Wanting to improve credit

[mariogreymist]

Hi all. I'm new here and just trying to get my finances back in line. I had surgery this spring, and between the co-pays, co-insurance and the 7 weeks of unpaid medical leave, I got way behind on bills. As a result of that, and a couple of old and forgotten (by me) debts, my credit score is pretty sad. I suspected this, but it was confirmed when my car died and I needed a new one.

I had people willing to lend me $24,000 at 12+%. This was frightful to me, and I had my mother co-sign on a loan for me at my credit union, and managed to get a very nice car and only @ 5.75%. I have student loans and the car payment plus payments on a vacation club which total about $1300 a month. (I'll get the exact amount later - I'm taking a break at work now) It doesn't seem too extreme for me.

The car loan is for $31,000 and is by far the largest item on my credit report, followed by a couple of school loans in the 10k neighborhood. The question for those of you who know credit scores: How much is the addition of the car loan going to help my credit assuming no late payments on it or any other credit accounts in 6mo? 1yr? Current scores range from 546-557-622.

[sweeps]

You're having trouble paying bills and you took out a car loan for $31,000?

[disneysteve]

You're having trouble paying bills and you took out a car loan for $31,000?

Exactly what I was going to say. I've never spent more than $20,000 on a car in my life and I have a 6-figure income.

I'm also curious about the "vaction club" mentioned. Is that a timeshare purchase or something else?

As for how the new loan will affect your score, you might try posting at creditboards.com. I don't think anyone can give a definite answer since those things are so variable and based on many factors. Surely, taking on such a large amount of new debt can't be a good thing as far as your score is concerned. But making consistent, on-time payments will gradually bring your score back up.

Why are you concerned about your score at this point? Are you anticipating borrowing more money in the near future?

[Scanner]

I am puzzled too.

I am 39 years old, we earn a six figure household income and have only bought a new car once in my life and that was for $17,000.

What was the matter with a good used car for $5000 since you were under a bit of a rainy day? Why would your mom agree to this? I wouldn't with my kids.

I'm sorry to sound preachy - your question is credit.

Actually, you sound like the perfect candidate that lenders want (a perpetual American borrower) and I bet your credit score moves up provided you make payments on time.

[mariogreymist]

The car is a big expense, sure. It also happens tobe one of the few cars I feel comfortable in - I'm a big guy and I feel like a circuis clown in anything smaller than the upper end of mid-size. And I'm not "having" trouble with bills. I had some trouble six months ago when I spent seven weeks flat on my ass due to a spinal issue.

The vacation club is a way to avoid paying for hotels, ever. Essentially you pay a price today (which I financed) and you get a certain number of annually renewed credits which are spent at the resorts owned by the club or its affiliates (100's of resorts on every continent). I like to travel, and the amount of the payments was comparable to what I was saving for one big trip in a couple of years. How good a deal it is remains to be seen, as I haven't used it yet, but the upside is the points are renewable in perpetuity.

My income is in the upper five figures and I live a fairly simple lifestyle - no booze, no drugs, only the occasional dinner or movie out. I have a single credit card with a low limit that I charge and pay off. I have a savings plan set up based on actual expenses that will allow me to have 15K liquid within a year or so. I want to use some of that to cover closing on a house while Real Estate is slumping. To do that without a $40k down payment or paying egregious interest, I need to have my credit score over 720. I am trying to plan that out. I know one thing to do is to pay the cc only to 30%, and probably to get a couple more for the same purpose.

I'd just like to know generally how much gain I can expect from what activity?

[disneysteve]

The car is a big expense, sure. It also happens tobe one of the few cars I feel comfortable in - I'm a big guy and I feel like a circuis clown in anything smaller than the upper end of mid-size.

The vacation club is a way to avoid paying for hotels, ever. Essentially you pay a price today (which I financed) and you get a certain number of annually renewed credits which are spent at the resorts owned by the club or its affiliates (100's of resorts on every continent).

I know one thing to do is to pay the cc only to 30%, and probably to get a couple more for the same purpose.

A few comments:

Just because you needed a big car doesn't mean you had to spend $31,000 to get it. The same car 2 or 3 or 5 years old would have been considerably less expensive.

With the vacation club, other than the initial buy-in cost, what are the ongoing costs, annual fees, etc? I believe you should never finance vacations but that's just me.

I'm not sure what you mean about the credit card. It is true that you should keep your utilization below 30%, so if you have a 10K credit limit, you shouldn't charge more than 3K. Also, you should pay your bill in full on time every month. You should not carry a balance and pay interest charges just to try and help your credit score. And you definitely shouldn't get more credit cards that you don't need. Having more available credit can be a bad thing when it comes time to apply for a mortgage.

Again, I'd recommend creditboards.com for more advice.

[sweeps]

Unfortunately we can't tell you what effect certain things will have on your credit score because:
(1) Nobody outside of Fair Isaac and the credit reporting agencies know the algorithm of how your credit score is calculated, and
(2) There are numerous factors that go into the credit score, that without looking at your credit report we could not know.

But in general, it sounds like you have credit, you're using it, and you're making the payments -- that's going to put you on the right track. It's my understanding that revolving credit (i.e. credit cards) count for more than installment loans (i.e. car loans), but that is purely anecdotal.

[mariogreymist]

A few comments:

Just because you needed a big car doesn't mean you had to spend $31,000 to get it. The same car 2 or 3 or 5 years old would have been considerably less expensive.

With the vacation club, other than the initial buy-in cost, what are the ongoing costs, annual fees, etc? I believe you should never finance vacations but that's just me.

I'm not sure what you mean about the credit card. It is true that you should keep your utilization below 30%, so if you have a 10K credit limit, you shouldn't charge more than 3K. Also, you should pay your bill in full on time every month. You should not carry a balance and pay interest charges just to try and help your credit score. And you definitely shouldn't get more credit cards that you don't need. Having more available credit can be a bad thing when it comes time to apply for a mortgage.

Again, I'd recommend creditboards.com for more advice.

You can drop the car thing, really. I bought a two year old car for 27K with extended warranty, tax license etc, the loan is 31. It's a car I've been dreaming of owning since they released them, and it's within my means. I know I could have saved money with something less extravagant and more functional, but I love the car and I don't mind the payment, aside from the hitch it puts in back-end dti.

In the long run, improving credit before buying a house is worth carrying small credit card balances if doing so is really effective. Most people falsely believe their home is the most expensive thing they will ever purchase. It's the mortgage. The difference in mortgage terms between a fico of 680 and 720 can literally be tens of thousands of dollars over the life of the loan. If I pay a couple of hundred in cc interest between now and closing, I still come out way ahead if the increased score pushes me into prime borrower territory.

And it's good advice on keeping my credit utilization below 30%. I plan on that already. I'm just wondering what the relative impact of adding the two large loans (car and vacation club) will have on my credit. I'd like to know if I need to get more credit cards (I don't like carrying cc debt - it makes me feel dirty to have unsecured debt) or if the increased installment loans combined with a year's on-time payments will have sufficient impact.

*edit - and thanks for the suggestion - I'll check it out.

[disneysteve]

From what I know - and I'm not a FICO expert - what matters most is utilization ratio and payment history. I just don't think it makes sense to carry a balance that you don't need to carry and pay interest charges that you don't need to pay.

Keep in mind that even if you pay your CC bill in full each and every month, your credit report won't ever show a zero balance if you use the card regularly. It will always look like you are carrying a balance. Here's why. Let's say my billing period runs from October 1 to October 30. The bill covering that period comes around November 10 and is due around November 25. So even if I pay that bill in full, if I've continued to use the card, I will generate new charges from November 1 on. By the time they process my October payment, I've already run up another couple thousand dollars in new charges. So at any point in the month, my credit report would show a balance. It will never be zero. FICO doesn't care if you pay in full or not. All they care about is your utilization and your payment history.

[mariogreymist]

From what I know - and I'm not a FICO expert - what matters most is utilization ratio and payment history. I just don't think it makes sense to carry a balance that you don't need to carry and pay interest charges that you don't need to pay.

Keep in mind that even if you pay your CC bill in full each and every month, your credit report won't ever show a zero balance if you use the card regularly. It will always look like you are carrying a balance. Here's why. Let's say my billing period runs from October 1 to October 30. The bill covering that period comes around November 10 and is due around November 25. So even if I pay that bill in full, if I've continued to use the card, I will generate new charges from November 1 on. By the time they process my October payment, I've already run up another couple thousand dollars in new charges. So at any point in the month, my credit report would show a balance. It will never be zero. FICO doesn't care if you pay in full or not. All they care about is your utilization and your payment history.

Thanks - that's a great point. I can then use CCs for the expenses I usually pay with my debit card, then pay off the CCs each month and build credit without ever carrying interest, if I understand correctly. Great idea...dangerous for those with no discipline, but it can improve my credit without paying shylock.

[disneysteve]

I can then use CCs for the expenses I usually pay with my debit card, then pay off the CCs each month and build credit without ever carrying interest, if I understand correctly.

Exactly. Even better, use a reward card and earn the rewards it generates. We use a Marriott Visa. This summer, we redeemed some points for 10 free nights in New Hampshire. We pay every bill we possibly can with our credit card - local, long distance and cell phones, alarm monitoring, auto insurance, cable, internet, gas, groceries, etc.

[mariogreymist]

Exactly. Even better, use a reward card and earn the rewards it generates. We use a Marriott Visa. This summer, we redeemed some points for 10 free nights in New Hampshire. We pay every bill we possibly can with our credit card - local, long distance and cell phones, alarm monitoring, auto insurance, cable, internet, gas, groceries, etc.

And as an added bonus, it keeps my average daily balance in my interest bearing checking account maximized. Good idea. I think I might wait two months and do this. (Given my current credit, most cc's charge egregious fees at account opening)

[disneysteve]

(Given my current credit, most cc's charge egregious fees at account opening)

Not sure what you mean. What kind of fees do they charge for opening a credit card account? Do they charge a fee because your credit score is low? I've never paid any fee to open a credit card account.

[mariogreymist]

Not sure what you mean. What kind of fees do they charge for opening a credit card account? Do they charge a fee because your credit score is low? I've never paid any fee to open a credit card account.

With sub-par credit, many finance companies charge an "Account opening fee" as well as an annual fee. I have actually seen offers where the account opening fee was 179, the annual fee was 50 and the minimum credit limit (they tell you once you've applied) is 250. That means you end up with a brand new card with a $229 balance and $21 of available credit. I really feel for people that agree to these kinds of deals, as it essentially amounts to 1,000%+ in interest on the first $20 borrowed, and often up to 30% on a continuing basis.

[disneysteve]

With sub-par credit, many finance companies charge an "Account opening fee" as well as an annual fee. I have actually seen offers where the account opening fee was 179, the annual fee was 50 and the minimum credit limit (they tell you once you've applied) is 250. That means you end up with a brand new card with a $229 balance and $21 of available credit. I really feel for people that agree to these kinds of deals, as it essentially amounts to 1,000%+ in interest on the first $20 borrowed, and often up to 30% on a continuing basis.

Yes, I've heard of those types of rip-offs too, but you have to be insane to accept that type of offer. A legitimate credit card offer wouldn't carry those types of fees. Heck, if a college student with no job and no income can get a decent card, everybody should be able to (not that that is a good thing).

As for annual fees, the prevailing opinion is to never get a card that has a fee. I happen to disagree with that. There are times when paying an annual fee makes sense because you get some perk in return that is worth more than the fee. For example, our Marriott card has a $65 annual fee but every year on our account anniversary we get a voucher for one free night at up to a category 5 Marriott. Since cat. 5 hotels can go for up to $300/night, being able to stay at one for $65 is a great deal. In July, my wife and I stayed at the Renassaince Hotel outside of NYC for our anniversary. It even included breakfast the next morning, all for that $65 annual fee, so it was well worth it.