Getting credit, avoiding debt - establishing a financial self

[akdiver 3]

I've been seeing a number of threads where people are asking questions about how to get credit, reasons for being denied, how to establish accounts, and so forth. So, I thought I would start a new thread addressing these issues, using the material I wrote for other threads. This is not a complete primer on how to be a citizen of the financial world, but it should be enough to help you get started and learn about this stuff. Yeah, this has probably been covered before, but people are still asking questions. Maybe it should be made "sticky" or something. (: Anyway...

ESTABLISHING A FINANCIAL SELF

An easy way to establish credit for "the other" is to add him/her to your existing account as an authorized user, or better yet, open a JOINT account with that person. In my case, what we did was this:

• I opened a new Visa account and added her as an authorized user to a Visa card before she even came to the U.S. This way, she had a credit card to use immediately upon her arrival. However, this fact never showed up on her credit report. It's like it didn't happen. I opened a new account for her exclusive use mostly for management purposes - she could easily see what she was spending and so forth and treat the account as if it were really her own.
  
• As soon as we got married (less than three months later), she opened a Roth IRA account. Doesn't affect credit issues, but it is good to do. My adviser trusted us enough to let her use her married name even though we didn't have the certificate yet. Open this account AND START PUTTING MONEY IN IT as soon as you can. Even $25/month is good. It may not seem like anything, but it establishes a habit. Try to get money auto-deposited it via automated monthly transfers, or a slice of your paycheck dumped into it. Make it easy for yourself to save for the future, you will be glad you did. In less than two years, my wife has managed to save about $6K in her Roth IRA, on top of her workplace savings plans. Good for her!
  
• After we got married and got the certificate with name change stuff in the mail, and changed her name on her driver's license and SS card, we opened a joint bank account, and an individual bank account for her. We could have done it earlier, but we didn't want to mess with the name change issues at the bank, so we just waited until she could work with her married name from the beginning. This was almost three months after getting married (it took that long to get the certificate in the mail, etc.).
  
• At that same time, we opened joint credit card account (which only she uses, I have my own card to use). So, this is still about three months after getting married. This account shows up on her credit report.
  
• The following July (about 9 months later), she opened a Home Depot account in her own name (not a joint account), adding me as an authorized user. The limit was only a piddly $500 though, so I opened a Home Depot account in my name and added HER as an authorized user. This account had a $15K limit, which is a lot more useful if one is shopping at home depot. In any event, we made sure she used her account a few times and paid it off, to show a good history. Both of these accounts showed up on her credit report.
  
• 4 months later (November), her student loan is showing up on her credit report. It has now been one year since we opened our first joint credit card account.
  
• The same month, she opened an American Express card account in her own name (i.e not a joint account, and I do not have an AmEx card myself). It came with a $2000 limit. This is now the card she uses on a daily basis. She only uses the joint visa card at places that do not take AmEx. The AmEx card is of course on her credit report.
  
• One month later (December), we got a joint car loan account for about $32K. The bank told us that HER credit score was about 680, which is about average (mine was 730).
  
• A week or so later, she got an individual car loan, completely in her own name, for about $6K. Both of these car loans of course show up on her credit report.
  

So, there you have it. Some plan for establishing a credit history successfully. I hope it helps.

As for my wife, at this point, I think her credit history is basically established over the course of about a year. Any future credit approvals and limit approvals is just a matter of good management of her existing credit. Her credit score will naturally rise as she establishes a good payment history, her average account "age" increases, and the recent inquires for her credit report disappear (2 years). We pay off her AmEx card monthly, and of course, always pay the car loans on-time. We only owe $6K on her car, so that will be paid off reasonably quickly - and then she will have a zero balance installment loan on her credit report, which should increase her credit score. Overall, I think she is doing well in this regard.

Some credit info. Spend the time to educate yourself:

http://www.myfico.com/

http://seattlepi.nwsource.com/lifestyle/31...consumer24.html

http://www.christianpost.com/article/20070...redit_Score.htm

http://www.americanchronicle.com/articles/...articleID=24380

http://www.bankrate.com/brm/news/credit-sc.../20040128a1.asp

http://homebuying.about.com/cs/yourcreditr...prove_score.htm

CREDIT SCHEMES TO AVOID

The most expensive, risky credit you can get are things like "payday advances", car title loans through non-banks, pawn shops, adjustable rate mortgages, interest only mortgages, etc. In general, the further you get from traditional, conventional credit mechanisms, the worse of a deal you are going to get. Do not do these things unless you are just completely and utterly desperate. And even then, don't do them.

IMPORTANCE OF AVOIDING DEBT

I don't want to lecture you - you're an adult, do what you want. I will however offer you some friendly advise based on personal experience as both a debtor and a bill collector. You can take it for what it's worth (:

Taking out a loan to go on vacation, nice furniture, and other highly optional optionals, is DEFINITELY not a good use for credit. IN general, you want to use credit for necessary things, things that increase in value, things that improve your cash flow, and other "responsible" things.

Some people will argue that you should never use credit to get a car. I disagree, for three reasons. First, a car is arguably a necessity. In some places, sure, you can get by without one, but in many places, it's just not reasonable to try to do so. Second, it can be unrealistic to try to save for a reliable, quality car that is worth buying, in the face of ensuring you have reliable transportation in the meantime. Cars are expensive creatures and most of us simply can't afford to pay cash for even a modestly-priced one. Better to keep your cash in an emergency fund, and use credit for something like a car. Third, buying a car on credit is a good way to build credit - a necessity in the modern world in and of itself. So overall, I think it is reasonable to use credit to buy a car, but not a really nice car that you do not need, when a more affordable one will do. However, that doesn't necessarily mean you need two. Or three, so that little Johnny can drive around too. Cars are expensive creatures. Try to get by with one if you can. If you really need two, try to buy one nicer one, and one OK one, so that you minimize your costs. Remember about insurance and maintenance and factor those into what you can REALLY afford. My wife recently bought a 2007 Chevy Aveo 5 for $8000 (total). It's touted as the "cheapest car in America". It's perfect for her, it's what she wanted - but it would never make do as our ONLY car (we have needs it cannot meet). I bet that such a car would be a fine primary vehicle for many of you, esp. if you're just starting out, and certainly fine for many of you as a second vehicle. (: If you buy a car, esp. on credit, get the most out of it you can! Don't be a fool and get a new car every few years. I may have just got a 2007 Jeep, but until then, I had been driving the same old car for 13 years (it was a 15 year old car). Buy quality and then drive it until it will drive no more!! This will save you money in the long run.

If you do have a newish car, say more than 5 or 6 years old, that you have paid off, you could use that as collateral for a loan. This will help you out if you are having problems getting a loan otherwise. If you can document your ability to make loan payments, a bank will generally be happy to take the title of your car as a collateral for a loan of a fraction of its value. I did this once in an effort to pay off a credit card with higher interest than the loan was for and it was very helpful.

I still advocate skipping the loan for purposes of buying furniture, going on vacation, and other such things however. Those are things it is better to "save up" for.

Using an in-store credit plan is a sure way to pay high interest rates. Those "0% interest" sales tend to have fine print that can cause you to lose the special rate, or make it not so special, such as missing or late payments, accumulating interest that will be added to the balance if you do not pay in full within a year, and so forth. Bad idea in my opinion.

Education is worth borrowing for, but please try to avoid student loans if you can. Long story, but I ended up with some $90K in student loans (no doctor or laywer here either), and it has been a nightmare. I wish I had never borrowed a penny for school. I think I would have been better off working on/off semesters and paid cash up front. Alas - regrets. Student loans are easy to get, and the interest is low, but do not use them to finance a non-student lifestyle. If you are taking out student loans, you should be living in a rented apartment with free or thrift-store furniture and a cheap car. Do not go buying newish cars, computers, and other electronics with that money. It's a student loan, use it to be a student and nothing more. Do not borrow more than you absolutely have to. Trust me on this one. (:

By the way, in January 2007 I had a credit card balance of about $35K, which I had been carrying (with some fluctuations) for years, so trust me on this one. I know exactly how easy it is to over-spend yourself a few bucks at a time, into a very deep hole, all while completely rationalizing and justifying it. Furniture for new house, fence for new house, pool table, scooter, vacations, engagement/wedding rings, medical bills - all good stuff. But going into debt for it, and significantly so, while making not much more than the minimum payments on $80K in student loans, was just crazy on my part.

I was able to dig myself out due to a reasonably high income and a fortunate influx of a large amount of cash. Even so, during the time when I was trying to get things paid off, I used $10K from an IRA, about $15K from equity in my house (refinanced for a lower rate), and I STILL managed to have $35K built up on credit cards. Why? Because spending was not in control. I was spending money I didn't have on vacations, furniture, and other stuff, all while telling myself that paying off debt was a high priority. It was! I paid thousands on my balances every month, but it didn't help me much because I was still charging them up with unnecessary expenditures - all while driving a crappy 13 year old vehicle on its last legs. Had I been able to put those credit card payments into car payments, I could have been driving a Ferarri (if I wanted), or better yet, making significant progress on paying down my student loans.

Fortunately, I had good credit, several credit cards, and a good income. The result was that I was able to play various games to keep my interest rates low (averaging about 6% overall) on this debt while I was carrying it, which helped a lot - but had I had some of these crazy 18% and higher rates that many people have, or been unable to transfer very large balances ($20K+) among cards to play the low-interest shell game, I would have been done for. Doomed. Kaput. Bad credit would have ensued!! That follows you for 7 years by the way. Many (most?) people (with more average credit card interest rates and less income) in this situation would have been hopelessly lost. Being single with no kids helped save me too.

I'm glad to say that as of January, I still have very good credit, and that I have four credit cards with a total credit limit of $78K and a balance of $0 - and I intend to keep it that way, barring some REAL need for using that credit (real emergencies and the like). It was hard work, requiring a lot of juggling and some good luck to get to that point. I am battling the temptations daily - currently for vacation and home improvements. I have to fight the debtor urge, and fortunately, my wife supports the fight (:

I hope that by sharing this personal information that you will just please trust me when I say you do not want to go into debt over vacations and furniture. I started there too and it took me down a debt spiral of death from which I almost did not escape. Please don't let it happen to you.

Cheers!

AKDiver

[Nancy2015 2]

Thanks, AK Diver. This is very useful, and I'm sure a lot of people will benefit from reading it.

My husband was my teacher of how not to manage credit He has 12 items on his credit report, 11 of them are baddies - accounts in collection, with some balances as low as $70 The reason is, he used to apply for credit cards in the past and treat them as "free money" - he never paid anything back. Not a cent. Fortunately, some of them will disappear from his report soon, since they are approaching the 7-year limit, but there are still some debts that we need to take care of. I think his credit is improving - I few months ago I added him as an authorized user on two of my credit cards, and just recently he was able to get a credit card in his name only - the first card in years! It has a $300 balance, and I'll make sure he makes payments on it

Because of my husband's irresponsible past, I had to do everything myself, as far as establishing creditis concerned. I started out with a secured card a year ago (when I got my first part-time job), and eventually was able to get a few unsecured cards. They all have low balances, but at this point it's just a matter of letting my credit mature. A few days ago I got an $11,000 car loan which should make my credit history more diverse and overall better Well, at least I'm very good about managing finances and I always know how much debt we can handle.

[akdiver 3]

My husband was my teacher of how not to manage credit

Yeah, my parents served that role for me. I may have accumulated a lot of debt, but at least I knew the importance of paying up (:

He has 12 items on his credit report, 11 of them are baddies - accounts in collection, with some balances as low as $70 The reason is, he used to apply for credit cards in the past and treat them as "free money" - he never paid anything back. Not a cent. Fortunately, some of them will disappear from his report soon, since they are approaching the 7-year limit, but there are still some debts that we need to take care of.

Just some comments here - unpaid collections are a TON worse than paid collections. Definitely take care of those small collection balances ASAP, it will help a lot. Also remember it is 7 years from date of first reporting, which is generally later than when the debt is actually generated.

A few days ago I got an $11,000 car loan which should make my credit history more diverse and overall better Well, at least I'm very good about managing finances and I always know how much debt we can handle.

Hey, so you got the loan!! Good job. I've been following your saga for a while (: I hope the terms were not too unpalatable. And just remember, just because you were APPROVED for $11K doesn't mean you have to SPEND $11K. Go get yourself one of those cheap Chevy Aveo - and yes, learn how to drive a manual and save a lot of money (:

Cheers!

AKDiver

[Caladan 19]

Great advice! It will surely be helpful as we try to build up C.'s credit once he gets here.

I disagree with shunning student loans, at least in part. Education is an investment in yourself, and if you need the credentials, it can be worth it to take out a loan, and the interest rates are very low on Stafford loans. I was lucky in that I went on scholarship, but even then I had to take out the minimum in federally subsidized loans. But, the interest rates are doable, and $15K is not soul-crushing debt, just an annoying payment every month.

So if you're taking out the interest subsidized loans, and you keep your other expenses minimal, you're probably better off getting the degree all at once rather than working a bit and then going to school a bit. It's much easier to drop out that way, and the only thing worse than being in debt with a degree is being in debt *without* having finished. The key is discipline. School money is for tuition and cheap room and board. There's a reason the lifestyle's called 'starving college kid.'

Just a second opinion on it.

[kitkat1 5]

akdiver, GREAT stuff. Good of you to take the time to write that up - those are very useful tips and suggestions.

[Dan J 277]

Great advice! It will surely be helpful as we try to build up C.'s credit once he gets here.

I disagree with shunning student loans, at least in part. Education is an investment in yourself, and if you need the credentials, it can be worth it to take out a loan, and the interest rates are very low on Stafford loans. I was lucky in that I went on scholarship, but even then I had to take out the minimum in federally subsidized loans. But, the interest rates are doable, and $15K is not soul-crushing debt, just an annoying payment every month.

So if you're taking out the interest subsidized loans, and you keep your other expenses minimal, you're probably better off getting the degree all at once rather than working a bit and then going to school a bit. It's much easier to drop out that way, and the only thing worse than being in debt with a degree is being in debt *without* having finished. The key is discipline. School money is for tuition and cheap room and board. There's a reason the lifestyle's called 'starving college kid.'

Just a second opinion on it.

There are people who end up with a lot of student loan debt with a not very marketable degree. Taking on debt with education is good if your going to be able to get somewhere afterwards. But really there are some industries where you can make it well without a degree if your willing to learn on your own. But then, there is no way collage can teach you everything you need to know, you have to be willing to learn if you want to succeed.

[akdiver 3]

All - thanks for the kudos - I just hope it is useful to someone. (:

I disagree with shunning student loans, at least in part. Education is an investment in yourself, and if you need the credentials, it can be worth it to take out a loan, and the interest rates are very low on Stafford loans. I was lucky in that I went on scholarship, but even then I had to take out the minimum in federally subsidized loans. But, the interest rates are doable, and $15K is not soul-crushing debt, just an annoying payment every month.

Hmm....well, essentially, I said that borrowing for education is worthwhile, but borrow wisely, live like a student, use the money for school and not for other ####### that you can't afford. What part of that are you disagreeing with?

There are people who end up with a lot of student loan debt with a not very marketable degree. Taking on debt with education is good if your going to be able to get somewhere afterwards.

Exactly. Borrowing tons of money while majoring in something that qualifies you to work retail at the mall is not a wise move. The only thing that saved me, quite frankly, was rocketing up in salary in a very short period of time. Had I been stuck making $40 or $50K/year for god only knows how long, I would have been completely screwed. Even so, I think I would have been better off skipping school entirely and moving my sorry butt to Silicon Valley and get in on the insane money making that was going on down there, save up serious cash, and THEN go to school, loan-free.

Cheers!

AKDiver

Edited May 3, 2007 by akdiver

[ChristinaM 0]

Can we get this pinned? I think it would be very valuable.

Thanks, AKD!

[rizthomson 3]

thaaaaaaanx AKDiver.......its indeeed a great topic which you started......great work man....

One Question....i just immigrated to USA.....we wanted to check my wifes credit score....how can we do that.....i heard their are three credit scoring agencies.....hope you can enlighten about that to US.

thaaaaanx

[Dan J 277]

thaaaaaaanx AKDiver.......its indeeed a great topic which you started......great work man....

One Question....i just immigrated to USA.....we wanted to check my wifes credit score....how can we do that.....i heard their are three credit scoring agencies.....hope you can enlighten about that to US.

thaaaaanx

You can use this site https://www.annualcreditreport.com/cra/index.jsp to get a free credit report once per year. Not all accounts are reported to all credit reporting agencies and lenders will not always check the same agencies.

[akdiver 3]

One Question....i just immigrated to USA.....we wanted to check my wifes credit score....how can we do that.....i heard their are three credit scoring agencies.....hope you can enlighten about that to US.

thaaaaanx

As the previous poster indicated, you can get a free report from each of the big agencies once per year through https://www.annualcreditreport.com, but you will have to pay a small fee for your credit score. Note that each agency typically has their own score, and since you don't know which your lender might use (and they may pull more than one, and also use their own internal system), you really need to get all three. It's certainly worth the money to know your scores before you go shopping for loans and such.

It's worth pointing out that when the free report legislation passed a couple of years ago, the credit bureaus fought it tooth and nail. They were successful in striking the provision for a free credit score as well, but this may change in the future, esp. with the democrats in power.

Also, you can often get a free report from the credit bureaus themselves, without it counting against your "one free report per year". Write them and tell them you applied for credit and were denied, and the lender cited their credit report as the reason. Sometimes they will check to see if there have been any recent inquiries on your report and if not, tell you to kiss off, but I've only had that happen once. It has worked every other time. I should point out that while this technique involves lying to the credit bureau, but I don't really consider it a problem since it is MY INFORMATION that they are making money from, and as far as I am concerned, I should be able to get a free copy whenever I want anyway. So there. (:

At any rate - credit scores are very important and you should know your score when you shop. In my case, when I applied for a car loan, the lender told me what our scores were, which was good to know. Mine had climbed quite a bit since the last time I had checked it. Also note that when I checked it (paid for scores), the differences between the three scores was as much as 30 points, which is quite a bit. Finally, the report I got told me what kinds of things were bringing the scores down - in my case, it was mainly "outstanding balance too high relative to credit limit". (:

Cheers!

AKDiver

Edited May 3, 2007 by akdiver

[mychelle 1]

thanks for taking the time to write this. it's extremely helpful hearing from others who wants to get out of debt. also, if you are ready to be credit-card debt free...use this calculator to figure out how long it will take you to get out of debt:

CNN and Money Magazine Debt Calculator

i just did this last month and the coolest part is it will show you where your payments are suppose to go (i have two major credit cards with huge balances but low APRs but i have three store cards with lower balances that have high APRs!)

i'm more motivated now to pay down everything as soon as possible. i've always had credit card debt and i thought since my APR were low, it wasn't really hurting me but when i did the calculator...i was shock on how much those companies earn in interest from my debt.

most importantly, if you're going to get on with paying down your debt...make sure you don't acquire NEW debts. as much as possible, pay up in cash. if you don't have the cash for it...guess that means you can't buy it.

[Nancy2015 2]

Just some comments here - unpaid collections are a TON worse than paid collections. Definitely take care of those small collection balances ASAP, it will help a lot. Also remember it is 7 years from date of first reporting, which is generally later than when the debt is actually generated.

You know, I'm kinda tired of babysitting my husband, and I left it up to him what to pay off. He likes the fact that these little debts will be going away this year (yep, it's 7 years since they were reported). If it were up to me, I would have paid them off today.

Hey, so you got the loan!! Good job. I've been following your saga for a while (: I hope the terms were not too unpalatable. And just remember, just because you were APPROVED for $11K doesn't mean you have to SPEND $11K. Go get yourself one of those cheap Chevy Aveo - and yes, learn how to drive a manual and save a lot of money (:

Cheers!

AKDiver

I got the loan! And I got me a Honda Accord, a fantastic car. Used, of course, but it is really good. The terms of my loan are not a dream come true, but they are better than I had been preparing myself for.

I wanted to learn to drive a stick shift, but my husband can't drive it either, and he has no desire to learn. And since we both will be driving the new car, we had to get an automatic. But to be honest with you, I'm so spoiled by automatic now that even thinking of having to switch gears manually gives me the creeps

[Caladan 19]

akdiver, this:

Education is worth borrowing for, but please try to avoid student loans if you can.

Is what I was disagreeing with. Student loans usually have better interest rates than financing education by other means. Everything else seems spot on, especially the part about getting a marketable degree.

[msu17 0]

Thanks SO much for posting all this. Being young and new to the credit world, it really helps. I'm lucky that I graduated with NO student debt, but graduate school and now med school has screwed that over It's ridiculous how quickly you can get yourself into a hole and how long it can take to climb back out (as my fiance is finding out... Why does everyone in the UK have so much freaking debt?) Again, thanks for the tips AND the chevy tip Paul needs a car and I dont know how to drive stick, so he would HAVE to use that and leave mine alone hehehe!