Establishing credit with a credit card. What is the best way to handle the balance?

I’m 37 and haven’t purchased anything on credit since my early 20’s. I pulled my credit report and it’s blank.

I’ve learned that having no credit history can be as troublesome as having bad credit.

Anyway, I was able to get a credit card through my credit union. (I’ve had a checking and saving account with them for a while)

As far as FICA score, what is gonna look best? Using my card and paying the balance in full each month, or leaving a balance and making payments? I’ve heard conflicting advice. My natural inclination is to pay the balance because of the interest. But i’m willing to live with a balance temporarily if that’s the best way to get a credit history.

I think this might be an IMHO question.

The most important factor in your credit score is a lengthy history of regular timely payments. Pay it in full every month.

Not just that…

Pay it in full, sure. But the FICO score also takes into consideration credit in use relative to credit available.

So…if you have a credit card with a $1000 limit don’t run it any higher than $500 at any time.

And pay it off in full each month.

The effect of carrying balances that are a certain percentage of your total credit limit is taken into account but only temporarily. It is fine to use the entire $1000 available in your example as long as you pay much of it back before you need credit again. Credit utilization ratio is a single factor and not one that takes history into account. You don’t want to be at the $1000 limit when you apply for a new card but it is fine if you don’t need new credit. You don’t have to keep your credit score as high as possible at all times.

I’ve also heard that closing an account hurts your score. Say you have 3 cards, pay one off then cancel the card. Why is that? And is there some general rule or formula one can abide by to understand all this?

I’ve been looking at cars. Honda offers 1.9% (for qualified buyers). In the future I want to be one of those qualified buyers.

I’ve heard that closing accounts hurts your sore only if you close your oldest line of credit. You want to show long-standing credit basically.

I have closed plenty of new cards but I always keep my oldest card.

Unfortunately BOA decided that my oldest card (since 1998) had been stolen/compromised (it hadn’t) and just went ahead and closed that account for me. Pissed me off because now my oldest line of credit is only from 2003 or something.

But yeah, I believe it’s just having “old credit” that is the basis of not closing cards.

Here’s where it gets tricky, since the FICO score does consider average age of credit accounts, but it’s technically correct that closing an account does not affect the average account age (since opened and closed accounts are both considered). However, closing accounts does decrease your total credit available, thus increasing your credit utilization ratio and potentially hurting your score. So if you really want to close an account, at least ask for a credit limit increase on one of your other accounts.

Better yet, get a limit of $10,000 and still don’t run it higher than $500 every month. The more credit you have available to you that you’re not using, the better. It’s demonstrating to creditors how much financial willpower you have. :slight_smile:

See I’ve also heard that having too much available credit is bad too. A lender doesn’t want to see that you make $50k in a year have the ability to run up $60k of debt overnight.

That’s just not true. Even though the exact formula is a secret, we know that these are the factors that contribute to the score. What matters is the credit utilization ratio (CUR). None of those would indicate that having “too much credit” could hurt you.

It won’t hurt your score but lenders may not like seeing it if they look beyond your score to your actual credit report. If they are looking in this much detail though, they will tell you what the problem is and you can close cards as necessary.

Paying off the balance each month might seem the best thing, but it does potentially have it’s downside though.

Are you sure you are not? If you make a good income, that plus no bad credit may be enough. And then you can build your credit score through car payments.

I have pretty good credit - 760 score or so. I’ve never had a late payment on my 2 credit cards, and they’ve been active for maybe 8 years and 4 years respectively. I carry a balance of 25% of my available limit on them, the interest rates are pretty low.

I recently started looking at cars. The dealer financing departments have all reported that I have excellent credit, but “limited credit experience” - meaning, I’ve never had a long-term loan I’ve had to pay off (like a car loan or a mortgage). Therefore, although my credit score would qualify me for one of the best interest rates, no one is interested in giving me a loan unless:

A) I get someone to cosign the loan with me.
B) I put down a large down payment, e.g. 50%.

When I inquired while at the bank on other business, Wells Fargo was generous enough to offer me a loan - at a 12% interest rate.

It’s really rather aggravating.

What’s ridiculous is that I make plenty of money (and can prove it), and have enough saved to pay for most of the cars I’m looking at with cash. I’ve been looking for a loan simply to build my credit history, yet no one wants to take my money because I have insufficient credit history!


That’s really frightening. I have arranged with the bank to automatically debit my chequing account on the 24th of every month to pay the CC bill. I am careful to always have money in the account to cover it. They still get their 3% or whatever on every purchase, so I don’t think I am actually costing them money.

I think that was true under the old FICO scoring model, but FICO '08 changed it.

See points 4 and 6

Unforunately some slacker financial advisors are still preaching that too much credit will hurt your score. That’s old news.

I’m a huge Clark Howard fan. Check out his credit score guide.

Since the annual fee seal has been broken, I would think now cards are more likely to add an annual fee to “unprofitable” cards than to cancel them.

Not to hijack, but those 1.9% rates are sales puffery. If you forego the 1.9% rate, then they will give you a $1000 to $1500 extra off of the price of the car.

Get a quote with the 1.9 rate and without. Then get out your ciphering tool and compare the money you would pay out with the 5-6% rate from the bank at a lower price versus 1.9 at a higher price. They are usually very similar.