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Building Credit
GiantRobo
Registered User regular
Registered User regular
I turn 18 tomorrow, and quite frankly I thought it'd be easier to take out a small loan(~$1,500) for a car(I know it won't be the best car, but it's better than nothing), but before I do that I need to build credit. I want to start out very small so i get used to it and know I won't fall behind on stuff. Peoples of Penny Arcadia land, please help me!
GiantRobo on
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Here are some factors in your credit:
1.) Bankrupticies, foreclosures, defaults, charge-offs, or any other case of totally shirking a debt (duh).
2.) Payment record (on-time is good, late is bad).
3.) Ratio of used credit to available credit. Maxxing everything out is bad. Using a small chunk of your credit and consistently paying it off is good.
4.) Age of accounts. The older your oldest account, the better. The newer the newest account, the worse. This is why people tell you to be careful opening credit you don't need. It affects the "age of most recent account" part of your score.
5.) [In contrast to the above] - amount of credit. If you have tons and tons of credit you aren't using and paying off, it looks like you're planning to do something bad. This is why people tell you to close accounts that you don't use. But generally, that is bad advice. See #4 above. Don't ever close your oldest accounts. Having a old account that you've never been late on is much better than closing an account you don't use.
6.) Variety of accounts. Having well-paid car notes, mortgage, credit cards, and retail credit is better than just having a credit card or just having a car payment. Credit agencies want to know that you can handle all different kinds of credit responsibilities. So you can actually build better credit by getting both a credit card and doing a finance deal at a store.
Everyone is saying "you have to have the discipline..." etc.. Well, duh, because that's why it's called "building credit." You are proving that you know how to manage debt and pay it off instead of just using it to buy things you can't afford. If you don't have the discipline/self-control, then building credit isn't an option to begin with.
That being said, carrying debt and paying interest on it won't necessarily hurt your credit as long as you are in keeping with the above factors I listed (not maxxing it out, paying on time, etc.). As long as you are paying your bill as agreed in your account information, then you are building good credit. However, it is much safer to manage it as advised here, by paying in full every month, because otherwise you're wasting money on interest and also running a huge risk of losing control and doing all those other things that will hurt your credit.
Be carefull with AmEx cards. My friends was screwed over with them (he didn't loose any money but it was damm annoying for him)
He was on the Amex card with no annual fees but interest kicked in the day after you bought something. Like most people who are just building credit he pays it off as he goes so he doesn't have any interest building. Amex said, hangon we aren't making money off you, and reset his terms and conditions so that each month if he pays off the bill it feezes the account until the next month. Basically forcing him to build interest each month. Once he found out what was happening he politely asked to be forwarded to the cancelation department.
Also, 1500 isn't that much? Do you have a monthly phone contract? A job? That should be enough to seccure a loan. If not talk to other banks and see what they can offer.
Satans..... hints.....
Hmm, I think American Express has changed because now you NEED to pay it off every month. In fact, you have to sign up with a special program for payment over time purchases.
I have an AmEx Gold, and the full balance comes due every month, and when I pay it I don't get "frozen" or anything like that. Maybe it's different for the "student" edition with eleventy billion per cent APR. An AMEX Gold has no APR as long as you pay it when they ask for it, though there is a small annual fee.
As far as building credit, I WOULD recommend an American Express card because as far as I have seen it is not your typical "charge 500 dollars pay 20 a month" type of card. You charge basically as much as you want but the entire balance comes due that month so you are forced to watch your ass and ensure you don't overspend. If you can't handle that responsibility, then you shouldn't be touching any credit card in the first place.
The "Blue" series of cards from AmEx are typical credit cards where you can maintain a rolling balance.
the "no true scotch man" fallacy.
No you misread me. He tried to pay off his debt that he had accumulated that month on (for arguments sake say) the 15th. On the 16th his accound was frozen. The reasoning given by American express was that he can only "even the balance" once a month.
Satans..... hints.....
Electronic composer for hire.
Easiest ways to do it are to take out small personal loans, a secured card that reports to credit bureaus, or store cards with easy limits that also report to bureaus.
Several things that I'd advise for building a good credit history faster:
--don't stop at one card. for mortgage purposes, banks are looking for a minimum of four accounts open for at least one year. Don't go get four at once, you'll probably be denied for the latter two, but two lines of credit wouldn't be a bad idea (a small secured card and a small personal loan, for example)
--don't, for the love of Christ, max out the card or go anywhere near it.
NEVER carry a balance of more than 50% of the card's limit at any time. This kicks in a red flag on credit reports that drops your credit score, that reads "proportion of debt to credit limits is too high" which drags down your score.
--there is no benefit to carrying a balance on a revolving account, period. Using it, yes. Paying less than the full amount in a month, no.
--once you've established some credit, DON'T CANCEL CARDS. Once you have say, four cards from other places, (Macy's, Gap, Chase Mastercard, etc) you can go ahead and kill any secured lines, that's fine. But overall you shouldn't do it. Cut up the cards but leave the lines open unless they're gonna charge you fees, and then threaten them with leaving so they don't charge you the fees. If they're going ahead with it, get a new one before cancelling the old one. Overall you'll reduce your available aggregate credit, it'll bring down your score.
--if you have a $500 limit card and a $1,000 limit card, charging $300 would hurt you on the lesser but be just fine on the second. see above "proportion of debt to limit is too high" Always use your higher limit cards first.
Some more tips:
http://www.kiplinger.com/columns/starting/archive/2005/st0630.htm
I don't work for a bureau but we have a bureau rep come by annually to brief us on how it all works, common misconceptions and myths and so many people have no idea how credit works and how badly something stupid or insignificant (like carrying a $400 balance on a $500 card) can hurt you.
It would be better to go with Mastercard anyway, just because not everywhere takes American Express, especially smaller stores and restaurants. I don't know anyone with only one credit card where that card is not Mastercard or Visa.
I was under the impression that short-term borrowing didn't have much of an effect on your credit. Do you have a source for this advice?
It might bump up your credit score, but I think it might be difficult to GET such a loan without credit and definitely looks fishy paying it back without using any of it.
If you DO want to take out a loan and don't have any credit, you will almost certainly need a cosigner; it can still be a decent way to build credit. But I think the credit card route is better. And yes, pay it off in full every month (I've HATED that I couldn't do that on mine the last year - the interest adds up FAST, but I'm getting it paid back down now).
You build credit score by proving over time that you can responsibly handle credit and debt; that you can live up to a financial agreement with someone month after month.
It will affect it, but not by much, you're right.
Your credit score is a function of your total available credit and your demonstrated ability to pay back previous loans/lines of credit. So a large short-term loan demonstrates that ability to some extent. It doesn't hurt, but it doesn't really help.
As stated many times in the thread, the best way to build your credit from scratch is to get a small-limit credit card, use it often, and pay it off in full every month. You can go from no credit to pretty good credit in as litle as 5 or 6 months.
If you're a student, take advantage of one of the student cards you're offered. If not, get a secured card (you pay a small annual fee in exchange for a small credit line).
I know several people with stellar credit with thousands of dollars outstanding on their credit cards who are needlessly throwing away their money every month. A couple of them I have counseled to seek out offers of free balance transfers to cards with 0% interest for 12/18/24 months. I did it for myself...at my worst point I was about $9000 in the hole and paying nearly $100 a month just in interest, paying $170 (the minimum payment at the time) only to see the balance barely move. Since I have good credit, etc, I looked for a card offer, found three (Chase, Citibank, and Bank of America) opened accounts, found out Bank of America was going to charge me 3% transfer fee (so I cancelled their account) and split the balance from my one card to the other two. Didn't cost me a cent.
As of right now I have $2,800 left to pay off of that original $9,000, that I haven't paid a penny of interest on since the transfer over a year ago. The 0% interest on the remaining balance (all on Chase) expires in October....if I haven't paid it off in full by then, I'm just going to shop for another free balance transfer, and close an account (as I have several credit accounts and more than I need, too much is bad)
If your credit is good and you're disheartened by your interest charges every month, I implore everyone to do this. It's saved me well over a thousand dollars, all of which went straight to principal instead.