I’m too old to have never had a credit card, but that’s the situation. What can I say; I was scared off it by seeing the problems of my elders, and I vowed to only buy what I could afford from that point on.
But, as you might imagine, it’s now causing problems because I can’t do simple things like rent a car, or… well, I’m sure there are other things but I can’t think of them right now. Anyway, so I went out and got a super-small card, and while I am taking it to its (very low) limit every month, I’m also being super-careful about paying it off in full on or before the due date.
But I’ve seen so many conflicting things about this; some people (in person and online) say if you do that then you’re not really “building credit”, and some people say no, that’s a myth and it’s fine. So what’s the Straight Dope?
You are building credit. Your history of on-time payments is the most important ingredient.
Here is a graph from the horse’s mouth that shows how a FICO calculation (roughly) breaks down.
35% payment history
15% length of credit history
30% amounts owed
10% types of credit
10% new credit
The “amounts owed” bit, when it comes to revolving accounts, is sometimes referred to as your utilization ratio. Basically, the ratio of credit you are using to your credit limit.
It’s absolutely fine if you don’t want to carry a balance on your credit card; everything else you are doing means you are a proving yourself a good credit risk. Some people want to optimize their scores as much as possible, though, and carrying a revolving balance with a target utilization ratio may help with that.
Good that you got a card. Neutral that you pay it off in full - as long your balance doesn’t exceed something like 20-25% of your credit limit, it makes no difference whether you pay it off or just pay the minimum, as far as your credit score. Paying it on time or <30 days late are the same thing, to your credit report. Go 30 days late or later though on any account, even once and your credit scores tanks. The more recent your lates and the more severe (60,90,120 day lates also report), the bigger the hit to your score.
The biggest things you can do to improve your score:
Get more credit cards! Short term pain: inquiry hits new credit 10%, but impact lasts 1 year or less, long term gain: 30% amounts owed looks at your total credit limit and your % utilization of your limit. More cards = more limit = lower utilization (and lower is better)
Increase your limit ! If there is no hard pull, gain only: The 30% amounts owed looks at both what % of your overall limits you use, and what % of your limit you use on individual cards. And that reports at statement time, so if you max out your card, then pay it off in full every month, big credit score hit, because it always is reporting 100% utilization - and lower is way better.
Get an American Express issued Amex card right now (Amex everyday/blue/SPG/Delta/Gold/Green/Plat, etc): Same as #1, but any Amex cards you get later get their account start date back dated to when you first became a card holder, and thus can help increase the 15% length of credit history stat. IE, if in 5 years you want a second Amex card, it will look like you got it this year, just like the one you open right now.
A great credit score person basically looks like:
Never late, on anything, ever (that shows up - closed negative accounts “age off” eventually)
Average age of cards is quite old. (You can’t change that today, but if you have 1 card open today and 1 in 10 years, average age is 5 years. If you open 10 cards today and 1 in 10 years, average age >9 years)
Utilization - amount owed (including what you pay off in full for one month), on all cards is both overall and per card individually very low, but at least one card >0%
Has both Credit cards (revolving) and Mortgage/Car loans (installment)
Has 0-1 inquiry in the last year (inquiries fall off after 2 years, but count less or not all for your scoring in 1 year)
Edit to add, you can have a credit score that will get you the lowest rates on anything you need, which is >750-760 FICO, with a large number of inquiries and an account age of just a few years old, if your utilization is good and you have no lates or collections.
It’s important to keep the rating agency comments in perspective. Even if you have wonderful credit going back decades, they’ll still find something to bitch about.
Said another way, the scoring system is in effect subtractive. i.e. we can think of it as everybody starting with 800 points and as they look at a person’s specifics they’ll see things to ding them for & the person will get adverse comments. If someone’s final score is 795, there will only be one minor ding comment. If their score is 200 there’ll be lots of ding comments.
Overall I’d say the OP is doing it right as a first step. One of the things they ding folks for is rapid changes in credit available, outstanding balances etc. Since the OP is trying to remediate what’s already a non-standard situation, better to tackle it slowly & carefully for the first few months. Then advance to having a second card, or carrying a 20% of limit balance for a couple of months then paying it off, etc.
The key way folks get in trouble with credit is to assume they’ll never have to pay off the balance. Don’t do that and you’ll be fine.
Carrying a balance from month to month isn’t that expensive in and of itself. e.g. in Jan, charge $100 of *spending you were going to do anyway *and pay only the minimum payment. In Feb charge another $100 of *spending you were going to do anyway * and pay $100 plus the interest charge. Do the same thing month after month, paying what it takes to keep the after-payment balance at $100. After a few months pay the whole thing off. do that for a couple months then repeat the cycle.
Even at 25% interest (which ought to be illegal) you’ll spend $15-20 “investing” in a better credit score. Which in turn will get you a new card with a lower interest rate. And notice that except for the $20ish of interest, we didn’t spend any money we weren’t going to do anyhow: just our normal $100/mo of groceries, gas, whatever.
All good advice. Having worked at a credit card company (don’t hate me) I’ve seen plenty of people who just HAD to have a higher limit and plenty of people who got outright rejected because their credit score was in the tank.
Stick with a few major cards (the store line I work for had about a 27% interest rate), treat it like real money (because it is), and never use one card to pay off the other. Credit takes years to build but one month to destroy.
Why “carry a balance” for multiple months? I pay every month in full, and I always have a balance that counts towards my “credit utilization.” Basically, I use a card for certain routine purchases in the month of January, get the bill February 1st, and pay the bill when it is due March 1st (ish). Then, in February I make more purchases, which are paid off on the April 1st bill. That means I always have a balance with 1-2 months of purchases that count for credit utilization, and I never pay interest.
Anecdotally, probably. I’ve been paying mine off in full every month for 15 years, and never financed anything else except credit cards, and my credit score is 789. And once or twice a year, it goes up a few points.
I took a new card (because Best Buy gave me $20 for applyng) and that did not lower my score.
No reason to ever carry a balance month to month. It doesn’t affect the score.
With your basic credit report, if they only pull it once the creditor has absolutely no way of even telling if the balance reported is paid off in full already or you carry it month to month - it simply reports the balance reported by the creditor (generally at statement close). Some creditors report your last payment but that doesn’t necessarily say anything - you can charge a little bit one month, pay it off, then charge a lot the next month, pay it off, and your balance will be <big number> and last payment be <small number> and still be paying it off monthly.
I can second jtur88’s experience. 20 year credit history. Never financed anything. No mortgage. Never carry a balance (pay in full each month). My credit score is 796.
You (OP) aren’t doing it the best way you could.
Using all your credit is a big red flag (re: your credit score).
According to Build Your Credit Score Faster , anything over 30% usage is a ‘negative’.
Use only about 25% of your limit. Pay it off every month for 6-9 months. Then request a higher limit. Repeat.
Then open another card and use 20-25% of that one ea. month.
Thanks, guys! Glad to hear most of you think I’m going about it correctly, but HipGnosis is saying something I’ve never heard. My initial confusion stems from the fact that some people say you should carry your balance over month-to-month, and some say you should pay it off completely every month. But HG, you’re saying I should pay it off every month, but only put a quarter of money on the card to begin with? So, even with a very small limit ($800, I don’t mind saying), you’re saying I should only put $200 a month on it? Does it not build my credit “faster” if I spend almost $800 a month on it, as long as I pay it off completely every month?
HipGnosis is correct, high utilization is a negative. The reasoning is that high utilization indicates a problem with handling credit (not being able to stop buying). Of course ridiculous in your case with only a $800 limit but computer algorithms aren’t always that smart.
Having multiple lines of credit is a plus, up to a limit. Typically you want 2-4 credit cards. You don’t have to use all of them, just having a line of credit (and the credit limit) is good for your score.
Well bollocks. I guess I’ll stop putting that much on it, then. Just a couple hundred a month, eh? Almost doesn’t even seem worth it, but hey, whatever works!