On my way to $0.00 debt, help needed

binarysoul · July 2008

You may now or in the past have been in my position at some point, so you could send some help my way

I've about 4-5 credit cards that I've opened over the past several years and slowly paying them off. So far so good.

I plan to keep one credit card for use, but should I close the rest of the accounts? How is that going to affect my credit-worthiness? I plan to apply for mortgage in the near future. Is it better I have these accounts with $0.00 balance or close them all together. If I close them out, will creditors see me someone to whom nobody gave loans?

If I leave them open, won't they say, well this guy already has a lot of accounts, so no more credit for him.

cablegod · July 2008

If there is no annual fee, I would definitely leave them ALL open. The more positive tradelines you have, the better. The more the age of the active tradelines plays a big part as well. When you close accounts, the average length of your history stops. Try to keep your total utilization below 10% of available credit to maximize your scores. Most mortgages go by your middle FICO score (not the highest, nor lowest among all three reports = TransUnion, Experian, and Equifax).
Since you are planning a mortgage in the future, get your debt-to-income ratio as low as possible, that way you qualify for higher mortgage amounts and more favorable terms (rates, etc).

Your question about the loan underwriter thinking 4-5 revolving credit card accounts is too much, I think no. When I got my mortgage, I had way more open revolving accounts than that. In that aspect, just get your debt-to-income ratio down as far as you can before you apply when they pull your three credit reports.

nicklauscombs · July 2008

yes do not close the cards however make sure you put them safely away so you don't use them

dynamik · July 2008

How big are the cards? I don't think it's the number of cards you have as much as it is how much total debt you can potentially rack up. If they're all $5k, it does matter. If you apply for a mortgage or other large chunk of credit, and they see you might accumulate another $25k in debt, they're going to factor that into the equation. You should call your card companies and have them lower the maximum the for the cards you aren't going to be using. Just make sure that doesn't leave you with a high balance-to-maximum ratio because they also factor in the percentage of revolving credit used when calculating your credit score. I think the average is something like 33%. A high percentage makes it look like you have problems living within your means (and in turn hurts your score). Definitely get a score report (or 2 or 3). They'll give you good tips as well.

Also, don't you have to carry a balance in order to have revolving credit count for your history?

You should check something like this out: http://www.equifax.com/3in1-credit-report-score/

Or if you just want the score: http://www.equifax.com/fico-credit-score/

That 3-in-1 will give you credit reports from all of them, but just the score from Equifax I believe. You should also check out your score from the other two agencies as well. They can vary quite a bit! I believe you can order one free credit report per agency per year.

https://www.annualcreditreport.com

blargoe · July 2008

In the US, it's more favorable to your credit score to leave the credit account open, just don't use them. The ratio of your debt that you actually have accumulated to the limit of your credit is a factor. If you had only one card with a limit of 5K and you had a balance of 3K, you would have a lower score then if you had more cards with no balance added to that credit limit. Screwy, I know.

I don't know about the UK though.

learningtofly22 · July 2008

cablegod wrote:

If there is no annual fee, I would definitely leave them ALL open. The more positive tradelines you have, the better. The more the age of the active tradelines plays a big part as well. When you close accounts, the average length of your history stops. Try to keep your total utilization below 10% of available credit to maximize your scores. Most mortgages go by your middle FICO score (not the highest, nor lowest among all three reports = TransUnion, Experian, and Equifax).
Since you are planning a mortgage in the future, get your debt-to-income ratio as low as possible, that way you qualify for higher mortgage amounts and more favorable terms (rates, etc).

Your question about the loan underwriter thinking 4-5 revolving credit card accounts is too much, I think no. When I got my mortgage, I had way more open revolving accounts than that. In that aspect, just get your debt-to-income ratio down as far as you can before you apply when they pull your three credit reports.

Nailed it.

dynamik wrote:

How big are the cards? I don't think it's the number of cards you have as much as it is how much total debt you can potentially rack up. If they're all $5k, it does matter. If you apply for a mortgage or other large chunk of credit, and they see you might accumulate another $25k in debt, they're going to factor that into the equation. You should call your card companies and have them lower the maximum the for the cards you aren't going to be using. Just make sure that doesn't leave you with a high balance-to-maximum ratio because they also factor in the percentage of revolving credit used when calculating your credit score. I think the average is something like 33%. A high percentage makes it look like you have problems living within your means (and in turn hurts your score). Definitely get a score report (or 2 or 3). They'll give you good tips as well.

Also, don't you have to carry a balance in order to have revolving credit count for your history?

You should check something like this out: http://www.equifax.com/3in1-credit-report-score/

Or if you just want the score: http://www.equifax.com/fico-credit-score/

That 3-in-1 will give you credit reports from all of them, but just the score from Equifax I believe. You should also check out your score from the other two agencies as well. They can vary quite a bit! I believe you can order one free credit report per agency per year.

https://www.annualcreditreport.com

Also nailed it. As a small time real estate investor(4 houses), I've spent plenty of time sitting in mortgage broker's offices. Dynamik and Cablegod said everything that I was going to, especially the part about keeping your cards open, but lowering the maximum limits on them and keeping the balances low.

In addition, whether you are going to be putting 0, 10 or 20% down on your house, get that money sitting in your checking account for at least 3 months before going to see your mortgage broker. They will want to see the last 3 months' worth of bank statements, and if the money just "pops" in there all of a sudden, they will want to know why. Good luck, it's a great time to buy! Negotiate hard, supply is greatly exceeding demand now and you can get a great deal.

Don't get an ARM. Don't get an ARM. Don't get an ARM.

HeroPsycho · July 2008

In the short run, closing the excessive credit cards is worse for your credit, but in the long run better. You will take a hit by now closing the excessive credit cards. However, as dynamik pointed out, having the potential to rack up a lot of debt with the total amount of existing credit cards will cap your credit scores. Having them lower your max credit line is a good idea.

One factor you should take into account besides your credit score is the potential for identity theft. The more credit cards you have spread between different banks and agencies, the greater the risk of your identity being stolen. Of course, once you've opened the credit card, they have your information anyway even if you close the account, but I suppose over time that data may be taken offline and be less likely to stolen.

My wife and I personally closed all our unneeded credit cards. Our score was high enough at the time we did it, and we had just purchased our first house, so we didn't foresee buying another house anytime soon.

royal · July 2008

I've got tons of debt. Mortgage, school loans, car.

The mortgage and school loans I consider good debt though. The car I consider bad debt.

Thankfully I don't have any credit card debt as I have always been in the habit of spending only what I can afford and paying off my credit card bill every month.

I'm sure others have said it, if you're in credit card debt, a good way to get out is to get 0% APR cards, move over your debt, and rinse and repeat. This will save you money and get you out of debt faster. Granted opening credit cards isn't good on your credit, but either is debt. I haven't read too much about getting out of credit card debt, so I wouldn't hold much water on what I said above. I'm sure others have better suggestions.

jbaello · July 2008

I hate credit cards, I have 0, did I say I hate them? I believe that if I don't have the money I can't buy it.

I have 0 school loan since our education in the Philippines, is more of a rights for everyone rich and poor, rather than a financial obligation, our country believes that education is the key in overcoming hardship. My car is paid off, the only debt I have is uncle Sam taxes.

I wonder if I will be able to purchase a home later at all.

dynamik · July 2008

jbaello wrote:

I wonder if I will be able to purchase a home later at all.

You're going to have a hard time without any credit history. You should get a credit card that has a small maximum, or look into a secured credit card. The latter option requires you to provide the money up front to "secure" the card. It's a great way to build a credit history, and you're never in debt. Anyone who doesn't have a credit history should start doing this immediately.

jbaello · July 2008

Can car loans build my credit?

royal · July 2008

I was about to say.... You absolutely want a credit card to build credit, get free money from rewards, and be able to balance better (things like Microsoft Money/Quicken/Paying attention to online account), and not wasting money by getting change back and just tossing it around. Using credit cards is almost a must for financial success imo. Now using it to get in debt and using it to build credit and get free money while paying it off every month are two different things. Obviously the latter is better which is exactly what I use it for.

stlsmoore · July 2008

Yea I just finished paying off my 3 credit cards ($3,000 total) and I'll be done paying off my $10,000 car I bought last year in June by September of this year. Then the last thing I'll have to conquer is my 40k student loan debt that I'm going to pay off in the next 2 years. After that I'm going to save up a good amount and then immediately start investing. This is like a 5 year plan

binarysoul · July 2008

I enjoyed reading all the posts. I wonder if financial analysts too know enough about IT. Was that my compliment to you guys?

There is one thing that never sticks to my brain. I've read and been told many times, but never understood is this income-to-debt ration. Do they divide your monthly bills by your gross monthly pay (is it gross or net?)?

dynamik · July 2008

jbaello wrote:

Can car loans build my credit?

Yes, car loans, mortgages, student loans, credit cards, etc. will all build your credit. I checked my credit report recently, and even my gym membership is on there

tiersten · July 2008

dynamik wrote:

jbaello wrote:

Can car loans build my credit?

Yes, car loans, mortgages, student loans, credit cards, etc. will all build your credit. I checked my credit report recently, and even my gym membership is on there

Healthy people should live longer and therefore pay off the loan

HeroPsycho · July 2008

binarysoul wrote:

I enjoyed reading all the posts. I wonder if financial analysts too know enough about IT. Was that my compliment to you guys?

There is one thing that never sticks to my brain. I've read and been told many times, but never understood is this income-to-debt ration. Do they divide your monthly bills by your gross monthly pay (is it gross or net?)?

I don't know what is specifically used in the calculations, but I do know basically what things are used to determine your credit score.

There are a few things that might surprise you, as I found out actually today when checking my credit reports. as I do once a year.

1. While most people know having too much access to credit via credit cards is bad, there is such a thing as having too little credit available. Even if you have a credit history, there is a certain percentage of your income you should have accessible to you via credit cards or other revolving credit even if you don't use it. Apparently, I don't have enough, and I should go get another credit card (and promptly not use it).

2. The real estate property debt that you have should be at least a certain percentage of your income. My credit score, while good, could be better if I owned a house that is worth more because apparently my house is too small a percentage of my income.

One last thing about free credit reports. There is only one site authorized by the US government to get you one from each of the three main credit report companies.

Don't take my word for it, see it yourself.

http://www.ftc.gov/bcp/conline/edcams/freereports/index.html

Be aware that other websites offering this could very well be a scam.

astorrs · July 2008

HeroPsycho wrote:

1. While most people know having too much access to credit via credit cards is bad, there is such a thing as having too little credit available. Even if you have a credit history, there is a certain percentage of your income you should have accessible to you via credit cards or other revolving credit even if you don't use it. Apparently, I don't have enough, and I should go get another credit card (and promptly not use it).

2. The real estate property debt that you have should be at least a certain percentage of your income. My credit score, while good, could be better if I owned a house that is worth more because apparently my house is too small a percentage of my income.

I can speak from experience on everything Hero said here. Back around the beginning of my third year of my work as an independent consultant I needed to get a credit card with a decent limit for traveling expenses, filling out an application resulted in a denial. I went into my branch and she looked up and said well you only have $1000 limit and the card you have has only been opened for a little over a year (it wasn't through the bank, it was some card I filled out when I wanted to buy something online without using PayPal) and you hardly ever use it, you have nothing else on your report and you're self-employed. So I explained why I needed the card and a limit of at least $10k and was told it wasn't going to happen. I then reminded her that I made over 6 figures and just because I chose not to live outside my means it appeared to me that I was essentially being punished. She said, basically yes. In the end I had to put $10k in a locked term deposit for a year so they would issue the card - it pissed me off to the nth degree (the pathetic interest rate on the deposit was another kick in the ass

).

Get a card when you're young and buy stuff on it every month and then always pay the bill of promptly at the end of the month.

As for #2 what if you could afford to flat out buy the house, thereby accumulating no real estate debt... It would probably drop your FICO score by another 20 points... that's just sheer lunacy.

Vogon Poet · July 2008

binarysoul wrote:

There is one thing that never sticks to my brain. I've read and been told many times, but never understood is this income-to-debt ration. Do they divide your monthly bills by your gross monthly pay (is it gross or net?)?

I realize that you're probably talking about the infamous credit score, but let me add this caveat. The banks have ratios for how much they will loan you for a house. Traditionally it's been a 28/33% rule. That is, no more than 28% of your gross monthly income can go to PITI (principal, interest, taxes, insurance). Also, no more than 33% of your NET income can go to PITI (i.e. subtract long term debt from your monthly salary). The lower amount wins.
If you show up with 20% down and meet the 28/33 rule, you'll be qualified (unless you're credit score is an utter disaster)...and you won't have to pay PMI (mortgage insurance).

Plantwiz · July 2008

binarysoul wrote:

You may now or in the past have been in my position at some point, so you could send some help my way I've about 4-5 credit cards that I've opened over the past several years and slowly paying them off. So far so good.

I plan to keep one credit card for use, but should I close the rest of the accounts? How is that going to affect my credit-worthiness? I plan to apply for mortgage in the near future. Is it better I have these accounts with $0.00 balance or close them all together. If I close them out, will creditors see me someone to whom nobody gave loans?

If I leave them open, won't they say, well this guy already has a lot of accounts, so no more credit for him.

I would close them.

first, they will count against you because it is figured when someone 'buys' a home...they now need 'stuff' for that home and they'll put it on the credit cards.

second, credit cards are not needed to buy a house. I've done it and so have many others, so if you aren't using them...cut them up and close those accounts.

www.daveramsey.com

undomiel · July 2008

Plantwiz wrote:

I would close them.

first, they will count against you because it is figured when someone 'buys' a home...they now need 'stuff' for that home and they'll put it on the credit cards.

second, credit cards are not needed to buy a house. I've done it and so have many others, so if you aren't using them...cut them up and close those accounts.

www.daveramsey.com

I will second this. Dave Ramsey knows what he is talking about.

Pash · July 2008

http://www.moneysavingexpert.com/banking/credit-rating-credit-score < for UK members. You can get your credit status sent through to you by following the guide on there.

As plantwiz mentioned, it seems to be universal advice to cut those unused cards up (read that guide linked above).

Atm I still have one credit card £5k, the balance is usually nil and if not it will be paid in full at each payday. At the end of the day im not quiet at the stage where I have enough direct disposalable cash in my current account to get everything I need on a monthly basis. Sometimes relying on doing overtime and using that to pay the balance on the credit card.

Its also recommended to have between 3-6 months full salary pay MINIMUM in your savings account. Which I am finally at after years of not having that security!

The UK housing market is a no go currently so I cannot get any kind of real investment going yet, this is annoying me a little if I am honest because I don't have any long term return for all this outgoing.

Good topic, and well done for reaching 0. When my student loan is finished I will be in same boat

NetAdmin2436 · July 2008

How much are left on the cards? I'd start with the highest interest card and pay that off first, just paying the minimum towards the rest. Then once that card is paid off, move to the next highest one and repeat

Personally, I'd leave them all open once you've paid them all off. History counts! Your history is taken into account when compiling your credit score. Let's say one of your cards you put 5k on it over time and have paid it off. Why would you want to close your account and waste the 5k of good payments you made? I have a few unused credit cards no annual fee that are still around. Just make sure you lower the max, as dynamik pointed out. Sure, you can 'cut' them with scissors so you never use them. But don't close the account, just lower the max. Yes if they have an annual fee and you don't plan to use them, then I'd say close it.

Not to brag, but I'm 28 with a credit score of 800.

Plantwiz · July 2008

NetAdmin2436 wrote:

Not to brag, but I'm 28 with a credit score of 800.

When I was 28 I had a paid-for-house and no credit score.

Nothing fancy, but it was mine

NetAdmin2436 · July 2008

Plantwiz wrote:

When I was 28 I had a paid-for-house and no credit score.

Nothing fancy, but it was mine

Well then....To each there own. I'd rather have a nice new house with a low interest rate because of good credit. But that's just me.

With a quick google search.... I like #5

http://finance.yahoo.com/expert/article/millionaire/40724?count=30&start=36

Plantwiz · July 2008

NetAdmin2436 wrote:

Plantwiz wrote:

When I was 28 I had a paid-for-house and no credit score.

Nothing fancy, but it was mine

Well then....To each there own. I'd rather have a nice new house with a low interest rate because of good credit. But that's just me.

With a quick google search.... I like #5

http://finance.yahoo.com/expert/article/millionaire/40724?count=30&start=36

Not bad advice if it wasn't wrong.
The problem with the above link is that it doesn't account for risk. What happens when the job is gone and so is the income that pays for those lovely ccards? Panic? Or is there a reserve? And if there is a reserve, why take that risk? Once out of debt (as two and three generations back from us lived) you are free to make choices and can afford patience that many don't have when making big dollar purchases.

You are correct, to each his own, but when I sold my home, the money was all mine and I was able to roll that into my spouse's home and get that debt down to a manageable range. And one of both of us could lose our jobs....and we'd be ok provided we picked up something to cover taxes and some food and utilities.

Does the above work? It may, but without figuring risk into the equation....there is a significant piece missing.

HeroPsycho · July 2008

NetAdmin2436 wrote:

With a quick google search.... I like #5

http://finance.yahoo.com/expert/article/millionaire/40724?count=30&start=36

That point is a good one, but his DOLP system is retarded. What in the heck does a minimum payment matter when determining which debt to pay off?!

Take for example if you had two credit cards:

Card A:
Balance: $1000
Interest rate: 10%
Minimum payment: $100
DOLP: 10

Card B:
Balance: $1000
Interest rate: 5%
Minimum payment: $200
DOLP: 5

He's saying you should pay Card B off first?!?!?

Don't listen to crackpots like this. They're idiots. In that situation, you should pay the minimum balance on Card B, and throw any excess money you have at Card A.

His defense for his idiotic system is to renegotiate your interest rates. Great, and if Card A went down to 6%, you should do what I said above anyway.

Sorry, people like that bug me. They sucker people into paying $30 for a book that ends up costing people money because they end up following idiotic advice like that.

Plantwiz - keeping accounts open after paying them off doesn't hurt you in the end. It only improves your credit score, so if you ever do need to borrow money, the interest rates at which you borrow is lower. There's no question that's a good thing. The only time I agree with you is someone can't help using the credit card when they know they shouldn't. In those situations, the problem wasn't the credit card.

Plantwiz · July 2008

HeroPsycho wrote:

Plantwiz - keeping accounts open after paying them off doesn't hurt you in the end. It only improves your credit score, so if you ever do need to borrow money, the interest rates at which you borrow is lower. There's no question that's a good thing. The only time I agree with you is someone can't help using the credit card when they know they shouldn't. In those situations, the problem wasn't the credit card.

There is no reason to worship at the alter of the credit gods

With the exception of a buying a home, why borrow? Everything else is reasonably attained by saving and planning. Wanting/demanding items today is childish (it may be fun, but it's childish).

Not every culture lives on credit first...pay later. This sort of behaviour has gotten places like IndyMac into the mess they are in. There is no doubt that if everyone with credit extended had their loans called...there would be a....well....a mess. But it is possible to purchase a home without falling into the credit score myth....it can be done (manual underwritting...old skill that many mortgage companies are falling away from...but the better places still do it).

Some people may be 'responsible' with their cards. Though they too likely have made purchases they would not have made if they paid with cash. I'll never recommend any to keep credit cards open 'just because' and frankly don't understand buying things when the cash isn't in hand (or with a debit card if one like the feel of plastic).

Credit cards didn't exist until the 1950s and they didn't become popular until the late 70s early 80s. Now through 90s and today they are touted as being 'normal'. Unfortunately (at last poll of the ages on this board) most of the members here don't remember those days and likely have parents who grew up on credit and still live with credit. One can live without credit and credit cards.....that's my point. (and it's much less stressful).

HeroPsycho · July 2008

Plantwiz wrote:

With the exception of a buying a home, why borrow? Everything else is reasonably attained by saving and planning. Wanting/demanding items today is childish (it may be fun, but it's childish).

Not every culture lives on credit first...pay later. This sort of behaviour has gotten places like IndyMac into the mess they are in. There is no doubt that if everyone with credit extended had their loans called...there would be a....well....a mess. But it is possible to purchase a home without falling into the credit score myth....it can be done (manual underwritting...old skill that many mortgage companies are falling away from...but the better places still do it).

Some people may be 'responsible' with their cards. Though they too likely have made purchases they would not have made if they paid with cash. I'll never recommend any to keep credit cards open 'just because' and frankly don't understand buying things when the cash isn't in hand (or with a debit card if one like the feel of plastic).

With the exception of buying a home, why borrow? Car to get to work, open a business sooner to make more money than if you waited to build up your own cash, education if you can't afford it that will more than make up for the interest to borrow, a computer if it results in you making more money faster that more than makes up for the interest charges on it, etc. Fact is I would not have been able to get my MCSE when I did without using my credit cards. I'm sure the years it took for me to pay them off cost me quite a bit in interest, but it was worth it. I'm in WAAAAAY better financial shape now than when I started getting into IT.

But fine, we'll go along with your theory that borrowing except for a house is always bad. Would a good credit score result in a lower mortgage rate? In most cases, yes. That alone is a good reason.

I never said keep them open "just because". I said keep them open because it results in a better credit score, and better credit scores reduce the interest rates for almost anything you borrow money.

I know what you're getting at, and for things you want, I agree borrowing to buy them is financially irresponsible. Borrowing however is not always for things you want, and sometimes it's smart to do so. You never know when you may need to borrow money, so it's in your best interest to keep your credit score as high as possible. Keeping unused credit cards open after paying them off once again helps your credit score, and doesn't usually cost you a darn thing to do so.

NetAdmin2436 · July 2008

Hero,
I agree the DOLP system was not what I would do personally and I probably should have looked at another google link. I've seen so called 'financial experts' argue this system on TV many times. Anyways, I agree with you, as I said in my first post, to pay off the credit card with the highest interest rate first. It was late when i posted that and I should have looked at more links. I just choose the first one to reinforce my point about keeping accounts open.

Planet,
I hear your point, but unfortunately in today's age, credit cards and credit score are much more important that what they once were. Unless you've been living under a rock, you should know about the current housing/mortgage crisis. There's plenty of blame to go around on why this is happening, that is for sure. Mortgage companies were giving loans out left and right to 'unqualified buyers' and getting too greedy. Buyers were taking out the max and not being able to keep up there end of the bargain. Buying a house, is without a question the biggest purchase a person will ever make. Then as mentioned, a car, business start up loan, education, ect.. You absolutely positively want the best interest rate deal on your loans. Most people will have to take out a loan on there house, unless of course they are buying a trailer house or are wealthy. Your credit score typically correlate with what kind of interest rate you get on your house and other loans. Mortgage companies are now being more conservative and not just 'giving' loans away anymore. Look at countrywide. The largest mortgage company got bailed out and bought by Bank Of America because they had some of the worst regulated loans. So, I'd LOVE to see anyone with "no credit score" get a loan now-a-days.

Opening or closing you old credit accounts will not put more money in your pockets, nor take money out of your pocket. Bottom line is it will affect your credit score. If you close them, your credit score can will in almost every case go down. If you keep them open, it will likely in every case raise your score.

Slowhand · July 2008

Pretty much everything has been said about zeroing out your credit-debts. The only thing I can add about building your credit is the technique I'm using to build up my credit. Well, I should say, rebuilding my credit from having some bad spots on it from when I was younger and had very little money.

I've got one credit card at the moment, (that's not a credit/debit card,) with a $1,000 limit. I "spend" about $200 per month paying monthly bills that would normally be paid with a debit card or check, then I just pay off the balance at the end of the month; basically using the card to pay for expenses I'd be paying regardless of the method. The reason I keep a slightly higher limit than I need is in case of an emergency, like my car needing work or suddenly needing to hop a plane to see a sick relative or something like that. Little by little, I'm building up my credit, (thanks to the automatic payment I've set up through my bank, so I don't have to remember to send the credit card company a check every month).

On my way to $0.00 debt, help needed

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