This is the part of a credit score that makes the whole thing a bit like a scam. Pay off long term loans/bills and watch your score plummet. Personally, I was raised too far into the "cash for everything" approach to life and it really set me back personally. There needs to be a happy medium. As someone that routinely "invests" in my own ideas with quick turn around on profit, I've found a credit card to be a hugely valuable tool which I've never spend a dollar of interest on.
Debt and credit scores
- Thread starter mstateglfr
- Start date
Not disagreeing with you in the benefit of a credit card, but I’ve been amazed multiple times in life that seemingly intelligent people don’t understand how a credit card works. “It says I only have to pay $40, so that’s all I paid.” I’m guessing your raising put you further ahead than it set you back.
Unless something has changed, you should still have a good credit score with just credit cards that you pay off. Before I had a house, I think I had a score in the 700's with just credit cards that I paid off monthly, witih the negative dropping it into the 700's being length of credit history and average age of accounts and mix of debt (i.e., all credit card with no mortgage. Maybe a car note would have helped too?).
I could go into detail as to why, but you'd be wrong in my case. With the gift of hindsight of course. Certainly didn't need a credit card in college, but my use case in the years thereafter was a little different, in that I grew up having sporadic product/service innovations that are akin to catching lightning in a bottle with nearly infinite earning potential, only to let almost all of the lightning out of the bottle while trying to spool up the business purely on my limited cash and the profits produced from it. I guess you could blame small thinking and that would also be true.
Also true. It only took me 6 months to be in the mid 700s with one low limit credit card, off having no credit history at all.
I think there is a lot to be said from behavioral aspects of personal finance, but another aspect of this is that 3% will be tax deductible for a lot of people against regular income tax. That 8% will mostly be capital gains or qualified dividend taxes or even better, in a tax deferred account although if you have the money to pay off your mortgage you are probably maxing out your tax deferred accounts regardless of whether you pay off your mortgage. But if you are working to pay your mortgage down, then you really don't want to do that if you have a good interest rate and aren't maxing out whatever tax deferred options you have.
So to paraphrase: if you ignore the cost of what they helped you avoid and assume your lack of planning ahead well enough isn’t a factor, it’s clear whoever raised you set you back.
I’m sorry you had to suffer through such a raising, and I was clearly wrong. I’ll now take a lap.
Wireless Wizard would be Engie Wizard right now had I been able to spool funding quickly enough when the iron was hot, just as a single example of one of the better ones I've burned through over the years. I'm not bitter about it and have learned a lot along the way, but hindsight simply tells me a lot about the things that should have been done differently. To the extent that every new idea that comes along now I take 3-4x further than the one before and have yet to regret taking one too far but have plenty of regret going the other direction. Some of that is due to the intelligent usage of credit. But enjoy the lap.
You don't have to ignore the costs of interest avoided. I also negatively impacted my finances by being too conservative. I avoided a lot of risk, but if you look at it on a risk adjusted basis, the way I approached finances was pretty stupid. Safe and not a bad way to teach people who are bad at math and discipline to act because it eliminates some downside risk, but definitely suboptimal.
One of the biggest ripoffs that the CC companies have done (in my experience) is cancel your CCs that have no balance if you don't use them frequently enough to prevent that. Given that they don't generally notify you of that condition, it can mess up your credit when you assume you have 3-4 cards with no balance but a high limit, and then they cancel the accounts. This happened to me in 2014-15, when I had 5 cards between 3 companies with no balance. 2 of the companies (Chase, Capital One) canceled my 4 accounts with them for lack of activity. I had 1 card left with no balance, but it was a smaller limit and newer (I think it was a Home Depot card that I got when I bought some garage fixtures with 0% interest perk). My score went from a high 700 to around 600. I was punished for not using the credit that I had. Now I try to charge flights, etc., on my rewards cards and pay them off in the same period. Just another dumb thing for Americans to have to keep on top of to avoid predatory practice.
That is another reason I am glad I do not have one. I am not thier pet monkey and I refuse to dance to their tune.
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Just a warning about having one credit card. We were recently(on Sunday) called by our credit card's security company about a fraudulent purchase. It turns out it wasn't fraud, I had simply bought something (small) in the UK and it threw up a red flag. The young lady who called was in the Philippines and spoke broken English and proceeded to absolutely grill us with detailed questions we would had no way of answering had we not had our records handy. We've had the company call before to confirm purchases but nothing like this girl was doing. My point is if we had been out of town and not had our records handy she would have cancelled our card and we would have been in a bind. Thus we've had two cards with one being basically a back up for a while.
Well, that does point an inaccuracy in my post about the purpose of credit scores. I said they measured likelihood to default, but they are somewhat geared towards identifying likely profitable customers for creditors. Closing accounts (or having them closed b/c of inactivity) doesn't reflect on your creditworthiness (or if it does, it likely means you are more creditworthy because you pay off debts eventually), but I guess they do indicate you are less likely to be a profitable customer because you're less likely to generate transaction fees and less likely to pay interest to them.
Many of those like you suffer lower scores due to no borrowing activity in the last few years and you did the right thing to use a credit card instead of using your debit card and pay it off every month. That's a quick way to increase scores of those who don't borrow.
I get on an airplane or train or drive, like any normal person. My debit cards cary zero liability for fraud. All major rental car agencies take a debit card. All hotels take one. Anywhere that takes a credit card takes a debit card. Through my credit unions I have access to an international network of ATM's twice the size of Bank of America.
Debit Cards are not reported on your credit report so using a credit card and paying it off every month can help with credit scores especially if your credit limit is well above what you borrow. I've always felt that was the safer way to go even if your debit card is protected by your credit union.
A credit score is a measure of how well you dance like a trained monkey for the banks. Now that my student loans are gone mine will soon become indeterminate, and I like it that way.
Not a huge deal, but a couple of things that still make a credit card superior:
(1) Your holds for things like hotel rooms or gas pump charges don't restrict your access to money, they just go against your credit limit (not sure if this has changed)
(2) You're protected provided the bank agrees with your argument on fraud. As a matter of legal rights, you end up in the same place. But as a practical matter, them having your money makes a big difference. If there is a colorable disagreement, whoever has the money ultimately wins b/c they can't economically collect on a small cost and you can't economically sue them for a refund.
For an off the wall example, say you pay for a downpayment on a product (say furniture since there was just the big abrupt bankruptcy) but before your product is shipped, they declare bankruptcy. You are now an unsecured creditor of the bankrupt company. If you paid by debit card and the bank has transmitted funds, your bank likely won't make you whole. There's no way for them to get the payment back. They've got your money. You're out of luck. Even if they haven't paid, they're still legally obligated to and may make the payment knowing that it will prevent you from paying them back.
If you paid with a credit card, legally nothing has changed, but you have your money. If they haven't paid, they're probably not going to because even if it becomes a legal hassle from them, they know they may not get the money from you so they will make the trustee fight for it. Even if they do pay, you still can just continue claiming it's fraudulent and that you didn't get the service and while you might legally be wrong, they may not want the hassle of collecting. If it's a $15,000 charge, they're probably going to come after you, but if it's a $2,000 charge, they will very likely make a business decision and write it off. Worst case scenario they turn it over to a debt collector and you take a hit on your credit score but don't lose the $2k.
The solution to number one is simple. Have plenty of money. Which is easy to do when you have no payments.
Number two is such an oddball off the wall scenario it's almost never going to happen to anybody. But it can be solved by simply only buying merchandise in stock at the time.
I have two cards that the only time anything goes on them is once a month the internet provider, Atmos Energy, AT&T, and 4 County Electric hit them w/ my power bill, gas bill, cell phone bill and internet service. I get alerts when it happens and reminders if it doesn't happen for some reason. One card gets paid by the bank on 15th and the other on the 20th. Easy way to keep the cards active enough to keep the account open but nowhere near maxed out. My other one is a WalMart CC. It mainly gets used for WalMart and WalMart Neighborhood grocery stuff (I shop both a lot) which earns 2% cash back in store, 2% cash back on Murphy gas, and 5% cash back on Walmart.com purchases. Also gets me 3 cents/gallon off on the gas when I use WalMart pay and their gas is the cheapest in Starkville.
I agree with you, I'm just salty that they'll "grant" you credit and then take it away without any notice. Credit should, theoretically, be there for a time when you don't have immediate liquidity. By making you use credit when you don't need it just to keep it is a cynical way for them to hopefully garner a little interest for people who may forget to pay it off or get behind.
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