Navigating the world of credit
April 12, 2013 11:14 AM   Subscribe

Just found out my credit score sucks, now what do I do?

I just ran a report on creditkarma and found out my credit score is 614. I understand a good credit score should be >725-730. I've never had a credit card, have no debt, and have had two collections accounts in the past which are completely paid off. I have a few questions:

1. I'm starting my undergrad program in the fall and I want to take out student loans. How will my credit score effect this?

2. From what I've read, the way to build good credit is to first get a credit card and then treat it as a debit card (never borrowing more than I have) with the credit score increasing the longer I have a history of making payments on time. With all the credit cards out there, what would be the best for me? I make $12,000 annually and I wind up with ~$50 disposable income at the end of every month, so signing up for a credit card with a predatory interest rate scares me. Should I go with a secured card?

3. If I want to finance a car, how would my credit score effect this? Would it be a bad idea to go for car financing until my credit score is higher?
posted by bumpjump to Work & Money (19 answers total) 11 users marked this as a favorite
 
With all the credit cards out there, what would be the best for me?

The one they'll issue you. Seriously. Right now just get a credit card. With the strategy you describe, the only thing you miss out on is points/miles, but with your income/spending, you wouldn't be building them up at a particularly speedy clip anyway. You might want to get an Amazon card if you spend a lot of money on there.

...so signing up for a credit card with a predatory interest rate scares me.

Interest rates shouldn't come into play as you'd be paying off the balance on a monthly basis and incurring no interest. If you actually carry a balance over, that defeats the entire point. This is only a good strategy if you're good with money. As in, you track your spending, you know full well before you hit your limit, and so on and so forth. If you're not good with that sort of stuff -- and some people aren't! It isn't a judgement call in the least -- then this isn't the best method for you to build credit.
posted by griphus at 11:19 AM on April 12, 2013 [5 favorites]


so signing up for a credit card with a predatory interest rate scares me.

If you pay your balance off in full every month, you never have to pay interest. I don't even know what the rates are on my cards because I have literally never paid interest on a credit card in my life and don't intend to.

It's really easy not to ever pay interest so long as you follow one rule: don't spend money you don't have.

(And that includes, "oh, I'm getting paid next week, so I'll pay it off then." NO. If you couldn't otherwise pay in cash, don't pay with your credit card.)

Do that and you'll be fine. And in a few years when those student loans come due, PAY THEM.
posted by phunniemee at 11:24 AM on April 12, 2013


Yeah, just get a credit card. I never pay interest; I don't even wait to get a statement before I pay off my cards, I just go to the website and pay every Friday or so. Which reminds me.

Also: 614 for someone in the mid-20s is not GREAT but it could be a lot worse.

If you are making $12,000 a year I don't think you should finance a car regardless of your credit score.
posted by mskyle at 11:30 AM on April 12, 2013 [5 favorites]


Also, keep in mind there's a difference between your statement balance and your current balance. Every month you want to pay the statement balance. I mean, you can pay the current balance if you want, but you only have to pay up to the statement balance to not incur interest.

I've had a credit card for 10+ years, I figured this out six months ago.
posted by griphus at 11:32 AM on April 12, 2013 [2 favorites]


My husband uses his credit card for all purchases he can--groceries, supplies, etc.--and pays it off in full at the end of every month. It's a great strategy if you are able to do this, and if you can get a card with cash rewards back, you can earn a wee bit on it, too (it won't be a horrendous amount at your expenditure level, but hey, an extra $5 is an extra $5.)
posted by telophase at 12:31 PM on April 12, 2013


Everyone's saying just get a credit card, and while not incorrect, you can do a little better by getting one that offers rewards. My credit score is about a hundred points lower than yours, and I have a low-credit-limit Best Buy mastercard that I have no problem paying off regularly, and I get Best Buy points on every purchase. So, not only do I not pay interest, but every couple months I get $5 or $10 free to use at Best Buy which means free batteries or blank CDs every so often. If you're not a Best Buy fan, look at whatever gas station you regularly go to: they, too, usually have a visa/mastercard that earns points towards free stuff.

Be careful applying for too many credit cards at once; every time a credit company queries your credit score, it counts against you. Two or three recent inquiries might be fine; 10 or more (and it's possible that, when you found out your own score, that counts as a query, too) is probably going to result in a decline.

Also, JCPenneys, Kohls, and other retailers are starting to really push in-store cards (not visa/mc, so you can't use them at any other stores). We got declined for JCPenneys, but Kohls gave us a (small limit) line of credit, too, which was handy at Christmas time.

(Also, paying interest isn't a horrible thing. Even a usuriously high-rate credit card is probably about $2/$100 per month, you'll probably get something much less. So, if you get a $100 or $200 card, and you have a balance of $50 on it, that's just a buck, which, if that month is tight, it might be better to just pay the minimum due and have that $50 in your pocket. Don't ever be late, though, that's deadly)
posted by AzraelBrown at 12:33 PM on April 12, 2013


and if you can get a card with cash rewards back, you can earn a wee bit on it, too

Yeah, the credit card I have through my bank (which is probably your best option for finding someone to give you a credit card) is a % cash back card. It's way, way, WAY less confusing than dealing with points or miles (where do I spend them? are they expiring? etc) and every quarter I get a check in the mail, which is pretty cool.
posted by phunniemee at 12:53 PM on April 12, 2013


...which is to say, for your first one, I recommend you look for a (free) card that offers cash rewards rather than points.
posted by phunniemee at 12:54 PM on April 12, 2013


...I recommend you look for a (free) card...

Oh, duh, yeah, make sure the credit card has no yearly maintenance fees, no early payment fees and no minimum spending fees (i.e. they charge you the fee if you don't spend at least $X/month.)
posted by griphus at 1:05 PM on April 12, 2013 [2 favorites]


If you're not good with that sort of stuff -- and some people aren't! It isn't a judgement call in the least -- then this isn't the best method for you to build credit.

Would other ways of building credit be making loan/car payments on time?

If you are making $12,000 a year I don't think you should finance a car regardless of your credit score.

Yeah I'm not planning on it anytime soon, I was just thinking about few years down the road after I get my degree and have a real salary.
posted by bumpjump at 1:18 PM on April 12, 2013


Would other ways of building credit be making loan/car payments on time?

Making regular, full payments on loans of any sort will help build your credit yes. However, the way you phrase that makes it sound like it's an option, which it really isn't if you want to be fiscally responsible. There's no middle ground here: making the payments regularly and on time will help your credit, missing payments will hurt it. So unless your life literally depends on it, don't take out a loan you foresee having trouble paying back.
posted by griphus at 1:25 PM on April 12, 2013


(And that includes, "oh, I'm getting paid next week, so I'll pay it off then." NO. If you couldn't otherwise pay in cash, don't pay with your credit card.)

I don't really see the problem with this if you're just starting out. I have several credit cards and have never paid interest on anything.

I get paid once a month. After paying rent, utilities, car payment, car insurance, prescription drugs, and the balance of my credit cards, I usually only have a couple hundred dollars left over in my checking account. I usually need to use money I don't have to buy gas and groceries and misc expenses that pop up. I just got my first "real" decent job so I have pretty much no savings. Yet I never fail to pay off my balance completely.

If you're 40 years old, yeah it may be problematic. Things are different when you're a recent graduate.
posted by WhitenoisE at 1:34 PM on April 12, 2013


Credit Karma seems to report low, though, so I'd get your annual free credit report and see what's actually going on.
posted by Ideefixe at 1:34 PM on April 12, 2013 [1 favorite]


1. I'm starting my undergrad program in the fall and I want to take out student loans. How will my credit score effect this?

Subsidized and unsubsidized federal loans are guaranteed up to a yearly total, depending on your year in school. Your personal credit score has no bearing on your federal financial aid unless you have defaulted on a previous student loan, which you haven't.

If you need to apply for a student loan beyond what the government offers you in guaranteed aid, that would require a credit-approved cosigner most likely.
posted by Think_Long at 1:43 PM on April 12, 2013


It's also really important to understand that the Credit Karma score is not a credit score that lenders will ever see (also called a FAKO). When I was in the process of buying a house, the Transunion credit score that my lender gave me and my score on Credit Karma (which is based on Transunion data) was almost 100 points higher (when I was buying a car a few months ago, the difference was about 65 points). And though such a huge discrepancy is not true for everyone, considering that there's apparently 49 different FICO scores, it's not really surprising.

I buy my actual FICO scores once a year (and again before making a big purchase) from myfico.com and then use the free sites like Credit Karma and Credit Sesame for the free credit monitoring & to have a vague idea of when/why my score changes.
posted by eunoia at 1:56 PM on April 12, 2013 [1 favorite]


When I was in the process of buying a house, the Transunion credit score that my lender gave me and my score on Credit Karma (which is based on Transunion data) was almost 100 points higher

So your Credit Karma score was 100 points higher than your Transunion score?
posted by bumpjump at 2:21 PM on April 12, 2013


So your Credit Karma score was 100 points higher than your Transunion score?

The Transunion score given to me by my lender was 90 something points higher than the Credit Karma score.
posted by eunoia at 3:38 PM on April 12, 2013 [1 favorite]


Just to add more anecdota to the pile, my FAKO from Credit Karma is slightly higher, a bit lower, and much lower than my scores for Experian, Transunion, and Equifax.

If you get a secured card, make sure that it is one that actually reports to the credit bureaus. Some of them don't.
posted by sm1tten at 4:10 PM on April 12, 2013


You need good credit to borrow money. You shouldn't be borrowing right now, so now is a fine time to build a good credit score by paying bills promptly, esp. credit cards.
posted by theora55 at 8:23 PM on April 13, 2013


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