err... not terribly good. I wasn't too surprised at that, we're digging our way out of some holes. But I was interested to learn more than anyone usually tells me about how they calculate it. I've been making nearly all my payments regularly and on time, which is good (there was one late one from six months ago that dinged me).

But what I didn't know was that the balances on credit cards also count; that your rating goes down if the balance is over 30% of the limit, and again at 50%. That was news to me; I always assumed that if the card gave me X amount as a limit, that I could charge up to that limit and there wouldn't be any ill effects (other than needing to pay interest, of course). But apparently if you want to keep a good credit score, in addition to making your payments regularly, you really need to act as though the limit on the card is 30% of what they allow you. That definitely affects my strategy for paying them down; if my goal is to improve my credit score, the priority will be not so much to pay down the highest-interest one first, but to see which one I can get under 30% fastest, and just pay minimums on the others till it gets there.

Any other insights into how to manage your credit from people's expertise here?

The whole thing is kind of insane. If you charge something on a credit card, you rating goes down because you debt to limit ratio goes up. But, you can go get another card, and your rating goes up because of the same formula. I'm convinced these people are mentally challenged.

 

[roller]

Gotta love that guy. Makes millions selling common sense to those without any.

TRUTH!!!

 

[T_Bone_TL]

I thought Dave ramsey says to attack the highest balance first regardless of interest rate.

That would make no sense. Ultimately, the ideal is not owing anything, but for "amount X" available to pay down debt this month, attacking the highest interest rate first gets the most bang out of amount X.

"Concentrate on paying off your 3% mortgage while continuing to pay 20% on credit card debt" - is just not logical.

 

[two fingers]

I thought Dave ramsey says to attack the highest balance first regardless of interest rate.

Actually, I stand corrected. You are exactly right. I just looked it up. (I haven't listened to him in a while.)

I actually disagree with him on that. But, then again, he has helped thousands and thousands of people go from debt to wealth, so I'm certainly willing to accept that he may be right.

His theories on debt are as much emotional as they are mathematical. I'm not an emotional person about money and things, so I can see where we would part ways on that one detail.

Thanks for the correction!

Here's the link that backs you up.
Invalid Link Removed

 

[two fingers]

That would make no sense. Ultimately, the ideal is not owing anything, but for "amount X" available to pay down debt this month, attacking the highest interest rate first gets the most bang out of amount X.

Hopefully my incorrect statement about his plan won't derail the thread entirely and start a debate over Dave Ramsey.

His theories on money are as much about the emotional aspects of debt as they are the about the math. So, sometimes he sees the value in the emotional triumph of getting the largest debt paid off over the few bucks a month you could be saving by taking down the highest interest rate first. In his view, once you get that huge victory of your largest debt being paid off, you are more likely to stick to the plan and pay them all off.

Sorry to send this off in a direction not intended by the OP. Hopefully we can get back to him and his question. I wish him all the best it getting it sorted out in the way that works for him and his family.

 

[roller]

One log to toss on the fire -- if you have a credit card you're not using and/or are thinking about closing out, DON'T DO IT. Canceling a credit card will hurt your credit score. It's best to simply keep a zero balance on an unused card and just let it sit.