Credit Rating ?

[Ara]

I'm planning on buying a mustang within the next couple of years. I'm pretty young and don't have any credit cards yet. I do have a debit card that I use regularly but am wondering if I should start building up some credit now so I get a decent APR for when the time comes. Would I even be able to buy a car with no credit rating? I don't want to have to cosign or whatever with one of my parents or anything like that.

If i get a credit card and pay off my debts completely and before the end of the month would I still build credit? Or do you have to pay in installments in order to get some sort of rating?

I really wouldn't even want any credit card otherwise...

 

[Mickey21]

It will be more difficult with no credit history. Look at it this way. If I walked up to you on the street and said. Give me 25000 dollars. What would you say?

What would you say if we were long time friends and could tell you always made good on your debts? Probably a lot different answer wouldnt it?

The idea is to build a history of paying people back for being loaned money. Whether it be by loans or by credit cards. Debit cards dont do this because essentially the money was already yours, so no risk was ever involved. Credit card companies use a risk factor scale to determine if they should give you money and expect it back. It really depends how much they are willing to risk at any given time. But with no credit history, and I am guessing you are young too, the only way you will likely get a loan without a cosigner is either:

A) a long history of banking with someone (hopefully a credit union as they can generally be more easily convinced locally)
B) you have a long history of employement (usually have to make quite a bit of money though to offset and people that tend to make quite a bit of money likely already have established credit history)
C) you know the dealer/seller and for some reason they can swing that for you (not likely and frankly stupid on their part no matter how great the person in question is)
D) They are very very desperate to make money or the opposite, they are doing so well that they can take larger risks (most companies do not fall in this category as they tend to make money well enough to make it but not great enough to start getting stupid about how they do it).

Just the hard truth. Even with a cosigner, you will likely get owned on the interest rate if you are both young and no credit history (in the 17-20%) kind of owned. But really if you dont have history, you will have to take one for the team and work at paying it off on time. It's not a bad thing, most everyone had to start like that at some point. And it doesnt mean you will end the car paying off at that rate either. When I first bought my own car at 18, I had my mom cosign and got 18 percent interest. 1.5 years later I got the car refinanced to 11.9 percent, 2 years later got it refinanced to 7.9 percent, and then paid it off.

One last tidbit, try to pay ontime everytime, no matter what you have to do. Dont try and pay it off too fast. A couple of bucks extra here and there is fine, but dont pay it off way before it is due. The company wants a history, so you have to go through the motions of paying it off no matter what. It will work better to your credit rating than paying it off 4 years early for instance. Good luck.

 

[wilsons]

Getting a credit card will help you out. I'd be careful about these cards that you can get from some companies however. I am pretty anal and tend to stay with credit cards I can get from local banks. That way I can pay it off online, and its done immediately, and the transaction goes through within about a 24hour period. I'm not fond of sending these crackheads a checks 3 weeks early, and getting a note saying it was late and your interest has gone up. That happened to my Dad. And it wont happen to me!! One advantage of staying with a local bank's card.

Anywho, If you put some food or gas on the CC, and pay it off every month that will help build you some credit. I cosigned with my dad 6 years ago. To get my debit and credit card, and my first truck.


Just my 2cents

 

[The Fang]

Good advice guys.
We bought a used car on a credit card once 5400 to be exact at 0 percent interest then the next year transfered it to another card 0 interest. you see where im going with this?
Be smart and build yer self som credit slowly.

 

[wilsons]

Im going on a year with no interest on my credit card. The third (and final) card

 

[shooterm1]

Money Talks - (Ca$h) -

I'm planning on buying a mustang within the next couple of years. I'm pretty young and don't have any credit cards yet. I do have a debit card that I use regularly but am wondering if I should start building up some credit now so I get a decent APR for when the time comes. Would I even be able to buy a car with no credit rating? I don't want to have to cosign or whatever with one of my parents or anything like that.

If i get a credit card and pay off my debts completely and before the end of the month would I still build credit? Or do you have to pay in installments in order to get some sort of rating?

I really wouldn't even want any credit card otherwise...

Avoid the Credit Score game = join a Credit Union near you and sock away some ca$h for your down payment - then when the time comes, fill out an app for a car loan at the same Credit Union - requesting less than the price of the car you're buying. They cant turn you down!

and then you can walk into the dealership Pre-approved & smiling!

 

[wilsons]

join a Credit Union ... and then you can walk into the dealership Pre-approved & smiling!

Thats what I am going to do in a few years!! I hope, provided life doesnt throw me any bad curve balls. its been known to happen

 

[Fast05]

Building credit

One thing that helped me build my credit was when I cosigned on the purchase of a car with my mom. My name was on the note and she made the payments...I know that may sound like a cop out way to do it and you may not be able to do that...but when I went to the dealership on my 21st birthday with a $5000 down payment they approved me no problem with a 6% interest rate, and no cosigner this time, this baby's all mine

 

[Dyoct]

You will need to get some sort of credit history done. Are you in college? Companies bend over backwards to give cards to kids in school. But like it was mentioned, stay with a well known card ala Discover, American Express, or even better, get one with your credit union or bank. The sad thing is, to establish your credit, you will have to make some sort of payment over time. Getting a card and simply paying it off does little. A debit card does squat as was mentioned. You may have to get a co-signer regardless, especially if you're out of school. I've known two friends who were from very well off families so they accrued no debt through school. They both had to have a parent co-sign on their first new car despite having solid jobs. Debt is never a good thing, it took me a few months to pay back my cards after school. I'd go with the saving route if I were you. Save up, and years from now go to your financial institution, you may need that credit angel, but after that, as long as you repay on time, and yeah put a little extra here and there, you'll be set.

 

[mackey]

One point that I still want to know is if your credit rating still goes up if you pay it off everytime. Or if you have to leave some sort of balance on it. Say you pay $50 when there is a $200 balance on the card.

 

[Ara]

Thanks for all the replies guys. So the jist of it is that in order to build credit you have to spread out the payments, and they obviously have to be on time, instead of paying it all in one chunk even if you have no problem affording it... seems illogical to me. If you pay it all, all at once, that means you buy things that are obviously and easily within your economic means, am I right? Kinda confused

And im going to go research credit unions 'cause i've no idea what one is.

 

[wilsons]

UC? as in University of Cincinnati?

 

[Mickey21]

One point that I still want to know is if your credit rating still goes up if you pay it off everytime. Or if you have to leave some sort of balance on it. Say you pay $50 when there is a $200 balance on the card.

Your credit rating improves when you make ontime payments for amounts due. So in regards to keeping a balance, well it is better for a record to say "Paid Ontime, Balance paid in full". That is what they will see. They can typically delve deaper by looking into the complete history like "Paid ontime July, Paid ontime August, etc...". So essentially you want more paid on time notations as you can get. But understand that paying ontime and such is only one part of the entire equation. Outstanding debt is another part, Available spending credit is another, Delinquencies is another, and so on. In the end it is hard to determine the actual formula a bank or such will use, but I believe most formula's follow about a 30% weight to your paying ontime portion.

So for instance, if I was going to give you a score to a fictitious number, I would multiply your paid ontime percentage times 3. 100% of the time would be 300 points. Figuring for the rest is a big secret with most financial institutions but you get the idea. They put a portion of their consideration into the whole picture of your financial record. And bad stuff starts making that number sink.

In general a score of 650 or more is worthy of most loans being accepted. Below 600 score is much harder to get approvals. Usually over 700-750 you are sitting pretty on getting great interest rates and large amounts of money even without the noticeable wages (they figure anyone with 750 is proven and will not likely let them down at all). It's all a numbers game and pretty much just like legal gambling.

As far as the comment above by Ara on the logical sense of paying something off faster. It seems illogical, but think of it this way. Lending people money isnt about what they can afford or cant afford, it is about lending to people who dont have enough money in order for the lender to MAKE money themselves.

Look at it this way. If I lend you 500 dollars and go into a contract to get it paid in 5 months at 10% a month interest (just for easy figures sake), I will make 50$ to lend you the money. So I come back with $550 when the deal is done. I see it as a way to make money and do the deal. I pay someone to broker the deal for me (which costs money) and draw up the paperwork and forms (which costs money) and start an account (which costs money. Now lets say I figure my expenses for the whole process to be about $25 dollars in wages/overhead/etc. No problem I still made a cool $25 of pure profit and hence my business can go on with the world of commerce. Sounds good. But then the contract gets finished in one month when the person I lent money to pays it off in one month after all. Making me only $10. Well I am out $15 dollars now in wages/overhead/etc and there is nothing I can do about it. Plus I no longer have guaranteed montly income on that account for the next 5 months to keep me in business. I dont like that as a bank. I want to make money and to do that I need people who pay me what the contract said in the time we set for the amount we set. In other words paying ahead of time is never a good thing for the bank on there part of the contract. So a paid balance for the amount monthly including interest is ideal for them. See where I am going. It is usually acceptable though to the banks that some extra be paid. That just means the person is trying to get a little ahead.

You will also find that some banks even limit the amount you can pay ahead of time that will be applied to the principle (actual amount of money left to pay), in other words not paying interest on the amount paid in excess. I find those banks to be mostly bad banking institutions and usually do business elsewhere, but they are out there. Typically with store type credit lines like Best Buy or something (not them specifically though but you get the point). Hope this helps general understanding.

 

[celticstanger]

Get credit. Pay it off. Keep putting things on your credit card, keep paying it off. Keep your debt-to-income ratio low (what you owe v's what you earn). Get at least four cards/lines of credit going.

Banks don't keep/change your credit score, btw. I don't recall for sure, but I don't think paying debt off early hurts your credit, since the bank isn't the one rating you.

There're some good online resources for helping breakdown how your fico score is maintained. I can't remember the sites off the top of my head, but Google "fico", "Fair Isaac", "credit score", etc and you'll turn something up. Also, try Equifax, TransUnion and Experian.

 

[Mickey21]

Your credit score surely is decided by banks (unless of course you are talking strictly about Fico or equivalent scoring - in which of course what the bank has reported to crediting agencies is also considered anyways). Your credit score is also determined by anyone trying to determine whether to lend you money or not. And isnt isolated to just Fico scores. Anytime you ask for a loan it is likely handed over to a loan officer that considers the whole picture (hence your score) and has a complete set of rules and guidelines established by the bank to judge the merit of a loan and he/she makes a decision that way. Unless of course you were immediately approved (usually for small amounts and judged against simpler rules like - job length, wages, own or rent a home, married, single, blah blah blah). Banks are a very large integral portion to credit history and scores.

 

[celticstanger]

Credit score is credit score. Banks don't maintain it. When you go for a loan, it's a part of which "product" the bank will offer you, based upon other factors. The banks product guidelines aren't the same as your credit score. Which product you qualify for may depend upon your score. Also may depend upon whether you're a war vet, how much you wish to borrow, whether you've declared bk in the last 5/10/x years, etc...

Bank products are one thing, credit score is another.

 

[michaelgta]

Credit advice from a finance director...

I am a finance director for an automobile dealership and I believe that there is some good advice here. That being said, there are multiple factors involved in a loan. Lenth of residence, time on job, p.t.i.( payment to income), d.t.i. ( debt to income), credit score, amount of highest credit line, time in credit report, do you own or rent, is your lines of credit maxed out, and what amount of money do you put down to show a lender that you have a vested interest in paying off the loan. If you can have the parents co-sign, do it. It will save you money in interest and keep a lower monthly payment that you can afford. Your co-signer needs to have a strong credit score. If this is not the case. First you need a job that pays enough to pay all your bills and still have plenty of money for a car payment and insurance. A good rule of thumb is most lenders will want your car payment to be no more that 18% of your gross monthly pay. Next you need to join a credit union. You can do this by opening an account. Then get a credit card with the credit union or a line of credit. Charge up a dollar amount and pay it off. Do this over a few months and request a increase in limit after so many months of good pay. As you show responsibility, the credit union will have faith in you when you ask for a car loan. Also keep in mind that you need to have a good savings account with them and never any deficient balances. As stated earlier a good down payment is also wise. I did what I am telling you and I bought my first car in 1998 at a 6.75% rate with no co-signer. Good luck, and remember to always pay all of your bills on time, and keep a steady job.

 

[Mickey21]

Credit score is credit score. Banks don't maintain it. When you go for a loan, it's a part of which "product" the bank will offer you, based upon other factors. The banks product guidelines aren't the same as your credit score. Which product you qualify for may depend upon your score. Also may depend upon whether you're a war vet, how much you wish to borrow, whether you've declared bk in the last 5/10/x years, etc...

Bank products are one thing, credit score is another.

If you believe that your credit score is static and is the same from one creditor to the next (i.e) bank, than you are mislead. It is almost never the same and isnt the same thing as say asking Equifax, etc for it. That is their score and what they have determined by either being reported to or finding the information for other people.

Credit Reporting agencies dont make credit scores either, well they dont make YOUR credit score I should say, everyone does. Banks do, Credit card companies do, credit reporting agencies do, hell you can make up your own credit score if you wanted to. But how valuable would it really be? That is the question.

Credit reporting agencies can make a score available to say you, me, a retailer, a bank, anyone who wants it really. But that isnt the whole truth. That is the credit score that Equifax has given for instance. And the reason it is even valuable to anyone is because retailers dont have access to most of that information and dont care to do it themselves for instance. Any store is going to pay a fee anually to a reporting agency to get quick access to the information needed in order to make quick decisions like if they want to accept a credit card payment, or debit payment, or grant store credit card, etc.

Banks will usually make their own score after gathering various information and possibly reporting agencies. They want as much information as they can get to make a good lending decision. Now, when a bank asks Equifax for credit information on an individual, they dont ask Equifax for the credit score. They ask for all the information on an individual and then plug it into their scoring system and make their own score. Sure, Equifax's score should be close to the number the bank comes up with, but it doesnt have to be identical and likely wont as the Bank will likely weight their decision differently.

For instance, if I wanted to get a home loan from a bank and my credit score is 800 (fantastic), I dont stand a chance in hell (or at least not a good one) if they have on record that I have defaulted on a home loan from the same bank years earlier. Because that bank not only considers a home loan default a bad sign for a home loan, but that I had already faulted on that bank and not likely to get a second chance.

My point is that everyone maintains a credit score, or should I say creates one at will and believing that a credit score is something that is fairly static and lives somewhere with a company you can check. Fico and other reporting agencies are just a place to get an idea of your score which is usually good enough, just clarifying that your score is dependant on the person you are in the process of asking and can sometimes be very different than what you might think your score is already...

Banks maintain credit scores, Credit card companies maintain credit scores, Credit reporting agencies maintain credit scores, etc. Anyone willing to lend out money or report on the habits of others for those that lend out money...

 

[celticstanger]

If you believe that your credit score is static and is the same from one creditor to the next (i.e) bank, than you are mislead. It is almost never the same and isnt the same thing as say asking Equifax, etc for it. That is their score and what they have determined by either being reported to or finding the information for other people.

Credit Reporting agencies dont make credit scores either, well they dont make YOUR credit score I should say, everyone does. Banks do, Credit card companies do, credit reporting agencies do, hell you can make up your own credit score if you wanted to. But how valuable would it really be? That is the question.

Credit reporting agencies can make a score available to say you, me, a retailer, a bank, anyone who wants it really. But that isnt the whole truth. That is the credit score that Equifax has given for instance. And the reason it is even valuable to anyone is because retailers dont have access to most of that information and dont care to do it themselves for instance. Any store is going to pay a fee anually to a reporting agency to get quick access to the information needed in order to make quick decisions like if they want to accept a credit card payment, or debit payment, or grant store credit card, etc.

Banks will usually make their own score after gathering various information and possibly reporting agencies. They want as much information as they can get to make a good lending decision. Now, when a bank asks Equifax for credit information on an individual, they dont ask Equifax for the credit score. They ask for all the information on an individual and then plug it into their scoring system and make their own score. Sure, Equifax's score should be close to the number the bank comes up with, but it doesnt have to be identical and likely wont as the Bank will likely weight their decision differently.

For instance, if I wanted to get a home loan from a bank and my credit score is 800 (fantastic), I dont stand a chance in hell (or at least not a good one) if they have on record that I have defaulted on a home loan from the same bank years earlier. Because that bank not only considers a home loan default a bad sign for a home loan, but that I had already faulted on that bank and not likely to get a second chance.

My point is that everyone maintains a credit score, or should I say creates one at will and believing that a credit score is something that is fairly static and lives somewhere with a company you can check. Fico and other reporting agencies are just a place to get an idea of your score which is usually good enough, just clarifying that your score is dependant on the person you are in the process of asking and can sometimes be very different than what you might think your score is already...

Banks maintain credit scores, Credit card companies maintain credit scores, Credit reporting agencies maintain credit scores, etc. Anyone willing to lend out money or report on the habits of others for those that lend out money...

Well, I did loans for quite a while. I suppose I'd better go tell Bank of America, Countrywide, etc... that they're doing business wrong, per Mickey21. I know a lot of people come on here and talk with authority on things about which they know nothing, I'm not one of those people. I've been through the whole process from getting a credit report, to using the score to find general eligibility, to using the contents of the report to further establish eligibility (loan/mortgage defaults).

Ara, I'm pasting something I used to use to help people understand how their score is calculated. I did not write this, but found it in our lending co's knowledge database. Or you can go with the "...well, I think this is how it works...".

EDIT : tidied up cr@ppy formatting -

CREDIT SCORE NOTES

Think of your credit score like you would a grade in school. A teacher calculates grades by taking scores from tests, homework, attendance and anything else they want to use, weighting each one according to importance in order to come up with a final single number (or letter) score. Your credit score is calculated in a very similar manner. Instead of using the scores from pop quizzes and reports you wrote, it uses the information in your credit report.
The number itself can range from 300 to 900. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac. Here, however, is an approximate breakdown of how it is determined:

· 35% of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

· 30% of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits.

· 15% of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

· 10% of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year.

· 10% of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the score.

IMPROVING SCORES
Credit scores aren't static numbers. Because they are calculated based on your current credit report, they change every time your credit report changes. While this change may be very slight, it can also be much more dramatic. Here are some things some financial advisers say to do to try to improve your score:

· Review your credit report and correct any errors you find. Getting rid of inaccurate (and bad) information can sometimes improve your score dramatically.

· Advice used to be given to close old and unused credit card accounts in order to reduce your “potential” available credit (which could change your debt ratio after you’ve been approved for a loan). Now, however, the ratio of your debt to your credit limit is more critical, so closing old accounts only raises that ratio – which you don’t want to do. Some people have moved debt from several credit cards to one card and then closed the old accounts. Since creditors look at the debt-to-credit limit ratio this can have a bad affect on your credit score because you have the same amount of debt but less available credit. So don’t close old credit card accounts just because you’re not using them.

· Creditors also now look at the average age of your accounts so, again, keep those old accounts.

· Reduce your balances on credit cards to 75% or less of your available credit (25% is preferable).

· Pay your bills on time. (This is probably the most important of all!)

· Don't let anyone make an inquiry on your credit report unless you absolutely have to. The more inquiries, the lower your score.

· Don’t open new credit card accounts just to increase your available credit in the hopes of raising your score.

Also, remember that some improvements -- such as better efforts at making payments on time -- may take time to impact your score. So, time is also a factor.
If you go to the bank for a loan and are turned down because your score is too low, your would-be lender will get a list of reasons for that low score. You can use that list to try to turn your score around. While nothing is guaranteed, since lenders can also use their own scoring methods, you certainly can't hurt your score by taking any of these steps.
The key is to get credit only when you need it (unless you're trying to establish your first credit), and then use it carefully, make your payments on time, and keep your balances low. Remember not to max-out credit cards.

 

[Ara]

Thanks Celticstanger, I appreciate that very much. Now where do I get a credit card or two?