credit card practices

[hemi68charger]

Hey gang...
Here's a question for the financial-minded... My wife is trying to improve her credit score since it was decimated by her ex-husband. We as a family have pretty much seized to use our credit cards for the past 2.5 years until we get our income-2-ratio down (cash is King). My credit score is fine, but hers isn't. Being that credit card useage is tied into one's credit score (a catch 22 if I ever saw one), strategic use is paramount. I've emphasized she use it, but pay it off each month. What's the percentage of balance owed towards the account's maximum credit line is considered good. I know it's not good to be at a 90% balance to max credit line, so what percentage is considered good? 50%?, 25%?, etc.....

[ITSA426]

I'm not aware there is a percentage but then the standards change so often it isn't worth trying to keep up.  FICO scores aren't even the standard anymore.  Just use the card so it fits into your life without controlling it.  Pay the balance when it comes due and don't sweat it.

[hemi68charger]

I'm not aware there is a percentage but then the standards change so often it isn't worth trying to keep up.  FICO scores aren't even the standard anymore.  Just use the card so it fits into your life without controlling it.  Pay the balance when it comes due and don't sweat it.

That's what I told her.. Granted, they were only $250 or so on two, but it's near the limit on these cards. We have purposely made sure they have low limits.. I just want what's in her best interest for later on in the event something every happens to me, but also want things easier for us now while we're together...

[Patronus]

There are services that report good ratings to your score.

[hemi68charger]

There are services that report good ratings to your score.

Like?

[nh_mopar_fan]

Utilization isn't your only concern. Your credit rating will take a hit if you owe money on too many cards. How many is too many? No idea and they won't tell you. But your best bet is to lower your utilization % and, if you must carry a balance, limit how many cards you have with a balance.

[BananaDan]

From what I have known/heard, it's not based on a percentage, but how much money you actually owe creditors.  Personally, my wife and I funnel about 95% of our monthly expenses through our card and pay it off every month, we rarely use cash or checks anymore.  You just have to be careful to make sure that you do that within your income means and don't charge what you can't pay for.  I agree on the catch 22.  I wrecked my credit in college and when I got out and got my first job I used my debit card to pay for everything thinking if I don't have the cash to buy it, I don't need it.  But doing that for ~3 years and not using my credit card didn't improve my score at all.  The most important thing is making your payments on time, paying "at least" the minimum payment to not show any delinquencies, but try to pay them off entirely every month if possible b/c the interest will kill you and open/owed money to creditors reduces your score.

Also, if you don't, I highly recommend using online bill payment systems that your bank's website would offer.  Ever since that invention I haven't missed a utility/phone/cable bill since, and those affect your credit score as well.  Pulling a copy of your credit report and studying it carefully will give you a good idea of what they look for and it will tell you the top three things that affected your score, both positively and negatively.  Also look for any inaccuracies and/or old credit accounts that may still be open that you thought were closed and close/cancel them if you don't want them anymore.  They count too as part of your total extended credit bottom line.  Also, if you have multiple cards with balances and crappy interest rates, it's time to get a new card with a low or zero introductory rate (on transfers mainly), consolidate all of your balances down to that new card and pay it off before the introductory interest rates expire.

Dan

[BananaDan]

Utilization isn't your only concern. Your credit rating will take a hit if you owe money on too many cards. How many is too many? No idea and they won't tell you. But your best bet is to lower your utilization % and, if you must carry a balance, limit how many cards you have with a balance.

[lisiecki1]

it's my understanding that the most important thing is debt to credit ratio, showing that you have credit available from applicable institutions.  in that scenario you don't even have to use the credit, just have it available.

[Troy]

Revolving credit is really a double-edged sword. Used properly it can boost your credit rating but it can also cause serious harm if you aren't careful. Since this is usually unsecured debt then the balances are more highly scrutinized.

Are you both named on these credit cards or are they only in her name? If you add her to your accounts - especially ones with a long history - her score will go up (even if no one uses them). Don't do it the other way though!

Personally, I wouldn't keep the limits that low. My reasoning is because a large part of your credit score is the amount owed vs the available balance (on revolving credit). You really want to be below 30% of your limit if you carry a balance and anything over about 70% will usually trigger higher interest rates and lower limits from the card company along with a decrease in your score. If you can get the limit raised your ratio will magically improve - as will the score. In the recent "downturn" many credit card companies have decreased the limits on existing accounts - with sometimes drastic effects on the cardholders' credit scores. When a person's score goes up they become a bigger risk so the card company reduces limits and raises rates - even though they caused the problem!

Also, with a low limit, your chances of increasing the balance too quickly are very good - which negatively affects your score and how your bank views you as a customer. For example, after buying gifts during the Christmas holidays I also had to pay for some expensive travel/training for work. It caused a BIG spike in my balance, about a 40 point drop in my credit score, and I got notices from two cards (not the ones I used either!) that they were increasing my interest rates due to how quickly I had been amassing debt. It took about 16 days until the expense check was processed at work and all the balances were paid back down. My score was restored the next month (making huge payments is a positive) and neither card increased my rates after I called to explain the situation. These guys don't mess around when you do something negative but the positive actions all take time. So, having a $500 limit and making a $300 purchase (pressure washer, lawn mower, car repair, plane ticket, etc.) is a poor way to "fix" bad credit.

If you're going to carry a balance it's better to limit the number of accounts if possible. The "typical" consumer with an excellent credit rating only has three accounts with a balance (assuming car and home loans that leaves one card).

Another big part of your score is the debt-to-income ratio but I don't know the desired percentages there. Obviously it depends on whether the particular debt is secured or not. If you have a house that cost 5x your income it's not bad but a credit card with a limit of 40% of your income could be really bad. Having several credit cards with a balance and then deciding to be a stay-at-home parent (or getting laid off) is not a good situation.

There's a common misconception that paying off installment loans (car, house, school, etc.) early is a negative. Not so. Pay extra and get them closed. The amount you pay is tied to your score so paying more than required is a good thing. Not to mention the money you save in interest and the fact that a paid off account looks good to future creditors.

Payment history is nice an all but I don't personally know of any evidence that paying the card off every month really has any effect. It really depends on the date of the payment and when the card reports to the credit bureau (technically you could either always have a balance or always be at $0.00 depending on the posting dates). Missing a payment has a big impact though! However, most companies won't report it until you're 30 days past due so if you make a reasonable attempt to pay (and are a good customer) they'll let it slide. Credit Unions are the most lenient I've found.

Of course,  did all this wrong for a really long time and I'm just now getting a handle on it. I paid cash for everything for about a decade and had a very poor credit rating - and no history! That's definitely not a good plan if you ever want to buy anything large (house perhaps?) on credit.

Troy

[Troy]

Dang, people responded between the last one I read and my post...

I've recently been turned on to myfico.com which gives you quarterly scores/reports and has a monitoring service (weekly alerts) to help you spot fraud and/or access to your credit info. One neat feature is that it will tell you the steps to take to increase your score and what you might reasonably expect (ie. paying $3,000 on a certain debt will likely boost your score from 707 to 723).. Yeah, it costs money but it's better than blindly hoping that whatever you're doing is actually helping.

Troy

[BananaDan]

Wow Troy, I should have shut up!  Fantastic write-up.

[ITSA426]

Of course if you get out of debt altogether, save the money you would pay in interest, and pay your credit cards off each month, and live below your income, you don't need to be concerned about your credit score, except for how you are rated for things like car insurance rates.   It will also leave a huge emotional security feeling. 

I realize all of that is easier said than done but it might be a goal worth aspiring for. I'm not trying to preach to anyone so I hope no one is offended.  These kind of topics are good because almost no one I know, including me, learned anything about financial management until they got into trouble.  I think financial skills should be taught at home, and in high school, and taught by people who aren't trying to sell you something.

[Vainglory, Esq.]

A couple of rules of thumb, although I know I'm retreading some of what Troy already posted.

1) Use the "70-30 rule" - never allow your balance to get above 70% of your limit even if you pay it off before the end of the billing cycle, and never carry over a balance that is more than 30% of your limit to your next billing cycle.

2) Have enough credit available, but don't use it all - oddly enough, having extra cards doesn't hurt you unless you decide that you need to use them all.  Low-risk customers are those who never "need" to resort to their other accounts, and so have only a few balances at any given time.  It's perfectly acceptable to have a credit card that you never use except for emergencies.

3) Use credit judiciously...but use it - you'll often hear stories of people cutting up their cards and "going off plastic."  That's fine if it's what you're into, but it's not the quickest way to increase your credit score.  To help your credit, you have to prove that you can use it responsibly, and not using it at all doesn't help in that regard.

[hemi68charger]

Thanks everyone..

There are some very insightful information. Kim and I are "trying" to get a cash-out loan now. The housing market is taking a big chunk out of our appraised value, which goes hand-n-hand with a cash-out loan. The cash out is going to pay off a big debt we accumulated when we fixed Mom's house to sell. If we can tab into our house's equity, we'll pay off a large amount of debt, about 1,300/month while only increasing my mortgage by about $200. You do the math... The appraisal is the key now...... My credit score is fine...  That extra money can go to pay off the one other card we have and start chipping away at the Durango. At the same time, we have the ability to utilize ONE of the major credit cards we have "just because" and pay it off each month to show our ability to use it responsibily. With the lower income-2-debt ratio post pay-off, my credit score should increase. Kim's will increase with the continued use/payoff of her 2 small limit cards.... "IF", and as of today thanks to the new freakin' mortgage laws that took effect, if we swing it, it'll gain the whole family a more secure financial picture and enable us to care for Mom and place her in an assisted living facility when we can no longer care for her properly and with sanity..

Troy

[learical1]

Question to ponder:
How does paying off you credit cards every month show that you how to handle credit?  I was told that, if you pay your balance every month, the reporting agencies think that you probably could have paid cash for the purchases.
Therefore, you must be:
A.  accumulating credit card benefits (airline miles, 1%-2% kickbacks, etc.) OR
B.  attempting to improve your credit score.
If you charge 20%-30% of your available balance, then stop using the card and pay it off in 3-4 months, you demonstrate your ability to properly manage your credit. 
Think, if you pay your card off every month, what can the credit card company report?  January, $0 balance; you buy something and pay it off; February, $0 balance.  This doesn't hurt your credit score, but how does it help.  Now, look at this: Jan, $0 balance; you buy something for $150 and pay $50 + interest; Feb, $100 balance; pay another $50 +; March, $50 balance; pay off the card; April, $0 balance.  That looks responsible!

[hemi68charger]

Question to ponder:
How does paying off you credit cards every month show that you how to handle credit?  I was told that, if you pay your balance every month, the reporting agencies think that you probably could have paid cash for the purchases.
Therefore, you must be:
A.  accumulating credit card benefits (airline miles, 1%-2% kickbacks, etc.) OR
B.  attempting to improve your credit score.
If you charge 20%-30% of your available balance, then stop using the card and pay it off in 3-4 months, you demonstrate your ability to properly manage your credit. 
Think, if you pay your card off every month, what can the credit card company report?  January, $0 balance; you buy something and pay it off; February, $0 balance.  This doesn't hurt your credit score, but how does it help.  Now, look at this: Jan, $0 balance; you buy something for $150 and pay $50 + interest; Feb, $100 balance; pay another $50 +; March, $50 balance; pay off the card; April, $0 balance.  That looks responsible!

It's all a black box any how........ My credit score just went up. Why? I have no clue other than my income-2-debt ratio is better......

[Tilar]

Question to ponder:
How does paying off you credit cards every month show that you how to handle credit?  I was told that, if you pay your balance every month, the reporting agencies think that you probably could have paid cash for the purchases.
Therefore, you must be:
A.  accumulating credit card benefits (airline miles, 1%-2% kickbacks, etc.) OR
B.  attempting to improve your credit score.
If you charge 20%-30% of your available balance, then stop using the card and pay it off in 3-4 months, you demonstrate your ability to properly manage your credit. 
Think, if you pay your card off every month, what can the credit card company report?  January, $0 balance; you buy something and pay it off; February, $0 balance.  This doesn't hurt your credit score, but how does it help.  Now, look at this: Jan, $0 balance; you buy something for $150 and pay $50 + interest; Feb, $100 balance; pay another $50 +; March, $50 balance; pay off the card; April, $0 balance.  That looks responsible!

Most credit reporting companies only report credit that is established over the course of 6 months or more so paying your credit cards off every month doesn't really do anything for you other than to save you a bunch of interest.


Getting your credit rating up is easy if you have half an ounce of self discipline. When my son turned 18, he wanted to buy his first new car. He had gone to a bank and they all but laughed at him.

Here is a scenario that I gave him and he followed it to the letter, 8 months later his credit was good enough to buy that new car on his own and with minimal money down.

I gave him $1000 and told him to open a savings account at a major bank in town, and then go borrow $1000 on a one year note against that savings account. This is all but a guaranteed loan because they have your money for collateral. Take the $1000 you just borrowed and go to another major bank and deposit that in a savings account and then say a week later, borrow against that account.

At this point you have $2000 in loans and $2000 in savings accounts at two major banks. You can do this again if you really have a lot of discipline making it $3000 in savings and $3000 in loans at 3 major banks. Take the last $1000 and put it in a checking account that will be used strictly for paying these loans back. Do NOT use it for anything else. Your payments will be roughly $88 a month per loan.

Now, If you are worried about making 3 - $88 a month payments, You need to make sure that the banks will release from your savings accounts the amount of principle you pay every month. This needs to be done when you take out the loans. That way as you run out of the last $1000 you borrowed making the payments, you can use the released money from these savings accounts to make the payments.

I told my son to make the payments every three weeks, And then midway through the 7th month, Pay all the loans off. I'm not sure how the ratings are classified anymore, but 15 years ago this would gave him a AAA1 credit rating at those three major banks, and when they will report that type of payment history your credit rating will make a big jump.

[adauto]

it's my understanding that the most important thing is debt to credit ratio, showing that you have credit available from applicable institutions.  in that scenario you don't even have to use the credit, just have it available.

This is correct. Have credit available is often more important. Having maxed out cards w/no available credit shoots you in the foot (so to speak)

[RusTy/SE]

Troy i've read figures as high as 40% (of the credit limit) on each card.

This site recommends 25%...

http://www.creditorweb.com/articles/maintaining-an-optimal-balance-.html

...while bankrate suggests 20 - 30 percent

http://www.bankrate.com/finance/credit-debt/tips-for-boosting-your-credit-score-3.aspx