Clear this up for me...debt and credit scores

Ducktale

This is stemming from a discussion on TB. I get that if you have no credit history, your credit score is low (non existent?). What if you've had debt but paid it off, and hypothetically have no debt? I would think that would reflect really well on you if trying to get a new loan, but sometimes credit scores are straight out of opposite world, so I don't know. People are arguing that its bad for your credit to currently have no debt, and you need to have some major loan in order to have a good credit score (they are saying a credit card that you pay off each month doesn't cut it). Sounds like damned if you do, damned if you don't to me.

Sisugal

Not necessary to have a large loan to establish a good credit score.  You also do not need to have a credit card with a carry over balance -- it is OK to pay it in full each month.
You want a history of paying in full and on time - all the time.  It is not a ding if you carry a balance - buy why pay more than you need to?
It is helpful, IF  you have a short credit history, to have a variety of credit, car loan, Student Loans etc.  NEVER get rid of your longest held card, even if you no longer use it --- use it only often enough to keep it active and not have the card holder drop you. (a few times a year is usually enough - buy some gas and pay it off  works fine)
If you are looking at a mortgage - consider a credit union as they often accept alternative sources of credit (rent, utilities etc) along with a credit card.
My credit score is over 800  (810-820) and I have no large loans and only use one major credit card (have 2 store cards I keep only for the extra rewards/special sales and use rarely the pay in full each time)
You want to keep your debt to income ratio LOW.
Dave Ramsey says you do not need to worry about credit scores IF you have a good emergency fund ( a least 6 month's expenses in savings), pay for everything in full (cash, debit card etc) and save for cars and pay cash, pay off your mortgage etc --- live totally debt free. (Read his Total Money Makeover) Not something you can do when first starting out, but definitely an achievable goal.

Sisugal

Not necessary to have a large loan to establish a good credit score.  You also do not need to have a credit card with a carry over balance -- it is OK to pay it in full each month.
You want a history of paying in full and on time - all the time.  It is not a ding if you carry a balance - buy why pay more than you need to?
It is helpful, IF  you have a short credit history, to have a variety of credit, car loan, Student Loans etc.  NEVER get rid of your longest held card, even if you no longer use it --- use it only often enough to keep it active and not have the card holder drop you. (a few times a year is usually enough - buy some gas and pay it off  works fine)
If you are looking at a mortgage - consider a credit union as they often accept alternative sources of credit (rent, utilities etc) along with a credit card.
My credit score is over 800  (810-820) and I have no large loans and only use one major credit card (have 2 store cards I keep only for the extra rewards/special sales and use rarely the pay in full each time)
You want to keep your debt to income ratio LOW.
Dave Ramsey says you do not need to worry about credit scores IF you have a good emergency fund ( a least 6 month's expenses in savings), pay for everything in full (cash, debit card etc) and save for cars and pay cash, pay off your mortgage etc --- live totally debt free. (Read his Total Money Makeover) Not something you can do when first starting out, but definitely an achievable goal.

hoffse

Sisugal is correct.  You don't need to carry balances on your cards, etc. to have a great credit score.

That said, the easiest way to establish credit is through a credit card.  I have a girlfriend who has never had a credit card in her life.  She's also never had any other type of loan - no car loan, student loan, etc.  She has "no credit."  Well now she's 27 and trying to buy a house.  She can't find a lender to loan her any money because she really has no history of anything.  She lived in dorms at college and then moved home when she got a job and refused to leave her parents' house because she was too cheap to rent.  Believe me, she's brilliant at saving money, but she has no history of anything that a bank can look at to determine what kind of credit risk she might be.  She says it's unfair, but I think it's completely reasonable - why would a bank loan her money if they aren't sure how she handles debt?  

Your score also goes up if you can show different kinds of credit that have been extended to you.  Credit cards are revolving credit - at the end of the credit period (virtually always one month), you get more credit available to you.  It's technically an ongoing loan and it lasts forever as long as you use the card once in awhile so you don't get dropped.  A mortgage or car loan, on the other hand, is a term loan.  So after a certain number of years it will be paid back in full.  If your credit report shows regular payment on both revolving credit loans and term loans, your score will go up.

Often young folks have lower credit scores than older folks simply because they don't have as large a variety in their "credit cocktail" (this is my phrase, not a real one).  For instance, my credit cocktail is entirely credit cards.  When I've borrowed money for school or a car it's always been through my parents, and obviously they don't report that loan to the credit agencies.  I still have a very high credit score (780 - 790) but it's not as high as it could be because my credit profile is not diverse.  It will probably go over 800 once I have a mortgage and have a year or so of consistent payment. 

The idea that you have to carry a balance on your credit card to have good credit is 100% untrue.  What you have to have is credit available to you and a history of repayment.  That's it.  When you pay your cards off in full each month, that re-sets the full value of credit available to you, and that actually helps your credit score by keeping your debt-to-credit ratio low. 

I really don't think credit cards are all that is evil.  I've tried to explain to my "no credit" friend that H and I get hundreds (thousands?) of dollars in rewards, points, and cash back each year from our credit cards because we are strategic.  I have a LOT of credit cards - far more than I will probably ever admit to having on MM.  Some cards give great flat rewards.  Others are store cards for places where we shop often or that give great coupons (ie: Kohl's 30% coupons).  As long as you are aware you can charge almost everything and still not have credit card debt.  It's like a game for me to see how many points I can get through credit cards, and it's really been pretty lucrative for us.  But you don't get those points if you don't pay off your cards.  My friend doesn't get it, but at the end of the day I win from both directions - I get all these rewards, and I have a pretty great credit score. 

Ducktale

I thought that. So in my case, the only debt I have is a mortgage, but I've also had student loans and other debt in the past. So let's hypothetically say I pay off my mortgage (say..many many years from now) and therefore have no debt. I would still have quite a bit of good credit history, but no current credit being used. Would my credit score go down after paying off all my debt?

(am I making sense?)

hoffse

You are making sense.  I don't believe your credit score will go down, though if you want to be certain it won't, all you have to do is open a credit card and use it once or twice a year.  That will make sure that you always have a current credit history.

Frankly, by the time most people are truly debt free it just doesn't matter - most people don't pay off a house entirely and then move to another one down the road that would require a mortgage.  Usually if you pay of a house in full, that's your "forever" house at least until you decide to downgrade, perhaps in retirement.  And typically if you are downgrading from your forever house that has been paid off in full, you can buy your downgraded house in cash. Likewise, people who have debt tend to continually have debt... so either a credit card or a car payment every few years, etc.

Ducktale

Thanks. And this is more because I'm curious. I use CCs and no where near paying off the house, just wondering after a thread I was reading. And I think you're probably right that those who have substantial debt (like a mortgage) and pay it off probably don't need a ton of credit in the future anyway.

mana8503

@ducktale - Haha I was going to direct the discussion to this board.

I don't see why you need a current installment loan to get approved for another loan. if you already have a high score, you already proven your financial responsible by the high score.  You can keep it current with a CC you pay off, but you don't need another loan.  

Now if you have borderline score, but you currently have a loan and making on-time payments that might help in the creditor's decision.

In my H's case, it's helping to raise his score.  So we aren't going gun-ho about paying off his car.  My student loans on the other hand, I'm paying off.  Yes it's low interest, but it's money we can us elsewhere - like retirement.

Ducktale

@mana8503 You were on that post? Is it still going on? I only got about halfway through the thread (it was like, 60 comments long when I got there), but it got me wondering. I agree with your line of thinking.

mana8503

@ducktale - yea I was the one saying "good debt" is a lie.  No one posted about it after I posted the yahoo finance link and C&P the bottom line.  It just moved on to how to set up different accounts etc.  I was hoping for more chatter on it. 

Ducktale

Just went back and read it, your posts make sense to me. It was the person who said she worked in financing at a car dealership and said when she worked there, having no outstanding debt hurt people who want a car loan that got me thinking. I thought that can't possibly be true, but what do I know. I think there's a difference between having zero credit history, and having credit history but you've paid off your debt.

mana8503

That's the one that was making me hot under the collar.   I'm glad I made sense to someone. 

hoffse

Ducktale said:

Just went back and read it, your posts make sense to me. It was the person who said she worked in financing at a car dealership and said when she worked there, having no outstanding debt hurt people who want a car loan that got me thinking. I thought that can't possibly be true, but what do I know. I think there's a difference between having zero credit history, and having credit history but you've paid off your debt.

Whoever said that probably doesn't understand the difference between a term loan and a revolving loan... or she does and wants to encourage people to get car loans at a higher interest rate since that would help the lending industry.

And there is certainly a difference between no credit history and having a credit history showing you've paid off debt.  Once you start thinking about it from a lender's perspective it makes all sorts of sense.  On the one hand a creditor has no idea what sort of credit risk you might be; on the other hand, the creditor knows that you are a borrower who pays off his/her debt obligations.

mana8503

@hoffse - she said revolving debt was bad, but she knew people not get loans because they didn't have an installment payment debt.  But I'm thinkint they were borderline credit score, and needed something with a current good standing for them to be approved. 

 

mana8503

cramcakes said:

mana8503 said:

cramcakes said:

Also, it's a good thing to have SOME debt. It's bad for your credit to have none. You just need "good" debt (like "good" fat). Mortgages, student loans and car loans are good. Store credit cards are bad.

This is a lie creditor tell you.  If you need to boost your credit, get a card put gas on it or something, and pay if off each month.  That will help more than keeping SLs and car loans. 

I know I said we're keeping H's car loan longer to help his credit, but we're also planning on paying $100-200 more each month so it doesn't take AS long.  I just got him on my CCs I pay off each month for rewards, so that's helping too.

Uh. No. Sorry. I sold cars and worked in the finance department. It is bad for your credit to have a zero outstanding balance.

The credit card thing will help as well but you need at least one big loan to have "good" credit.

mana8503

^ for reference, and 4 people loved it.

hoffse

FFS.  I guess I was being overly optimistic?  Don't you just love it when people who work in the lending profession also don't understand how it works?

It's like when I tried to open a bank account recently and the person wanted to do a credit check on me.  I keep my credit frozen.  I asked her why she needed to do a credit check and she responded that all banks do that.  I said that no, actually, most banks use their own internal monitoring/reporting system to report clients who overdraw accounts, etc.  I told her I was happy for her to use the banks' internal system because it does not result in a hard pull on my credit.  But I have no interest in doing business with a bank that will do hard pulls instead of using the system that 90% of them use to check for overdrawn accounts.

Send those people over here... we can have some fun

mana8503

Honestly, getting validated on here makes me feel better. I'm about to post in the OU about how I think everyone needs to take financial classes and our country would be better off.  But I don't want to start another sh!tstorm.  I'm still new over there haha. 

hoffse

mana8503 said:

Honestly, getting validated on here makes me feel better. I'm about to post in the OU about how I think everyone needs to take financial classes and our country would be better off.  But I don't want to start another sh!tstorm.  I'm still new over there haha. 

H and I were talking about this the other day - I think every state should require high school graduates to pass a class in personal finance and basic US government before they get their degrees.  And I think a large part of that personal finance course should be about student loan debt.  I just don't think most 18 year olds are prepared to take on that kind of debt and really understand what it means for their future life.  I also think they should be required to fill out a tax return by hand so that they understand the difference between gross income and net income.

Ducktale

Totally agree. There are very few specific classes that are required to graduate high school (if I remember right, health class and civics class were two). Basic finances should absolutely be required. I struggled for years (and still do) trying to figure out some basics because my parents didn't teach me, and school definitely didn't.

mana8503

I honestly learned the most in my college econ classes.  I ended up minoring in it because I didn't want to stop learning.  I know MIL refused to help H even learn to write a check, I can't remember what BS she told him.  I plan on starting our kids early, because I know the schools won't.

hoffse

And if we want to talk about how monetary conversations appear on TK:

http://forums.theknot.com/discussion/1001158/but-we-just-need-money#latest

FFS.  But I put in a plug for the MM board.

MommyLiberty5013

mana8503 said:

cramcakes said:

mana8503 said:

cramcakes said:

Also, it's a good thing to have SOME debt. It's bad for your credit to have none. You just need "good" debt (like "good" fat). Mortgages, student loans and car loans are good. Store credit cards are bad.

This is a lie creditor tell you.  If you need to boost your credit, get a card put gas on it or something, and pay if off each month.  That will help more than keeping SLs and car loans. 

I know I said we're keeping H's car loan longer to help his credit, but we're also planning on paying $100-200 more each month so it doesn't take AS long.  I just got him on my CCs I pay off each month for rewards, so that's helping too.

Uh. No. Sorry. I sold cars and worked in the finance department. It is bad for your credit to have a zero outstanding balance.

The credit card thing will help as well but you need at least one big loan to have "good" credit.

Bolded is totally NOT true. DH and I pay off all our CCs each month in full and we have scores in the high 700's low 800's. Futhermore, I used to work at a BANK and did loans as my job too. We LOVED it when people paid off their CCs in full each month. It shows responsible credit use. If all else on an app looked good/decent, we loved giving them loans!

 

hoffse

mana8503 said:

I honestly learned the most in my college econ classes.  I ended up minoring in it because I didn't want to stop learning.  I know MIL refused to help H even learn to write a check, I can't remember what BS she told him.  I plan on starting our kids early, because I know the schools won't.

I think that's so incredibly important.  My parents opened a Roth IRA for me when I "earned" my first money through selling blackberries I had picked to my mom's office mates.  Up until the time I turned 18, my parents matched whatever I earned through extra chores, jobs, etc. in my Roth account.  They never even told me they were doing it until I graduated from high school and I suddenly started college with several thousand dollars in my retirement account.  It was an incredible graduation gift, and by the time I was 18 they had talked retirement with me enough for me to really appreciate it.

They taught me to budget with a Visa Buxx.  I told that story in a previous thread.

My H?  No guidance whatsoever.  In fact, I was the one who made him open his first credit card at age 21 because he was raised to believe that credit cards were what you used when you wanted to buy something you actually couldn't afford with cash.  When he finally told me that he didn't want a credit card because he didn't want to always be in debt, I couldn't believe it - I set him straight, and once he realized you could pay them off each month he was happy to open one.  But it's like... this is crazy.  

Xstatic3333

hoffse said:

And if we want to talk about how monetary conversations appear on TK:

http://forums.theknot.com/discussion/1001158/but-we-just-need-money#latest

FFS.  But I put in a plug for the MM board.

That was a doozy! Your response was really good, I hope she'll take it to heart.

I still don't get the "we've been living together for two years and have what we need" argument. Am I the only one who lived with my now-H for two years using mostly busted old hand-me-downs and college dorm purchases?

hoffse

Nope you sure aren't.  H and I lived together on and off, and by the time we finally got married we had some things that were really at the end of their useful life.  All our towels had bleach stains (compliments of my H), I had an iron from 1981 that started leaving black marks on clothes, we literally didn't own any drinking glasses at all, and most of our plates were chipped hand-me-downs that were rejects of my mother's.  In fact, most of our cooking equipment were rejects of my mother's.  We also didn't own a comforter or any blanket at all that fit our king sized mattress.  We each would use a couple twin blankets separately.  

By the time the wedding actually happened it was a relief to finally get some adult things.  We took more than a dozen boxes of old stuff to the good will.  It was awesome.

Janessadawn

hoffse said:

It's like when I tried to open a bank account recently and the person wanted to do a credit check on me.  I keep my credit frozen.  I asked her why she needed to do a credit check and she responded that all banks do that.  I said that no, actually, most banks use their own internal monitoring/reporting system to report clients who overdraw accounts, etc.  I told her I was happy for her to use the banks' internal system because it does not result in a hard pull on my credit.  But I have no interest in doing business with a bank that will do hard pulls instead of using the system that 90% of them use to check for overdrawn accounts.

I've worked at a credit union for 7 years, and this is only partially true. There is indeed a system to check for past account abuse. However, the SSN also has to be verified against the name, and this is partly why a credit report is run. There can also be fraud warnings or other types of notifications that show up on a credit report. I would be surprised if you could find any bank or credit union who doesn't run a credit report.

vlagrl29

Xstatic3333 said:

And if we want to talk about how monetary conversations appear on TK:

http://forums.theknot.com/discussion/1001158/but-we-just-need-money#latest

FFS.  But I put in a plug for the MM board.

That was a doozy! Your response was really good, I hope she'll take it to heart. I still don't get the "we've been living together for two years and have what we need" argument. Am I the only one who lived with my now-H for two years using mostly busted old hand-me-downs and college dorm purchases?

That's just silly.  I've never been on TK so there's that, but the only time you don't need to register for gifts is when it's your 2nd marriage and you've been on your own for several years.  When DH and I got married it was my 2nd and his first.  I wanted to go to the court honestly but he wanted a wedding.  We had 2 of everything!  We decided to do a honeymoon registry for our trip to Hawaii.  That was amazing!

hoffse

Janessadawn said:

hoffse said:

It's like when I tried to open a bank account recently and the person wanted to do a credit check on me.  I keep my credit frozen.  I asked her why she needed to do a credit check and she responded that all banks do that.  I said that no, actually, most banks use their own internal monitoring/reporting system to report clients who overdraw accounts, etc.  I told her I was happy for her to use the banks' internal system because it does not result in a hard pull on my credit.  But I have no interest in doing business with a bank that will do hard pulls instead of using the system that 90% of them use to check for overdrawn accounts.

I've worked at a credit union for 7 years, and this is only partially true. There is indeed a system to check for past account abuse. However, the SSN also has to be verified against the name, and this is partly why a credit report is run. There can also be fraud warnings or other types of notifications that show up on a credit report. I would be surprised if you could find any bank or credit union who doesn't run a credit report.

There are many.  I can give you an example: Wells Fargo.  Fidelity.  etc.  I keep my credit frozen for security purposes, and so if a bank runs an actual credit check against one of the 3 credit bureaus while frozen it will come back as blocked.  I've opened a number of bank accounts over the years without having to unfreeze my credit.  Upon thinking about it, it may be that it's more expensive for smaller banks or credit unions to subscribe to this internal service?  I'm not sure, but it was the first time I had been asked to unfreeze my credit for a bank account.  Now if I was trying to get a loan, sure, I would have to unfreeze my credit.  But to open a basic checking account?  It's completely unnecessary.  

That internal system is also matched with your SSN, which is how they verify you.  And credit unions typically do require a credit check upfront because one of the ways they maintain good rates is by only allowing in folks with decent credit.  It makes the lending risk lower. 

MommyLiberty5013

hoffse said:

Janessadawn said:

hoffse said:

It's like when I tried to open a bank account recently and the person wanted to do a credit check on me.  I keep my credit frozen.  I asked her why she needed to do a credit check and she responded that all banks do that.  I said that no, actually, most banks use their own internal monitoring/reporting system to report clients who overdraw accounts, etc.  I told her I was happy for her to use the banks' internal system because it does not result in a hard pull on my credit.  But I have no interest in doing business with a bank that will do hard pulls instead of using the system that 90% of them use to check for overdrawn accounts.

I've worked at a credit union for 7 years, and this is only partially true. There is indeed a system to check for past account abuse. However, the SSN also has to be verified against the name, and this is partly why a credit report is run. There can also be fraud warnings or other types of notifications that show up on a credit report. I would be surprised if you could find any bank or credit union who doesn't run a credit report.

There are many.  I can give you an example: Wells Fargo.  Fidelity.  etc.  I keep my credit frozen for security purposes, and so if a bank runs an actual credit check against one of the 3 credit bureaus while frozen it will come back as blocked.  I've opened a number of bank accounts over the years without having to unfreeze my credit.  Upon thinking about it, it may be that it's more expensive for smaller banks or credit unions to subscribe to this internal service?  I'm not sure, but it was the first time I had been asked to unfreeze my credit for a bank account.  Now if I was trying to get a loan, sure, I would have to unfreeze my credit.  But to open a basic checking account?  It's completely unnecessary.  

That internal system is also matched with your SSN, which is how they verify you.  And credit unions typically do require a credit check upfront because one of the ways they maintain good rates is by only allowing in folks with decent credit.  It makes the lending risk lower. 

I have worked as a banker for Wells Fargo and USBANK and neither use hard credit pulls to open basic banking accounts (checking/savings/CDs). They only do pull on ChexSystems, which is that national registry that tells if a potential customer has had any prior charge-offs of banking accounts at any other banks.

Wulfgar

It is, when I bought my current car, they were having a hard time finding financing for me.  It didn't help that it was 2010.  I was told that my credit score at the time was around 730.  That is why the people who keep the most debt tend to get credit easier. 

It is people who save up for most purchases and drive cars until they are scrap that can have good credit but still have a hard time getting loans.