Hey all - I need some help/tips on building credit.
Quick background: live in the US but not US citizen (am on my second H1B visa). Never have been able to get a credit card either do to status (Legal Alien) or no credit history.
Well the improbable has occurred and I got approved for a credit card with a $3K balance - yay for me…So now my question is how to properly build up my credit? run up a high balance and pay minimum payment each month? Pay full balance each month? Keep balance at $1.5K and pay minimum and then some each month?
I wouldn’t carry a large balance on the card.
I would however use it regularly and pay the balance in full on time every month. This will demonstrate your dependability on paying the bill when due.
Skipping payments or paying late is a bad mark in their record books.
I would also consider taking out a loan for your next vehicle, paying every month, on time for the duration of the loan.
Credit companies are willing to give lots of credit to people who can demonstrate that they are consistant payment makers when it comes to billing time.
While they’d prefer you make minimum payments so they can suck inetrest money out of you instead of paying in full it doesn’t really matter in regards to building good credit.
Why would you want to run up a high balance and only pay the minimum (or a little more)? If you think that is any kind of suitable strategy, you might want to look into the mathematics of credit cards a little bit more before you start spending. Since you haven’t had one before, you might not be aware of exactly how they work and how the interest charges add up.
As for building your credit, I have read that the best way is to make some charges each month and pay them off entirely upon receipt of the bill. You don’t want to charge up to the limit all the time even if you’re going to pay the whole thing off immediately, because then when you do want additional credit cards or loans, your credit report will show that you were always maxing out your credit card. I believe that’s not a good thing in the credit world, even if you do pay it off all the time.
If you can’t pay off the whole balance on the next bill, MAKE SURE to make some kind of payment - any kind - BEFORE the due date. Credit card companies and loan issuers want to see regular, on-time payments. Lots of people think that if they miss a payment but then pay double or pay the whole balance the next time, it “evens out” somehow and all is good. It is not. Plus, those late charges will absolutely kill you.
Credit card companies tread a fine line here. They don’t want you to pay the full balance. If you do, they lose income. They have a name for people who pay in full each month: Deadbeats.
OTOH, they want to be sure that they can milk a consumer and not get stuck with a huge uncollectible balance. That’s where the FICO model comes it. The FICO score is highly (inversely) correlated with bankruptcy filing: The lower the score the higher the probability that a borrower will file for bankruptcy. Because the FICO model is based on statistical probability and not the good credit practices our parents taught us, or should have, it sometimes yields some strange results.
As far as what they want to see? They love the Universal Default and you can bet they love late fees and penalty interest rates.
Your links indicate that the second option is the best option (Pay full balance each month?). From the MSN link:
The best option seems to be to charge a small amount every month (to keep your ratio of debt to credit low) and to pay it off every month (to establish a history of on-time payments).
Keeping a constant balance only serves to give the credit card company your money in the form of interest.
I think some people are confused about the distinction between credit reporting agencies and credit card companies. As far as I know, credit reporting agencies supply the credit score, which credit card companies can do with as they wish. If there is some partnership between these separate companies, I’d like to hear about it. While I’m sure credit card companies enjoy receiving your interest, giving them extra money doesn’t help your credit score.
My personal advice is to take it easy with that card you just got.
To keep it active, buy gas, groceries and toiletries with it.
If you confine your spending to those categories, which few Americans really go overboard on, (except for some folks discussed in this thread ), you shouldn’t wind up in trouble and your card issuer will see enough activity to grow to like you and report positive activity on your account.
If you investigate this matter, you will note that 20% balances on 3 cards may be close to ideal for your credit score. I would suggest to you that my advice will build your credit, and unless you’re actually in the process of trying to qualify for a particular loan product, is a better idea than running a $600 balance every month in an attempt to dope your credit score.
Just act like a grown-up with your credit, and your score will grow without too much effort on your part.
Remember, be careful with all this credit stuff, or you’ll wind up posting here: http://chat-cards.com/wwwboard/bankruptcy/messages.html
Good point. But take a look at page 10 of the Understanding Your FICO Score pamphlet. It directly contradicts Ms. Weston.
Weston, though usually credible, sometimes publishes erroneous stuff. For instance, a while back I was investigating an industry rumor that paying off old debts can sometimes drop one’s score. I e-mailed her about it. She wrote back and told me that it wasn’t true. Then she wrote this article: When paying bills can hurt your credit. I know, I’m arguing with my own source. Sorry.
As I pointed out before, the FICO model is a statistical one. It’s got nothing to do with what anybody wants or enjoys. I know of no direct partnership between FICO and any creditor. I’m not proposing any kind of grand conspiracy. My point was simply that talking about what creditors want is a little confusing (mortgage companies don’t really give a crap about late fees and would rather have a stream of on-time payments; credit card companies would probably like to see a lower FICO so that they can impose more fees, and they’d probably rather see you pay late once in a while, but late payments will lower your FICO for sure–so don’t). And talking about what the FICO model wants is anthropomorphic because it is a mathematical formula.
I don’t know about that. I pay off my Citi card every, single month, and they always treat me as a golden, AAA+ customer. For example when I call, I never have to wait in a queue once I enter my account number. They’re always willing to work with me. One representative told me that I was an excellent customer and they wanted to make me happy. But… if you consider that I use this card (associated with an airline miles program) for every, single conceivable purchase that I can in a month, they really do make a good quantity of money on commissions from me, more money than they’d make on just interest for someone with a $1000 balance carrying over.
That’s why it took so long for many fast food places to begin accepting credit cards. The fast food industry operates on a low margin. Paying the discount for charges wouldn’t make financial sense for them. So they asked for a better deal. Credit card vendors, meanwhile, were similarly disinterested in making a smaller percentage–to do so would not make financial sense for them. And then they came up with a solution. http://money.cnn.com/2005/06/14/commentary/everyday/sahadi/ http://credit.about.com/cs/anticredit/a/061597.htm
BTW anybody who has not checked out the Frontline story about the history of the credit card industry really should. You can watch the episode at the website.
Paying your balance in full every moth doesn’t please the CC companys, but it does not hurt your credit rating any that I can tell.
In my case it seems to help it a lot. The CC company sees that I am capable of making very large monthly payments, and raises the limit. I also suspect they’d like me to get in so deep I CAN’T pay it off every month.
Since I don’t USE it, the higher limit improves my FICO score, because I then have a much lower debt/available credit ratio.
As an aside, why did your legal status prevent you from building up a credit history? I am in the US on an H1-B (for under a year now and I had never lived in the US before) and I obtained a credit union credit card (with a limit of $500) and a new car loan (although with a 10.7% rate) right from the beginning.
I’ve been here for about 10 months now and my credit score is around the 670 mark (not great, but climbing). I have always put my purchases on the card and payed it back in full every month.
This in no way contradicts the quote I posted before, which was:
Both quotes are saying that whether or not you’ve paid off your balance since the last statement, your credit report will probably show you as having the balance you had at your last statement. So if you had a $300 balance and paid it off, it will look exactly the same as someone who had a $300 balance and merely paid their minimum payment. So there’s little or no benefit to someone carrying a balance if they don’t have to.
Even if you’ll be more favorable to credit card companies by carrying a balance instead of paying it off, this benefit is probably not worth the interest you’ll be paying. Every reputable source I’ve read says that the major factor in your credit score is whether you make consistent on-time payments. The companies who will be looking at your credit score (mortgage vendors, auto loan vendors, cell phone companies, insurance companies) are much more concerned about you paying what you owe on time than anything else. You seem to be basing your credit score theory on the idea that you’re going to use your credit to get more credit cards. There are other, more important reasons to have good credit.
I’m not trying to bicker with you, but I really don’t think encouraging people to maintain a balance just to increase your credit score is a good idea. By the way, I’m not an accountant, but I’m sure that’s pretty obvious.
However, a customer who always pays off the entire balance every month is the worst absolute person to the bank. Since they are actively using bank’s services without giving them a cent other than processing fees from merchants. This is obvious, and if you want to have a good credit history you should be a good customer, and a good customer generates profit for the bank without carrying much risk. That means paying as much interest as you feel you can afford. Think of it as a “good credit fee”.
Looks pretty contradictory to me. We need to distinguish between credit reports and credit scores. The *report *may or may not show balance as of the last statement. But Weston claimed that the *score * doesn’t distinguish. If that’s true it’s an artifact of the reporting system. There is no guarantee that it will be that way. And if she is making a claim any stronger than that, she’s just wrong.
Agreed.
Probably also true.
Fair Isaac, the creator of the score says it accounts for 35% of the variance in a credit score. So I guess it depends on your definition of major. It is the most important single factor, but it accounts for less than half of the variance in scores.
Well now, if that were the case, they wouldn’t need to look at the score. Late payments show up on the report. They account for only 35% of the variance in scores. Actually, it’s a little more complicated because creditors can buy scores that are tailored to their needs. There is little information available about how these scores differ from the FICO model.
*Scores *aren’t free, even to creditors. So the fact that the creditors are paying for them suggests that they are interested in a lot more than payment history.
It’s not my theory.
If you want the best score, you’ll need to have three cards.
I agree that good credit is not embodied solely in the FICO score, and that there are better uses for the score than simply getting more credit. In fact, it quickly becomes counterproductive. Too many open accounts, balances too high=lower score. And once you get there, it’s harder to fix.
The credit industry itself encourages people to get the highest possible FICO score, so it helps to learn as much as possible about how it really works. The model is proprietary, so we only get crumbs from Fair Isaac, and then only when Congress starts talking about regulating them.
Bicker away, it breaks up my day. It seems to me that there is a cost-benefit analysis that each of us must do about whether it is more costly to have a marginally lower score and pay no interest or have a marginally higher score and pay some interest. The problem is that we can’t reliably predict the effect on our score of any given change in our credit profile because the scoring model is a big secret.