Credit Advice (seriously)

[wintergreen48]

OK, we have had a few discussions about economic things and credit issues and so on, and it appears that some people don't know all of the ins and outs of the credit world. I thought that I would throw out a few tips and pointers, which might actually do someone some good. It's never a good idea to have bad credit, but in the current economic situation, bad credit is a particularly bad thing: even if you don't actually 'need' credit right now, you want to have a good credit record. For example, more and more employers now look at your credit report as part of the hiring decision, so if you were to lose your job-- as has happened to many of us over the past year and, alas, as will likely happen to more of us during the next year-- you could lose some opportunities if your credit record is less than pristine.

I think everyone understands all of the 'basics' of good credit-- don't default on a loan, don't pay late, don't borrow more than you can easily repay, etc., but there are a lot of nuances, that particularly apply with respect to credit cards, and I will focus on those, because virtually everyone uses credit cards from time to time, and credit card types of credit turn out to be very critical in credit scoring.

1. High credit limits are GOOD, but high credit balances are BAD. One very important factor in credit ratings is your 'utilization' rate (counts for something like one-third of your FICO score), which is the percentage of your available credit that you actually use: if you have a $10,000 credit limit on your card, and you have $2,000 outstanding, you have a 20% utilization rate. What you want is to have a LOW utilization rate-- never more than 33%. Thus, the best situation is to have a very high credit limit, but don't put too much on the card at any one time. In the old days-- which some of us recall very well-- high credit limits were bad, because it suggested high risk of potential exposure (that is, if you ran into financial problems, you would probably run your credit up to the limit, and then default, and that would be bad for your lender; lenders would typically look at you 'as though' you had taken all of your credit up to the limit); today, however, the utilization rate is the important factor, so the higher your credit limit (the denomionator for the utilization rate), the better. This is why it can be are real problem for you if your credit card company cuts your credit limit-- that reduces the denominator, and overnight increases your utilization rate. For example, if have a credit card with a $10,000 credit limit, and you have $2,000 outstanding, you have a (very nice) 20% utilization rate; if your lender cuts your credit limit to $5,000, you suddenly have a (very bad) 40% utilization rate, and your credit score will take a hit. So do what you can to maximize your credit limits, and keep your utilization rate down.

2. Multiple credit cards are good, but do not go overboard. The ideal is about 3-5 credit cards: if you have fewer than that, the credit scoring people have less data to work with, and anytime there is an 'unknown' factor, it works against you; if you have more than that, it can be very difficult to manage, and it looks a bit loose and uncontrolled to the credit scoring people, and that works against you. However many cards you have, use them all regularly (and of course pay off the balances regularly and on time), making sure not to screw up on your utilization rates (that is, do not exceed 33% utilization on any card, and of course do not exceed 33% of your total credit limits). If you do not use a card regularly, you increase the risk that the credit card lender will reduce your credit limit, or even close out the account entirely (new credit card rules that go into effect next year will specifically prohibit a lender from closing an account based upon the fact that the customer does not pay any finance charges, but will specifically permit a lender to close an account based upon the fact that the customer has not used the card for three months).

3. Pay off your balance in full each month. Apart from the fact that it is kind of dumb (for you) to pay interest on credit card purchases, it is 'riskier' behavior in the eyes of lenders, and this is the kind of behavior that triggers lenders to cut credit limits and increase interest rates (of course, if you pay your balance in full each month, you do not pay any interest, and therefore you could not care less what the interest rate is).

4. Do not do anything that requires you to pay a fee. In part, this is just good financial management: 'fee cards' (like the airline miles things) tend not to be a good deal when you consider what those miles are costing you; if you have a good credit rating you should have no problem getting a credit card that does not charge an annual 'membership' fee; other fees that you might pay are similarly bad ways for you to spend your money. But also, most of the things that you do that cause you to pay a fee are suggestive of higher-risk customers, and although credit card companies love that fee income, if you are doing things that generate those fees, we sit in our aeries wagging our fingers at you. This recommendation applies to ANYTHING that involves paying a fee, other than foreign transaction fees (most credit card companies-- other than Capital One-- charge you a 'foreign exchange fee' if you use the card outside of the US, either while you are traveling or when you buy something online from an overseas vendor; that fee is an unfortunate extra expense-- unless you have a Capital One card, because we do not [yet] charge it-- but it does not have bad credit impact on you).

5. Old credit is good; new credit is bad. One of the things that lenders look at is the LENGTH of your credit history: this can count for up to 20% of your credit score. What it means is, if you have a credit card that you have had since 1988, it is 'better' for credit scoring purposes than the exact same card that you have been using the exact same way since 2008. Currently, the credit scoring models count closed credit card accounts in your history, so that if you close an older account it is not as bad as it used to be, but in general, it is better to hold onto 'older' accounts unless the account is really bad in some way (such as, it charges you ridiculous fees just for the 'privilege' of ownership, or it has a ridiculously low credit limit that you cannot use safely). By the same token, you do not want to have a lot of 'new' credit, in part because 'new credit is bad,' but also each credit inquiry into your credit history is a knock against you (a few exceptions: if you are applying for a mortgage loan or a car loan, all of the inquiries that take place within a thirty-day period are calculated as a single inquiry-- it suggests that you are shopping for the best deal, and that is 'good,' so you do not get penalized for it-- but if you have a lot of inquiries, month after month, it will hurt your credit record). If you happen to be a 'rate surfer'-- someone who responds to every 0% interest balance transfer offer that you get, moving existing credit card balances to new cards as the initial 0% rate is about to expire-- you are really hurting yourself, first, because you are carrying balances (even if you are not paying interest, you are demonstrating risky behavior), but worse, you are triggering a lot of new credit inquiries, which negatively impact your record, even if you close out the accounts when the initial 0% interest rate expires and you move the balance to a new card.

6. Make your payments on line, using the credit card company's own system. Credit card companies are required to credit your payment upon receipt (subject to the specified 'closing time'-- if the payment comes in at 6 pm and they specify a 5 pm close, they can legitimately hold off on posting the payment until the next business day). There are lots of stories about companies deliberately sitting on payments for several days, forcing a customer to be late, but this is actually much less true than people believe: most of the time when this happens, it is an accident (First USA had a problem with this several years ago, that seems to have been totally unintentional-- they had a complicated system of multiple vendors who processed their payments, and the payments were moved from site to site and so were not credited until they hit the 'final' vendor, and this caused delays, for which they were penalized). A big problem is with the US Postal Service-- the Richmond post office is notoriously slow, and it can take a week (I am not making this up) for something to move from one place in Richmond to another, much less have it go from someone in California or some other remote location to someone in Richmond). It is very easy to miss the deadline if you do not pay careful attention to the due date, and given the possible delays on both ends (from the time the bill is sent from the lender to you, and then the time from when you send your payment to the lender), well, it is very easy to have a payment be 'late' even when neither you nor the lender has done anything really wrong. By making the payments online, you eliminate the postal problems, and can generally control when the payment applies. By using the lender's own site, you get a 'receipt' from them that shows when the payment is being credited, and they are generally stuck with that (unless, of course, your payment ultimately fails, as when you authorize a payment from an overdrawn checking account). Using your own bank's bill pay system to pay a bill that is due to another bank is not quite so good an idea, just because of the possible delays from your own bank (I pay my middle son's rent at college this way, and the payment I authorized last Thursday will not actually be processed until today, and it will not actually reach the landlord until the end of this week; for that reason, I authorize those payments at least ten days in advance of the due date, which is the first of the month). As a practical matter, I personally do not wait for the bill from the credit card lender anyway: I routinely go online and pay my balances every Friday, which might be a bit obsessive for many people, but it works for me, and it pretty much guarantees that I am never late on anything.

7. Keep an eye on your credit cards. This is kind of obvious, but a lot of people do not do it. You should monitor your existing credit accounts carefully-- look at your statements when you receive them, better yet, go online from time to time to make sure that nothing funky is happening. While you are generally not liable for any fraudulent or unauthorized use of your credit card beyond the first $50 (which most lenders waive anyway, even if the fraud or unauthorized use was entirely your fault), it can be a pain to deal with, and you want to nip it in the bud if you can. One problem with credit cards is that most merchants do not follow the rules (they do not watch you when you sign the bill, they do not compare the signature on the bill to the card, they do not get any other ID), so it is very easy for someone else to be 'you' and run up charges; even if those charges are deleted, you have to go to trouble to get that done, and it is easier to do that when the problem starts rather than after a lot of charges have been posted. One common source of this problem is restaurants: have you ever noticed that when you pay a bill at a restaurant, they take your card away, back to some secret room, and then bring it back with the bill? Do you know what the people in the secret room are doing with your card? Do you know who is in that room doing stuff? Of course not. But there is a huge amount of fraud that goes on, with restaurant personnel stealing credit card numbers and using the account to buy stuff for themselves (and some of these people are really stupid: we had a situation where someone used our Discover Card to pay her cable TV bill-- kind of dumb, since the cable TV company had her name and address, and since we did not have cable TV at the time, it was a no brainer to resolve, and go after her). Anyway, keep an eye on each account.

8. Keep an eye on your credit record. This is kind of obvious, but a lot of people do not do it. You should periodically review your credit records, to see if there is anything funky going on out there (that is, in case someone is obtaining credit in your name, that is, identity theft). You are allowed to obtain a copy of your full credit account once a year for free from each of the three national credit bureaus, and you should take advantage of this, just spread it out (that is, get your Experian record in January, get your Transunion record in May, get your Equifax record in September). I don't think you need to waste money on stuff like the supposedly free credit report services (they let you get one 'free' report, but you have to sign up for some credit monitoring service). The services like 'Lifelock' provide some benefits, but not much more than what you can do for yourself: the way that they tend to work is that they really just notify the credit bureaus not to accept any credit inquiries/applications without contacting you directly (which can be a pain, if you actually apply for credit, and the creditor bureau cannot reach you), but if that is something you want to do, you can do it yourself, for free (Lifelock's real benefit is that if the system fails, they pay the cost of fixing it, but even that is not that huge a deal for most people; their system actually does not work all that well anyway-- you know those commercials where Lifelock's president broadcasts his social security number? Well, some guy-- who was mentally disabled, as it happens, not a brainiac who knew how to goose the system-- actually obtained credit in the president's name, using that broadcast social security number; 'Lifelock' took care of it, but it sure didn't cost $1,000,000 to fix-- the value of their guarantee-- and in fact it didn't even cost one month's premium of Lifelock to fix).

I hope this helps someone.

[gsabc]

wg, PLEASE submit this to a local newspaper or even national magazine for publication. This is the clearest and most succinct explanation of one's personal credit that I've ever seen.

And whatever money they may give you for the article won't hurt either.

[SportsFan68]

If you do not use a card regularly, you increase the risk that the credit card lender will reduce your credit limit, or even close out the account entirely (new credit card rules that go into effect next year will specifically prohibit a lender from closing an account based upon the fact that the customer does not pay any finance charges, but will specifically permit a lender to close an account based upon the fact that the customer has not used the card for three months).

Thanks for this info. I suspect I'll be down to two cards next year.

[Catfish]

This is the clearest and most succinct explanation of one's personal credit that I've ever seen.

I agree. Thank you, sir. Please get it published. It should be required reading.

Love,

[christie1111]

Thank you Sooooo much.

I do most of these except pay off the whole balanceof one card.

But the most important thing to me was the use it or lose it part. I have been trying to pay down the balance of that one card and have not been putting anything on it.

I did use it recently so that is good, but does it matter how much I charge periodically? Like if I charge someting undr $100 every 3 months, would that be okay?

I agree with the others. One of the most concise and readable explanations I have ever seen.

[christie1111]

Oh, could I have permition to print this out for some people here? We have some young, not long out of college interns here I would like to give it to.

But some of the other people might benefit as well.

[TheCalvinator24]

Actually, would you give general permission to reprint?

Will gladly give proper attribution if you want it. Of course, I'd have to learn what your "real" name is first.

[KillerTomato]

Mr. 'Green, thanks for this. I can personally attest to the efficacy of much of your post. I ran into some credit problems a number of years ago; my credit is considerably better now, due in large part to the advice I got, much of which is in your post.

I'm curious about how you feel about auto-payment and whether that status matters. My guy said that it reduced your "risk profile" or something like that, so I'm signed up for just about every auto-payment I could find (since admittedly, this was one of my problems in the past; I'd forget to pay a bill, the remember 3 days after it was due). And my credit score is way up just since enrolling in those. Might be a coincidence, but I dunno.

Anyway, thanks again! And I agree, publish this.

[ulysses5019]

Actually, would you give general permission to reprint?

Will gladly give proper attribution if you want it. Of course, I'd have to learn what your "real" name is first.

I thought it was EugeneF.

[MarleysGh0st]

How does an online payment work? Is it an EFT from your checking account?

And is there a fee for this convenience?

[silvercamaro]

How does an online payment work? Is it an EFT from your checking account?

And is there a fee for this convenience?

Yes, and not usually, although you can double-check with your bank to make sure.

[KillerTomato]

How does an online payment work? Is it an EFT from your checking account?

And is there a fee for this convenience?

The autopayments I do are EFTs, so you'll have to provide the routing number and account number, and be sure to only work in a secured manner. I have personally never had an issue with secure sites, but your trust level may be lower than mine.

[KillerTomato]

Oh, and I have never paid a fee for online payments.

[gsabc]

How does an online payment work? Is it an EFT from your checking account?

And is there a fee for this convenience?

Yes, they'll ask for your checking account information and take it out directly. For automatic payments, you can often specify the day of the month for it to come out of the account. And no, most stores and banks don't charge a fee, because it saves them money to do everything electronically instead of manually. My town charges to pay our property taxes and water bills online, but it's all of a quarter, cheaper than a stamp. That fee probably covers the care and feeding of the website.

[KillerTomato]

I should clarify that my autopayments are not handled through my bank, but through the individual vendors. My cell, cable, insurance co., etc.

[silvercamaro]

I have another question about credit cards and credit scores.

In the recent Bikini Boot Camp Caper, the case of a nefarious person using my number for several small purchases, my account was closed immediately, and the financial institution is sending me another card with a different number. Will the fact that one account was closed and another opened immediately affect my credit score in any way?

BTW, I lurvs you, Wintergreen, not only for your interesting information, but also because you're the only person who seems to know stuff like this.

[ulysses5019]

I have another question about credit cards and credit scores.

In the recent Bikini Boot Camp Caper, the case of a nefarious person using my number for several small purchases, my account was closed immediately, and the financial institution is sending me another card with a different number. Will the fact that one account was closed and another opened immediately affect my credit score in any way?

BTW, I lurvs you, Wintergreen, not only for your interesting information, but also because you're the only person who seems to know stuff like this.

I guess that explains why he doesn't work for the government.

[ghostjmf]

(I'm just not up for it today)

[wintergreen48]

If you do not use a card regularly, you increase the risk that the credit card lender will reduce your credit limit, or even close out the account entirely (new credit card rules that go into effect next year will specifically prohibit a lender from closing an account based upon the fact that the customer does not pay any finance charges, but will specifically permit a lender to close an account based upon the fact that the customer has not used the card for three months).

Thanks for this info. I suspect I'll be down to two cards next year.

No: you want THREE cards. I would recommend a MasterCard and a Visa (both useful just about anywhere) and a Discover card (for the rebates).

[wintergreen48]

Thank you Sooooo much.

I do most of these except pay off the whole balanceof one card.

But the most important thing to me was the use it or lose it part. I have been trying to pay down the balance of that one card and have not been putting anything on it.

I did use it recently so that is good, but does it matter how much I charge periodically? Like if I charge someting undr $100 every 3 months, would that be okay?

I agree with the others. One of the most concise and readable explanations I have ever seen.

Usage is the most important thing; how much you put on it will affect how profitable you are to the company (the more you use it, the more they make on the interchange fees), but the really important thing is make sure it gets used periodically.

[wintergreen48]

Oh, could I have permition to print this out for some people here? We have some young, not long out of college interns here I would like to give it to.

But some of the other people might benefit as well.

Feel free. Send all royalties to Rexer, I think I owe a lot of those $10 fees.

[wintergreen48]

Mr. 'Green, thanks for this. I can personally attest to the efficacy of much of your post. I ran into some credit problems a number of years ago; my credit is considerably better now, due in large part to the advice I got, much of which is in your post.

I'm curious about how you feel about auto-payment and whether that status matters. My guy said that it reduced your "risk profile" or something like that, so I'm signed up for just about every auto-payment I could find (since admittedly, this was one of my problems in the past; I'd forget to pay a bill, the remember 3 days after it was due). And my credit score is way up just since enrolling in those. Might be a coincidence, but I dunno.

Anyway, thanks again! And I agree, publish this.

The fact that you go onto an auto-payment scheduled reduces your risk profile with respect to the individual creditors because they know that they will get paid on time (unless, of course, your payment bounces, but you would not do that). You also reduce your risk profile generally, over time, with all current and all potential creditors, simply because you never miss payments (again, unless your payment bounces, but you would not do that).

[wintergreen48]

I have another question about credit cards and credit scores.

In the recent Bikini Boot Camp Caper, the case of a nefarious person using my number for several small purchases, my account was closed immediately, and the financial institution is sending me another card with a different number. Will the fact that one account was closed and another opened immediately affect my credit score in any way?

BTW, I lurvs you, Wintergreen, not only for your interesting information, but also because you're the only person who seems to know stuff like this.

This should not cause you any problems at all. This kind of thing happens all the time, but so long as it does not happen too many times (multiple repeat occurrences might eventually suggest to creditors that you are doing something funky, or that you are just plain careless), you should have no problems. Since it is an existing creditor-- the same bank is just giving you a new card under a different account number-- it is a pretty transparent transaction, which should have no impact.

[ghostjmf]

I've several times been sent replacement cards that I did not solicit for cards that had not yet expired. That were not set to expire for several years. The # on the replacement card was the same. The code on the back of the replacement card was the same. I do not for the life of me know what made the new card "different". In each case, the credit card company sent me a letter 1st, with my right name, at my right address, which hasn't changed since the mid 80s, saying "we are going to be replacing your card". This of course lead me to expect the new card to have a new set of #s, front & back, but they never have. These were always active cards that were being replaced, too.

Are they changing what the magnetic strip does in some important way, but a way that does not need a change of card # or code-on-back?

[wintergreen48]

I've several times been sent replacement cards that I did not solicit for cards that had not yet expired. That were not set to expire for several years. The # on the replacement card was the same. The code on the back of the replacement card was the same. I do not for the life of me know what made the new card "different". In each case, the credit card company sent me a letter 1st, with my right name, at my right address, which hasn't changed since the mid 80s, saying "we are going to be replacing your card". This of course lead me to expect the new card to have a new set of #s, front & back, but they never have. These were always active cards that were being replaced, too.

Are they changing what the magnetic strip does in some important way, but a way that does not need a change of card # or code-on-back?

Yes-- that is most likely what has happened. They may have added some new functionality (quite possible something you are not interested in, but something New! and Improved!) such as ATM access for you to make cash withdrawals from ATMs (which, um, I would not recommend that you do) (unless you have a Capital One card, in which case you should make such withdrawals several times a day, because we make a TON of money from them). It is also possible that they are gearing up to offer some features that might be useful later, kind of like what happened with telephones when they went from rotary dial to touchtone: the pound key and the asterisk key had no functionality at all when the touchtones were first introduced, but 'they' knew that there would be wonderful things that would someday be available, and so 'they' sold touchtone phones for years that had a pound key and an asterisk key that really didn't do anything other than make it possible for them to display an even dozen keys.