How to Grow Good Credit in 2008
November 26, 2007 7:10 AM Subscribe
Help me design the Best Possible Plan For My Credit in 2008. Ten years ago I had no cash, and terrible credit. Today I have some cash, and no credit. I want to make some good choices next year, based on a well-considered strategy.
I should start by saying that I know this is a very nice problem to have. It's taken a long time to get here and I want to proceed wisely.
Back then: After getting into some minor credit card trouble in college ( lss than $2000), I argued some of the debts, settled the others, and never again looked twice at a credit card. But, I wasn't spotless; I still had hit-or-miss records on my student loans, and the assorted unpaid utility bills and bank overdrafts. There was a lot of robbing Peter to pay Paul back then, so any tiny surplus went to groceries, rent. Any time I could get a bit of a leg up, I'd improve my track record a bit, and by sticking to a cash-only policy, I stayed out of trouble. Fast forward to today: Recently married; partner had similar hit-or-miss past (sans the student loans), but no major credit stuff. Both happily employed with plenty of surplus, and making enough that we are both paying off debts here, socking away savings and retirement there. The one car is paid off; no mortgage. So, I've paid off all my old debts and claims, but there's no new good news to take its place. My FICO: TransUnion: 670, Equifax: 660. No Experian, because there's not been enough recent activity. I literally have nothing establishing credit in my name, save my debit cards / bank accounts.
The future:
- At some point in 2008, we need a second car; researching, I checked with my bank and they can't offer rates better than whatever dealership we'd go through. We don't care whose name the car is in since legally, it's all the same pile anyway.
- A mortgage won't be on the horizon till this sub-prime thing blows over, as we are in a market that's been hit especially hard; besides, we don't have that down payment saved. Still, I want to be mindful of that on the horizon, say 2009 or 2010.
- I would rather not get a store card (it seems like inviting trouble to create a purchasing tool that requires me to acquire stuff we might not need, in order to establish credit)
- And, a gas card won't be much help either (we don't drive that much)
- I would like a general credit card, that I would pay off every month. It would be for small daily purchases; the big tickets would only be travel, or the odd time where one needs to pay $500 or $1000 for something up front (medical, plumbing emergency, etc.). Bigger purchases might get paid off every two months.
- I have frequent opportunities to make fairly high dollar purchases for my company, which are reimbursed on time. I've refused to float those expenses out of pocket, to date, but it seems like putting them on my credit card could be an easy way to pay off an even higher balance promptly.
I want to proceed practically and with care, and in the order that will create the best effect, fastest.
Should I get the credit card before applying for the car loan? Should I postpone the car until after the credit boost that the (eventual, unplanned) mortgage will give... even if that will harm our quality of life for two or three years? Should I get a store card even if I don't want one? Should I definitely apply for a credit card that my bank offers, before any other lender, since they know me? I really would rather not get a secured credit card if I don't have to; will my FICO require it? Should I try to boost my FICO before I even consider applying for credit?
Tell me what to do, and why you think so. Or tell me of your own experiences and what seemed to work well. Or of websites, books, financial gurus we should check out. Or of glaring considerations I might have missed. I know you might not be an accountant, credit counselor or financial advisor, but we don't intend to hire one of those anyway. Our plan is to inform ourselves as much as possible, and then weigh it all and decide what makes the most sense.
I should start by saying that I know this is a very nice problem to have. It's taken a long time to get here and I want to proceed wisely.
Back then: After getting into some minor credit card trouble in college ( lss than $2000), I argued some of the debts, settled the others, and never again looked twice at a credit card. But, I wasn't spotless; I still had hit-or-miss records on my student loans, and the assorted unpaid utility bills and bank overdrafts. There was a lot of robbing Peter to pay Paul back then, so any tiny surplus went to groceries, rent. Any time I could get a bit of a leg up, I'd improve my track record a bit, and by sticking to a cash-only policy, I stayed out of trouble. Fast forward to today: Recently married; partner had similar hit-or-miss past (sans the student loans), but no major credit stuff. Both happily employed with plenty of surplus, and making enough that we are both paying off debts here, socking away savings and retirement there. The one car is paid off; no mortgage. So, I've paid off all my old debts and claims, but there's no new good news to take its place. My FICO: TransUnion: 670, Equifax: 660. No Experian, because there's not been enough recent activity. I literally have nothing establishing credit in my name, save my debit cards / bank accounts.
The future:
- At some point in 2008, we need a second car; researching, I checked with my bank and they can't offer rates better than whatever dealership we'd go through. We don't care whose name the car is in since legally, it's all the same pile anyway.
- A mortgage won't be on the horizon till this sub-prime thing blows over, as we are in a market that's been hit especially hard; besides, we don't have that down payment saved. Still, I want to be mindful of that on the horizon, say 2009 or 2010.
- I would rather not get a store card (it seems like inviting trouble to create a purchasing tool that requires me to acquire stuff we might not need, in order to establish credit)
- And, a gas card won't be much help either (we don't drive that much)
- I would like a general credit card, that I would pay off every month. It would be for small daily purchases; the big tickets would only be travel, or the odd time where one needs to pay $500 or $1000 for something up front (medical, plumbing emergency, etc.). Bigger purchases might get paid off every two months.
- I have frequent opportunities to make fairly high dollar purchases for my company, which are reimbursed on time. I've refused to float those expenses out of pocket, to date, but it seems like putting them on my credit card could be an easy way to pay off an even higher balance promptly.
I want to proceed practically and with care, and in the order that will create the best effect, fastest.
Should I get the credit card before applying for the car loan? Should I postpone the car until after the credit boost that the (eventual, unplanned) mortgage will give... even if that will harm our quality of life for two or three years? Should I get a store card even if I don't want one? Should I definitely apply for a credit card that my bank offers, before any other lender, since they know me? I really would rather not get a secured credit card if I don't have to; will my FICO require it? Should I try to boost my FICO before I even consider applying for credit?
Tell me what to do, and why you think so. Or tell me of your own experiences and what seemed to work well. Or of websites, books, financial gurus we should check out. Or of glaring considerations I might have missed. I know you might not be an accountant, credit counselor or financial advisor, but we don't intend to hire one of those anyway. Our plan is to inform ourselves as much as possible, and then weigh it all and decide what makes the most sense.
Best answer: In the short run (as in the next 6 months), applying for a new credit card will hurt your credit. That is because there will be a new "hard pull" and it will show up as a "new" line of credit (older lines of credit count for more). In the long run (especially after the account has been open for at least 2 years) it will help your credit a lot.
As far as your FICO score goes, all credit cards are the same except for the credit limit. The two main stats they look at is your usage percentage (current balance divided by credit limit), which you want to be low, and your credit limit to income ratio, which you want to be low too. Any balance that you have will also be counted as debt in your debt to income ratio.
As long as you aren't planning on getting a loan in the next six months, I would say you should get a credit card to improve your score, even if you don't plan on using it. Every month that you don't use it will show up as being "paid on time", even though you aren't actually paying anything. Make sure that you don't get a card with an annual fee though, because you want to be able to cut up the card and leave the account open without it costing you anything. Also, your bank "knowing you" doesn't usually count for much. They make most of their money from fees, so they don't generally let people off the hook even if they have been a loyal customer for a long time.
posted by burnmp3s at 9:20 AM on November 26, 2007
As far as your FICO score goes, all credit cards are the same except for the credit limit. The two main stats they look at is your usage percentage (current balance divided by credit limit), which you want to be low, and your credit limit to income ratio, which you want to be low too. Any balance that you have will also be counted as debt in your debt to income ratio.
As long as you aren't planning on getting a loan in the next six months, I would say you should get a credit card to improve your score, even if you don't plan on using it. Every month that you don't use it will show up as being "paid on time", even though you aren't actually paying anything. Make sure that you don't get a card with an annual fee though, because you want to be able to cut up the card and leave the account open without it costing you anything. Also, your bank "knowing you" doesn't usually count for much. They make most of their money from fees, so they don't generally let people off the hook even if they have been a loyal customer for a long time.
posted by burnmp3s at 9:20 AM on November 26, 2007
Are you with a bank, or a credit union? Credit unions tend to be easier to deal with about these types of things, especially the smaller ones. (I would beware of the huge ones with big marketing campaigns; these ones in many cases have less of the traditional advantages of credit unions.) They're more inclined to help in situations like this. I carry one credit card through my credit union, with a $1500 limit. They were very easy to deal with as far as getting that went.
When I got married, I suddenly needed two cars - one to replace my old and dying clunker and one for my wife. But we didn't want to spend a lot. We found two cheap cars, and I got a secured loan though my credit union. Since they had the cash on hand in case anything happened, they didn't need to send it in for approval or anything. They didn't even pull my credit file. However, the loan showed up on my credit report as being paid on time. You may want to ask about this option, and ask how it will affect your credit score. As a bonus, I paid 2.5% above the savings interest rate, so I paid very little interest on the loan. And the money was still there in savings once I'd paid the loan off.
posted by azpenguin at 9:55 AM on November 26, 2007
When I got married, I suddenly needed two cars - one to replace my old and dying clunker and one for my wife. But we didn't want to spend a lot. We found two cheap cars, and I got a secured loan though my credit union. Since they had the cash on hand in case anything happened, they didn't need to send it in for approval or anything. They didn't even pull my credit file. However, the loan showed up on my credit report as being paid on time. You may want to ask about this option, and ask how it will affect your credit score. As a bonus, I paid 2.5% above the savings interest rate, so I paid very little interest on the loan. And the money was still there in savings once I'd paid the loan off.
posted by azpenguin at 9:55 AM on November 26, 2007
Let me be the first of what I'm sure will be many to highly recommend CreditBoards.com. This site is like the Metafilter of credit repair. The information and advice there is what enabled me to go from FICO scores in the high 500s to the mid 700s within 3 years. I can't recommend this site more highly.
posted by melorama at 10:45 AM on November 26, 2007
posted by melorama at 10:45 AM on November 26, 2007
Best answer: Yeah, I'll second CreditBoards. It's fascinating reading, a whole community of people obsessed with gaming the financial industry's own methods (plus self-improvement and financial responsibility).
What I’d do would be to get about three revolving accounts (credit cards) open, applying for them at the same time (I think there’s a rule that they only ding you once if you’re applying at several places at the same time for a single thing). Do multiple ones both because the scoring companies like that you have a moderate number of accounts, and because having three means you will have a higher combined credit limit, making your utilization percentage as low as possible. (I do think the scoring companies know whether or not you have any balance, so I'd use them for groceries and pay them off monthly.) Since you’re not really using them, you won’t be losing any money in the form of extra interest by doing this while your scores are where they’re at now. None of the terms will be great, since your scores are moderate, but they’re not so low that you’ll have to get the type of cards that you’ll want to cancel right away or something.
Second, after whatever temporary drop was caused by those applications, I’d apply for the car loan. I’d do this second because you’re talking four- to five-figures that you’ll be paying interest on. If it’s not too much of a hit on quality of life, I’d skip this entirely in the name of having a huge down payment on the house (and since I believe oil is going to keep going through the roof so anyone who can start biking will start biking, and people will sell their cars and resale values will drop, but that’s just me). But since one of the factors in credit is the “balance” of different types of credit (in quotes because that’s all I know about it), having another installment loan in the form of a car loan (“another” because your student loan is one too) will help. But you could accomplish that same boost through one of those department store loans you talk about (if you had to buy, say, a computer), which I believe will show up as installment loans, too.
Then, deal with the house. Do this last, after your score is as high as possible. On a six-figure purchase financed over 30 or 40 years, every little change in interest rate will have huge repercussions on the amount you end up throwing away on interest. Good luck!
posted by salvia at 4:21 PM on November 26, 2007
What I’d do would be to get about three revolving accounts (credit cards) open, applying for them at the same time (I think there’s a rule that they only ding you once if you’re applying at several places at the same time for a single thing). Do multiple ones both because the scoring companies like that you have a moderate number of accounts, and because having three means you will have a higher combined credit limit, making your utilization percentage as low as possible. (I do think the scoring companies know whether or not you have any balance, so I'd use them for groceries and pay them off monthly.) Since you’re not really using them, you won’t be losing any money in the form of extra interest by doing this while your scores are where they’re at now. None of the terms will be great, since your scores are moderate, but they’re not so low that you’ll have to get the type of cards that you’ll want to cancel right away or something.
Second, after whatever temporary drop was caused by those applications, I’d apply for the car loan. I’d do this second because you’re talking four- to five-figures that you’ll be paying interest on. If it’s not too much of a hit on quality of life, I’d skip this entirely in the name of having a huge down payment on the house (and since I believe oil is going to keep going through the roof so anyone who can start biking will start biking, and people will sell their cars and resale values will drop, but that’s just me). But since one of the factors in credit is the “balance” of different types of credit (in quotes because that’s all I know about it), having another installment loan in the form of a car loan (“another” because your student loan is one too) will help. But you could accomplish that same boost through one of those department store loans you talk about (if you had to buy, say, a computer), which I believe will show up as installment loans, too.
Then, deal with the house. Do this last, after your score is as high as possible. On a six-figure purchase financed over 30 or 40 years, every little change in interest rate will have huge repercussions on the amount you end up throwing away on interest. Good luck!
posted by salvia at 4:21 PM on November 26, 2007
This thread is closed to new comments.
The third (and fourth and fifth) paragraph(s) should go:
Back then: After getting into some minor credit card trouble in college ( < $2000), I argued some of the debts, settled the others, and never again looked twice at a credit card. But, I wasn't spotless; I still had hit-or-miss records on my student loans, and the assorted unpaid utility bills and bank overdrafts. There was a lot of robbing Peter to pay Paul back then, so any tiny surplus went to groceries, rent. Any time I could get a bit of a leg up, I'd improve my track record a bit, and by sticking to a cash-only policy, I stayed out of trouble.
Fast forward to today: Recently married; partner had similar hit-or-miss past (sans the student loans), but no major credit stuff. Both happily employed with plenty of surplus, and making enough that we are both paying off debts here, socking away savings and retirement there. The one car is paid off; no mortgage.
So, I've paid off all my old debts and claims, but there's no new good news to take its place. My FICO: TransUnion: 670, Equifax: 660. No Experian, because there's not been enough recent activity. I literally have nothing establishing credit in my name, save my debit cards / bank accounts.
posted by cockwaffle at 7:12 AM on November 26, 2007