Since I work in the financial industry (WOOT Credit Unions!), I felt I would have some good insight on the topic. I mean, I am not the best at understanding what is on my credit report or how it works. But I know the basics, and I have access to those who know the details.
So with that being said, I'm going to post an email I wrote responding to various comments made by friends. I may need to clarify in a few parts, but please just go with it :o) Also, sorry for the length!
EMAIL:
Well, I was forwarded this extremely long convo to me at work, but I'm going to reply through here so my work email doesn't fill up. SORRY IT"S SO LONG! I had a lot to say!
I have a "few" comments, since I work at a financial institution. But I don't know everything, as this is not my forte. I'll start with Brett and work my way backwards in time.
What we really need is a debit card that will reward you for keeping a certain balance or spending your money well without overloading on credit cards.
Brett - to this point, that would be nice for all of us Debit card users. But what you're forgetting is that a Debit card is basically just a check in plastic form. Purchases still take time to "clear" your account. Like a check, it sits there for a day or to then takes it from your account. It's the modern day check. That's why they are also called "Check Cards." So basically what you are talking about is rewarding you for keeping money in your checking account - which they already have these products. They are supreme checking (which earn dividends), rewards checking (where you get rewards), round up checking (where it rounds up your purchases to the next dollar, and those extra few cents get automatically put into a savings account).
What if I pay off my card three times within a month? Does it still show that I used 1000$ on my car that month, which is like 50% of my max? Hopefully that doesn't hurt my credit score.
I'm not 100% sure on this one, but I think it basically lumps the payments together to make sure the card is paid off by the payment date. I also pay off chunks at a time just so I don't see a bigger number at the end of the month. Thanks internet banking! I think I have a rather high limit on my credit card, and I use about $100-300 any given month. That's a low debt ratio, and since I pay it off it works in my favor. Since you use about 1/2 of your credit limit it's going to hurt your score just a smidgen. Not a huge bit, but creditors/lenders will see that you are using a large percentage of your available credit which lowers your revolving credit (lots of big words to say you're using a lot of "fake money"). This only makes up 10% of your score, and if you have loans or another card that you pay off in full or have lower limits on, you should be okay.
To everyone, your credit score is made of up 5 parts:
To everyone, your credit score is made of up 5 parts:
- 35% - Payment History
- On time payments or delinquencies
- Basically saying - PAY BILLS ON TIME!
- 30% - Capacity
- Do not go over your credit limit. Capacity = credit card balances in relation to the credit limit
- lower balances on your card = a better score
- This is here because creditors like to see that you have unused "temptation" (this is a dumb one, but it weeds out those who think money grows on trees)
- 15% - History
- 10% - Accumulation of debt in the last 12-18 months
- Number of Inquiries - basically how many cards, loans, any line of credit you apply for
- Opening Dates
- 10% - Mix of Credit
- A healthy mix of credit includes (for example) a mortgage, credit card or two, car loan and a retail card.
As the lender, you're providing a service. You have something that the student needs. You're willing to provide it, but you obviously expect some compensation. And I think you'd deserve it.
I agree with this. Being on both sides of lending (having student loans, and working a smidgen in the lending dept at work), it's a need that has been provided with a solution. The reason there is interest attached is yes, because it's a service the lenders are providing, but because you really don't know if you are getting that money back. When you approve someone for a loan, regardless of what their "credit history" says, there is a risk that you won't get that money back, and you'll be out X thousands of dollars. For example - someone has a score of 750 (A+ by most standards) so they'll get the lowest rate on their loan (the worse your score, the more your risk goes up, and in turn increasing your interest rate). This person needed a car loan for 22,000. They wanted to put a down payment of 2,000 down, so the loan amount would be for 20,000 really. Everything is going fine, and they have the car and make payments on time for 5 months. Then the person gets fired from their job. They can only scrounge up enough money to pay for their mortgage/rent. They skip the car payment. This continues for 5 months. They go delinquent. Then it gets send to a collection department (for example the two people who work here). They work with the person to try to get the money, suggesting ways to pay it off, what they can put up for collateral (the car usually is but some people don't like that and decide to go to court over it). Eventually the person just can't pay it ever, and the credit union is out around 13,000. They won't get that money back. The interest rate reflects not only the service they provide, but the risk of the money not returning.
See above. It's not all about profit. No one WANTS someone to go into debt. We even offer free seminars, sessions, reports to our members to help them learn how to not go into debt. Credit cards from my perspective help you establish that credit HISTORY that you need to get a loan. Otherwise (to the resume comment someone made) we'd have to go off of peoples word. And there are too many dishonest people out there to trust that. That is why the credit system was invented. Yes it has gotten out of hand the past few years because people were allowing ANYONE to get a credit card/loan/line of credit. This was the bad thing that happened. Then they couldn't pay off those loans or make payments, went into debt and lost everyone thousands of millions of dollars. But is original purpose was to have a non-biased way of calculating the risk of default of people. Its still on a case to case basis here at the CU, but a lot of big banks have just now done a flat "if you don't have this number you're not getting a loan." So they can't get into too much trouble anymore, but it doesn't provide that service that it was also created for.The bottom line is this: profit. It is not in the interest of the credit card companies to have people paying off all of their credit card debt on time every month anymore than it is to have people borrowing money and ending up in bankruptcy without enough property to pay off their debt. So it is unsurprising to see the web of rules and regulations they weave in order to put them into the best position.
“How is spreading your medium sized debt over multiple cards more responsible than only spending the money which you have in the first place?”
It is not more responsible. Instead, it is more akin to putting lots of band aids over a gaping wound.
The reason this helps your score - not necessarily more responsible, is because it helps your capacity. Which makes up 35% of your score. If you only have one credit card, and you use a substantial amount of your limit, that lowers your capacity and lowers your score. You want to have a larger capacity - such as a credit card or two, student loan, car loan, and or retail card. This gives you 1-more capacity and 1-helps with your mix of credit. I think that's a very natural thing to have, so it's beneficial to you once real life starts. You just naturally get those things, and then in turn it increases your score. No problem there for me. Of course, the kicker is paying them off, keeping track of your finances, and being responsible with your money.
On a personal note, I think Americans in general need to take so much more financial responsibility than they do. The lack of interest in personal finance is astounding. If people cared half as much about paying bills, saving money, financial planning, and responsible spending as they did to what fashion trend is coming up next, what Lindsay Lohan did last night, or that there is a 5 hour TV marathon on, then we would be in much better shape. But that's just me. I take responsibility to educate myself and to make sure I have enough to cover in an emergency. I may be frugal at some points, but ultimately I'm being smart with my money. I'm also not afraid to splurge when I can afford it. If you want something, set a goal, save for it, and then get it without going into debt.
See my above breakdown of a score. You also don't have to pay. You can go to annualcreditreport.com for a free report/score once per year from EACH agency. It's also free if you were denied credit or a loan in the past 60 days or if you're a victim of Identity Theft. Also, if you are a member of the CU, I think it's free (maybe? not sure on this... ask for details) to set up a credit enhancement session where you can call in, set an appointment, and an associate will pull your credit report and score and sit down and go over everything with you on your report. What you can do to improve your score, whats hurting it, and any questions you have. I think it's a great product offering and I'd encourage you to take advantage of it. I'm doing it sometime next week myself.
I agree, while it is good to establish that credit history (re: above paragraph from me) and a credit card is the quickest and easiest way to do that. Having student loans and paying them off in full + more each month establishes some history. Also, paying rent or bills on time can help your score. Using a credit card like a debit card, for small purchases, say your gas purchases only, and paying those off in full each month is also a great way of establishing history and increasing your score. Picking one small thing you do every month really helps. Like I've said, it's the length of time you've had the good account that also boosts your score - a 15% boost!
On a personal note, I think Americans in general need to take so much more financial responsibility than they do. The lack of interest in personal finance is astounding. If people cared half as much about paying bills, saving money, financial planning, and responsible spending as they did to what fashion trend is coming up next, what Lindsay Lohan did last night, or that there is a 5 hour TV marathon on, then we would be in much better shape. But that's just me. I take responsibility to educate myself and to make sure I have enough to cover in an emergency. I may be frugal at some points, but ultimately I'm being smart with my money. I'm also not afraid to splurge when I can afford it. If you want something, set a goal, save for it, and then get it without going into debt.
“It seems that credit scores are based on some arbitrary set of factors which are counter intuitive to logic and you have to pay one of three major companies to even see this arbitrary score. That sounds like a giant scam if I've ever heard of one.”
See my above breakdown of a score. You also don't have to pay. You can go to annualcreditreport.com for a free report/score once per year from EACH agency. It's also free if you were denied credit or a loan in the past 60 days or if you're a victim of Identity Theft. Also, if you are a member of the CU, I think it's free (maybe? not sure on this... ask for details) to set up a credit enhancement session where you can call in, set an appointment, and an associate will pull your credit report and score and sit down and go over everything with you on your report. What you can do to improve your score, whats hurting it, and any questions you have. I think it's a great product offering and I'd encourage you to take advantage of it. I'm doing it sometime next week myself.
She is more or less right, but there are ways around the rules. For one thing, just because you do not have a credit card doesn’t mean you can’t get a car or home loan one day. Having a stable job and paying off your student loans in two years is more than enough to justify a future loan. There is someone out there who would lend you money on fair terms.
I agree, while it is good to establish that credit history (re: above paragraph from me) and a credit card is the quickest and easiest way to do that. Having student loans and paying them off in full + more each month establishes some history. Also, paying rent or bills on time can help your score. Using a credit card like a debit card, for small purchases, say your gas purchases only, and paying those off in full each month is also a great way of establishing history and increasing your score. Picking one small thing you do every month really helps. Like I've said, it's the length of time you've had the good account that also boosts your score - a 15% boost!
“Liberty not only means that the individual has both the opportunity and the burden of choice; it also means that he must bear the consequences of his actions. Liberty and responsibility are inseparable.
Right on. You get the responsibility, you also get the consequences.
The only real problem I have is credit cards and the credit score. Getting loans usually doesn't have as many loopholes and fine print.
Not necessarily true. Loans have A LOT of paperwork, especially mortgage loans. Also, they can take away the thing you are getting the loan for :o( so no house, car, boat, bike, computer since it's collateral. Just be smart about where you get a credit card from, read the terms and conditions. And remember, credit cards are there to help you build your credit score, not to supplement your income. :o)
What to look for in a credit card:
- Low interest rate (APR)
- Long grace period (time you have to pay off each month)
- No annual fee
- Low penalty fees
- No inactivity fee
It also seems you have to find the perfect balance of using your credit card to charge just the right amount of money or your credit score will go down.
The perfect number isn't that hard to achieve. Just pick one thing per month that you always purchase, use your credit card for that and pay it off after you purchase it. Simple as that. You're using it to improve your score.
Sure credit cards are great for making big purchases too - but you can break them down like I do and pay off a little over the month, so the one you see on your bill isn't quite as big. Just remember to pay them off. I have a 25 day grace period from the time my bill comes out to when I have to pay the amount. That's a great grace period!
So that is my post for this week. Hopefully you learned something, and if you have anything to add, just comment!
No comments:
Post a Comment