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  1. #1
    la vache fantôme phantomcow2's Avatar
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    Question about credit

    This is a noob question, but I confess that I am one. I have been trying to build credit. I acquired a credit card a few months ago, which I use frequently but have never paid any interest on, since I pay off the balance right away. I figure, school is starting, why stop my credit building now? So I took out a loan (out of necessity), which my parents cosigned. I also have a strafford loan, which my parents did not need to cosign. Right now I am in deferment, meaning interest accumulates but I am not required to make payments. I did make a hefty payment anyways, though. So, how does the existence of this loan affect my credit NOW? Also, how does it affect my parent's?

    If I managed to pay off one of my student loans before I even finished school, meaning while I am still in deferment by default (since I am a full time student), would that be indicated on my credit?
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  2. #2
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    I think credit ratings take into account a) missed payments and b) proportion of available credit that is used (ie what proportion of the credit limit on your cards do you use (just plain use, not whether you pay it off every month w/o paying interest) (this also includes industry-determined 'acceptable' proportions of your income for mortgage, car, and other things) (and for full-time students they probably have a whole other scale). I think the history of the Stafford loan w/ just you on it would not affect your parents credit at all, good or bad.

    I think paying off your Stafford loan before payments were due to commence (or before they were due to complete) would reflect no missed payments, and also no increase in the amount of debt you're taking on if you keep the interest current, and a further decrease in the amount of debt you're taking on if you can dig into the principal. I don't think you get bonus points for early payments, you just get the benefit of a person w/ less debt per net worth.

    Are you saying the private loan w/ your parents cosigned also defers payments until you're no longer a full-time student? That is pretty cool. For all the loans that have interest accumulating during deferral, it would definitely be worth, just in terms of the total amount of cash you will be paying over the life of the loan, making those interest payments monthly. Otherwise they will be compounding behind your back and the amount you're faced w/ paying off when you're out of school could be a surprising amount bigger.

  3. #3
    la vache fantôme phantomcow2's Avatar
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    Okay, so I know that if I have too little credit, it reflects poorly on my score. Likewise, I know that too much will as well. Does me paying off my balance on my card within a week reflect poorly? I use about 60% of the limit of my card.

    And yes, private loan payments are deferred until I am no longer a full time student. I am focusing all of my financial firepower on paying back the private loans I take out. My plan is to have all existing loans I have be as fresh as possible, so that they have had less time to accumulate and compound. THe bulk of my stafford loan is subsidized, meaning that it accumulates no interest while I am school, and so is not worth paying off now.
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  4. #4
    Senior Member skiahh's Avatar
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    OK, having "too little credit" doesn't really affect your rating that much. What does is the amount of credit you have vs the amount you've used. For example, if your card has an available credit limit of $5000 and you have a $10,000 student loan, then you have $15,000 in available credit. Of that, you have 67% used. That's not good. And, to add insult to injury, your credit card is reported each month as whatever balance you used, not zero typically, unless the report date is on a day you've got nothing on the card. It shows paid on time every time, which helps, of course. So really, your available vs used is probably closer to 70% which hurts your score.

    Like Hardy said, you get nothing for paying off early and/or paying off a credit card each month. In fact, if the credit companies had their way, they would count that against you because they don't get any interest from you. However, having the loan would increase your available credit and change your ratio. For example, if you had two student loans at $10K plus your card, you'd have $25K available and $20K (+your credit card amount) used, or around 82%.

    As for what the loans will do to your parents score, it will probably have a negative impact, but only a slight one, since they have a longer history, and in theory, more available credit so not a big ding for them.

    In your case, I think another card might help lower your score. Open one, but don't use it. That will lower your ratio.

    On the other hand, I'm not sure that you need to worry about it in this detail just yet. The only thing really using your score now is your insurance and possibly your credit card. Just keep doing what you are doing.

    Oh, and as for paying off things within a week of using them? On a small scale, no big deal. But once you've got accounts with larger balances in them earning interest, keep your money in YOUR account until the due date. You get the few cents interest, not the credit card companies (remember, you get nothing for paying off early!). Your agreement with them says you get a "grace period"; use it to your advantage. That's just a personal preference, and extends to using 0% offers, too. Use 'em, pay it off in full when due! I'm a firm believer in using other people's money! In fact, I put my new Stumpjumper on a one year, no interest, no payments account. Next July, I'll pay it in full, much to the chagrin of the card company.
    Last edited by skiahh; 08-16-08 at 09:22 AM.
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  5. #5
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    Quote Originally Posted by phantomcow2
    Okay, so I know that if I have too little credit, it reflects poorly on my score. Likewise, I know that too much will as well. Does me paying off my balance on my card within a week reflect poorly? I use about 60% of the limit of my card.
    You want to have a high level of available credit, but ideally less than 25% of that should be debt. IMO paying off your balance a few days before the billing cycle closes is a great idea. That helps you by making it appear to credit agencies as though your carried balance is lower than it actually is. As far as the student loan goes, you really don't have choice, first of all. Secondly, it'll increase your debt in the short term, but your FICO score tends to get better the longer you successfully maintain a mix of different types of loans, so in the longer term you'll likely get FICO points for being able to handle an installment type loan.
    Last edited by stargazin; 08-16-08 at 09:33 AM.

  6. #6
    T-Shirt Guy ehidle's Avatar
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    Okay, first of all, a couple of misconceptions here.

    Installment loans are looked at differently than revolving debt. Your debt/available credit ratio looks at the revolving accounts ONLY. The difference between a revolving account and an installment account is that, with a revolving account, you can re-use the credit at any time whereas with an installment account, you cannot reuse the credit. Once you pay some principal on an installment account, you cannot re-borrow it.

    For installment accounts, the important factor is how much of the original balance has been paid down. This often goes hand in hand with the "recent new accounts" factor, but even together, they are not nearly as important as your revolving debt ratio.

    Student loans are treated as installment accounts, and the fact that it is in deferment is not relevant. The only thing that will hurt you with the installment account is that it has not been paid down very much and it stays that way until you do. As they get older and you pay them, they help build credit quite a bit.

    One other important factor is having a mix of different types of accounts. If you have only one credit card, that's not going to increase your credit score. Having a credit card, student loan, a department store card, and a car loan will be better. The best thing to have is a mortgage that is about half-way through its life in addition to these.

    A couple of things that can drag down your score:

    Having too many revolving accounts with balances.
    Having even one credit card that is charged up close to its limit
    Owing more than about 20% of your available revolving credit on those accounts
    Opening new accounts or demonstrating "credit-seeking" behavior (lots of applications)
    Constantly closing accounts and opening new ones (prevents accounts from getting old)

    Some things that increase your score:

    Having a healthy mix of accounts
    Owing between 5 and 15% on your revolving accounts
    Paying on-time, every time (this is the MOST important)
    Having old, established accounts (very important)
    Only seeking credit when you really need it (no inquiries/applications)


    Here's one caveat. If you charge up your card every month and pay it off, it still looks like you are borrowing a high % of your available revolving credit. If you want to improve your score, pay your card down BEFORE the statement closes, but leave about 10% on it. Then pay that off AFTER the statement closes. This can make a 50 point difference, depending on how much available credit you have.

    Credit scoring does not take your income into consideration, contrary to popular belief. Your income does not show up anywhere on your credit report, and the bureaus have no knowledge of it. As a student, you are an unbelievably high credit risk, but you can still obtain a 700+ score just by engineering your profile.

    Hope this helps.
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  7. #7
    la vache fantôme phantomcow2's Avatar
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    Wow, great responses! First of all, I was only able to get a credit card with a max of 500 dollars. It's not much, but I thought it would be enough to help me start building credit. The credit union said that I can apply for a higher limit in a few months. Actually, it's been several months, and I probably could apply now. So, that makes it impossible to owe 20% of my available credit on a revolving account.

    You say that opening and closing accounts is bad for credit. Does that include paying off loans--an installation debt--off quickly? So, is it better to have zero balance on my credit card? Or better to hgave 10% carried over month to month? It sounds like you're saying the better thing to do is keep 10% omn it at all times, but why? I would have thought that responsibly paying off the card when it reaches 50% is ideal. I have no idea when payments are due on my Visa classic; I have never received a statement.


    You say that the thing which hurts me about student loans is that the balance has not been paid off at all while in deferment. If I prepaid and managed to take care of a good 1/2, then surely this must add to my score?
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  8. #8
    more ape than man timmhaan's Avatar
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    don't spend too much time worrying about this. the credit score is just a way of conditioning all of us to assume credit is a necessary part of living. it's not.

    i never gave my credit score a second thought. just paying off your bills on time and not over extending yourself will put you head and shoulders above the average person.

  9. #9
    la vache fantôme phantomcow2's Avatar
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    I had a feeling this was going to happen. Right now, credit is a necessary part of living; I am in school and will continue to be for a while -- living on credit. A higher credit score will allow me lower rates on future loans, such as a car or mortgage. It makes financial sense to have that high credit score, no matter how calculated and/or silly it is.
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  10. #10
    Senior Member skiahh's Avatar
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    Quote Originally Posted by timmhaan View Post
    don't spend too much time worrying about this. the credit score is just a way of conditioning all of us to assume credit is a necessary part of living. it's not.

    i never gave my credit score a second thought. just paying off your bills on time and not over extending yourself will put you head and shoulders above the average person.
    Sorry, but you're very wrong on this one.

    Your credit score now impacts your auto insurance rates, utility bills (deposit or not), even job hiring in some cases, not to mention the ability for renting an apartment or buying a house.

    Your credit score IS a part of every day living, whether your head is in the sand or not.
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  11. #11
    Banned. timmyquest's Avatar
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    When you make big purchases, humans--not computers, review your credit. They will notice that these are student loans. $1 in student loan debt =/= $1 in credit card debt

  12. #12
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    Quote Originally Posted by ehidle
    but even together, they are not nearly as important as your revolving debt ratio.
    Thank you for this great info. I was never sure what the exact impact of installment loans were to FICO.

    Quote Originally Posted by phantomcow2 View Post
    You say that the thing which hurts me about student loans is that the balance has not been paid off at all while in deferment. If I prepaid and managed to take care of a good 1/2, then surely this must add to my score?
    Hopefully ehidle is swirling around and sees this question. Based on my personal experience, I think having a deferred student loan dings your credit slightly. I can't say for sure, because other negative things happened around that time which may have affected my credit even more, and ultimately each credit reporting agency has their own secret formula for calculating your credit score.

    But honestly, I wouldn't worry about your student loan too much. Having the student loan deferred is not the same as default, so it's not going to affect your credit significantly. I know people who had student loans deferred and it didn't change their credit scores at all. So if you have free cash, focus on paying down the loans that are higher interest first (credit cards, car loans, etc), then move to private student loans, then to gov't loans. It certainly wouldn't hurt to pay down some of your student loans as early as you can, but if you can't, it's not something to worry about. It's not a huge deal and won't significantly affect your credit, IMO.

  13. #13
    more ape than man timmhaan's Avatar
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    Quote Originally Posted by skiahh View Post
    Sorry, but you're very wrong on this one.

    Your credit score now impacts your auto insurance rates, utility bills (deposit or not), even job hiring in some cases, not to mention the ability for renting an apartment or buying a house.

    Your credit score IS a part of every day living, whether your head is in the sand or not.
    i don't dispute that. i'm just saying that other than paying on time and not overextending one's self, you really don't need to think about credit scores that much. as long as you use common sense you'll be fine.

    if you end up with bad credit, and need to repair it... then that's a different story.

  14. #14
    Senior Member skiahh's Avatar
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    OK... agreed.
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  15. #15
    Videre non videri
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    Wow! I'm very happy to live where I live after reading all that!

    Build credit? Here, all that matters is that you pay your bills on time, pretty much. Miss a few bills too many, and you get a negative rating in a national database. And it takes a looong time to end up there. You need a seriously messed up economy for that.

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