OT: Transitioning from debit card to credit card. Also other credit advice...

[4Rings6Stars]

I know I know, a bike forum is not the place to get financial advice... but the Amex thread going on now inspired me to post this.

I'm young (finished undergrad two weeks ago) and would like to start building up my credit more since I hope to buy a house in the next few years while the prices and rates are still low. I'm debt averse, so I've always just paid my CC balance off immediately and I currently use my debit card for 95% of purchases.

I want to start using a credit card for the bulk of purchases to help build credit and take advantage of a rewards program. The card I currently have is a BofA Extra Bases card but that rewards program isn't great. I've had this card for three years but I pay it off immediately after each purchase and have never carried a balance. I've read that this doesn't help me build credit and I should actually carry a balance.

Anybody have any suggestions for a credit card with a good rewards program and relatively low fees that somebody like me (have a good job at a large accounting firm but don't start full time until I finish grad school this winter) would qualify for?

Any other advice for building credit without taking out a car loan?

[nighthawk]

Try taking out a small personal loan from your bank, should have a positive affect on your credit (assuming you pay it off!)

[dustyrider]

I'd say from my limited knowledge in purchasing a home; it's all about the down payment. You've got to have large amounts of capital/collateral saved up, at least that's the way it seems to work now a days. There are first time home buyer's programs, and HUD homes, etc, that help offset this.

I was recently turned down for a relatively small auto loan because of my debt to income ratio. My college loans are all the debt I carry, and they're nowhere on the level of some of my cohorts, it's just my yearly pay after expenses is pretty low. I'm sure I could have gotten the loan from another lender, or just lied about my expenses. But, I like my Credit Union, and didn't want to sink on a loan, plus I really could only afford their rates, that I'm not eligible for.

With this in mind the best advice I'd give is to not carry any credit card debt, ever. Their interest rates are scary! :eek: Come up with something else to make payments on, if carrying debt is really the best way to get your credit score higher.

I have a Citibank card with 1% cash back on everything, and I always pay at the end of the month. So not a huge reward but, a nice surprise. I pretty much depend on a credit card as I'm paid once a month on the 18th. It's archaic and took some time getting used to, but I'm very good at budgeting now, and fortunately all of my bill carriers, utilities etc., have pushed my due dates to the end of the month.


Most of the credit cards with really good rewards seem to come with an annual fee, which I avoid. Although depending on the types of things you're into there are some cool reward programs and may be worth the fee.
For awhile I had a credit card with 3% back in Subaru dollars. Once you earned a $100 they give you a check you can spend at your Subaru dealer, I got lots of good stuff with it.

Have you got your credit report lately?

You'll have to pay for you score, but the report is free, and it's surprising what counts towards your credit.

[Mr Cabletwitch]

Its all about debt to income. If you have cards that you pay off each month you are building credit, if you have any utilities, rent, etc... you are building credit. If you make 60k and have no debt you can get a loan for just about anything assuming you don't have any negative impacts on your credit report. I've been trying to do a refi on my house and it seems that if I make 42k a year they will approve me for a 1k per month housing expense, meaning mortgage, taxes and insurance. So that's what they seem to care about. Carrying a credit card balance seems to be a bad thing to me.

[rounder]

I am not sure what today's credit advice is...so take this for what it's worth. But I used to work for a big bank. The theory was bank's do not like to make loans to individuals with no credit history. They want to make new loans based on the borrower's previous ability to repay the old loans.

If all of your purchases are made with your debit card, then you have no loan history. If you charge purchases to your credit card each month, and then pay off the balances each month, then you will have a favorable loan history. However, if your only credit purchases are to pay for meals at Applebee's, then the bank will assume that you are capable of paying off small balance loans, but there would be no evidence that you would be able to pay off a car loan or mortgage loan.

If you are interested in building a positive loan history, it would probably make sense to pay for some larger ticket items with credit, and then pay off the loan by at least the due date. Don't bite off more than you can chew.

Good luck.

[Mr Cabletwitch]

I almost forgot in fact I'm trying to do my refi and I'm held up right now because of a line of credit for my family business that my name is on. because of this 20k line of credit I can't refi my house. All thanks to being the only member of my family that hasn't declared bankruptcy.

[4Rings6Stars]

Thanks for the advice so far guys.

I agree that carrying a credit card balance (if I don't have to) is crazy and that is why I have avoided it to this point. I will keep paying it entirely each month.

I thought utilities didn't get reported to credit rating agencies? I pay my cable, internet and electricity on time every month but didn't think that got reported.

I have gotten a credit report before and all was good but I don't remember if utility payments were on there. I haven't paid for a credit score yet.

[dustyrider]

Thanks for the advice so far guys.

I agree that carrying a credit card balance (if I don't have to) is crazy and that is why I have avoided it to this point. I will keep paying it entirely each month.

I thought utilities didn't get reported to credit rating agencies? I pay my cable, internet and electricity on time every month but didn't think that got reported.

I have gotten a credit report before and all was good but I don't remember if utility payments were on there. I haven't paid for a credit score yet.

annual credit report . com is free once a year you should do it, and see.
Like I said the all important score costs money, and really isn't something I care too much about. But it may help you gauge where you're at right now and go from there.

[Mike748]

Never pay credit card interest, its just stupidly expensive. Keep paying it off, that reflects positively. Also don't let the cc co. raise your credit limit too high. Some situations they figure you could max it out. A small personal loan at a reasonable interest rate will help. Or a car loan. I don't think utilities matter unless you pay late. I think if you are prudent financially your credit score will reflect it.

Btw, I despise debit cards, too little fraud protection.

[brockd15]

I also don't like debt and don't like the idea of carrying a credit card balance. Instead, you could take out a personal loan, deposit it in an account, then set up the loan to autodraft the payment from that account. The interest you pay is essentially what you're spending to buy credit.

ETA: I think this whole credit game is ridiculous, but most of us have to play.

[esldude]

Don't use credit to build a credit history. If you need credit at some point, be responsible about it and pay it off. But a good plan is to live without using credit. Most people will need credit at some point for a home loan. Maybe one or two for a car loan. A good idea is to keep your first couple cars longer than payments last. By the third you should be able to buy it for cash. If you are lucky with a good income, you might do it before then.

If you have a good record of paying utilities and other bills, you can find a bank for a home loan. Now maybe not every bank around, but there are always some appreciate that kind of history. Credit is almost like drugs or gambling in Las Vegas. You aren't going to come out ahead, they just want to get you into the game. Once you are in they win you lose.

At some point, you may have unexpected things that put you into a position to use credit as a need. If you have been responsible otherwise, you will manage to get what you need.

Otherwise, if you don't have the money for it, with few exceptions, you don't need it. Don't use credit for it. Don't use credit when you don't need it to build a history (it is basically a psychological trap).

One last thing. Any credit you use, requires you to pay some interest. You will only make a finite amount of money in your life. The more you pay to interest, the less is left to spend on things for yourself.

[tuxbailey]

Prior to buying my house, I think I only had one month where I carried a $500 balance. The interest shocked me so I never carried anymore balance. I had no problem buying my first house after working for a couple years.

[Ahneida Ride]

Just remember that Banks do not make Loans.

They create the $$ outa thin air using the Ponzi Scheme they call
fractional reserve. Since you are paying interest on nothing, you are
in effect paying infinite interest.

Banks overbook 10 to 1. In no other field of human endeavor can
10 people claim ownership to the same entity all simultaneously.

:eek:

[Louis]

They create the $$ outa thin air using the Ponzi Scheme they call fractional reserve.

Wow, Ray - I've never heard of this before.

Please tell us more.

[MattTuck]

I'd get a Chase freedom card, which is the one I have other than my amex. It is a good program.

Pay it off every month. The rest will take care of itself.

I agree with the above on the difference between debit vs. credit. Credit cards provide better fraud protection, and lots of benefits that are not talked about much anymore. ie. if a vendor is giving you crap, you can contest the charges. also, many credit cards allow you return stuff for a longer period of time than the store normally allows.

[onsight512]

You might consider keeping the cc that you currently have. 'New' sources of credit can sometimes be a 'ding' to your score. It may be better to keep the card that you already have a three year history with rather than opening a new one now.
And as others have mentioned, debt to income ratio is very important. When a bank is calculating your ratio I believe that they count your limit on any given cc even if you have a zero balance. In other words, if you have a 25k limit, they count that as 25k of debt.

[rwsaunders]

Make an appointment with a member service rep at a credit union or a customer service rep at a local community bank and discuss your financial situation. Tell them your reluctance to use a credit card to establish a credit history and ask their advice.

Financial institutions are dying to make loans as the spread is so tight and they only make money when they lend money. They also are looking for low risk individuals to lend to, so try to establish a relationship by meeting face to face. Credit unions in particular are really on a push to seek out younger members.

The only good thing about a debit card is that it limits you in spending what you have in your account, which is not a bad thing.

[tkbike]

I haven't made an interest payment on a credit card in 35+ YEARS....I always pay the entire balance each month and I charge everything! My daughter makes fun of me because I never have more than $5 in my pocket!
My wife and I fly at least 4 times a year and haven't paid for an airline ticket in the past 10 years, so I only carry credit cards which earn airline miles/flights.

[Polyglot]

I doubt that this is of importance to you, but Amex is the only credit/charge card issuer to report to the credit agencies on a world-wide basis.

When I moved back to the US in 2001, I was turned down left and right for a mortgage (and even for a Sear's credit card!); this notwithstanding that I a had a solid work contract which guaranteed me a minimum of 18 months of earnings/severance and I had enough cash to pay more than one third of the cost of the house. I simply did not have a credit history as I had lived out of country for such a period of time that there were no reports of my existence in any of the credit agency databases. Even after presenting the last 10 years of tax declarations, as well as certifications from 3 large international banks confirming my creditworthiness, nothing was happening until I made a call to Amex (I held an Amex card for years in Italy). I asked them to report my credit situation to the credit agencies and within days i went from having no credit history to having a reasonably good one, able to get a mortgage. This alone makes getting an Amex card worthwhile in my eyes (notwithstanding the membership fees).

My credit score is now in the top 5% of the population and apart from my mortgage, I have never paid a penny in interest on any credit, so there is no need to carry credit to get a good score. Used properly, credit/charge cards are the best thing around.

[LouDeeter]

Many rewards programs require you to pay off your entire statement balance in order to get the rewards. If you carry a balance, no rewards. I don't have a credit card with an annual fee and the two credit cards I use offer rewards. My Bank of America Signature card offers good rewards and the cash reward is credited to my bank account each month.

[Gummee]

You might consider keeping the cc that you currently have. 'New' sources of credit can sometimes be a 'ding' to your score. It may be better to keep the card that you already have a three year history with rather than opening a new one now.
And as others have mentioned, debt to income ratio is very important. When a bank is calculating your ratio I believe that they count your limit on any given cc even if you have a zero balance. In other words, if you have a 25k limit, they count that as 25k of debt.Everything's weighted higher in the last 24mos of credit. If you have judgements, collections, etc that are older than 24mos DO NOT pay them off before applying for a home loan. They went from being old bad debt to NEW bad debt in one swell foop. I've had clients screw themselves royally doing that. AFTER I'd told em not to.

Going back to that 24 mos: buy a cheap car and pay on it for 24mos before paying it off. That'll help establish credit.

Quick and dirty method of calculating how much house you can afford: 2.5 times your salary.

At least when I was a loan offier, it was all about GROSS income not net. 50% max of your income can go to bills (may be a little less now that credit's tighter) including the mortgage payment.

Oh, if someone's coming in with a rate significantly lower than everyone else, its possible they're not on the up and up. If you're a broker, you're getting your $$ from the same spots everyone else is and the rates will be within a small range.

HTH

M

[nm87710]

Congrats on graduating and landing a job.

[HenryA]

Just a heads up --

Pay attention to your bank's policy on protection of your debit card and any bank accounts it is linked to. Fraud on a CC does not tie up your cash money in your bank, but fraud on a debit card can. It may be for only a few days until they get it sorted out but it can be very inconvenient (or worse if you have a bill(s) being paid automatically from that account and the account is now locked).

[MattTuck]

This is another possible card offer to look at. If you do traveling, and think you might spend $20k in the first year, it seems like a good deal.

http://www.nerdwallet.com/blog/2012/british-airways-credit-card-offers-100000mile-signup-bonus/

[cat6]

On August 20, 1979, Terrell made his pitching debut for the Royals in the ninth inning against the New York Yankees at Royals Stadium, and retired the Yankees on three pitches; the Yankees were ahead 16–4 at the time and Terrell hurled on an emergency basis

[djg]

Wow, Ray - I've never heard of this before.

Please tell us more.

Yeah. Thanks. Because what he needs is encouragement.

[Gummee]

When you're ready for a mortgage limit it to a 15year fixed. 30 year products are good for bankers and mortgage brokers - not borrowers. I'm going to disagree with this one. I'm a big fan of keeping your money outside the walls of your house.

You can't take drywall down to the bank and get your 'equity' out. Paying off your house and having all your $$ wrapped up in it is passe. In these uncertain days, I'd say its much better to keep your equity where you can actually get to it. In short: control the property with the smallest payment possible and keep the difference going somewhere else.

If you really want to pay off the loan in 15 years, you certainly can. ...but what if you hit hard times? What happens if/when you need to move and are upside down on your house? Not only have you just lost your house, you've just lost all that extra $$ you just shoved into 'equity.'

M

[Gummee]

I also request credit increases annually even though I don't need them.What you're doing is keeping the percentage owed low which looks good to banks.

I was told that having a lot of credit available to you looks better to a lending bank, so long as you manage it properly and are not maxed out/behind on payments.The higher limits are actually a bad thing. Shows that you have the ability to run up your bills higher than the bank wants to see (debt to income levels) The good comes from managing to NOT run up those bills.

The ex- started paying off some of her cc-s. Stopped using em so they dropped the limits. She went from having lots of room to very little. Her credit score dropped precipitously. She became a 'high credit user' and her scores reflected it all without her doing anything but trying to pay off her debt.

M