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Hi! I remember you used to do Financial Fridays and Friday’s almost over by 4 minutes but could I ask a quick (and probably incredibly stupid) question? Do you have to use a credit card that you already have in order to build up your credit score? Or can you just hold onto one? I really did try to find out the answer on my own but no luck 

You do not have to use it!

Basically, your card issuer is reporting your info every month that the card is open.  The provide payment status (if you’re on time or late) if you’re carrying a balance and if so how much, your original credit limit, your current limit, and the date that the card was opened.  

The credit reporting agencies look at this for a few things.  A. how long you’ve had the line of credit.  Longer is better!  It means that you’re in good standing with that lender.  B. If you’re past due on your payments.  This is bad for obvious reasons.  C.  What your current balance is.

A big part of your FICO score (a numerical score that indicates if you are a good credit risk) is your debt to equity ratio.

Let’s say your credit card has a $3000.00 limit.  You do not use that card, and it is your only card.  That means you have equity, but NO debt.  This is excellent!  You have credit that you are NOT USING.  So the logical conclusion that can be drawn from this is that you are financially in a good place!  

Keeping a card and not using it is a good thing.  Be aware, though, that some card providers charge a fee for non-use, or an annual fee.  Do not put up with this nonsense.  If they demand that the card be used, or they might close it without your permission (it is legal, but it’s sucky, it can crater your credit score) if it isn’t being used, then try to make one charge every few months and pay it off as soon as the charge posts.  

Remember, as long as the charge is paid off in full by the due date on your statement, you should into be paying any interest.

Now, this does not mean you should not use your card.  If you need to, or want to, use your card.  Just use it responsibly.  For credit reporting purposes, they are looking for a debt to equity of around one third.  In other words, if you have a credit limit of $3000.00, you should try to keep your use to around $1000.00.  Anything over one half of your available limit is a warning sign to the credit reporting agencies.  

Having a card close to, or at it’s limit, is a major red flag.  Try to avoid it, and pay it down if you can.  Remember, because of 2009s Credit Card Responsibility Act in the US, everything over your minimum payment MUST be used to pay down your balance.  No matter how much you have in fees or interest, any additional payment will go to your balance.

TL;DR, no, you do not have to use a card to have it contribute to your credit score, but if you do use your card, try to keep the balance to at or less than one third of your available limit.  


Former credit card call center worker here — inactivity fees are prohibited by the card act. Also, totally unused cards looks different on credit reports than cards with regular payments; set up a small recurring bill and put the card on autopay.

I’ve never noticed the difference between an inactive and an active card, since many people who are attempting to keep a good credit score will pay off their balance down to zero prior to their credit card reporting date (which can be different from their due date) and both of these instances would show a zero balance.  However, this is very good advice, PROVIDED that you do not make a mistake with your payments.  Always pay attention to an active card, even if you’ve got auto payment set up, because if there is a balance on the card, you are responsible for the payment.

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Mini financial Friday! WHY NOT!

Does a purchase on a credit card getting flagged as suspicious bring down your credit score? This has happened to me 4 times now where my card company randomly decided that I spent too little (iTunes song) or too much (new computer) on something and I’m becoming concerned. I feel like my card is jinxed and I should stop using it before they tank my credit score. :-/

No.  Not at all.

The only things being reported to the credit bureau should be the date that the loan/line of credit was opened, the total available or starting balance for fixed rate loans, the current balance, and the payment history.

Nothing else matters in terms of your credit reporting.

Sometimes people get concerned when they lose a card, have fraud or have real time purchases tagged as suspicious, but none of these things are reported.  Even if you had four actual cases of fraud, and your card number was changed four times, that does not affect your credit reporting.

Basicly, your lender is reporting the line, or the loan.  The particular card number that you’re using to access that line does not matter, that’s an internal bank number.  And any protection that your lender uses to protect themselves from fraud are immaterial to your credit reporting.

Also, a side note: These kind of companies and systems are employed to minimize your lender’s responsiblity for fraud.  To put it in simple terms, you are not ever responsible for fraud that is done on your credit card.  It’s called the Zero Fraud Liability, but guess what?  If someone buys a couch with your credit card in Wisconsin, someone’s gotta pay for that.  It’s not you, and it’s not the retailer.  It’s the lender.  So they want to minimize the potential issues.

Some things that can set off these systems!

-Purchase from high fraud merchants:  These include online sites that specialize in content, not physical items.  iTunes, World of Warcraft, online porn sites (not that any of you would play World of Warcraft! 8) ) and others can trigger these kind of fraud alerts because card companies see a LOT OF FRAUD done through them.

-Purchases outside of your usual buying area:  You spend your daily life in Seattle.  You buy coffee.  You buy umbrellas.  You pay for therapy.  That’s where your card bill is sent, that’s your home turf.  When a charge comes in from a casino in Vegas, the card company is confused.  Disoriented.  Are you on vacation, or is someone taking a vacation using your card without your knowledge?  They don’t know.  Easy way to head this off is to place a travel alert with your card company and bank prior to leaving on vacation.

-Purchases made outside of your usual buying area that indicate fraud: So, you’re visiting Disneyland!  It is wonderful!  You check into your hotel, and that’s a normal ‘travel’ kind of thing.  You rent a car, and that goes through fine.  You realize that you should’ve bought shorts and go to the local Target and purchase 200.00 in clothes, and suddenly, the purchase is denied.  That’s because bulk purchases outside of your buying area, or gas station purchases outside of your buying area, are very, very likely to trip those fraud sensors.  If you’re taking a road trip, call your lender before you fill up your tank a hundred miles from home!  You’ll be glad you did!

Filed under I explain financials Because I'm done with con and fic I shall answer some old questions!

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APR and Calculating Interest

This is probably a really obvious question, but what *is* APR?
APR stands for Annual Percentage Rate.  It is the interest percentage that is charged on a per annum, or yearly rate.  Simple, right?  Sometimes.  And sometimes, it’s a little more complicated.
With a fixed rate, fixed term loan like an auto loan, your interest is based on your APR and your principal balance.  Think of the loan as like a sleepy dog.  Every day, it lifts its head up and goes, “Is the loan paid off?  No?  Okay, one more day of interest,” and then it goes back to sleep.  This is called a per diem, or the amount of interest that’s owed every day.  It’s pretty steady, because the only thing that changes the principal is a payment.  Therefore, the amount of interest taken from your first auto loan payment will be very high, and the amount that goes to interest on your last payment is going to be very low.  This is taken into account when your loan is laid out.

Because the amount you pay every month on an fixed rate, fixed term loan is steady.

Then you have a line of credit.  A line of credit is like a hyper cat.  Sometimes it’s sleeping, sometimes its got the midnight crazies and it’s destroying all of your most valuable possessions.  Thanks, cat.

That’s because a line of credit has the ability to change the outstanding balance on a daily basis.  As you make charges and pay them off, the balance on the card changes.  For that reason, interest on a credit card is calculated with the following formula.  Are you ready?  READY TO WEEP?

Average daily balance X  Annual Percentage Rate  X Number of days in the billing cycle divided by 365.

SO EASY.  Yeah, yeah, sarcasm there. 8)

So say your average daily balance is 1322.58, your interest rate is 9.9% and the number of days in the billing cyle is 31.  The calculation would look like this:

1322.58 (average daily balance) X 9.9% (interest rate) X 31 (number of days in the month of Dec) divided by 365 (number of days in the year)=  $11.12

So carrying a balance of 1322.58 for one month with an interest rate of 9.9% would cost you just over eleven dollars.  And the calculations get more complex when you add in different interest rates for cash advances, and other specials, because each of those balances would have to have their own average daily balance, and thus, their own interest calculation.  I bet you miss the nice, sleepy dog right now, don’t you?

When you make a payment to an auto loan, or any fixed rate/fixed term loan, you will be charged the interest that has accrued since your last payment.  If it’s been 27 days since you last paid your loan, you own those 27 days worth of interest.

When you make a payment to a credit card, you are making a payment against the interest that accrued during your previous billing cycle.  Once that interest has been paid, you can make additional payments within that billing cycle, even days apart, and all of those funds will go to principal.  Interest will only accrue on a line of credit at the end of the billing cycle.

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401K plans and IRAs

Can you explain what a 401k actually is? I know it’s a method of saving for retirement, but every time I try to ask about the details I end up getting overwhelmed with information I can’t really understand, and I’m always a little afraid to bother someone by asking them to repeatedly explain it just because anything beyond basic finances renders me brain dead.

I feel you.  I do, trust me.  My plan confuses me, too.  But here’s the thing.  Explaining it is someone’s job.  Your HR deptment, or your plan administrator, they need to do this, because they’re getting paid to do it.  Not getting something doesn’t make you stupid, it makes you new to the information, and most HR and plan admins are really, really good at explaining it in a way that’s comfortable for newbies.

Make them do their jobs!  You have to do yours, right? 8)

But a little background, to maybe make you feel a bit more secure.  A 401K is an employer sponsered plan that usually, but not always, involves tax-deferred benefits and matching contributions.  Basicly?  It’s your pension plan.  Most are administered by a financial company, and can offer a bunch of different options for investing your funds, depending on age, your ability to risk your money without panicking, and your plans for retirement.  Since 401Ks can be contributed to pre-tax, it saves money and can be extremely beneficial.

Why?  Couple of reasons.

Most people contribute to a traditional 401K while fully employed, and withdraw the funds after retirement.  Even though taxes will be due on those funds at the time when they’re withdrawn, for the most part, most people are in a much lower tax bracket at that point. 

Time is your best friend for retirement funds.  Time and patience.  Compounded interest and dividends are powerful things, but they need time to come to fruition, so give them time.  If your employer provides a 401K, ESPECIALLY if they have funds matching, you should be contributing.  Not contributing to a plan with funds matching is leaving money on the table, and dang.  Why would you do that?  It’s like immediate profit!

Now, some employers do have strict regulations about removing funds from 401K plans.  There are certain emergency situations that you might be able to access the money, but you’ll pay a hefty penalty for it, usually 10% in addition to normal taxes.  Don’t do it unless you have no other choice.  If you feel you have no other choice, contact your HR department or plan administrator and go over your situation with them, they will know the rules that your particular employer follows.

My employer has just offered a Roth 401(k) in addition to a regular 401(k). How do I get the most out of this? Is there an advantage? 

 Ah, Roths.  Making life complicated since forever! 8)

Roth IRAs and 401Ks are not tax deferred, which means at the time of withdrawal, there will be no taxes due, since they’ve already been paid.  Roths are also more flexable than most retirement plans, allowing additional contributions PAST the age of 59 1/2, and have no required distributions after 70 1/2, unlike a traditional IRA.  Since the taxes have already been paid, you can make withdrawals at a lesser or no penalty, once the funds have been vested.

Since traditional IRAs are limited by employer sponsered plans, a Roth can pick up the slack.  Basically, if you have maxed out tax deferred retirement planning via traditional 401Ks or IRAs, a Roth allows you to save additional money for retirement.

Which is better is something that can only be decided by looking at your tax bracket, income, situation, and planning, and is best left to a professional.  However, a good rule of thumb is that if you expect to be in a lower tax bracket after retirement, if you’re starting late, don’t have an employer sponsered plan or if you need the tax deduction now, a traditional IRA or 401K is generally better.  If you’re starting young (18-44), and expect to be in the same or higher tax bracket, or want to suppliment an existing plan but have maxed out your employer sponsered contribution, a Roth will fit the bill.

Consult your HR Dept or Tax professional!

I have a Roth IRA that my mom helped me set up, but I don’t understand what it is, or how much I can add to it when. I asked my bank and they said “ask your tax preparers”. News flash: I made $8000 this year. I file a 1040EZ. I don’t HAVE tax preparers to ask. So: how do I Roth IRA? 

 Well, FINE THEN. 8)

You can contribute up to 5000.00 a year to a qualified Roth or Traditional IRA.  If you have both, you are allowed up to 5000.00 between the two.  Between January 1st and April 15th, you must make your contribution with the proper forms, because right now, miracle of miracles, you can make a contribution either for the 2012 or 2013 tax years!  After the tax deadline, any contributions made will be for that calendar year.

You can contribute to a bank held Roth IRA with a simple form and and deposit, but what they offer (IRA certificates are most popular) are limited by the financial institution.  Ask them what they offer and what you can do with it!

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Happy financial Friday! I’m guessing you will have lots of questions, but if you can fit it in would you explain SRCA a little, just in case there are any service members/families that are unaware of the protection it offers? 

 Hey, hey!  If any military service members or families are not aware of the Service Members’ Civil Relief Act, they should totally look that stuff up!  

It’s got some useful stuff: it prevents a default filing by a creditor, ie the debt must be left open and active, giving the service person a chance to make good on the debt, and can remove judgements and garnishments.  This means that the court cannot take funds from a service person’s wages for payment of a debt. 

And here’s the one I like.  Debts that are accrued prior to beginning active duty service, such as credit cards or car loans, are capped at 6% interest.  This is seldom something that’s offered, but for the most part, you just have to approach your lender with proof of active duty service, and they should adjust your loan for the term of the active service. 

All of this is contingent to you providing your lender proof of active duty, and there are different rules for debts acquired during and those acquired before active duty.  Do some research on the internet or speak to your local advocacy or assistance personnel about if the SCRA applies to you and yours. 8)

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Welcome to Financial Friday!

Took some time off for the holidays, but I am going to try to answer a couple of financial questions again today.  How this works is if you send me an ask and I think the answer is beneficial to a lot of people, I’ll copy your question without your name, and then link you to the public reply.  If a question is very specific, or private, I’ll attempt to answer it privately.  If you’re not interested in reading me babble about this, they will all be tagged with, “I explain financials.”

Now, on with the show!  For starters: Credit cards and Payments!

When I first got my credit card, I was very bad at paying it off on time, as I’m quite forgetful. After almost two years of less-than-regular payments, I set up my account to pay off the card automatically. Since I never use my card to spend money I don’t have, there haven’t been any problems. How much did I screw up my credit rating with that first year or two? How long (if ever) until my current good payment habits supersede it? 

 It entirely depends on how late you were.  Late fees don’t always mean that you were reported to the credit bureaus.  Most lenders do not report until you were thirty days or more past due.  So say you were due on Jan. 1st.  You don’t make your payment at all, and 12 days or so later, you receive a bill that says, “Hey, uh, you planning on paying us?” and you go, “DAMMIT!” and make your payment.  In this case, despite the fact that you missed a payment and got a late fee, you were well under the average threshold, and my not have been reported at all.

For your credit score, on average, they’re paying the most attention to the last 12-18 months.  Stuff still counts for around 7 years, but if you had a couple of missed payments two years ago and your payment history has been flawless since, that generally means you were having a bit of a bad time and now you’re not.

Remember, your credit score is a rating to let a lender know if they should lend to you.  A more recent late payment is worse, because the system doesn’t know if this was a “I didn’t get my mail” or a “I can’t afford to pay my debts” kind of thing.  A recent late or missed payment will cause your credit score to dip, it’s a warning: there may be trouble here.

So what you need to figure out is, what is your card company’s policy for reporting late payments, and  did you hit that?  Easiest way is to either ask your card company directly if they reported you, they are required by the Fair Credit Reporting Act to tell you if they reported you late to the credit bureaus, or just pull your free report.

I recommend using Annual Credit Report, the free site set up by the three bureaus per the government mandate.  There you can request one or all three of your reports once every twelve months.  Pull one and see what it has to say.  More than a year out, and your score will be improving.  It might still cause issues if you are attempting to apply for a mortgage, but will be unlikely to cause problems for an auto or credit card loan.

Hi I don’t know if you’re still doing this but…I have a credit card that I haven’t been able to pay, not even a minimum payment, for some time. I am going to be able to pay it soon and I was wondering if it would be better to pay it off all at once or gradually. I’ve heard differing opinions from people in my life but nothing that really helps:/ 

 Okay, by this question, I’m assuming you’re basically in default.  Default means, after X number of months of non-payment, the company will have likely either written off the debt (logged you as a debtor in their books, but not worth sending to a collection agency) or submitted your debt to a collection agency.

It’s entirely dependent on which of these answers we’re dealing with.

If your debt is still with the cardholder, contact them and attempt to work out a payment plan.  I know it’s embarrassing, I know this.  I know there is nothing fun about calling someone to whom you owe money, but most places, once they hear the words, “I am ready to pay,” will work with you to make this as easy as possible.

Unless you came into a large chunk of funds, I’d recommend paying it down as quickly as possible, but don’t over extend yourself.  If you dump all of your available funds at this debt, you run the risk of causing problems somewhere else.  But you’re paying fees and interest by the day.  Pay it off as quickly as you can do it, but make sure that you have enough money to live on.

If your debt has been passed to a collection agency, they may allow you to set up a payment plan, or they may force a lump payment.  They tend to be less flexible about it, but that doesn’t mean they won’t work with you.  They want their money.

If you have been making enough of a payment to keep yourself from being marked a bad debt, then GREAT!  Start making regular payments, above the minimum, especially if there’s a chance for keeping or regaining your line of credit.  If the line is closed, talk to your lender about if they’d be willing to reopen it if the debt is paid in full.  Having the line will improve your credit score, which you likely need after recent defaulted payments.

Basically: Pay it off, as soon as you can, but do not make the rush to pay that off put you back into the same situation with another biller.  Robbing Peter to pay Paul is not sound financial strategy. 8)

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I have two cards that I got as a young dumb college kid, both paid down to the point where they’ll be clear by summer. Both have very high interest rates. But I have a really awesome credit score these days and was thinking of looking into a card with a lower rate. Is there a best way to do this? Would adding a card be problematic? Should I cancel a card? (One card has an insanely high, could-buy-a-nice-car credit limit. Yeah, it’s been a lot of ramen fixing that one.) Thank you for your help.

Do speak to other lenders and explain your intent.

Intent is everything. If you want to go for a lower interest rate (and they’re out there for the taking), tell them why you’re applying.  Ask the lender if they would force you to close or reduce another line.  Depending on your income, some might make that a criteria of extending you additional credit.  Some won’t care, depending on your current debt load.  

However, if at ALL possible, try to keep the oldest card open.  If they make you close a card, then choose either the one with the worst rate or the worst fees, but try to keep one of them open.

The other thing to keep in mind is, if you’re not going to carry a balance, then screw what the interest rate is.  So you can keep one card with a high interest rate, but maybe a nice rewards program, that you’ve had for a long time.  Use that card only for purchases you can afford to pay off immediately.  Get a second card, if possible, with a lower interest rate, on the off chance that you need to carry a balance.  Car repairs: How I hate you.

The other possiblity, of course, is to call your current card issuer and say, “I’m looking around, and my rate seems high for my credit score.  What would it take to look at my interest rate?”  Many of them can, and will, hit a button and put you in line with your current credit score.  Others will charge a fee for a reapplication.  Don’t pay it.  Just stop using the card.

But right now?  You’ve been paying well, and paying regularly, and they want your business.  I can’t hurt to ask.  The worst that will happen is they will say no. 8)

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Paying down a maxed out card

I’m one of those who fell prey to the high spending limits as my first, and only c.c, was started at 4k back in college. My question is this. Due to those emergencies like car dying, computer dying, etc, it’s maxed out. I pay about a little over the min balance every month, but is there anything I can do to get rid of it faster? I also noticed about 6 months back that my min payment lowered drastically (not sure why, maybe lowered interest rates?). Will this benefit me or be a hindrance?

Thanks to the CARD responsiblity act, the only amount that can go to fees and interest is equal to your minimum payment.  This means that any, ANY AMOUNT, that you can afford to pay over the minimum, automatically goes to paying down the principal.

Anything you can pay, pay it.  I know it feels like you’re chipping away at an iceburg with a toothpick.  But for most people?  Paying the minimum means you will never pay off the card.  It sucks so bad, but even if all you can afford is ten dollars more a month, do it. 

The main thing is to avoid late fees.  If you can only scrape together the minimum for the due date, make sure it gets there in time.  Because nothing will screw up your efforts faster than a 25.00 late fee slapped on top of your loan balance.

The six month ago thing might have something to do with another part of the CARD act, which was that if your rate was raised due to a change in your credit score, the card issuer is required to automatically reaccess your account after a set amount of time, and if your score has improved, to adjust your account accordingly.  Check to see if your interest rate has changed.

If it has or if it hasn’t, if you can afford to keep paying the old, higher minimum, do it.  Even if it’s not every month, try to consistantly throw a little more at it.  Credit cards will typically have one of the highest interest rates amongst all your loans, so the best thing you can do is pay it off as soon as possible.

Look at it this way.  Say your interest rate is 10.99% which is a good average credit card interest rate.  With a 4000.00 balance, at that interest rate, and a 100.00 payment, then it will take you 50 months to pay it off, and you’ll be charged 1004.39 in interest.

Even adding TEN DOLLARS MORE to this, it’ll drop the number of payments to 46, and you’ll pay 886.75 in interest. 

If you could afford 125.00 to pay each month, just an additional 25.00?  It drops it to 38 MONTHS, a full YEAR less to pay it off, and the interest will just be 755.03.  That saves 250.00 in interest over that three year period.

An extra twenty bucks can do the job.  You just have to hold on and do your best to stick to throwing any additional amount that you can afford at it.

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Don’t know if you are still taking questions, but if so I have one. I am a college student with no income and a phobia of credit cards. Everyone tells me that I need to get a credit card to build credit history. But I do have federal student loans. Do those establish a history? I know it will be 5+ before I need something like an car loan, and 10+ before I even consider looking at home loan, so I’m in no rush

A student loan reports to the credit bureau just the same as any other loan, and in some ways, due to being able to defer and transition it, it’s more forgiving than most.

No one, not anyone, needs a credit card.  I prefer HAVING one, in case of an emergency.  Check with your bank or credit union if they offer a line of credit to use as overdraft on your checking account.  Some of them will simply be a line of credit, some will be a credit card that’s tied to your account, but honestly?

You can get a credit card for the borrowing history and destory the physical card.  If you’re afraid of what might happen to your finances if you use it, then remove the ability to use it.  You can have it on the books and not have the ability to use it.

But you do not have to have a credit card.  It makes things easier.  But no person has ever been turned down for a loan because they don’t have a credit card. 8)

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I have a bunch of store credit cards, like from Lane Bryant and stuff like that - they’re all at zero balance; I only use them when I have to and then pay them off as soon as I can. Does this effect my credit?

As long as the cards are not charging you an annual fee or any sort of maintenance fees (seriously, screw that) they can only improve your standing.

There are two types of store cards, one that has a Visa or Mastercard logo on it and can be used at other locations, and some that are only good within the store or the company.  The former always reports to the credit bureau.  The latter may or may not, but either way as long as you’re not carrying a balance and you’re paying them off and not getting late fees, there’s no reason to shut them down.

Unless they charge fees.  Seriously, people, DO NOT PAY FEES TO CREDIT CARDS.  There is never a reason to fall for that nonsense.

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Do I actually need a credit card? People keep urging me to get one so that I can have the credit to qualify for a home loan, but I inherited a house and have zero intention to move 

 Not at all!  Many people have no credit cards at all.  If that works for them, it’s great!

But credit cards are amongst the easiest loans to get, and here’s the clincher: Credit cards, if used appropriately, are the only loans upon which you can pay no interest at all.  So it’s possible to build a borrowing history and not have to pay a cent to do it.

Because of this, it’s recommended that you do have one, even if it’s not in use, both for emergencies, and to build a borrowing history.  Even if you have no intention of moving, say, God forbid, that you had a major repair that needed to be made.  To get a Home Equity loan or line on your property, credit would be pulled.  And it’s easier to approve you at a decent rate if you have a borrowing history of SOME SORT. 

It doesn’t mean you have to do it.  There are always ways around anything that needs to be done in the financial world, for the most part, but it makes things easier.  If not having a card is working out for you, don’t let anyone tell you that you have to do it.

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Several years ago I opened a store credit card with my mother as a co-applicant. At the time her credit was fairly good and I had no credit, so we both benefited from be getting the card. I’ve kept a small to medium balance on the card and paid at least the minimum balance every month, but my mother’s credit has utterly tanked over the last 2-3 years. How is this going to affect my credit? I’m not in a position to pay off the card right now and close the account 

 EXCELLENT question!

Her financial standing does not affect you at all, at least not where this card is concerned.

Think of the card as kind of a one way valve.  It provides information to both of your credit reporting, and judging by what you’re saying, the information it’s providing is good.  Pay promptly, and if at all possible, pay above the minimum, and that store is reporting that you are being responsible with that loan, for both of you. 

However, that is the only piece of information shared across your two credit reports.  If your mom is having a problem with a car loan that only she is on, that does not report on your credit, because you are not involved. 

Now, the card issuer could choose to shut down your line or reduce it, if one borrower on the card is doing poorly, but just because you share a single loan, that does not cause any other co-mingling of your credit.  In fact, that credit card may be assisting your mom if you’re making on time payments.

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Cards and Credit

 What’s the best way for a college student to get their first credit card? Should I get one now and start building my credit with small purchases I know I can pay off on time, or just wait until I graduate and continue having my mom co-sign my loans for a credit history?

If you qualify for one now, you can feel free to get one.  The important thing is not to spend beyond your ability to pay unless it’s an emergency (and no, the new iPad is not an emergency 8) ) and pay on time.  Some lenders do have a combined account for college students that might involve a checking account, debit card and small limit credit card.  They’re helpful, just be careful.  It’s very easy to end up paying for that pizza party for the dorm and then still be paying for it five years later.  I’ve seen it happen.

I graduated from college 2 1/2 years ago and have never had a credit card. I work full time and I want to get one now, but I don’t have the money to open a secured card, like, at all. Is it going to hurt my credit if I apply for more than one credit card, or if I apply for one and get turned down? 

It will, but just a tiny bit.  Every credit pull effects your credit score, a drop of just a couple of points.  It’s intended to warn lenders that you’ve been applying for loans elsewhere, which is normal, but over an extended period of time, it can, again, be a sign of trouble.  Try to cluster your attempts over a couple of days.  Better yet, try to talk to someone, over the phone, or in person, and make it clear where you are BEFORE they pull your credit.  An intelligent loan officer or service rep will know if you have a pretty good chance of being approved or not, and can gently suggest what is best for you.

They cannot legally stop you from making a loan application, but if a loan officer says that by their loan guidelines they are unlikely to be able to approve you, then listen to that.  They want your business, but they’re trying to avoid damaging your credit score if they know there’s no chance in hell that you’ll get past their lending guidelines.  If they’re dismissive or rude, you don’t want to do business with them anyway.

I heard that having an outside source check your credit score (like someone checking if they will give you an autoloan) will lower your credit score by 3-5 points. Is that true? If so…WHY? They are just checking to see if you’re in good standing. Why would it hurt your score if someone wants to check?

Seems counterproductive, doesn’t it?  The issue is how you’re checking.  Everyone needs a loan now and then.  Auto loans, credit cards, mortgages, even specialized loans like a vacation loan, a holiday loan or a recreational vehicle loan, chances are you’re going to have to borrow eventually.

The question is, what is your financial situation?  Because a credit score is basically telling a lender if you are a good risk or not. 

If I’m looking for an auto loan, I’ll probably shop around to a couple of lenders, see who can give me a good rate.  I might have my credit score pulled four or five times in a weekend.  This is understandable, and my score will dip, but it recovers fast.

But if I’m in a desperate situation, and I really need a loan, I might be calling a lender every couple of days, over a period of weeks.  I might be living within my means, I might not have missed a single payment, but something might be lurking in my financial background that I know about, but the credit bureaus haven’t figured out yet.

Constant pulls by multiple lenders over a period of time is a warning sign of a potential problem, so your credit score will dip when the score is pulled.  Like I said, a couple of pulls in a short time, that’s not that big of a deal.  Your score fluctuates all the time, just based on your reported balances.  But constant pulls will continue to push it in a downward direction, and will cause a lender to wonder what’s happening behind the scenes.

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Credit Card Use and Abuse

I don’t know if working in banking would allow you to answer this question, but what’s the best way to build credit? I just got my first credit card, and it has an $800 limit, but I use it for maybe $10-25 worth of purchases each month. Do I need to use it more to build credit? Or does it not matter? Thank you!

This is an EXCELLENT way to use your card!  No, you absolutely do not have to make large purchases to build credit.  You actually want to keep the balance on the card, even if it’s a temporary balance to under a third of the available credit limit, if at all possible.

The only thing that matters in terms of your credit score is if you’re using TOO MUCH, especially if you’re over your limit, and if you’re making late payments. 

Why is using too much of your card bad?  Because the computers that calculate your credit score can’t tell if you’re stretched to your limit, or if you’re just running up your card and paying it off every month. 

Remember, the primary purpose of your credit score is to give a new lender an idea of your financial situation.  If you have three credit cards, and none of them have a balance, then that means you are probably not experiencing financial difficulties and are in a comfortable place.  Under this reasoning, you are a good risk in terms of a loan.

If your cards are all maxed out, then the minimum payments alone are probably putting a strain on your finances, and you stand little to no chance of paying them off.  This means one more additional loan or line of credit may be what pushes you over the edge to bankrupcy, a chance a lender doesn’t want to take.

If at all possible, keep the balances on your cards low, either by paying off purchases as you make them, or merely by charging very little and keeping most of your purchases on your debit card. 

Now, realisticaly speaking, there will come a day where you’ll have to put something big on a credit card.  Something you need, but can’t afford to pay for all at once.  This is fine, this is what credit cards are for.  To pay for that busted water heater, or the broken axle on your car, or replace the fan on your laptop.  But keep in mind, you’re paying interest on anything that you cannot pay off immediately.

Life sucks sometimes, and things are horrible even more often.  We’ve all had to put things on our cards that we don’t want to spend money on.  If at all humanly possible, pay down the balance as quickly as you can, and try to avoid putting additional balances on the cards.  Your credit score will drop if your balances get too high, but unless you’re in the process of applying for a loan, that won’t effect you in any noticeable way.

The important thing, if you charge $10000.00 or $10.00 each month: Pay the bill.  Pay it promptly, pay it a little early if possible, and pay over the minimum if you can in any way afford to do so.  Nothing will hurt you, or haunt you, so much as a late reporting.

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Credit Cards and Credit Score

I have two credit cards. One I have been using for 5 years and another i just got over the summer. If I cancel my first card, does that hurt my credit score? Since I built up my credit with that card (I thought I heard this somewhere). I don’ t miss payments so my credit score is pretty good

It would hurt your credit score, but it’s hard to say by how much.

If at all possible, keep the older card.  Now, if that company is charging you fees, or forces you to use the card to keep it active, it might not be worth it.  But if it does not have annual fees, fees for non-use or fees for ‘statements’ or ‘maintenance,’ then don’t shut it down.

Basicly, there’s a couple of things that your credit score takes into account: the length of your borrowing history, your payment history, and how you use what credit and loans that have already been extended to you.

Think of your credit score as EBay buyer feedback, but for financial institutions.  They want to know if you have a history of buying/selling (length of borrowing), if you ‘ship’ out on time (payment history), and if previous buyers/sellers are happy with what the transactions you’ve done with them (previous and current loans and who’s giving you credit).  The more history you have, and the better you’ve done with your previous loans, the less of a risk you are for a new lender.  That translates to better loan terms and lower rates with higher amounts extended to you.

If you close the five year old card, then your borrowing ‘history’ is shortened.  Even though that closed card will remain on your credit reporting for seven years, it’s not an active loan, and is therefore not weighed as much. 

Also, a big part of your credit score that people tend not to talk about is debt to equity.  Let’s just say that both the old card and the new card have a $1000.00 limit, making your total available $2000.00.  Of that, you are making purchases of around $500.00 a month.  When the computer runs those numbers, it sees that you are using roughly 25% of the funds that are available to you.  This is healthy, anything under 33% is considered very good.

However, if you close down the older card, you still are making $500.00 worth of purchases, but now you only have $1000.00 worth of credit.  This means your debt to equity skyrockets from 25% to 50%, and the computer DOES NOT KNOW WHY.  It can’t make a differentiation between you using more of your available line, and you closing an inactive line.  All it sees is the numbers change, and your credit score will drop.

If at all possible, keep the older card open.  If it has to be used, make a small purchase every few months and pay it off immediately so you don’t get any interest or fees.  Or set up a single biller, like your “Jam of the Month” club to it, and make sure you’ve set up an automatic payment.  If they’re charging you an annual fee, or something else unavoidable, well, then, that’s not worth it, but especially if you’re considering getting a car loan or any other loan soon, do not close it until after you’ve secured that loan. 

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