Help me join the 760+ club

December 1, 2011 6:24 PM

I'm in my thirties. I've never had a credit card. Where do I go from here?

I've never needed one. I've never wanted one. But now that my adulthood seems to be upon me, I would like to bring my credit from "very good" to "really awesome."

My score, which I recently checked for the first time, is currently about 740. I have student loans that I've always paid on time or ahead of time. I pay my bills on time. I have a bank account with $5000 of overdraft protection. That's pretty much it.

I've never had much money; I'm just boringly conservative with what I do have. In fact, I've never paid much attention to my credit before, because of that. I always figured that responsible financial behavior = a credit score that would make any landlord happy. (I don't think the matter of my credit has even arisen otherwise, as I've never financed anything other than my education.)

But, you know, adulthood makes things more complicated. Now that I have a Grownup Job that pays the big medium dollars, I'd like to think about buying a home in about five years. When the time comes, I'd like to be ready with Awesome Credit, to get the Awesome Mortgage. (Overachiever.) According to my credit report, I'd have a better score if I had a credit card, I guess because it would make credit available to me.

What should my plan be?

I was thinking I'd apply for one or two credit cards with good rewards, use them for regular expenses (but never over 10% of the line of credit), and always pay the bills immediately. Then I'll periodically ask for credit increases. I'm guessing I won't have much trouble getting approved, but can anyone recommend a particular card or strategy?

Considerations:
-I will be done paying off my student loans soon. How will that affect my credit?
-I would like to switch banks (for the same reasons everyone else did recently). How will losing that $5000 overdraft protection affect my credit?

Any other factors I haven't accounted for? Sorry if I seem dense or overly careful; it's just that credit cards are a foreign land to me.

posted by anonymous to work & money (21 answers total)

I was thinking I'd apply for one or two credit cards with good rewards, use them for regular expenses (but never over 10% of the line of credit), and always pay the bills immediately.

Carry a small balance once in awhile. It's much better for your credit to do so than to always pay off your credit bills immediately, and a lot of credit card companies will reduce your spending limit if you use the cards for small bills that you pay off before interest accrues.
posted by xingcat at 6:38 PM on December 1, 2011

Don't be scared of credit. If you have the will power and the means to pay it off each month they can be great.

Credit cards can offer cash back, buyers protection, extended warranties, etc. These all can be potentially very valuable.

Start slow and watch your bill since without the action of handing over cash, or sending in a check it might be harder to manage your spending.

Eventually many people I know try to funnel all spending (monthly bills, everyday expenses, etc.) through the card for the cash back.

One important aspect some people miss - in most (maybe all) states a credit card is orders of better than a debit card. If you have a fraudulent charge on a credit card, it gets reversed almost immediately. On a debit card, you the funds might sit in limbo frozen for a while for things to get sorted out...if they do get sorted out.

Finally. if you do two cards, I would suggest one AMEX credit card and one VISA/MC. Don't pay any yearly fees for either, you can get good cards which are free.
posted by NoDef at 6:39 PM on December 1, 2011 [2 favorites]

Carry a small balance once in awhile.

Do it carefully, though. IIRC, it takes two payment cycles to get back to current and no interest. (I once accidentally paid a previous month's bill twice, and the current month was higher, so I ran a balance. They charged me interest on the next month's purchases even though I paid the carried balance and next month on time.)
posted by spacewrench at 6:42 PM on December 1, 2011

Another good way to build credit is to buy something on credit. There are often deals where you buy something (like a computer) and have one year to pay it off before interest charges kick in. This looks good on your record, too. I did this to start establishing credit years ago.

Personally, I have my credit card set up for automatic monthly withdrawal from my checking account, for which I have a sizeable overdraft. This way, if I charge more than what's in my account, my credit card is still paid for automatically and I am not charged interest. Just make sure to treat your credit card like a debit card -- always put enough in your checking account to cover the credit card charges.

I recently switched from a "too big to fail" bank to a credit union, and didn't have a problem getting overdraft established on my checking account.
posted by zagyzebra at 6:43 PM on December 1, 2011

I have never carried a balance and never had my limits reduced. I'm not sure if the uncertain credit times we live in might be different.

But remember the credit card companies also make 2-6% from the merchant - so even if you pay it off every month they are still making money assuming you are using the card.

If you do carry a balance (And I'm suggesting you don't) - be careful the rules for interest are not always simple and might be computed on an average balance, or an average balance over multiple cycles - so make sure you understand just how much interest you will pay before you carry a balance...
posted by NoDef at 6:47 PM on December 1, 2011 [1 favorite]

Chase, Capital One, and Discover all offer actual cash back, at least 1%, sometimes up to 5%, and on occasion up to 15% at certain online retailers.
posted by TheTingTangTong at 6:53 PM on December 1, 2011

I wouldn't get a reward card unless that feature is free. If you are just trying to build up better credit, you might not use the card enough to make the fees for rewards worth it. I'd recommend a no-fee, low interest card.
posted by looli at 7:23 PM on December 1, 2011 [1 favorite]

Your $5000 in overdraft is available credit that you're not using -- which is a detriment to your credit score. Not that your credit score is shabby at all, of course. That $5000 could prevent you from getting a credit card, depending on your income: you have the ability, essentially, to max out $5000 in an unsecured loan at any time, so credit cards may be wary of giving you even more credit on top of what you've got available.

So, close that overdraft protection -- get credit from a source that you can make use of, like a reward-card, like you've said, and do let a balance roll over once in a while. Showing that you can have credit and use it regularly and responsibly is what having a credit card is supposed to show.

I haven't experienced EVERY reward credit system, but I've found that if you try and game the 'charge it up and pay it off', there are hidden rules about how much of that you can do. I had a small reward card, filled it, paid it off, and then filled it again in the same month, and when I went to pay it off the bank said they cannot accept more than 200% in payments over the phone in one month (that's previous month's payment + the extra payment I tried to make, so payment #3 was a problem), so I had to carry a balance to the next month. I suppose I could have mailed a check rather than phone payment, but then how long it would take....etc., etc. Just be aware that credit card companies are aware of that method of gaming the system, and do their best to discourage it.

In the same vein as the overdraft protection: don't sign up for a credit limit higher than you need. For example, if your personal expenses that you'd pay with a credit card and pay off are $2,000 a month, maybe go for a $3000 card for padding in case of emergencies, but don't let them give you much more than that -- again, that's a lot of available credit that you're not using but could be accessed at a whim, which looks worse on a credit application. Credit card customer service will resist, but if you push they'll lower an 'automatically-raised-your-a-good-customer' credit limit.

With your credit score and high income, you shouldn't have any reason to accept a card with fees of any kind. Anybody who wants to charge you an annual fee, or a higher-than-the-lowest-possible-rate, or anything else, tell them you'll find somebody else. If you're building credit, you want to find a credit card that you'll stick with (switching cards regularly looks bad, too) and stay there.

Something else to look at: maybe look into credit other than a credit card, like a gas card, or buy furniture on the 'no interest for 2 years' plan and pay off early. A variety of debts can look better on a credit report, too, particularly debts that aren't revolving lines.
posted by AzraelBrown at 7:34 PM on December 1, 2011

Your $5000 in overdraft is available credit that you're not using -- which is a detriment to your credit score

I'm not an expert, but just have to call this out as completely untrue. More available credit HELPS your credit score, within reason. I suppose maybe there is some theoretical point of "too much availble credit," but I'm not sure I've ever heard of anyone reaching it. Having a lot of debt as a ratio of your available credit is definitely an issue, but not having available credit. That makes no sense.

That $5000 could prevent you from getting a credit card
No it couldn't. You have a credit score of 740. You can get almost literally any credit card you want.
posted by drjimmy11 at 7:40 PM on December 1, 2011 [5 favorites]

I'm not an expert, but just have to call this out as completely untrue. More available credit HELPS your credit score, within reason.

Quoted for truth! Having a good credit to debt ratio is absolutely the situation you want to be in. Both to have a good credit score and to get a credit card!
posted by grapesaresour at 7:59 PM on December 1, 2011

I like CitiCard because it has a Virtual Card feature that lets you generate artificial credit card numbers and expiration dates so the on-line merchants don't get your real numbers, even for recurring payments.

I like Green American Express because the total amount is due each month, it's a Charge Card *not* a Credit Card, so it enforces discipline.

The above two points were for your general information. They may not necessarily be applicable to your situation.
posted by forthright at 8:05 PM on December 1, 2011

Get a small credit card ($200 or $300 would be perfectly fine), charge up maybe $50 on it, and pay the minimum monthly, always keeping a low balance. Having a revolving balance, and having your total borrowed to total available ratio at under 20%, will work wonders for your credit. The advantages of having credit cards do not outweigh the disadvantages. So if you want to use credit cards to increase your credit score, DON'T fall for the trap of using them for purchases -- that leaves you in danger of actually racking up high balances, which will damage your score. (My ex worked in a job where he had to understand how credit worked.)
posted by DoubleLune at 9:10 PM on December 1, 2011

If you have the self control, and can spend a lot on your card (i.e. use it instead of cash with all merchants) and pay it off every month without fail, a mileage card is good, becuase you can get free flights....these are ballpark figures which may be conservative if you get a good mileage card:.if you can spend ca. $2.5k a month with the card, you can a minimum of get one free coast-to-coast RT domestic flight a year, which can be worth up to $500....

Flyertalk is agood place to start to look...
posted by lalochezia at 5:03 AM on December 2, 2011

I will be done paying off my student loans soon. How will that affect my credit?

If you have no other lines of credit, having zero debt basically erases your credit score (but not your credit history) and will make it impossible to get a credit card to re-establish your credit and grr argh grrraaahh. (Guess how I know.)

If you get a credit card now and have a paid-off loan on your credit report, it reflects positively. (I cosigned a mortgage on the strength of my husband's also-excellent credit, and now our scores are both in the ridiculously-good range, if I recall mine's slightly higher because I had student loans.)
posted by tchemgrrl at 6:29 AM on December 2, 2011

I don't really understand the idea of "run a small balance constantly and pay the minimum". On my credit report, the listed account balance for each month is whatever I charged that month, even if I pay it all off. Would running a balance look different somehow?

I suppose maybe there is some theoretical point of "too much availble credit," but I'm not sure I've ever heard of anyone reaching it.

And consider that "too much" would have to be relative to your income, and income is not part of your credit score. Individual banks do know your income, and will have a max based on it among the cards they issue you, but that is outside of the credit score process.

I'm just boringly conservative with what I do have.

Generally these are the people who take advantage of the credit card system. Put anything you can on a credit card, then pay it off and get 1-2% back, and never have the total due on your cards be higher than your bank account.
posted by smackfu at 6:31 AM on December 2, 2011 [1 favorite]

I don't really understand the idea of "run a small balance constantly and pay the minimum".

This is how to improve your credit score. The score is determined by a variety of factors, but not the actual amount of money. They look at available and used credit in relation to your income. They reward you for a low balance (under 20% in relation to available credit) and punish you for a high balance (over 80%). They give you nothing for a balance paid off every month. They want people to keep a running balance, so they discourage people paying their cards off in full every month.

However, it's not smart to put a lot on your cards if you don't need to. You get used to it, then one day you may decide to buy something beyond your means (because now you can) and can't make the payments. CC companies are a trap. The only reason I would encourage having a card is to maintain and increase ones credit, and this can be done with a low balance card. You use their rules to your advantage - keep the balance under 20% of what's available, but keep a small balance on it at all times. This will help maintain and increase your credit without letting you slip into the trap of spending it because its available to you.

So unless you have really good self-discipline not to spend beyond what you actually could pay for in cash, I don't recommend putting lots of things on a CC.
posted by DoubleLune at 7:16 AM on December 2, 2011

I've never carried a balance and my credit card limit gets bumped up regularly. Once it reaches about 50% of my annual income (I know, wtf?!) I call the bank and request that they lower my limit, which puts them into a wild backpedaling frenzy of 'if your limit gets lowered it looks bad and it'll never be raised again, and you'll never succeed in life and your kids will be stoopid and you will be shunned' blah blah blah. I persist, the limit is lowered, and a few years later I am back to the same place, with a credit limit that is way beyond what I want or need. So I call the bank...

It seems nonsensical to carry a balance. Isn't that just buying in to the credit card companies' fear-inspiring policy/marketing trick of 'the world will end if you don't pay us a bunch of interest every month' ??
posted by lulu68 at 8:09 AM on December 2, 2011

No, you do not need to carry a balance (not pay off your bill every month and accrue interest). The amount that gets reported to the credit bureaus is your bill amount. So just pay your bill when it comes, no need to do anything fancy and no need to pay interest!

Get a card that gives rewards on whatever you buy a lot of. If you drive a lot, look for something with good gas rewards. If you travel a lot, find a card that gives good rewards on airlines and hotels. Or whatever. Just make sure it doesn't have an annual fee. Then pay your bill IN FULL every month when it comes. That's it.

If you pay your bill IN FULL every month, and you have a card that gives you good rewards on the stuff you buy with it, you actually make money from your credit card. I do this and it's awesome, I get a couple hundred dollars a year just by buying groceries and gas, paying utility bills, going out to eat, all the stuff I would do anyway. (I get fancy with it, rotate cards based on what I'm buying and what kind of reward I'm getting for that particular category, but you don't need to do that unless you're really interested in maximizing your rewards).

Once your student loan is paid off, it stays on your report for 7-10 years so you'll still have that history but yeah you'll need something else (credit card, auto loan, mortgage) going forward to show potential creditors that you're still good at paying bills. It's not like your credit score goes away the second your student loan is paid off but you probably will want something else to add to the mix.
posted by rabbitrabbit at 8:54 AM on December 2, 2011 [2 favorites]

They give you nothing for a balance paid off every month

@DoubleLune can you provide a reference for the idea that you need to actually carry a balance to improve your score?

Everything I have ever seen (including a quick confirming google search just now) indicated that using the card is the critical point, not actually paying any interest. The balance which gets reported to the credit agencies is the billed amount each month, not the amount of interest paid. This is the amount which is used for credit utilization computations. My scores certainly have not been hurt by paying off my cards every month.

CC companies are a trap.

Lots of people use credit cards without falling into a credit trap. I can't imagine buying something really expensive or traveling without using a credit card. I would also contend they are one of the safest possible ways to spend money - the credit card company still holds the risk in the transaction with respect to fraud. If someone steals your card or number and charges something, a simple phone call will take this charge off your bill. If you lose cash, or a check, or someone gets your pin # for a debit card the recovery process is either onerous or impossible...
posted by NoDef at 10:04 AM on December 2, 2011

For the first time in a few years we missed a payment on our AMEX Blue Cash card. Bam, 30 bucks in interest and 25 late fee. That kinda charge defeats the purpose of using a card for cash-back purposes. So I called them and, with only a few softspoken words (not threats either), got the charges removed completely.

Moral: Since you're green/new to the credit card game remember they want to keep you and they will forgive a bit if you're otherwise a good payee. Using the card more probably helps as well, remember they make money on each transaction you make with the card not just interest/fees.

Finally, the amex blue card is amazing. I have the old version but the new one is still really good for rewards (cash, not points) and no fees. I ignore interest rates since I pay it every month like clockwork (except where noted above heehee).
posted by RolandOfEld at 10:30 AM on December 2, 2011

No, you do not need to carry a balance (not pay off your bill every month and accrue interest). The amount that gets reported to the credit bureaus is your bill amount. So just pay your bill when it comes, no need to do anything fancy and no need to pay interest!

Yes, this needs to be repeated for truth. You don't need to run a balance, and shouldn't; just pay it off in full every month. A small nuance is that the amount that gets reported each month is whatever the balance is at that time, usually the billed amount, but not necessarily. I suppose you could try to figure out when the card company reports to the credit bureaus, and then pay the bill after the report, but the timing is not consistent, so I wouldn't even bother. I have paid off my credit card bills in full every month for many years and so have never paid a penny in interest in all that time, but if you look at my credit report, you'd never know that.

The rest of rabbitrabbit's comment is all great advice, too. I charge almost all of my expenses to credit cards in order to earn rewards and for safety, as NoDef says.
posted by odin53 at 2:51 PM on December 2, 2011