Credit Card: Small balance vs. paying off?

Question

I have heard two conflicting ideas on building credit. I'm 21 with a steady income and a sizable savings (>$15,000) but little to no credit. My parents are co-signing on a bank credit card for me to help establish my credit. I have heard from a few people that it is better to maintain a small running balance (say between $10 and $50) on a card and make above the minimum payment and accrue some interest on that balance in order to increase your credit score, while others maintain it's better to pay it off in full each month. Does anyone have insight into these two methods, pros and cons of each, and which may be right or wrong. It would be worth it to spend a few dollars in interest payments every year if it would raise my credit score enough to save possibly 10's of thousands on a home loan in the future.

btw...my credit score isn't all that bad...745...i just don't have history to back up that score. The history I have is all good but is over 2 years old and almost no one will approve me for a card without a co-signer. The previous history was a Zales card so it's of no use to me as a daily credit card...

Anyone else have an opinion?

To answer some of the last posters questions. I know that I can afford to pay cash or debit for most things, but having good, established credit is essential to getting good loans on cards and homes, not just having a good bank balance. Having money in the bank in no way assures lenders that you will pay off your bills on time, it just shows that you have the ability to. But a good lending and credit history is more evidence to the fact that you can be trusted with a lower interest rate. A secured credit is kinda a rip off. Most have annual fees and since you have to put up your own money as your credit limit, you're basically paying to use your own money. Crappy deal if you ask me.

Also, I do budget and I do have a debit card. I don't want a credit for the "convenience" of it. I'm doing it purely to build credit. Anything that I put on the card, I will have the ability to pay cash for if I wanted to so I will have the ability to pay it off each month. It's just that i've heard carrying a balance is better for your credit and helps your raise your score faster than paying off each month. Most likely, i'll use it like I did my only other credit situation. I bought my fiancee's engagement ring on credit from the store using that store's credit card even though I had the money to pay cash if i wanted to. Unfortunately, it's a long engagement and that was 2 years ago and is no longer considered active and thus, has little affect when credit companies look at my record when deciding whether to approve me or not.

Sophie, I don't know where you're from, but having a great credit history is almost a guarantee to get lower interest rates for any major purchase: automobile, home, etc...And a 1 or 2% interest difference CAN mean literally thousands, especially on an expensive home. The reason i'm being denied credit even though I have a good job and a sizable savings is because of lack of credit history (or so that's what I'm being told)...My mom has agreed to co-sign to allow me to get a card, and when my credit is good enough to stand on its own then I will have her removed...

Answer 1

The banks look at your credit to debt ratio and whether you pay off your bills on time (among other things). A low balance wouldn't necessarily hurt, but why would you want to pay any interest if you can avoid it?

Check out this book- it tells all about it: http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2Fexec%2Fobidos%2FASIN%2F1600200400&tag=thestateofart-20&linkCode=ur2&camp=1789&creative=9325 and shows you how to make some money in the meantime.

Good luck- nice score btw!

Answer 2

If your job is that good and you have that much in savings what does it matter if a couple of banks won't lend you money at a hight interest rate. With that much in savings you should be able to open some sort of secured line of credit with the bank. All that means is that they hold some of your money then lend it back to you with interest. So you will lend the bank money at 3 percent so that they can lend it back to you at 10 percent.

With that much income and savings learn how to budget your money so that you can plan what you spend. If you want the convenience of using a card then get a debit card. Visa and MasterCard backed debit cards are taken every where there credit cards are taken.

Now about the home. With your good income and savings by the time that you are in a position to buy a home you should have enough for a good down payment and would have a good income for quite a while. Any mortgage lender will look at a clean credit history, large downpayment with stable income and make that loan in a heartbeat. If you don't already owe anybody then there shouldn't be a reason that you would have trouble paying his loan.

All the savings from having a good credit score is in the possibility of lowering your interest rate on your loan. However if you get a 15 year fixed conforming mortgage you should be able to get a good rate. And even if your rate is a little above the market then you can adjust for that by paying a little extra on your loan. Extra payments on the front side of a loan make a huge difference over the life of the loan.

Answer 3

wow, that was a long one...hopefully I answer all your questions. .. I don't know when the last time was that you applied for credit with anyone (a car, furniture or appliances or just a credit card) but if you're over 18, you have a large savings account like you say you do (is it under your name?), and you have seniority and are earning over $15,000 a year and you don't have any outstanding balances on your credit report, and you have education and a career then you should be able to get your own credit, even if you start out with a small credit line. If they are turning you down then something is wrong on your part, either you don't own what you say you do, it's not provable, etc. or you don't even have a credit report, or something is showing up on your credit report that is detrimental or doesn't belong to you. You need to clear that up.

To implicate your parents in your dealings like having them be your co-signer is just wrong, and it will not give "you" the credit you want. And, if you're over 18 you should no longer be a clinging vine.

Now to talk about the credit card. Today everyone needs a credit card (no fooling), for unexpected events, for when you forgot to take cash with you or get cash from the ATM, to pay your bills, to pay or buy online, you need gas for your car, etc. So get one, and get one that has the travel miles on it. It's also a good idea to get one (usually a Visa) with your bank just in case for some strange reason that you overdraw your checking account and that prevents you from being billed for the overdrawn fee charges.

The idea is to keep all your bills paid and timely (before they are due, and that includes utility bills). Always pay the amount they ask for or more or pay it off. The point is to be "using" that credit from time to time otherwise they will close your account. If you keep a balance owed in that account they you will pay interest on it. Some banks give you the credit so that you will be paying them interest.

I don't know that having any credit would save you 10's of thousands of dollars on a home loan in the future, or even that it would save you $1. However if you have all your accounts (checking, savings, credit card, etc. etc.) with "one" specific bank and you get your home loan from them then you "may" get a lower mortgage rate because of your loyalty t them, or if you bring them business, or if you have more than one mortgage they reward you for your loyalty.

You need to learn more about home buying...seems you lack some info.

Answer 4

The poster before me is absolutely right. As long as you make the payments (either in full, or keep a small balance) ON TIME, you'll have the most positive credit score. Since you're just starting off as a cosigner on a bank card, establishing a solid payment history is more important than worrying about keeping a small balance.

What I did early on in my credit history is alternate... one month pay it off, the next month keep a small balance, then pay it off the next month, etc. This way you have both full payments and the credit card company makes a little bit interest as well.

BUT MAKE SURE THE PAYMENTS ARE ON TIME. Even one late payment will send your score plummetting... the credit card companies love late payments because in many credit agreements, just one late payment allows them to jack up your interest rate to 24.99% or higher.

Answer 5

I agree also--pay off the card. Carrying a balance gains you nothing except expense for the interest you will pay. Make sure your payments always arrive on time. Even if you don't use the card at all, as long as the card is open your score will continue to improve as time goes on. However, if you don't use the card, be aware that some issuers will close the card for inactivity after an extended period of time. This information should be detailed in the card agreement/disclosure.

Answer 6

Pay the credit card off every month. Carrying a balance does not help your credit at all. You just have to pay the interest.

Pay in full or carry a balance, it gets reported exactly the same way. The most important thing is to pay on time.

Answer 7

Yes, paying off a debt will increase your score. Ideally, the less debt you have the better your score will be. Though early, depends on how early. While you may boost your score, you may be shocked to discover that some loans penalize you for paying in advance because that means they make less money off your interest. (Be sure to check the fine print) But in the area of your credit score, you're sure to get a nice little boost whenever your debt is gone.

Answer 8

Great that your mother is willing to co-sign for you, but since you have sizeable savings, have you considered applying for a secured credit card at your bank? Then you would be completely independent of your mother. With a $15k bank balance, your chances of getting a secured card are high.

As for the payments, good money management says to use a credit card only for things that you would buy, anyway, and always pay the balance in full each month. Carrying a balance and paying interest does not bestow any added benefit to your credit score.