General Question

tonedef's avatar

What spending/payment habits are best to establish credit with a credit card?

Asked by tonedef (3915 points ) February 3rd, 2009

I’m hopelessly clueless when it comes to credit. I have my first card, and I’m finding conflicting things on the internet regarding how to best build credit. I’ve read that paying your balance in full each month doesn’t build credit, because you’re not managing your account, but are just using it as a substitute ATM card.

What kind of spending and payment can help me to best build my credit?

Thanks, ladies and bros. :)

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31 Answers

tonedef's avatar

Well, dang. I only looked on the first two pages of the search. This has been asked before, but I really don’t understand credit-to-balance ratios.

Can someone simply give me an example of, say, 3 months of use of a card that would maximize benefits to one’s credit?

jessturtle23's avatar

You don’t want to go over half of your credit limit and always pay a little more than your minimum payment. If you get a card and max it out then it screws up your credit and if you just try to pay the minimum every month then you will have to deal with more interest.

cak's avatar

One thing I was taught, if you must carry a balance, never let it exceed 1/3 of your credit limit. Clearly, you should always make more than the minimum payment. Oh and pay the balance off, within a few months.

I don’t know what is wrong with buying things and then paying them off right away. My credit is excellent, that is what I do. I use one card for just about everything, for the entire month and then pay it off.

Last year I did buy one thing that I split between two months. That’s rare for me.

tonedef's avatar

@cak, I need to be clear- I do not need this card whatsoever, and am solely using it to build credit. I am able to pay off things right away, if that is best. I’ve heard that carrying a balance is better to build credit, though. Any insight?

wundayatta's avatar

Don’t worry about paying in full each month. I have always done that, and I have excellent credit. What they look at is not how much you spend, but whether you are consistent in paying on time, and you keep up with the minimum, but don’t let things blossom out of control.

Never, ever, let credit build up if you can at all avoid it! That is the fastest way to getting into economic trouble. Many avoid it, but those who do end up in trouble—that’s how they usually got there.

cak's avatar

@tonedef – I understand and it is important to build credit, responsibly. It’s not the end of the world to carry a balance, just keep it on the low side. Also, keep in mind that is generally how the credit card company makes it’s money – finance charges. The more you carry or the longer you carry that balance, the more they make. That’s your money – you want to hold onto your money…don’t let them have that money. :)

It’s not the end of the world if you carry a balance, just keep in mind that you are starting to pay more for the item than you originally paid for it – I don’t think you want to continue adding more to the cost of the item. At the minimum, when making your payment, pay the minimum plus the finance charge – and if you can, throw a little more in there!

It’s not horrible to carry a balance, it just gets tempting to add to that balance.

I think it’s great that you are looking for the responsible way to build your credit, without sinking yourself.

Bri_L's avatar

I agree with daloon. I pay it off in full every month. every card and have excellent credit. all the carry over means is your paying the card companies more money. By using the card for a month, keeping track of your purchases and making sure you have the money to pay it off at the end you are managing your credit.

fireside's avatar

I do not pay my balance off every month, but still have borderline excellent credit.
The Credit to Balance ratio is basically a risk assessment done by the lenders.

The credit companies want to see that if they give you, say, $1000 to spend that you will not max out the card right away and make little effort to pay the amount back.

If you show that you are willing to pay back into the system and you are keeping your debt at a manageable level, based on income and other lines of credit, then they will consider you lower risk and will raise your credit limit or you will start to get offers from other companies.

Over time, this translates to a better credit score.

Bri_L's avatar

I just don’t think it is necessary to pay the credit card companies interest to do this is my point.

I also don’t think it is wrong if you do. You just have to realize you are paying more for your purchases then.

wundayatta's avatar

I hate paying the credit card companies finance charges. It annoys me no end. I’d rather get money any other way to pay for things. I do not want to pay those horribly high rates of interest.

On the other hand, I love getting the free “float.” I buy the thing, and, in some cases, don’t have to pay for it until a month later. Also, in my case, I get 1% back for all I buy on the credit card. They get automatically paid from my bank account, so I don’t miss a payment.

I missed one once, accidently, and paid it twice accidently, and still got charged interest twice on the same amount. The company wouldn’t give me the finance charge back, (it was maybe $30), nor pay interest on the money I lent them, and so I left them. They probably made $500 a year off me due to the fees they get from the Merchants, and they sacrificed that for $30! Assholes!

bythebay's avatar

@tonedef: Your scores are based on many things; primarily prompt payments and your credit to debt ratio (as mentioned above). Having a balance and making responsible and timely payments is how you “show” your credit company you’re responsible. You can pay it off every month without interest or recourse, and it’s the actual responsible use of the card that helps to maintain your good standing. Routinely, I use only an Amex; but do have a MC & Visa. I use the MC & Visa occasionally to keep the accounts in good standing.

Recent activity is counted in your favor, an inactive or unused account cancels itself out but the available balance could work against you in some cases. Having a large amount of credit available to you is not necessarily a good thing. As with most things, moderation is best.

cak's avatar

@bythebay – you bring up a great point! I lived under the misconception for several years (early on credit user) that having the credit – but I really didn’t use it, couldn’t harm me. Here I had thousands of dollars of available credit and when I went to apply for a car loan – I had a harder time, because I had a lot of credit, with a lot of available credit for my use. I had NOTHING on my cards – not a dime! It wound of harming me, a bit.

bythebay's avatar

@cak: Exactly! They can count the cumulative credit available to you when determining ratios. So while you might be able to afford your payments with your current debt; you might not be able to afford them if you accessed all the credit available to you.
(did that make sense?)

wundayatta's avatar

Yes, when looking for a home mortgage, they look at your obligations if you max out every credit card you own. If they think you can’t make your payments under that scenario, you’re out of luck. It’s good to cut down to one or two cards at that point.

cak's avatar

@bythebay – Lessons learned the hard way! :) I’ve heard people brag about how much credit they have….I just shake my head.

Somewhere in my mid-twenties, I asked for decreased limits and put a hold on any automatic increases. I haven’t asked for an increase in over 15 years…longer than that, I’m sure.

bythebay's avatar

@cak: You’re doing it exactly the right way. It’s much better that way than canceling accounts you’ve established – that can count against you as well. Trust me, if you needed more credit and you’ve been a good customer; the credit card company would extend it to you in a second!

Bri_L's avatar

That is what happened to me I kept my credit limit down. Then later when my wife and I wanted to put some bigger purchases on to get the cash back dividens we called and they increased them, no problem.

tonedef's avatar

Also, I’ve heard that closing a credit card is bad for your credit score. Does anyone know about this?

fireside's avatar

That was the advice about just contacting them to have them reduce the spending amount rather than canceling.

I doubt that canceling a card or two would hurt much, what they would be looking for are those serial cancelers – people who open a card just to get the promo rate and then move their balance to a new card for that promo rate while canceling the first.

Lots of great answers above.

wundayatta's avatar

I’ll open a credit card account to get the 50% off or whatever they offer to get you to take one, and then I’ll cancel it. My credit seems not to be affected.

I wonder if that’s a myth encouraged by Mastercard and Visa in order to keep people ready to be seduced to use the card.

mirifique's avatar

@Cak, et al.: so if I have, for example, $15K in available credit over 3 cards, my credit score will actually increase if I ask them to reduce it? How do they track one’s “ability to pay?” I assume this done by tracking your average monthly payment, particularly if you are carrying a balance. I think I have been misled though, by various marketing campaigns relating to credit score systems, in thinking that the more available credit one has, the higher your score gets, assuming you have/keep a low balance. Is there any way to simulate the common credit score algorithm, that is, without having to “purchase” a credit score (which has always seemed to be the biggest rip-off of all time)?

fireside's avatar

Last I checked, you can get your credit score free once a year by going to:
www.annualcreditreport.com

mirifique's avatar

@Fireside, I believe this just provides a free report, with no score.

wundayatta's avatar

When you have a credit card, the rating agencies assume you have borrowed to the limit of the card. If you have higher debt to income ratio, your credit score is lower. If you get rid of a credit card, the amount you might borrow decreases, and your debt to income ratio goes down, and you have a better credit score, all other things being equal.

Of course they look at other things, like your record for paying on time (indicates attention to details, a good thing in a lenders eyes), the number of debts you have paid off in the past (college, car, more than one car, mortgage), indicating you are good at paying off debts. They look at your income, to see your capability for paying off debts. They might look at your work history, if they have it, to see how consistently your work.

On the other side, they look at debts you have not paid off, payments you’ve been late on, judgements against you, the amount you owe, whether debts have been put out for collection, or are outstanding, and more.

So, if you want to borrow, you want to minimize the bad stuff (fix any problems) and maximize the good stuff.

fireside's avatar

@mirifique – you are correct, i just found that in the FAQs.
I haven’t used that one in a long time, but I thought they used to give you a score, seems kind of useless without a score.
I actually paid for my score last year so I know I’m right around 732.

cak's avatar

@mirifique – it may not significantly raise your score, but what it will do – if you need to borrow money for say a house or a car, will make you more attractive to a lender. It will help your interest rate and may boost the amount you can borrow. It’s been many years since I learned that lesson – now, my credit is excellent, very clean -no dings. I have no problem borrowing, but I only have two cards and one has a very set limit – that I have told them not to raise – unless I request an increase. The other is for our small business (my husband and I both have small businesses), clearly, that has a higher limit.

I do often think they through certain things out to keep you from reducing your limits and to keep you from closing accounts.

cak's avatar

@tonedef – you can close accounts, just keep one open. I went into college in the late 80’s. By my second year, I had 5 cards. By the time my daughter was born (90’s), I had reduced them down to 3, now I have two. My credit is great. No problems. Just make sure you have an open card – you can’t keep your credit active, without credit. That’s where you start to get into trouble.

wundayatta's avatar

Three more payments on the house and it’s ours! Of course, we may have to borrow against it right away, now the the value of the investments that were to pay for the kids’ school has flown away like a leaf in the wind. (Recessions suck!)

Bri_L's avatar

I had seen a story on the today show by that hot little finance chick but also read an article in business week that said closinig your credit cards isn’t the best thing to do.

I wonder if it has to do with how established your credit rating is and the quality of that established rating.

AlfredaPrufrock's avatar

Pay on time.

The best place to learn about transacting payments is www.privacyrights.org. They are the bible on understanding consumer credit, credit fraud, identity theft and how to manage money. Everyone should have to read Paper or Plastic: What Do You Have to Lose? when they open their first bank account. The site isn’t fancy, but the information is straight forward and reader-friendly.

NightRStar's avatar

I’d like to contribute another tidbit of info for those still following this question I’d like to share, I found this article a few days ago on a service called Glyph. From the article:

“Glyph will tell you the best credit card to use in order to earn the most valuable rewards, whether that’s cash back, travel or hotel loyalty points, discounts, or any other type of credit card-activated reward. At launch, the company supports over 250 credit cards, including the top 18 credit issuers in the U.S., representing over 90% of today’s credit cards transactions.”

Glyph’s New iPhone App Tells You What Credit Cards To Use To Earn Better Rewards

Hope it helps everyone make more informed on-the-fly decisions and helps you reap up those rewards you signed up for in the first place!

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