Author Topic: Question about Building Credit  (Read 4107 times)

dragonstache

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Question about Building Credit
« on: August 03, 2015, 01:43:55 PM »
Hey All,

I'm a student and have made it to my mid 20s without a credit card. I'd like to start building my credit. I've been hearing the best way to do this is by getting a credit card and putting small purchases on it every month and paying it off. I'm willing to do this, I know MMM has a recommended cards link, but I'm pretty happy with BOA and might stick with them. Here is my question though- can anyone recommend me good resources like blogs and articles that explain how a credit score is calculated? I want to understand how credit works so I can work to build good credit most effectively.

Thanks in advance.

kasperle

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Re: Question about Building Credit
« Reply #1 on: August 03, 2015, 01:51:31 PM »
I've been using CreditKarma for a few years, and it seems to have a pretty good algorithm.

Bob W

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Re: Question about Building Credit
« Reply #2 on: August 03, 2015, 01:55:57 PM »
I believe that creditkarma has recommendations and a forum with additional ideas.

In my understanding credit scores are based on a variety of factors.

Available credit,  credit used, length of credit, types of credit,  number of creditors.   If you sign up for CK they will give you a little synopsis showing the importance of each of the areas and your rating in that area such as poor or good.

It is free and not necessarily 100% on target but fairly close enough for your purposes.  Dave Ramsey might say to never have a credit score,  but thankfully we know better here, as you can easily garners thousands of dollars in cash and travel bonuses each year by using credit rewards programs. 

Liz

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Re: Question about Building Credit
« Reply #3 on: August 03, 2015, 01:57:51 PM »
I would check out creditboards.com

dragonstache

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Re: Question about Building Credit
« Reply #4 on: August 03, 2015, 02:19:47 PM »
I guess one of the things I was wondering is regarding how length of credit factors into your score (or creditworthiness- not sure if I'm using that word right). Since this is my first card, if length of credit is a huge factor, then it seems to me like foregoing any sort of rewards program for a low interest and no annual fee card would be best. That way, this card can be a basic card that I have for a long time just to work on building credit. In a year or something I could then get a rewards card and get cooking on that. Is my thinking on target here or am I flawed?

EricP

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Re: Question about Building Credit
« Reply #5 on: August 03, 2015, 02:23:03 PM »
I guess one of the things I was wondering is regarding how length of credit factors into your score (or creditworthiness- not sure if I'm using that word right). Since this is my first card, if length of credit is a huge factor, then it seems to me like foregoing any sort of rewards program for a low interest and no annual fee card would be best. That way, this card can be a basic card that I have for a long time just to work on building credit. In a year or something I could then get a rewards card and get cooking on that. Is my thinking on target here or am I flawed?

You can just leave your existing BoA card open and then open another card with good rewards.  Having multiple CCs won't hurt you as long as you pay them in full every month.

dragonstache

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Re: Question about Building Credit
« Reply #6 on: August 03, 2015, 02:33:12 PM »
I don't have a BOA card, just have done banking with them. So I'm asking what should be my first card.

kasperle

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Re: Question about Building Credit
« Reply #7 on: August 03, 2015, 02:56:37 PM »
Dragonstache, NerdWallet is a good resource I read sometimes. They have good credit card reviews:

http://www.nerdwallet.com/the-best-credit-cards?utm_expid=16171530-14.jsYLNKN9RMqjppw2zAWfjg.0&utm_referrer=http%3A%2F%2Fwww.nerdwallet.com%2Fblog%2Ftop-credit-cards%2Fno-foreign-transaction-fee-credit-card%2F

I'm pretty boring when it comes to credit cards, though. I just stick to my Discover DiscoverIt card. I make close to 100% of my purchases each month using it, and pay it off in full, to get the free cashback bonuses.

GizmoTX

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Re: Question about Building Credit
« Reply #8 on: August 03, 2015, 03:14:31 PM »
It's often easier to get a credit card as a student rather than waiting until after you graduate -- go figure. I'd start with a cash back rewards card as your first card, if possible. You also want zero annual fee & it would be great if the card doesn't charge a foreign transaction fee, in case you travel. You don't care what the annual percentage rate is, because you absolutely should be paying the balance in full & before the due date every month. An unblemished payment history will build your credit. Pay it online by linking to your checking account -- do not trust snail mail to get it there on time.

This article recommends the Capital One Student card as its current top pick. It has a good rewards offer for a student card. CapOne tends to be stingy with its credit limit & decides when it wants to raise it, but you don't need or want a big credit limit at this point in time.
http://www.nerdwallet.com/blog/top-credit-cards/nerdwallets-best-college-student-credit-cards/

If you get turned down at CapOne, then check out the BoA basic offerings for students & walk into your branch to open it.

After a year or so of making monthly on time payments, check your credit score with Credit Karma or similar free service. When it's 750+, look over the offers for a second credit card with better rewards. Most cards offer an online application with an immediate yes or no. Adding a second card ups your overall credit limit availability, which also increases your credit score, & gives you backup in case either card gets lost, doesn't work, or must be replaced in case of erroneous charges (it happens). We now use one card strictly for internet & any other purchases that may be compromised.

Oh, & when you get your credit card, use your debit card only for ATM cash, not purchases. Debit cards don't give you any of the consumer protection that a credit card does, plus you want to be earning the cash rewards for what you do buy.

I also recommend YNAB (You Need a Budget) software to help you manage your credit card purchases, since it's easy to get overextended when the balance isn't due for a month. YNAB is FREE to college students -- see the FAQ or blog section of the website.

Lis

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Re: Question about Building Credit
« Reply #9 on: August 03, 2015, 04:03:11 PM »
I've been using CreditKarma for a few years, and it seems to have a pretty good algorithm.

Not only does it have a decent algorithm (my actual score was within 5 points of CK's estimation), it also has a good section that explains the different factors, how important they are, and where you stand. So at a quick look at my page it explains...

- the three highest factors that impact your credit score are: Credit Card Utilization (total debt* over your total limit), Payment History (whether you've ever made any late payments), and Derogatory Marks (for example, something sent to collections).

- Age of Credit History has a medium impact, and will likely be the highest negative contributor to you. My score is "Poor" simply because 1) I only opened my first credit card five years ago, and 2) every time you open a new card, it lowers your average age. But it's only a medium impact, and there's honestly nothing you can do except wait for time to go by, so no use worrying about it!

- Total Accounts and Credit Inquiries are of low impact. Don't worry about Total Accounts - I have 10 and that's deemed "Poor." They recommend 21+. But don't go opening cards and accounts for the sake of it. This does not have a big part in your score. Likewise, inquiries are also not a big deal, but I'd avoid opening any new accounts for about a year before you make any HUGE purchase (like a house).

As a mustachian, the first three factors that have the highest impact are pretty easy. I'd open one or two cards now and just be sure to pay them off every month!

* It's important to note what kind of 'debt' I mean. You should and will pay off your card in full every month, but each credit card company reports your debt at different times. So for example, I pay off my AMEX card in full on the first of every month. My statement closes on the 27th. AMEX might report what I owe on the 15th. Or the 26th. Or the 3rd. I don't really know. Unless you pay off your CC every day, don't worry about this. "Excellent" is 0%-9% utilization. The only reason I'd be worried about this is if you get a student card with a relatively low limit and you have expenses that end up higher than 10%. Considering my first student card had a limit of $900, it is possible.

Bikeguy

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Re: Question about Building Credit
« Reply #10 on: August 04, 2015, 07:31:13 AM »
I don't have a BOA card, just have done banking with them. So I'm asking what should be my first card.
First,  find out what your credit score is.  It may support a regular credit card.   If so,  apply for one.   If not,  either get a secured credit card or a brand store card.   Secured card you will need to pay up front.   Store card,  like Target, should be easy.  Pay them off and check score in 6 months.   Then apply for regular credit card.

My friend, who had to declare bankruptcy, did exactly this path and now gets reward credit cards with sign up bonuses regularly.

Sent from my SCH-I545 using Tapatalk


Bob W

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Re: Question about Building Credit
« Reply #11 on: August 04, 2015, 07:41:55 AM »
Consider being added as authorized user on loved one's long term card.

MustachianAccountant

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Re: Question about Building Credit
« Reply #12 on: August 04, 2015, 07:56:53 AM »
Citi Double Cash is no annual fee, and gets 2% back on purchases. Most cards only give 1%, especially the no fee ones.

Lis

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Re: Question about Building Credit
« Reply #13 on: August 04, 2015, 09:38:55 AM »
BofA was my first student credit card. This was back before I fully understood credit cards so it was for EMERGENCIES ONLY OR ELSE YOU WILL GO BANKRUPT AND DIE. I know better now, and you seem to know better too :)

Side note, while credit cards are certainly the easiest way to build (or wreck) your credit score, it's not the only way. Was there ever a loan, student or otherwise, in your name?

I personally love my AMEX Blue Cash - FANTASTIC customer service and decent cash back deals. Definitely don't pay for a card right now. Some of the preferred cards with a fee do positively work out for some people, but as a student, probably not.

Drifterrider

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Re: Question about Building Credit
« Reply #14 on: August 04, 2015, 10:44:53 AM »
I don't have a BOA card, just have done banking with them. So I'm asking what should be my first card.

One that pays YOU.  I like cash back cards (because I get some of my money back).  Others like points cards.

Do you have a recurring monthly expense?  Can you pay it with a credit card (especially automatically)?  This will help you build a history without adding any spending to your routine.

If you will pay the balance in full every month then the interest rate is/should be immaterial.  Look for a no fee card.

hyla

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Re: Question about Building Credit
« Reply #15 on: August 05, 2015, 04:59:11 PM »
I guess one of the things I was wondering is regarding how length of credit factors into your score (or creditworthiness- not sure if I'm using that word right). Since this is my first card, if length of credit is a huge factor, then it seems to me like foregoing any sort of rewards program for a low interest and no annual fee card would be best. That way, this card can be a basic card that I have for a long time just to work on building credit. In a year or something I could then get a rewards card and get cooking on that. Is my thinking on target here or am I flawed?

You're correct that you should get a basic card you plan to keep a long time at this point.  No annual fee is important.  The interest rate does not matter, because you're going to pay the balance off every month.  There are actually plenty of decent no-annual fee rewards cards, the best one depends on your spending habits, but I currently have a Sallie Mae Rewards (5% back on grocery/gas/bookstores) and chase freedom (5% on rotating categories of various usefulness).  I also have a card from my bank (first card I got) that I don't use much anymore because it has lousy rewards, but I'm I'm glad I have it cause it has a 10 year history and helps my credit score. 

As others have mentioned, utilization is also important.  I think the general guidelines are it's best to be below 10% but below 20% is not bad.  My score improved from good (low 700s, 8 year history with perfect payment record but only one credit card so my utilization ratio was higher) to excellent (mid 700s) when I got a second credit card and my utilization ratio was cut in half (same spending, but on twice the credit limit since I now had two cards open).   Another way to improve your utilization ratios is to call your credit card company and ask for a higher limit after you've had your card for a while - different banks vary in their willingness to do this, but generally if you have either been using and paying off your card responsibly or have had a recent increase in income they will raise your limit. 


BTDretire

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Re: Question about Building Credit
« Reply #16 on: August 07, 2015, 03:31:44 PM »
I don't have a BOA card, just have done banking with them. So I'm asking what should be my first card.
I'd find a $0 yearly fee card and pay it in full every month.
I 'm 60 and haven't borrowed any money for at least 20 years.
The only thing I have is a credit card. I became curious what kind
of score I would have since I haven't used credit.
I checked into Credit Karma, it is free but you need to give up information.
All they found was my credit card paid in full every month. I generally
charge $1500 a month on an $11,000 available limit. My score 775.
I think the low balance on a higher available limit increases your score.
 Never be tempted to spend money you don't have!
Other than that, credit cards are a nice convienience.