Credit Card question

Posted on 2011-04-28
Last Modified: 2012-05-11
Up until about 1 year ago, I've never had a credit card.  About 1 year ago, I piggy backed on my wife's credit card from Target.  Since having purchased my first home under my name, I recently just got two.  One is from Bloomingdales and I used it for $140 with a credit limit of $500.  The other was a Home Depot and I've charged $2500 on a $3000 credit limit with no payments for the next 6 months.  My question is more along these lines.  I do have the money to pay both off, but would it be recommened that I do pay both off completely and maybe possibly just cancel the cards?  Or keep them so, I'm assuming, that my credit keeps climbing higher?
Question by:ee4itpro
    LVL 84

    Expert Comment

    pay them off completely.
    LVL 13

    Expert Comment

    If your main goal is to increase your credit score you would not want to cancel more than one card per year and do not want to cancel your oldest card as that one is tied more directly to the length of your credit history. Cancling any of them would lower your score as it would lower the number of sources of credit from which your score is drawn.
    As for paying off, I find that paying 1/2 of the balance every month is far better for your score than paying off all at once.

    One of the large factors is the ratio of credit / how much is available so you will want to keep the cards and use them but retain a low balance.

    I hope that helps.
    LVL 37

    Expert Comment

    IF you have interest free for 6 months then pay it off after 5 and a half!! No point paying it off before hand as you would in effect be giving away free money!!
    LVL 26

    Expert Comment

    Ask yourself several question
    1. Is there a charge just for having the credit card ie an annual fee. (not just a free first year)?
    2. Are they charging you interest on unpaid amounts?
    If either answer is yes pay NOW and cancel the card.

    Also ask is the credit card good at places other than the issuer. If not cancel
    Are you prepared to keep close track of your various terms and conditions? If not, keep only one credit card.

    Does the credit card give you back a small (usually very small) percent of your purcheses?  If no look for another card.

    do not worry excessively about your credit rating. Trying to upgrade it is a waste of time unless you plan to borrow a lot of money or you have been a bad credit risk in the past.
    Credit cards are very useful. I use mine for every purchase possible BUT I ALWAYS pay the balance competely. Discover is good.  I use Visa from State Farm
    LVL 32

    Expert Comment

    Paying off balance in full and canceling cards are both bad for your credit worthiness.

    If you carry no balance, the CC companies can't make money off your transactions and any interest on revolving balances.  They also see it as taking out unused credit...anyone who's had a card in the past 3 years knows that unused card (zero balance) will be canceled by the bank with no advance notice.  They are extending credit to you, so it looks bad on their books to have risk but no revenue.

    When you cancel credit cards (I think _one_ is OK), but keep opening new ones, then you are a non-customer.  You are using the credit for free, then jumping out before the CC company or bank can make any money.  Not a good customer in their eyes, so you would not be a good candidate for future offers.

    Long-term accounts that are not maxed out, that have a long track record of on-time payments look good to creditors.  It shows that you  know how to use the credit given to you.  You've advanced beyond filling out an application, then writing one check to pay the bill...nothing sophisticated there.  A monkey could do it.

    Use the full length of free credit (like 6 or 12 mos no-interest), as long as you can pay IN FULL during the last month.  Otherwise, they add up all of the formerly "free" months at very high rate of interest.  Often 21% or more.

    I've done that with Home Depot.  Over 12 months I'll get a tax return or save monthly and pay off the bill before the interest hits.  There is always a small balance from month to month (weekend runs for "stuff").  I've not had any problems.

    With another card that I paid off, I didn't add any new charges for 1-2 years...kept the card in a drawer so I wouldn't be tempted.  Bank canceled the card to reduce their exposure.  The people who had balances with interest accruing didn't get touched.  Some people with low use got their credit lines reduced.
    LVL 16

    Expert Comment

    Do you have a poor credit score?  Do you NEED a higher credit score?  Do you even know what your credit score is?  

    Unless you are looking to refinance your home or take out an auto loan AND your existing credit score is sub-prime, I don't see any need to try to raise your credit score or worry about your credit score dropping a few points.  You just need to keep making your mortgage payments and not be late or miss any bills and your credit score will rise plenty high enough in time.

    While I don't know what is the exact cut-off, if your credit score is in the top tier (and it soon will be if you keep paying your morgage and not be late with any of your bills) you will get the best interest rates next time you go to get a mortgage or an auto loan.

    So unless you already know your credit score is NOT somewhere in that top tier, and you KNOW you indeed will soon need a loan, then don't worry about the credit score.

    Instead, look towards what your needs are.  

    Do you frequently shop at Bloomingdale's?  If not, pay off the card and cancel it (the balance and credit limit are relatively miniscule compared to your other sources of debt/credit).

    You say the Home Depot card doesn't require any payments for 6 months, but what about interest.  I don't know the particulars about Home Depot, I do know there have been forms of credit where you don't have to make a payment until some future date, but intrest is still accruing... payment or not.  There there are other credit cards that don't charge any interest if you pay the card off by a certain period.  But if anything happens and you miss a required payment or don't make that final payment in time, you get suddenly get all that defered interest added to your balance retroactively to the date of the original purchase.

    So again, I don't know details about the Home Depot card, I do know that typical interest baring checking and savings accounts are only paying something around 1% interest.  That means you could make $5-$10 in interest if you keep the money and pay the credit card later.  But if anything happens and you miss that payment date, it could easily cost you $50-$100 or more in back interest.  Are you really dilligent enough with your money that you can risk a screw-up costing you $100 just to try to make $10?

    I personally like to keep things simple when possible, so I personally prefer to just keep everything paid off, and then maintain open accouts where I really need and use them.
    LVL 26

    Expert Comment

    Your credit score is for the benefit of companies that extend credit; it's not for your benefit. That is, a higher credit score implies that a credit company will want you more as a customer. You will make more profit for them.

    Usually, that ties to a couple of things -- you'll pay them more interest on whatever you borrow and you won't significantly increase their cost of giving you credit. You would pay more interest essentially simply by paying whatever monthly amount they say you should be paying. And you would increase their cost by doing anything outside of the normal flow such as skipping payments or paying off early in full.

    You might pay off the Home Depot card near the end of the term, but also keep a running balance with normal payments for Bloomingdales (and perhaps Target). I don't think you can strike a better balance than that.

    LVL 32

    Expert Comment

    A higher credit score means that you are worthy of higher credit lines and less risk of default or Kate payment.

    You generally get the best terms and lowest interest rates.  That doesn't equate to higher profit.  It's more predictable.

    Like a high return high risk bond is mire profitable for the investor...but potentially a loss.  Lower return, lower risk borrower is less profit on THAT single loan, but safer and more predictable.
    LVL 26

    Expert Comment

    A higher credit score means that you are worthy of higher credit lines and less risk of default or Kate payment.

    I would agree if the word "means" is changed to "implies". That comes from the ability to manipulate your credit score by stretching out payments -- making the smaller recommended payments rather than attempting to pay off the balance faster with larger payments. That is, there are more factors involved.

    Staying with the schedule over time is a measure of 'predictability'. Regularly paying balances too early will slow the rise in a credit score.

    LVL 18

    Accepted Solution

    paying them off will not automatically increase your credit score I don't think, if you make the minimum payments then you are building up a good payment history.  

    If you make use of interest free periods, that might benefit your interest on savings.  If you pay off amounts such that you never pay interest, you also build up a good payment history.

    I worked in credit, the biggest factor was to be an owner-occupier and to have been at the same address for a long time.  Moving house actually reduced the credit score (that was the UK though, ten years ago).  I worked with Experian, what they didn't like were missed payments and they hated court judgements, repossessions and personal bankrupcy.
    LVL 7

    Expert Comment

    I recommend keeping your total revolving debt to credit limit at about 50 % this will increase your credit score because they can see that you do actually use your credit, and that you are responsible with it as well.  When I have kept that up, I was able to get credit limit increases within about 6 months (as long as I made payments on time).  Of course, you have to balance that with how much you will end up paying in interest.

    So, if your plan is to increase your score then pay them all back to 50 % and keep making payments.  If you want to pay minimal interest then your best interest is to pay them off.  Do not close the accounts as that might damage your score, but you can keep them open and simply cut up the cards so they won't be used.

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