Mana blue, here in the U.S., a Visa debit card is also called a Visa check card, they are the same thing. It's linked to a checking account and purchases are debited directly from it. We were not talking about credit card access checks as discussed in this same post below.
So no to answer Rekrul's qestion, a Visa check card/debit card does not build credit.
Also there are two false statements in your quotes above:
-Credit cards do not build a credit score as well as structured debt like a car or home loan, but they do help create a profile. Everyone's got to start somewhere right? We're young people and this is the best we can do this early in our lives.
It's very very false. A credit card account is a revolving credit account on one's credit report. It is the strongest type of trade line and it is VERY VERY important for one's score. It is very important to have a strong revolving credit history to be considered "good credit".
Car loans and mortages are both "secured" loans because cars and houses are collaterals. In case you default, a creditor has the right to take them back. This substantially reduces a creditor's risk. Such loans belong to the "installment loan" type under which you have a fixed and scheduled monthly payment till the debt is paid off. A credit card on the other hand is a unsecured loan because the bank relies solely on your promise to pay. (An exception here is a secured credit card, used mainly to establish or re-establish credit). It's revolving because payments are determined by how much one spends and once they are paid back, the credit becomes available again. In other words, a high limit unsecured credit card carries a LOT more risk for a lender than most car loans/mortages.
A credit card is a stronger credit builder than a car loan/mortage. It is generally more difficult to qualify for a good prime credit card than a car/mortage loan. Of course the later two are important too. With existing satisfactory car/mortage loan tradelines on one's credit report it is easier to qualify for a lower rate on new car/mortage loans. But even without such lines, established exellent revolving credit history still has no problem getting you a good deal on a car loan/mortage loan as long as your income and DTI (debt to income ratio) supports it.
Credit checks are viewed in a similar manner to credit cards. Most intitutions don't bother differentiating between them at all. Using a check rather than the card is user preference. It's still debt, so they don't care either way.
If by "credit checks" you are talking about those checks credit card companies send you in the mail, you have to be very very careful. In the U.S., most of such checks are either for cash advances or balance transfers. It is VERY important to read the fine prints on these checks because most of them have a hefty TRANSACTION FEE. It is also VERY important to know what APR you are getting with such checks? Is it a promotional 0%, 1.9%, 5.9% APR or a STANDARD CASH ADVANCE APR that can range from 18%-30%? If it's promotional, how long does it last and when it expires, what kind of new APR will apply? Finally it's important to know that most checks like this have NO grace period, which means interests (unless its 0%) start to accumulate from the date the check posts to your account.
Nice post ilovecats. I wasn't aware that the visa check card was a debit card. Since we have the largest debit and interact use in the world here in canada, the banks take care of us. I assumed he was talking about visa checks, that you talk about in the 2nd half of your post. I didn't realize there was a different product with such a similar name.
As far as your post goes, in practice it usually doesn't work that way. Firstly, the amount is usually much lower unless you're an exceptionally big spender. The size of the debt is a big factor in how it effects your credit rating.
In addition, the amount of risk for the lending institution doesn't effect how the debt will impact your credit rating. The risk to the institution (secured vs unsecured debt) will rather effect whether they give the credit to you or not.
You are completely correct about the visa credit check card (debit card). Pardon my mistake. However I don't agree with your assessment of credit cards and their effect on scores. Prime cards are hard to get, you're right. But a person that gets one already has a good score.
A standard limit credit card will not have a maxed limit every month that is paid off on time. If it did I'm guessing you're not the kind of person that needs to worry about this stuff anyway.
Structured, secured debt in normal circumstances will normally be the most important financial factor of a person's score because it will be for the largest amount and will carry over the longest time period.
If you spend a fortune in consumer spending, you'de be better off with a line of credit or a similar product from a bank for the purposes of credit building anyway, so I don't see why you think credit cards are that good for building a rating. A normal person, particularly a young adult, doesn't have enough cash flowing around to do what you described in your post.
I use a Visa Check Card...I have never had debt and a lot of $ goes through that account. This is good for credit history even though its not a credit card?
So to clarify Rek, ilovecats is right. If your card is a direct withdrawl from a bank account, it's a debit card, so there isn't any debt created.
On December 25 2006 12:25 ilovecats wrote: To answer your question, no Rekrul it does not build your credit if it's a debit/check card.
Debit cards are different from Credit checks. A debit card directly withdraws money from a bank account. You are correct, this is not debt and won't effect a credit rating.
Visa checks show up on a monthly statement, just like when you swipe the card to buy something. You are carrying debt, so it is the same.
In fact, most visa credit cards allow you to use some credit checks and the regular card simultaneously. All of the card and cheque transactions show up on the same monthly credit statement.
the only difference between a debit and a check card as far as i know is you ability to use check card wherever appripriate (visa/master/etc) credit cards are accepted. it still withdraws money directly from your checking accoutn and u cant spend more than your current checking accoutn has. this is my understanding of it from a few conversations with cashiers who im sure dont know jack shit really (no sarcasm). if im right, i doubt it builds any credit scores
manablue, credit rating structures might be different in Canada. As far as the U.S. system goes, my post was correct and I stand by it. I spent the last 5 years studying consumer credit systems in the U .S from scratch and I consider myself as a semi-expert on this. My statement regarding revolving accounts being the big factor in the US industrial credit score FICO is proven by both the source and the consumer experience.
As far as your post goes, in practice it usually doesn't work that way. Firstly, the amount is usually much lower unless you're an exceptionally big spender. The size of the debt is a big factor in how it effects your credit rating.
"Size of the debt" is a very vaglue concept. First of all, "big" or "small" debts are relative to one's income and total credit limit. A score mechanism can no way penalize based on solely the amount of debts, hence the DTI ratio and credit utilization ratio come to play. Secondly, secured and unsecured debts are totally different, and are viewed totally different as such. The US industrial credit score, FICO, cares little about the amount on secured debts such as car loans and mortage loans. In other words, a person with no car loan and no mortage loan, a person with a $25k car loan and $250k mortage, can have the same score as a person with a $150k car loan and $1 million mortage. In a credit analyst's review, again he/she looks at the ratio, not the actual figure. If the above two people with loans both have appropriate income (let's say $80k/annually and $4 million/annually) to support their debt, they are both viewed as credit worthy,
In addition, the amount of risk for the lending institution doesn't effect how the debt will impact your credit rating. The risk to the institution (secured vs unsecured debt) will rather effect whether they give the credit to you or not.
As a matter of fact, in US, the type of the debt resulted from certain types of lending has a very major impact in one's credit rating. For example, the FICO score penalizes HEAVILY on certain types of high risk lendings such as pay-day loans. If such loan companies ever appear on your report, you can expect a major score hit. The theory behind this is rather simple: if a person has to borrow from a high risk lender, chances are its because he cannot be accepted by "regular prime" lenders, hence the reduced credit rating. It might not be accurate in all cases, but that's the way it works.
However I don't agree with your assessment of credit cards and their effect on scores. Prime cards are hard to get, you're right. But a person that gets one already has a good score.
This fact is directly available from Fair Issac Co, the creator of FICO score, the US industrial credit score. Established good history on credit accounts are the biggest score builder.
A standard limit credit card will not have a maxed limit every month that is paid off on time. If it did I'm guessing you're not the kind of person that needs to worry about this stuff anyway.
Sadly, many consumers with few "standard limit cards" (by standard I'm assuming limts ranging from $5000-$15000) carry a few thousands balance from time to time. This hurts their score because FICO prefers very low utilization ratio. This is why the common understanding "3 or 4 cards is plenty" is false in many cases. It might not be enough, if you want a high score and you do not have very high limits on those cards.
Structured, secured debt in normal circumstances will normally be the most important financial factor of a person's score because it will be for the largest amount and will carry over the longest time period.
A mortage loan does tend to have a long period. A well aged mortage paid on time can be very rewarding score wise, I agree. Actually this single factor often results in the difference between "exellent credit" and "exellent exellent credit". Car loans are usually short. (less than 6 years). However by no means credit cards do not have a "long period". Most US consumers with established credit history have credit cards that have more than 10 years of payment history. This is a very strong credit reference in US lender's eyes and FICO surely loves to see these accounts.
Let's put it this way. Here in the U.S. a person with exellent revolving history but no previous car loan/mortage loan has no problem getting approved for such loans with an exellent rate as long as their income supports it. On the other hand, a person with only car loan/mortage loan can have heck of a hard time getting approved for a good card by a prime lender. I'm sure some may approve him, but a lot will deny him for "insufficient revolving history", a classic FICO denial code.
If you spend a fortune in consumer spending, you'de be better off with a line of credit or a similar product from a bank for the purposes of credit building anyway, so I don't see why you think credit cards are that good for building a rating. A normal person, particularly a young adult, doesn't have enough cash flowing around to do what you described in your post.
Again credit cards are exellent and the most important credit builders in the U.S. Lines of credit are not very popular compared to credit cards. For those who spend a fortune here, there are "speciaty credit cards" with generous limits such as the American Express Centurion (the "black card", with minimum yearly spending of $250k on other AMEX cards to qualify). These people do not need to build credit really. Their money is their credit. For the average people, credit cards are important for credit. For young adults, I totally agree that a couple cards with responsible payment behaviors is a great way to start them off on financial management.
Yet another great post ilovecats. You're clearly very knowledgeable.
I don't contest anything you said there. I'm just thinking of this in the context of a young adult with no credit history. Your example of a person with 10 years of excellent revolving credit history constrasted to a person with a car and mortgage but no revolving credit and their likelyhood of getting a prime credit card makes sense. But the maturation of an individual's spending habits will rarely, if ever, materialize like that.
I'm saying, when you get your first "real" job after graduating from where ever you are, you'll need a car. You probably have very little credit history. In the next 5+ years, you're going to want a home.
This is very common. The biggest factors that a typical mortgage lender will consider are marital status, employment factors, and other indications of personal and social stability. Annual salary and other income are also very big.
These factors overshadow personal credit history by a very very long shot.
I would never say credit cards build no history, but with the time frame that most of us are looking at the history we'll be able to build before needing these types of loans is insufficient for it to be a major factor.
Your posts are all great, and well written. You clearly know your stuff. Just as a point of reference, credit scoring models in Canada and the U.S. are very similar. I'm not an expert on the differences, which I'm sure there are, but when I study credit risk at school they regularly interchange Canadian and American examples depending on the consept.
If I could pose a question to you, rather than this turn into an arguement or something. Do you think I'm underestimating the influence of 5-7 years of marginal credit card spending on a mortgage? Why or why not?
To answer your question 5-7 years of "marginal credit card spending" is more then sufficient for car loans/mortages. You really are underestimating it.
Given that you are : 1) Never late on these accounts 2) Keep your utilization low (marginal is actually way better than heavy, I'll explain it later) 3) Do not open new accounts before the loan (low number of credit inquires too)
You'll be easily looking at a 700+ score, or even higher. This combined with an acceptable income will qualify you for the best deals out there. Credit score IS very imporant and personal creidt IS very important for these lendings if you want a good rate. Actually, people with strong personal credit tend to leave dealerships with their new cars without ever having their income verified. Some mortage lenders may omit income verfication with a strong score too.(or conduct a very brief simplified one)
When a credit report is pulled, it shows all your credit accounts and their payment history. Whether they are paid on time or if they are ever late at certain points. It shows the latest balance reported by your creditor (most creditors update the balance and status monthly) as well as your total credit limit. (Some creditors such as Capital One does not report limit, which is a very bad thing for utilization radio and score) No matter how "marginally" you used your account, as long as you paid on time, it will report as "paid as agreed", and this is what builds the score over time. At the time the report is pulled, the scoring model compares the balances on your accounts against their credit limits (utilization ratio). It likes to see a low ratio because that means you still have a lot of room and you are not desparately running up your accounts. It hates to see a high ratio because it's concerned that you are using up a lot of your available credit due to financial difficulties. Obviously you want your potential creditors to see low balances on your accounts at the time of credit application. "Marginal" usage against your credit limits is always a good thing, espeically when you do not have that high of limits as most young adults don't.
I'm saying, when you get your first "real" job after graduating from where ever you are, you'll need a car. You probably have very little credit history. In the next 5+ years, you're going to want a home.
True on the "very little credit history" part because unfortunately not every high school/college student is well educated on credit. You see all the misunderstandings in this thread alone. That's a typical problem. If they never had a credit account till they graduated and they are not authorized users/secondary account holders on their parents' accounts, chances are they'll have very little credit. Even worse, many kids who did have credit cards in colledge messed up on them instead of using them wisely. They ended up with debts and bad credit out the door and of course they'll get in troubles financing a car or a house. For those who DID have credit cards and always paid on time, 5 years is a very nice accumulation. They'll surely be rewarded when they apply for that first car loan of their life.
This is very common. The biggest factors that a typical mortgage lender will consider are marital status, employment factors, and other indications of personal and social stability. Annual salary and other income are also very big.
These factors overshadow personal credit history by a very very long shot.
As explained above this is not true in the case of good credit. A good credit itself is a strong indication of personal responsibility and financial stability. If a person manages to control his spending and pay his credit card bills on time over years, it is very unlikely that he'll default on a car loan/mortage which is a low risk secured loan in nature. It is very true however in case of no credit/bad credit. These people need cars and houses too, and since they do not have the good credit to prove themselves, lenders need to carefully evaluate their job/income before making a decision. These people tend to get substantially worse rates than those with good credit even if their income is higher.
I would never say credit cards build no history, but with the time frame that most of us are looking at the history we'll be able to build before needing these types of loans is insufficient for it to be a major factor.
This is a valid concern. Fortunately if one starts to build credit once he goes to college (or becomes 18, or even earlier than 18 with co-signer) and always pays on time, by the time he graduates he will have sufficient credit for what he'll need. Another bonus is to have a parent/guardian add him/her as an authorized user on one or more of their well seasoned credit accounts with low utilization. It will surely improve the score a lot.
There is also one HUGE misnomer here that has yet to be addressed. Interest is not incurred due to late payments! Interest is ALWAYS incurred on a credit purchase that goes unpaid for more than 1 month. And when i say paid, i mean payed in full. If you purchase something for $100 on your credit card and take 2 months to pay it off, you will have incurred a little bit of interest on that payment, and will have actually payed $104 for example.
A late payment on credit bill is entirely different, and very damaging for your credit if it continues to happen. A late payment is just that, the bill was due on the 1st and you didnt pay till the 15th. In such a situation, not only will you be charged interest (sometimes the interest increases as a penalty), you will also be subject to a fine, anywhere from $20-$50 or more depending on the severity of the issue and the balance remaining.
IloveCats feels the idea behind a medium balance on your credit cards to be one put forward by the lenders of the nation to dupe customers into extending their interest payments for longer periods of time, which is how the banks make money. This could easily be true, although I doubt theres anyway to prove it, other than to examine the credit scores of those with medium balances and those with low balances. I imagine either is probably suitable, and the difference between the two is likely nominal, in which case maintaining large credit balances really does benefit the banks and not yourself. But I think we all agree now that keeping a zero balance on every credit card, and paying them all off within one month is useless yes?
IloveCats feels the idea behind a medium balance on your credit cards to be one put forward by the lenders of the nation to dupe customers into extending their interest payments for longer periods of time, which is how the banks make money. This could easily be true, although I doubt theres anyway to prove it, other than to examine the credit scores of those with medium balances and those with low balances. I imagine either is probably suitable, and the difference between the two is likely nominal, in which case maintaining large credit balances really does benefit the banks and not yourself.
It has been proven by the actual experience of consumers and you'll find it out in related consumer credit forums. FICO itself also stated the fact that a low utilization ratio improves the score even though there is no "exact low". Generally less than 10% is considered the best. 15% is acceptable but 20%-40% is too high. And no it's not always a "nominal" difference. As a matter of fact high utilizations can kill scores, especially on the relatively thinner files.
But I think we all agree now that keeping a zero balance on every credit card, and paying them all off within one month is useless yes?
I'm not sure what you mean by "keeping a zero balance on every credit card". If you pay the bill in full by the end of the grace period monthly, it will not incure any interest. However since you can still use the card after the statement is cut, I'm not sure how u can have a zero balance unless you pay it in full and not use it at all. If we are talking about the balance that gets reported to the credit bureaus, just because you paid the bill in full doesnt mean a "zero balance" will be reported. This is because most creditors report the "statement balance" itself. If it's high, then it's high, and it might hurt the score. Some creditors may report the balance as of a certain date (say the first or the end of each month). But as far as I know no creditors will intentially report the balance after you make your payment.
This means the only way to have all 0 balance on your report is to either not use the card at all, or pay it off as you spend even before the statement cuts. It's not necessary. If your creditor reports the statement balance, just keep your statement balance low. You may even make a partial payment before the statement cuts if in a given month you feel that it's gonna be high.
For young adults (with limited income that is), I recommend paying the bill in full each month. You do not want to spend more than what you have in your bank account because you do not have the financial strengh to "turn around stuff" flexibly. Paying interest under such circumstances is a bad idea. If you ever fall behind, you may find it hard to ever catch up again. Paying in full constantly reminds you of your spending control.
Well basically the general advice users around here are throwing out is to go around making small purchases with your credit card, and then paying off the purchases before your next bill in order to make your credit score soar. So theyll spend $40 on gas, then pay off the $40 the next week and think that this will help improve their credit.
Anyway, of course 80% usage of your credit card would go against your score. You say <10% is good based on what you've heard, i say 20%. No matter what your credit limit, a 5% remaining balance could easily fall into the hundreds of dollars category. Building credit by owing $400 for 8 months just sounds silly to me. Not that I enjoy making larger interest payments, it's just youre one guy on the internet going against everything ive been told, heard, or read in the past. Im stickin to my guns on this one.
Anyway, there were some huge bombshells dropped in this thread when it comes to how some people believe credit works. And they wonder why teens/young adults are in such peril when it comes to proper credit use. I hope these lectures spread amongst their peers, valuable information here, and thx for contributing.
No problem. I learned my lessons the hard way. You can find a lot of good information here at http://www.creditboards.com. Just be careful because there are lots of credit whores on that board. (People with good credit but are obsessed with credit who go after every single card on the planet)
A special note about car loans. It's always a good idea to walk into a dealership with funds in hands. For this purpose a relationship with a good credit union can be very handy. Credit unions are member funded and operated organizations. Unlike most profit-hungry banks these days, they can provide credit cards and loans at very competitive rates. If you have solid credit, a credit union may cut you a check with a preapproved amount that you can use directly at a dealership. This will prevent the deceiving tactics dealerships like to pull on customers such as excessive number of credit inquiries and APR traps. Most credit unions have secured credit cards for those with limited credit history to establish a relationship with, and imo it's well worth it.
I also want to emphasize the importance of good credit yet again for those who havent or were just starting out. You probably wont realize it till the day you need it.
Income is a peice of paper. There are plenty people out there with nice 6-figure incomes who ended up over-extending themselves and declaring bankrupcy.
That signature of yours is just a flip of a pen. Sure you promised to pay, but so did u promise your bf/gf that you'd never cheat.
And that word of yours? Well it's just that word of yours.
Your credit report, however, is a factual sheet. It speaks for itself.
On December 25 2006 22:45 IIICodeIIIIIII wrote: take the advice from Warren Buffett. Don't use your credit card.
There used to be a very long discussion about that speech of his on creditboards. The conclusion was that the talk was very one-sided and did not justify the many benefits of credit cards. It's more likely that he was just trying to make a point about unwise credit card spending.
Let's face it. He's a multi-billionaire and he can spend his money the billionaire way. He can buy a town in cash and we need a loan just for that $20k car.
Nice posts ilovecats. That blows that I can't build up any credit history going about as I am right now.
I have enough cash, so it doesn't really matter, but it seems like maybe it would be a good idea for me to get a credit card and use it to build up credit?
Yes Rek defintely get a few. Remember you get rewards for using credit cards too, espeically when you spend a lot.
I don't know anything about your current credit profile so I cannot tell whether or not you can be approved for certain cards. If you ever had any student loan/car loan or things like you probably already have some credit. It always helps a lot if you have someone with established credit add you on one of their seasoned accounts with low utilization.
If you do not have sufficient credit and get denied for a prime card for that reason, you may consider a secured card. Or you can try a store credit card such as Target/Macy's/Chevron/Kay. Also if you receive any pre-approved credit card offers in the mail from a reputable bank, you might give them a shot.
Some major US prime lenders to consider:
Citi (my personal favorite) AMEX Bank of America / MBNA Chase (kind of sneaky) US Bank
Some great national credit unions: Pentagon Federal Credit Union Palteco Credit Union Digital Federal Credit Union NASA Credit Union Agriculture Credit Union
These cards are generally a bit easier: Juniper/Barclay's Washington Mutual
id like to ask some advice from the those who know a lot about credit cards
first off, let me say fuck capital one. first, ive had my card for 2+ years making over 30k a year and they havent raised me past 500$ limit.
and now, over the last two days, ive wasted about 3-4 hours of my life and still havent had my problem resolved. on dec. 24, i needed to go pick up a gift certificate to my parents favorite restaurant, this upscale italian place. my card got declined despite me paying 470$ on 12/20. this was after i used it a few times during the last two days, totaling about 200$. i go to look online to see why and it says im carring a balance of 49$ and that i have no available credit.
i sit on the phone and they first tell me that the reason was because on 12/20 i made a $270 purchase. it never happened. finally they tell me its an error and that the reason that i was declined was that they withheld 200$ of my payment. the lady said she didnt know why and couldnt get anyone else to figure out why. then they told me that a supervisor is going to call in 24 to fucking 48 hours. so im stuck longer without a card now.
id like someone to plz make sense of this situation, because i have no fucking clue what is happening.
shit happens. your problem isnt a bad credit card company or bad customer support, nor even the fact they havent raised the limit past 500. i mean an issue in a 2+ year period with a company who proceses millions of transactions a day? how could it possibly happen. if u rely on a single card (or single anythign else really) ure a moron and are bound to get fucked over at some point. get another card, keep multiple cards in your wallet, use a checkbook, pay cash. not like a credit card from capital one is the only possible solution. if you want higher credit limit, ask them, or apply for a different card, noones gonna increase it for u.
EPT
