Improving your credit score

[FourPaws]

@InLucemEdita

This was my impression, too.
But just from what I’d read.
I understand that the percentage of total credit line used is considered in the score but I thought the type of cards you had was also a factor.

Four Paws are you certain this isn’t the case?

Store cards are supposedly counted against you simply because the type of lender that they are. In actuality, it’s the ratio of credit line to purchases that really does you in, not the ownership of store cards.

Also, the frequency of opening them can be a factor – opening four store cards at xmas for instance, and then charging the credit line would drop your score drastically – all for the benefit of getting 20% off of your purchase that day. Blecch.

Bottom line – they are not worth the hassle, especially with the ginormous interest rates and fees and low credit lines.

[Mr.Slant]

% of available credit used isn’t that simple.
It affects two methods that the FICO system uses for scoring:

1. Total % of available credit in use.
2. % of individual tradelines in use.

And, by extension, the # of tradelines at various levels of usage.
The FICO scoring system is hideously complex. It looks for combinations of factors that, individually, it really wouldn’t care about. I’m actually in awe of how complex it is, despite my awareness that it’s a limited tool: and one that has recently gotten a ton of very smart people in industry in a ton of trouble due to their foolish decision to rely on it overmuch.

[letter_after_rho]

There are excellent books on this topic that go into great detail.
Any librarian can assist you. One common series is the Nolo Press books. They have a number of free articles at their site nolo.com

[Mr.Slant]

With all due respect, to the well-read, most of the treatments of credit scoring intended for consumers are laughable.
I spent years on a message board where we tried to reverse engineer and experiment with the FICO system, pulling our scores and reports daily and monitoring which changes in which reports did what to which score. I can find fault in most articles on the topic in the first two paragraphs.
Now the professional literature, that’s a different story…

[Elza_B]

@FourPaws

Store cards are supposedly counted against you simply because the type of lender that they are. In actuality, it’s the ratio of credit line to purchases that really does you in, not the ownership of store cards.

Also, the frequency of opening them can be a factor – opening four store cards at xmas for instance, and then charging the credit line would drop your score drastically – all for the benefit of getting 20% off of your purchase that day. Blecch.

Bottom line – they are not worth the hassle, especially with the ginormous interest rates and fees and low credit lines.

Huh. That’s good to know. To be honest, I keep it because it’s the store where I do most of our household (non-food) shopping, and I buy diapers (when he was younger, I bought formula and baby food there), and I actually use it to budget each month - I will buy clothes there sometimes for me and for the kiddo (however, I’ve lost 40 lbs and have dropped 4 sizes in the last 8 months, and am still working on losing another 30, so I tend to buy clothes at a secondhand shop anyway, unless I know it’ll last me even if I get smaller…). Once our household items are bought on a monthly basis, I use it for a little ‘play’ money and we buy a CD or a book or a toy here or there. But it gets paid in full every single month. I never carry a balance on it.

But that’s food for thought. I will definitely look at closing it. My husband and I talked about putting me on his credit card and we’ll use it each month and pay it off each month for groceries, bills, etc.

Aside from that one store card, I won’t open another one. The only reason I have that one is because it’s Target, and it’s my favorite place to shop . Having the card keeps me in check each month because I know how much I can spend at Target each month, and prevents me from OVER-spending there, if that makes sense. But I’ve gotten much better at budgeting, so I can do the same thing with a regular credit card.

This has been interesting to learn about - I wish I had cared about my credit score at 24. :smack:

[FourPaws]

@Mr. Slant

% of available credit used isn’t that simple.
It affects two methods that the FICO system uses for scoring:

1. Total % of available credit in use.
2. % of individual tradelines in use.

And, by extension, the # of tradelines at various levels of usage.
The FICO scoring system is hideously complex. It looks for combinations of factors that, individually, it really wouldn’t care about. I’m actually in awe of how complex it is, despite my awareness that it’s a limited tool: and one that has recently gotten a ton of very smart people in industry in a ton of trouble due to their foolish decision to rely on it overmuch.

“In use” isn’t that simple.

The definition of “in use” is just that the card is active and current and the credit company is reporting as such. Each company has their own parameters.

[FourPaws]

@Mr. Slant

With all due respect, to the well-read, most of the treatments of credit scoring intended for consumers are laughable.
I spent years on a message board where we tried to reverse engineer and experiment with the FICO system, pulling our scores and reports daily and monitoring which changes in which reports did what to which score. I can find fault in most articles on the topic in the first two paragraphs.
Now the professional literature, that’s a different story…

Exactly. It’s incredible to see the amount of literature out there on the topic that is completely incorrect.

It’s almost like reading the newspaper.

[FourPaws]

@Elza B

Huh. That’s good to know. To be honest, I keep it because it’s the store where I do most of our household (non-food) shopping, and I buy diapers (when he was younger, I bought formula and baby food there), and I actually use it to budget each month - I will buy clothes there sometimes for me and for the kiddo (however, I’ve lost 40 lbs and have dropped 4 sizes in the last 8 months, and am still working on losing another 30, so I tend to buy clothes at a secondhand shop anyway, unless I know it’ll last me even if I get smaller…). Once our household items are bought on a monthly basis, I use it for a little ‘play’ money and we buy a CD or a book or a toy here or there. But it gets paid in full every single month. I never carry a balance on it.

But that’s food for thought. I will definitely look at closing it. My husband and I talked about putting me on his credit card and we’ll use it each month and pay it off each month for groceries, bills, etc.

Aside from that one store card, I won’t open another one. The only reason I have that one is because it’s Target, and it’s my favorite place to shop . Having the card keeps me in check each month because I know how much I can spend at Target each month, and prevents me from OVER-spending there, if that makes sense. But I’ve gotten much better at budgeting, so I can do the same thing with a regular credit card.

This has been interesting to learn about - I wish I had cared about my credit score at 24. :smack:

BTW- I didn’t advocate you closing your account – just simply paying it off and not using it. Since you already have it, and have had it for some time, I would suggest keeping it open. Keep the card for emergencies, etc if you think you won’t be tempted to buy irrationally; otherwise destroy the card. But keep the line open.

[Mr.Slant]

@FourPaws

“In use” isn’t that simple.

The definition of “in use” is just that the card is active and current and the credit company is reporting as such. Each company has their own parameters.

We’re misunderstanding one another. Perhaps I used the wrong term. I stopped being a credit board junkie back when I bought my house, as I’d fixed up my credit nicely.
As an aside, it is NOT that hard to get nasty tradelines deleted as long as the bill has been paid. Amazingly easy, actually.
I meant % of tradeline credit utilized when I wrote my above post, not # of opened and live accounts.

[Shodan]

@Lemur866

The important thing to remember about your “credit score” is that it isn’t a score of how good you are at managing money, it’s a score from the credit card company’s perspective on how profitable a customer you will probably be.

This is why you get the seemingly paradoxical advice on how to raise your credit score…take out more loans but pay them off. Don’t be late on payments, but don’t pay off early either. From the credit card company’s perspective, someone who never misses the minimum payment, who keeps paying 18% interest but never pays off the principal is a prefered customer.

This can hardly be over-emphasized.

Don’t do stuff just to raise your credit score. Do stuff that makes sense financially, and let your credit scores take care of themselves. This means getting one no-fee credit card, and pay off the balance in full every month. No exceptions. If you have to eat beans and rice for a week to pay it, look for Mexican recipes on the Internet.

And the instant you say “I can’t afford to make the full payment” is the instant where you lose, and the credit card companies have you by the balls. If you can’t afford to pay for it now, how are you going to pay for it at 18% interest?

The credit card companies hate this advice. They will do everything in their power to try to get you to carry a balance. One of the most common scams it to offer you a credit card with 0% interest, guaranteed. And they will follow thru, the first couple of months. But I can almost guarantee that, buried in the fine print, is verbiage that says they can change the interest rate at any time, and for any reason.

So, you build up a balance, they send you a mailing with five pages of fine print, and buried in there will be a notice that they are jacking the interest rate up to 18%. They are betting you won’t read it. Then the next month, you will get a bill with finance charges. They are betting you won’t pay off the balance. And then they got you, because the temptation is to look at the minimum payment and see that it is a hell of a lot lower than paying off the balance, and you have more in your pocket than you would if you paid in full. And they own your ass.

There is no limit to the creativity of folks who are trying to get into your wallet. I received a notice from a credit card company that they were giving me a Christmas present - I didn’t have to make any payments on my credit card bill that month. Pretty generous, yes? Buried deep in page 3 was a notice that they intended to charge interest and finance charges on the full balance. “Merry Christmas, valued customer - turn around and bend over.”

Ho ho ho, mo-fo.

Regards,
Shodan

[Mr.Slant]

Elza,

Now that you have that tradeline, I do not suggest you close it. I couldn’t make that determination without more information than you’ve given, and quite frankly I wouldn’t suggest you share that much data here.

[ZipperJJ]

@Shodan

This can hardly be over-emphasized.

Don’t do stuff just to raise your credit score. Do stuff that makes sense financially, and let your credit scores take care of themselves. This means getting one no-fee credit card, and pay off the balance in full every month. No exceptions. If you have to eat beans and rice for a week to pay it, look for Mexican recipes on the Internet.

And the instant you say “I can’t afford to make the full payment” is the instant where you lose, and the credit card companies have you by the balls. If you can’t afford to pay for it now, how are you going to pay for it at 18% interest?

Are you saying that this is how every credit card, in every instance, for every person should work? I can see how it’s good advice for someone trying to work their way out of bad spending habits, but I’m always slightly taken aback by statements like this on the Dope. The idea if you ever pay a lick of interest on your credit cards you’re a fool. Is that really what people think?

I’ve had credit cards for the last 10 years. There’s been points where I am paying interest on a high balance, some when I am paying on a low balance and some where I have been able to pay off monthly. I’ve gotten store cards so I could save the 20% and also take advantage of the 0% interest when payed off at a certain time, and ended up paying 0% interest.

My credit cards got me through being able to establish a business, and buy/furnish a home. The interest I pay is part of my budget.

After using credit cards and carrying balances for 7 years, my credit score was 785 when I bought my home. Sure, I paid some interest. Not thousands of dollars. But having cards and paying interest and keeping up with my finances help me get to where I am now - a financially responsible single woman who started her own business at 21 and bought a home at 26 and doesn’t live above her means.

I realize that where I am financially took time, planning, skills, hard work, diligence and sacrifice and maybe not everyone can be in the same boat as me. But it makes me feel bad that so many people are told to be scared of credit cards and credit and interest to the point where people think there is either life with a no-balance card or a life of eternal damnation.

It seems to me that it ends up working out like bad dieting advice. People set such un-reachable goals for themselves that they are either starving or gluttonous and set themselves up for failure. Subscribing to blanket statements about diet and exercise doesn’t give people the incentive to find out what works best for their lifestyles and body makeup and they get frustrated when what works for everyone else doesn’t work for them. Understanding exactly what your life and your body requires is the healthiest way to form your eating habits, just the same way that understanding your lifestyle and income level (present and future) helps you to form your own personal best financial habits.

You CAN live a financially sound lifestyle while carrying credit card balances. But you MUST pay attention and you MUST plan. Just tighten the belt as far as you can by taking stock of everything involved in your family’s financial needs and goals, and don’t tighten the belt too far so that you can’t breathe or else you’ll just give up and go back to being bloated and broke.

[Mr.Slant]

ZipperJJ,

I think the argument is that no step in what you just described REQUIRED you to carry credit card debt.
If you spend on credit cards, they’ll be glad to keep them open.
I’d be glad to pocket 2% of everything you spend, and so are most banks.

[ZipperJJ]

@Mr. Slant

ZipperJJ,

I think the argument is that no step in what you just described REQUIRED you to carry credit card debt.
If you spend on credit cards, they’ll be glad to keep them open.
I’d be glad to pocket 2% of everything you spend, and so are most banks.

Well, for what it’s worth, the first time I ever paid interest on a credit card balance was when I was in my early 20’s and I had a boyfriend who had just moved to Ohio, didn’t have a job and couldn’t pay his rent. I borrowed against my credit card so he could stay afloat for a while until he got a job and could pay me back. He did eventually pay me back but I ate the interest, out of love. It made sense to me at the time that I had all this money available to me and someone I loved really needed it so we leaned on the credit card and the idea of interest for “the now” and it all worked out ok. That’s a great example of how I think credit cards can be used and how they are a good thing. When you or someone you love is about to be homeless it doesn’t do you any good to worry about a couple hundred bucks of interest, or feel like a fool for having to pay it.

When you get any loan, you pay interest. Why is it such a horrible thing to pay it on a credit card loan?

[Shodan]

Because, more often than not, you are borrowing money to buy a depreciating asset.

The attraction of a no-fee credit card on which you pay off the balance every single month is that it is a short-term, interest-free loan. You are using some one else’s money, for free. You are getting, IOW, the same deal you gave your boyfriend. But the company is not doing it out of love, but because they hope you will slip up and not pay the balance.

Suppose, instead of borrowing against your credit card, you had dipped into your savings. In that scenario, you lose out on the interest you would have earned on the money you loaned him. Instead, you lost out on the interest you would have earned, as well as the interest you had to pay the credit card company.

That doesn’t mean you shouldn’t have done it. It means that your financial life will always go better with a clear-eyed understanding of what you are paying, and what it buys you. Saving up for a purchase means you are letting other people borrow your money until you need it, and they pay you interest. Using a credit card means paying other people interest for letting you use money you don’t have.

You can get away with paying interest and still come out ahead if you buy assets that increase in value - houses, for instance. You can also get away with it if you are willing to pay for the use of something before you have accumulated the assets to pay for it - car loans come to mind. But car loans and such-like are cheaper to obtain (usually) because they are secured debts. If you don’t make your car payments, they can repossess your car. Credit card debt is typically unsecured debt, and thus the credit card companies have to charge more because of all the people who don’t pay their credit card bills and have nothing that the credit card companies can get to offset the loss.

That is why Lemur866 makes such a cogent point. The ideal customer (from the credit card company point of view) is the guy who carries an unsecured balance and pays on it as reliably as he would for a secured debt, because he is paying interest that he doesn’t have to. People who are that organized and reliable could save up their money and pay cash - but instead they pay 18%.

People often get into trouble because they think that credit card debt is free money - and it never, ever is.

Regards,
Shodan

[FourPaws]

@Mr. Slant

ZipperJJ,

I think the argument is that no step in what you just described REQUIRED you to carry credit card debt.
If you spend on credit cards, they’ll be glad to keep them open.
I’d be glad to pocket 2% of everything you spend, and so are most banks.

I assume you’re referring to the credit card processing fee / merchant fee, not the interest rate.
People may be unaware that credit card companies make a lot of money from this fee as well - not just interest, late fees, and overlimit fees.

[Athena]

I’m with ZipperJJ. Just because many people get into trouble with credit cards does not mean that using credit cards or carrying a balance is automatically a bad thing.

For what it’s worth, I just pulled my VantageScore (which is apparently replacing the old FICO score) from Experian, and it’s 990 - the highest it goes.

I currently don’t carry any credit card debt, but I have in the past, and I have no regrets. I used the cards for specific reasons - business startup expenses, occasionally to finance travel, etc. I paid them off over time, and was happy to pay interest for the service. It was a good deal for me.

People can use credit responsibly, and there are good reasons for using it.

@Shodan

If you can’t afford to pay for it now, how are you going to pay for it at 18% interest?

I can think of a dozen reasons how I’d pay it off plus interest.

Maybe I’m getting a new job with a better salary, but I need to buy clothes now so I can dress correctly for the job.

Maybe “Big Ticket Item X” is on sale right now, I don’t have the cash at hand, and even factoring in credit card interest it’s a better deal than buying it off-sale.

Maybe I have an ethical issue (like Zipper’s homeless boyfriend) and a couple hundred in interest spread out over a few months is worth it to me to fix it.

I could go on.

[Malthus]

@RickJay

It may be different in the USA, but in Canada credit scores aren’t really what the banks look at for mortgages, and I had a mortgage officer tell me that just two weeks ago. They have their own way of figuring what they’ll give you and it’s primarily based on four questions:

1. How much money does this person/couple make?
2. What do they have to pay now?
3. What’s the difference?
4. So can they afford this mortgage?

From my bank’s perspective, whether or not I paid my furniture loan bill late last September is of very little importance. What matters to them is whether I can afford it, because if I can, they’re getting the money. On the other hand, I could be the most conscientious bill payer in the world, but if my income would be stretched beyond a certain danger point by the mortgage I’m not getting it.

Indeed, I’m not really sure to what extent a credit score is important in Canada.

I have a credit card and a mortgage, but in neither case was a credit score mentioned - when I went for my mortgage, they asked me about employment and down payment, and sent someone to physically look over the house.

[BlinkingDuck]

@ZipperJJ

Well, for what it’s worth, the first time I ever paid interest on a credit card balance was when I was in my early 20’s and I had a boyfriend who had just moved to Ohio, didn’t have a job and couldn’t pay his rent. I borrowed against my credit card so he could stay afloat for a while until he got a job and could pay me back. He did eventually pay me back but I ate the interest, out of love. It made sense to me at the time that I had all this money available to me and someone I loved really needed it so we leaned on the credit card and the idea of interest for “the now” and it all worked out ok. That’s a great example of how I think credit cards can be used and how they are a good thing. When you or someone you love is about to be homeless it doesn’t do you any good to worry about a couple hundred bucks of interest, or feel like a fool for having to pay it.

When you get any loan, you pay interest. Why is it such a horrible thing to pay it on a credit card loan?

I can read your words…and understand them but it is foreign to me.

This was the biggest issue in getting married.

To me, if I didn’t have the money, I didn’t spend it. NO MATTER WHAT. If that meant I had to eat ramin, so be it. Heck, if I had to eat nothing, I would have done it (but you can get cheap food to fill you up).

I just didn’t go negative but stuck it out.

When I got married, I was introduced to:

'We don’t have the money but we HAVE TO HAVE this" - I understand her point, but if one didn’t plan well and there is no money for food then hunger is a good teacher (well not really hunger because you can get very cheap food - you just won’t like it but you won’t be hungry). You don’t HAVE TO HAVE this…it can wait unti payday.

“We can buy this now because we get paid in a couple days” - well…then wait a couple days. See, this is a trap. What happens next pay period when we have to pay off THIS payperiod…what is going to be so magical about NEXT payperiod that we will spend less than this one to make it up?

etc etc

This came to a head a few months after being married when I sat her down and showed her that we were spending then making every month and I didn’t see how it would change…but that if it kept up then I would quit my job. I mean…what is the point in working if every month that goes by you are worth less?
It was tough at first - two different value systems head-to-head. I still am not comfortable but neither is she - a compromise - but we can live with it. It really helped when BOTH her best friends got married about the same time lost their homes because both they and their husbands were spenders and not paying attention at all.

[FourPaws]

@Shodan

Because, more often than not, you are borrowing money to buy a depreciating asset.

The attraction of a no-fee credit card on which you pay off the balance every single month is that it is a short-term, interest-free loan. You are using some one else’s money, for free. You are getting, IOW, the same deal you gave your boyfriend. But the company is not doing it out of love, but because they hope you will slip up and not pay the balance.

Suppose, instead of borrowing against your credit card, you had dipped into your savings. In that scenario, you lose out on the interest you would have earned on the money you loaned him. Instead, you lost out on the interest you would have earned, as well as the interest you had to pay the credit card company.

That doesn’t mean you shouldn’t have done it. It means that your financial life will always go better with a clear-eyed understanding of what you are paying, and what it buys you. Saving up for a purchase means you are letting other people borrow your money until you need it, and they pay you interest. Using a credit card means paying other people interest for letting you use money you don’t have.

You can get away with paying interest and still come out ahead if you buy assets that increase in value - houses, for instance. You can also get away with it if you are willing to pay for the use of something before you have accumulated the assets to pay for it - car loans come to mind. But car loans and such-like are cheaper to obtain (usually) because they are secured debts. If you don’t make your car payments, they can repossess your car. Credit card debt is typically unsecured debt, and thus the credit card companies have to charge more because of all the people who don’t pay their credit card bills and have nothing that the credit card companies can get to offset the loss.

That is why Lemur866 makes such a cogent point. The ideal customer (from the credit card company point of view) is the guy who carries an unsecured balance and pays on it as reliably as he would for a secured debt, because he is paying interest that he doesn’t have to. People who are that organized and reliable could save up their money and pay cash - but instead they pay 18%.

People often get into trouble because they think that credit card debt is free money - and it never, ever is.

Regards,
Shodan

Maybe we shouldn’t buy depreciating assets. That would solve the problem. We’ll just buy homes with our credit cards.

Truly, there is not one right answer. It depends on the individual. It’s not a cardinal sin to pay interest, if you’re doing it with both eyes open.