Good/Bad credit in US

[girlysprite]

I have been following a discussion following an article about creditcards, and I saw some interesting points, but i wonder if they were correct.
The discussion started out with people who said that using creditcards usually was a bad idea. Even when it comes to emergencies, they have a savings account for that. If the emergency requires more, they rather try other venues first before creditcard. However, people replied that the side effect would be that these persons would have no dredit history, and that would work against them if they'd try to get a loan, buy a house (requiring a mortgage) or even rent a house (where credit history is also checked).

I wonder - is that true?

Where I live people always use debitcards. Creditcards are mostly only used when going out of the country or for online purchases. There are even lots of people who don't own one.

[CG]

Yes, unfortunately it does.  It can also affect how much you pay for auto insurance, and if your credit is bad, it can affect getting some jobs.  Dave Ramsey, a man who has made a ton of money encouraging people to be debt-free, says that he couldn't rent an apartment in many places, even though he could buy the whole complex.

[SamiHami]

Yes, but the point is that if you don't use credit, you don't need to worry about credit. Good credit for renting an apartment can be obtained by having a solid work history and by having a substantial amount of money in the bank--money that would have been thrown away on interest fees, rather than gaining interest as it should. It is a little harder to get that initial credit established, but it's far better than running up a bunch of debt. Using credit is like flushing money down the toilet.

[Yvaine]

Yes, but the point is that if you don't use credit, you don't need to worry about credit. Good credit for renting an apartment can be obtained by having a solid work history and by having a substantial amount of money in the bank--money that would have been thrown away on interest fees, rather than gaining interest as it should. It is a little harder to get that initial credit established, but it's far better than running up a bunch of debt. Using credit is like flushing money down the toilet.

Unfortunately, that's not entirely true. A solid work history and money in the bank will be unsatisfactory to a lot of landlords; they'll want to see those credit reporting companies' ratings of you, and if you've got nothing on there, tough luck. And you'll also have trouble getting a mortgage if you decide to buy a house. I'm going through this right now--not enough history on my credit report. They don't just want to see proof that I have enough money for whatever it is, or that I've worked at the same job foreeeeever--they want a history of me making a lot of debt payments.

It would be nice if the system rewarded good decisions, but it really doesn't. It rewards a really arbitrary course of action. Not having any debt at all=penalized. Having credit cards but keeping the balance at 0=penalized. Bad credit=penalized. There's this magic "sweet spot" where you get rewarded. The system, IMO, is broken.

ETA: There are more details about all of this and how it works, but I need more coffee and I don't think I can explain them well at the moment.

[lady_disdain]

Yes, but the point is that if you don't use credit, you don't need to worry about credit. Good credit for renting an apartment can be obtained by having a solid work history and by having a substantial amount of money in the bank--money that would have been thrown away on interest fees, rather than gaining interest as it should. It is a little harder to get that initial credit established, but it's far better than running up a bunch of debt. Using credit is like flushing money down the toilet.

In the US, do you pay interest if a credit card is paid off in full at the end of the month? I have heard this so often from Americans.

I only start paying interest if I do not pay my full bill at the due date, which I always do.

[Yvaine]

Yes, but the point is that if you don't use credit, you don't need to worry about credit. Good credit for renting an apartment can be obtained by having a solid work history and by having a substantial amount of money in the bank--money that would have been thrown away on interest fees, rather than gaining interest as it should. It is a little harder to get that initial credit established, but it's far better than running up a bunch of debt. Using credit is like flushing money down the toilet.

In the US, do you pay interest if a credit card is paid off in full at the end of the month? I have heard this so often from Americans.

I only start paying interest if I do not pay my full bill at the due date, which I always do.

I think it depends on the credit card. And just to add "fun" to the whole situation, some of them have fees to penalize you for paying the whole balance off every month--you're not generating enough interest for them, so they ding you with a fee.

[lady_disdain]

What?! No wonder credit cards are so badly seen in the US. I never understood the advice of not using them at all before but now it starts to make sense. I use mine for almost everything, since it makes budgeting a lot easier.

I pay a yearly fee for holding the credit card (which makes sense in my mind, as they are providing me with a service) but, as long as I pay it off in full, that is all.

[Dindrane]

Yes, but the point is that if you don't use credit, you don't need to worry about credit. Good credit for renting an apartment can be obtained by having a solid work history and by having a substantial amount of money in the bank--money that would have been thrown away on interest fees, rather than gaining interest as it should. It is a little harder to get that initial credit established, but it's far better than running up a bunch of debt. Using credit is like flushing money down the toilet.

In the US, do you pay interest if a credit card is paid off in full at the end of the month? I have heard this so often from Americans.

I only start paying interest if I do not pay my full bill at the due date, which I always do.

I don't know if the way it works here is exactly the way it works for you, but the simple answer is no, you don't pay interest unless you don't pay off your card each month.

The complicating factor is that most cards have basically three amounts you can pay each month without getting dinged for not paying.  The lowest amount is your minimum balance -- sometimes as low as $10 or $15.  If that's all you pay, you will start accumulating interest on your debt.  The next lowest amount is generally your "statement" balance.  The highest amount is actually paying your card down to $0.

The reason why a credit card bill often tells you that you owe less than the full amount of debt you are carrying is because credit cards allow you to carry debt interest free for a month.  It takes time, sometimes even a few weeks, to process a bill.  So by the time you have a bill to pay for the previous month, you're halfway through your current billing cycle (with the transactions to show for it).

So personally, I never pay the minimum balance because I don't want to pay interest.  But I also never pay my card down to $0, because keeping that debt for the full period of time allowed to me (interest-free) means my credit is better, and it means I can keep my actual money in an interest-bearing bank account as long as possible.  I've managed to work things out (partly through skill, partly through luck) so that I pay all of my bills with my credit card, and the only thing I pay out of my bank account is my credit card bill and rent.  My monthly paycheck gets deposited on the last business day of the month, and my interest for the month is calculated at the close of business that day.  My credit card bill is automatically paid the first business day of the next month, meaning that the day my interest is compounded is the day I have maximized the amount of money in my account.

[Sunbeem]

Sunbeem here, in the midwest of the USA-
I have heard many places that it's true about credit affecting mortgages- having good credit will get you a much better interest rate.  When I was in high school, I was encouraged to get a credit card in order to start building good credit.  So I did.  Unfortunately, Yvaine is right- the whole system is broken.  It rewards you for having debt that you manage, and punishes you for avoiding debt.

 I tried to get a small car loan after college, and my credit history wasn't good enough- even though I paid off my credit card in full every month (meaning I never had to pay interest or late fees), and had a really high credit score, and had had the same credit card for over 3 years, and had accepted a good job in a stable industry, US Bank told me that since I only had 1 credit card and no other kinds of debt, that I had "too limited" of a credit history.  I ended up getting a loan co-signed by one of my parents, and because I had a good credit score I got a very slightly lower interest rate than I otherwise would have.

In the US, do you pay interest if a credit card is paid off in full at the end of the month? I have heard this so often from Americans.

I only start paying interest if I do not pay my full bill at the due date, which I always do.

Credit cards in the US: You use the card to buy stuff.  At the end of the billing cycle, they send you a statement and then you have another few weeks until the due date.  If you pay the full amount on the statement, there will be no interest charged.  The other option is to pay the "minimum" payment, which for my card has ranged from $10 to $30 a month.  If you pay the minimum payment, you will not be "penalized" per se, but you will be charged interest on whatever remaining balance carries over into the next billing cycle.  Completely missing a payment is what hurts the credit score the most.  I'm not sure how the monthly balance factors in.

One nice thing about credit cards is that they allow one to buy something and not pay for it until six weeks later- for example if my billing cycle started on June 1, I could buy something June 1, and it wouldn't show up on my statement until July 1, and then I wouldn't have to pay it until about July 15, and at that point could pay it in full and have no interest.  Meanwhile my money would be sitting in my interest-paying checking account and giving me a few extra dollars.

I think Dave Ramsey's "cut-up-your-credit-cards" advice is good for people who have racked up a lot of cc debt or don't have the discipline to avoid impulse purchases, etc., but he is a bit over the top as having a credit card is a good tool for someone who uses it responsibly and is cautious enough to read the fine print and not get into a credit card with bad terms & conditions.

[Dindrane]

There are a handful of things that can generate good (or bad) credit in the US.  The one that is probably the most accessible to people is having a credit card, since you can get one even if you don't pay rent or utilities.

However, renting (and paying your rent on time) can contribute to your credit, as can having a utility (like electricity or water) in your name and paying those bills on time.

Basically, what a good credit score reflects in the end is your ability to have debt and pay it off.  Which, incidentally, is the reason why most people don't actually know their credit score unless they are trying to take out a loan -- the score itself is basically a calculation of how risky a loan to you is going to be.

A credit report, on the other hand, is something that everyone can get for free once per year, and something that rental companies, utilities, and sometimes employers check.  That's mostly going to reflect how good you are at paying your bills, and having nothing on there at all can make it difficult and/or more expensive to rent an apartment or set up utilities.

Personally, I had to pay a larger deposit when I signed my first lease on my current apartment, because while my credit was fine, I had no income.  So it's not just credit that matters, but if I had literally had none, I might have found myself in the same situation even if I'd had a job at the time.  When I arranged for electricity for this apartment, they didn't really care if I had a job or how much money I had -- they wanted to do a credit check.  Had my credit been poor, I would have had to pay a deposit to get service.  Since my credit was good, I didn't have to pay anything.

At that point in my life, the only things contributing to my credit were two years of holding a credit card, one year of leasing an apartment (with my parents as co-signers), and one year of having a phone/internet bill in my name.  All of those things contributed to my credit history, but I'd guess that the credit card made the biggest difference (mostly because of the lengths of time in question).

[Slartibartfast]

(This will be long, I know, but hopefully it's interesting!  And amazing how broken the system is . . .)

Your credit score can affect:

1) interest rates you get for loans (which could cost you tens of thousands of dollars in the long run!)
2) your ability to get a job in some industries
3) your ability to get security clearance for classified government work
4) your ability to rent an apartment/house/condo
5) your ability to rent pretty much any big-ticket item with monthly payments
6) your ability to get other credit cards, and the rates for those cards

Most people don't know their credit score because the three companies which do the calculations charge for those scores.  Banks and other lenders pay a hefty fee each year for the use of the service, and they're often not allowed to tell you your score even when you're applying for a loan!  You can get a free credit report from each of the three agencies once per year, but it won't have your actual numerical score on it.

The credit card thing: let's say you charge $20 a day on your brand-new credit card.  At the end of the first month, you have a $600 balance (30 days x $20/day).  You get the statement in the mail a few days after the billing cycle ends, giving you two numbers: the minimum balance ($10-$30), and the current balance as of the last day of the cycle ($600).  However, neither of these are correct, since you've used your card in the interim and your actual balance is $600 + a few days worth of $20 purchases.  If you waited until the due date to pay (usually 3-4 weeks after the end of the billing cycle), you'll have $1000+ on the card.

Here's the weird part: credit cards have grace periods.  They used to be 30 days, but most are now 20 or 25 days.  If you pay that $600 balance before the due date, even though that's not the full amount you've charged on the card since then, the credit card won't charge you any interest on it.  You won't have any interest on the $400+ you've charged since the end of the last billing cycle, either - that will get rolled into the next statement.

However if you miss your payment, or you pay less than the total balance on the card as of the previous billing statement, you now have to pay interest.  And the interest is back-dated for everything since that statement was printed!  So the $400+ of charges you made so far this month are now $500+, including the interest.  (Many cards offer low or no interest for the first several months, but then the rate jumps substantially.  The good ones are in the teens; the bad ones can be as high as 40%!)  Usually if you miss a payment, your rate automatically jumps to a "penalty rate" much higher than your usual one.  Also, companies are starting to use "universal default" - meaning if you miss a payment on ANY credit card or loan (that they know about), ALL your interest rates will jump.  Crazy, I know!

The long and the short of it is, credit cards are free (to the consumer) if the statement balances are paid off in full every month.  Some give cash back - mine credits me $0.01-$0.05 for every dollar I spend with it.  I know stores are paying more, but I get all my purchases automatically tracked for me and I get about a hundred bucks a year out of the deal!  It's a delicate balancing act, though - miss a payment and all of a sudden you're responsible for interest on nearly two months' worth of purchases, plus you have to stop using the card for another month until you get back into a new "no interest" cycle.

Credit cards can be a great thing - IF you are good with your money and only use them for things you can afford.  They're less great for people who treat them as "free money" (they're not) or who can't resist spending on things they wouldn't buy otherwise.  If you get in debt, it can pile up fast - and it can take decades to dig yourself back out again.

[girlysprite]

Wow...when i read that discussion i was writing about, I thought it was an exaggeration coming out of anti-US sentiment. But it seems quite some bits of it are true then. I don't mean this as a punch to the US, but I do prefer how such things are handled where I live - daily stuff and semi-big stuff is paid for with a debit card. If you're taking out a loan, credit history and income is checked. No credit history is also good. If applying for mortgage, the advisor will often just talk about your financiual situation, your income, how much you can spare, etc. They are obliged to check such details. If they are checked by the government and can not proove that they didn't check these things of their clients before contract signing, they can get quite some penalties.

[Dindrane]

Credit cards and credit in general is really not something that is 100% bad.  The problem isn't so much with the extension of credit itself -- it's with predatory lending practices and a lack of transparency.  Those things make it more challenging to manage one's debt and credit responsibly, but it's not impossible and it's still something that can be enormously beneficial to consumers.

There are always going to be times when it just makes more sense to delay having the actual money taken from your account, even though you have it available.  Using credit to make purchases can mean that each dollar you spend is able to earn you as much interest as possible before it's gone.  Interest on the money you have in savings is the closest thing out there to free money, so it makes a lot of sense to maximize how much of it you can earn.

Even with loans for something major like a car or a house, it can make more sense in some circumstances to pay exactly what you owe and nothing more, even though that means being in debt and paying more overall.  There are times when the money you could put towards a loan or mortgage payment to pay it off faster is better used elsewhere.  Or when you need to keep that cash liquid, and not tie it up in a non-liquid asset.

[nutraxfornerves]

To get back to the original question about credit cards and how they affect credit history--

A few years ago, a financial institution needed my FICO score in order to do something I wanted. A FICO score is "a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts." I won't bother to go into details about the score. Scores can run from 300 to 850. Higher is better. Few people score 850.

My score was 825. They have to disclose what downgrades the score from 850. I lost points for only one thing: I only have one major credit card.  When I looked into it, it turns out that having only 1 card is considered bad, because that may mean that your credit is so bad that no one else will give you a card.

Since the score is done by a computer, no human being looks at the entire package and evaluates the "1 credit card" against an otherwise spotless record. The optimum number seems to be 2 or maybe 3. More than that might indicate you are a credit junkie.

[Seraphia]

Yes, unfortunately, it is true to a certain degree. I have no debt. No school loans, no car loan, no credit card balances. I had scholarships, my car was a gift from my parents, and I've never needed to use my credit card. Even when I lost my job for several months, I had enough in savings to ride it out. My DH has school loans, a car loan, and has just paid off his last credit card bill from when he was out of work before we got married.

Guess whose credit is better? His. He is considered a better investment by loan companies because he has a history of borrowing money, paying it back slowly, and not defaulting, while I don't borrow enough for them to find me a good investment. I'm trying to counteract that by using my debit card as a credit card and holding a joint credit card with DH, so that when we look to buy a house, my lack of credit won't affect our ability to get a loan.