Help me understand credit scores
September 12, 2013 8:24 PM   Subscribe

In aug and this first week of sept, I have managed to pay three of my four cards off completely. I kept the highest balance the one because of it's age and it's the lowest %. So, now I have a credit card and a mortgage. Was paying them off a good idea? I applied for a starwood Amex and got denied. I understand it was too early but when will I see a jump in my credit and will I? I paid about 10k at average of 22%. It is a huge huge deal for me!
posted by femmme to Work & Money (9 answers total) 4 users marked this as a favorite
To clarify: did you close them after you paid them off?
posted by Night_owl at 8:26 PM on September 12, 2013

I hope you didn't close the accounts when you paid them off. If you did, the account age for those credit cards no longer shows up on your credit report and your overall utilization went up (because your credit limit goes down but your usage stayed constant), both of which are credit negatives.

That said, if you had $10K at 22%, you can consider the benefit of paying off your debt as being $2200/year. It's almost always a good idea to pay down debt before any other consideration (the exception being a six month emergency fund). Even with a pretty good rewards card (as the Starwood Amex is), it's pretty hard to get a rewards benefit of that amount. So, even if you were denied for credit, you more than make up for it with the paid off debt. Further, if you already have a mortgage, there's less need to have a good credit score anyway.

For what it's worth, Amex is one of the pickier credit card companies to deal with; it's somewhat common for them to reject applicants that Visa/Mastercard branded cards would accept.
posted by saeculorum at 8:44 PM on September 12, 2013 [1 favorite]

You probably mean highest credit limit card rather than highest balance right?

Paying off debt is ALWAYS a good idea regardless of credit scores issues. Otherwise you are simply giving away a percentage of your earnings. Why give away 22% per annum on every dollar you spend (and this is what you are doing if you have credit at that rate even if you are not using your card to spend because you are not paying your debt off.)

You are entitled to a free credit report every year I believe. Get one and see what your score is and check for inaccuracies.

A 22% rate indicates that your credit was not great before you paid down so you have some rehabbing to do and time to wait.

BTW - the starwood card is a trap (as are all credit card offers - they do this because they make money off you.). The signup bonus is less useful than cash and the $65 annual fee will eat up any savings and rewards unless you are a big spender. Also do you really want to pile $5000 on a credit card in 6 months after paying down your debt?

You sound like you wised up and cleaned up your financial act. The key is to remember that spending is never saving.

Calling your remaining credit card company and seeing if they will give you a lower rate will probably save you more than any rewards program ever could.
posted by srboisvert at 8:46 PM on September 12, 2013 [1 favorite]

Yes, paying them off was a good idea. Pay off the last one. You should feel proud of yourself. check your fico score or credit score online to make sure this stuff is off and then recheck next year. Keep on keeping on.

Also agree that you should call the credit card company you are still paying and ask for a lower rate.
posted by katinka-katinka at 8:47 PM on September 12, 2013 [1 favorite]

Credit Karma will let you update your score on a regular basis. It used to be daily, but now there's a tiny bit of a lag. I'd wait until you can see it there and then wait a bit more. These sorts of things aren't instant, your creditors report to agencies on a regular, but certainly not daily, basis.
posted by Brian Puccio at 9:20 PM on September 12, 2013

Paying off open credit card debt is always a good thing. Definitely keep those accounts open, even if it just means routing a small monthly bill through them with autopay enabled.

If you're interested in seeing your credit report now, whichever company Amex used is obligated to provide a free copy even if you've used up your annuals (if you haven't, get those from the other two so you can make sure nothing's incorrect -- they should not ask for payment information when you do so). Also, if you'd like to try for a different card that might be easier to get, as long as your accounts are actually showing up as having been paid off this would be a good time since then the "hard pulls" will show up together in your report. From what I've read, that looks better than several more spaced-out applications and means that they'll also "fall off" (stop counting against you) together in due course.

In any case, as long as you keep up on your payments, things can only get better from here. Congratulations!
posted by teremala at 10:58 PM on September 12, 2013

From my experience it takes two months or so before a balance change makes it all the way through all the credit bureaus. Your application was probably rejected because your reports are still showing the june/july balances on your current scores.
posted by JoeZydeco at 5:26 AM on September 13, 2013 [1 favorite]

Adding to the chorus here - yes, paying off your credit card debt is a great idea, and congratulations to you on a solid start.

Don't close all your credit card accounts - at least keep the oldest couple open. I've heard people sometimes freeze their cards in blocks of ice, so that it is available for emergencies but not a daily temptation. This may or may not be a helpful thing for you.

What matters to your credit score, apparently, is your credit utilization fraction. (I am by no means an expert on this - in fact, I bet most of this comes from reading MeFi...) So having say $5000 in credit available with $1000 in debt may be better than having $1000 in available credit and $500 in debt as far as your credit score is concerned. But it is best of all to have $5000 in credit with $0 in debt.
posted by RedOrGreen at 10:01 AM on September 13, 2013 is the USA's government-mandated credit report website where the three major credit reporting companies are required to divulge some of the information they keep about you for free. They are required to tell you about the records they have on all your payments, timely and missed, but they can and do charge you a fee to see your actual credit score...because it is a proprietary algorithm, capitalism, etc.

I have only paid the fee (to each of the three companies) once, when I was shopping around for mortgages and wanted the exact numbers each company had on me. It was a decade ago but if memory serves each fee was something like $10-20.
posted by zyxwvut at 11:46 AM on September 13, 2013 [1 favorite]

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