Personal Finance

Good Credit: How It Really Works & What They Never Tell You

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  • Feb 21st, 2010 4:21 pm
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[OP]
Jr. Member
Oct 15, 2008
166 posts
3 upvotes
Vancouver

Good Credit: How It Really Works & What They Never Tell You

Our credit score is becoming more and more important in other aspects of our life, even if it has nothing to do with our finance. For example, potential employers and landlords will use it to gauge your character. That is why it's important to know exactly how it works.

I just wrote a piece explaining what you need to know about credit ratings and how you can manage it. Hopefully you can use this information to your advantage.
Good Credit: How It Really Works & What They Will Never Tell You
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Sep 23, 2009
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Brampton
Its really simple and easy to understand, and what I have been preaching for years. I get this situation often and would like your input.

If you have 2 cards

2000/10000 19.75%
4000/5000 9.75% or even make this x its just lower then the above card.

Is it better to consolidate the 4000 dollar debt into the 10000 card?
But where I get into issues is that the 10000 dollar card has an interest rate of 19.75% and the 5000 card has a rate of 9.75%. So its an opportunity cost, what is more important, protecting your credit due to proper utilization or saving money? One has short term implications and the other long term.
Sr. Member
May 24, 2007
509 posts
7 upvotes
Great article and summary. Thanks.

One point I do not necessarily agree in the article:

[QUOTE]That means the next time that lady at the mall offers you a credit or department store card, you'll be doing yourself a favor by getting the card even if you don't plan to use it as it will only increase your total open credit limit and lower the percentage that you owe.[/QUOTE]

Is it really true? I thought credit score has a component called "Credit Exposure". If we have too much "available credit", it's considered risky.

Also instead of signing up for a new card to increase "total credit limit", doesn't it have the same effect if you call up your existing card issuer and request for a credit increase? (well, you may get a free gift when you sign up a new card :-)
Sr. Member
May 24, 2007
509 posts
7 upvotes
Vednar wrote:
Jan 12th, 2010 3:58 pm
If you have 2 cards

2000/10000 19.75%
4000/5000 9.75% or even make this x its just lower then the above card.
If I understand the OP's article correctly, your total open credit is $10,000 + $5,000 = $15,000. And your total debt is $2,000 + $4,000 = $6,000.

So your utilization is 6,000/15,000 = 40%.

It doesn't matter where the balance is. It counts "revolving debt" as a whole.

Is my understanding correct?
[OP]
Jr. Member
Oct 15, 2008
166 posts
3 upvotes
Vancouver
What you should do in this case in transfer $1000 of 19.75% balance to the 9.75% card. You still have the same total percentage owing so it does not affect your credit score negatively but will help you save on interest.

So you are wrong in assuming there is a trade off. The opportunity cost is really not utilizing the $1000 room still available in the 9.75% card.
Sr. Member
May 24, 2007
509 posts
7 upvotes
I noticed I have four types in my report:

1. Revolving (credit card, LOC, HELOC)
2. Installment (car loan, student loan)
3. Mortgage
4. Open Account (Rogers, utility bills, etc)

To calculate my revolving account utilization, do I add up all my balance and divide it by the total open credit (credit card + LOC + HELOC, etc)?

I assume Installment, mortgage and open accounts are treated separately?

Thanks.
[OP]
Jr. Member
Oct 15, 2008
166 posts
3 upvotes
Vancouver
peter_ross wrote:
Jan 12th, 2010 4:03 pm
Great article and summary. Thanks.

One point I do not necessarily agree in the article:



Is it really true? I thought credit score has a component called "Credit Exposure". If we have too much "available credit", it's considered risky.

Also instead of signing up for a new card to increase "total credit limit", doesn't it have the same effect if you call up your existing card issuer and request for a credit increase? (well, you may get a free gift when you sign up a new card :-)
Man, these questions are coming up quicker than I can even realize....

What I have said in the article is true. Department stores are the most unlikeliest of all lenders to worry about credit exposure. That is why you will find that those cards tend to charge the highest rates, higher than even regular credit cards.

But you are right in considering that raising your existing card limit is the same as getting a new card. They have the same affect but if you get a new card there's a little extra bonus: your potential level will increase more as the new card "age".
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Feb 20, 2006
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peter_ross wrote:
Jan 12th, 2010 4:03 pm
Is it really true? I thought credit score has a component called "Credit Exposure". If we have too much "available credit", it's considered risky.

Also instead of signing up for a new card to increase "total credit limit", doesn't it have the same effect if you call up your existing card issuer and request for a credit increase? (well, you may get a free gift when you sign up a new card :-)
"Credit exposure", as you call it, is not a component of the credit rating (not could it easily be, since this number is relative to your income, something the credit bureaus do not know) - but certain lenders may consider this value in addition to your score - particularly mortgage lenders.
[OP]
Jr. Member
Oct 15, 2008
166 posts
3 upvotes
Vancouver
peter_ross wrote:
Jan 12th, 2010 4:03 pm
Is it really true? I thought credit score has a component called "Credit Exposure". If we have too much "available credit", it's considered risky.
Oops, I read "credit score" as "credit store"(department stores).

Where credit exposure is most important is when you go into the bank and apply for credit. To approve you the might require you to close some accounts that you aren't using.

Your credit exposure will have a really small affect on your credit score if anything at all. This is because credit agencies do not know your financial position. You could be very wealthy or very poor. Only when you apply for credit will the banks ask for this information and thus might require you to reduce the credit exposure.
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Dec 11, 2005
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I'd suggest before posting questions to check the awesome Hellfire thread, where your question has most likely already been answered:

http://www.redflagdeals.com/forums/im-p ... ay-392710/
To be nobody but yourself - in a world which is doing its best, night and day, to make you everybody else - means to fight the hardest battle which any human being can fight; and never stop fighting. -- E. E. Cummings
[OP]
Jr. Member
Oct 15, 2008
166 posts
3 upvotes
Vancouver
peter_ross wrote:
Jan 12th, 2010 4:16 pm
I noticed I have four types in my report:

1. Revolving (credit card, LOC, HELOC)
2. Installment (car loan, student loan)
3. Mortgage
4. Open Account (Rogers, utility bills, etc)

To calculate my revolving account utilization, do I add up all my balance and divide it by the total open credit (credit card + LOC + HELOC, etc)?

I assume Installment, mortgage and open accounts are treated separately?

Thanks.
Only #1 affects your credit rating. The amounts you owe on #2-4 has no affect on your credit, unless you pay late. So this should make it every easy for you to calculate your revolving credit utilization.

The amount you owe on closed debt, like mortgages and loans have no affect on your credit score. But the period that you've had them and whether you pay late on them will.
Sr. Member
Mar 6, 2007
616 posts
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Markenstein wrote:
Jan 12th, 2010 3:45 pm
Our credit score is becoming more and more important in other aspects of our life, even if it has nothing to do with our finance. For example, potential employers and landlords will use it to gauge your character. That is why it's important to know exactly how it works.

I just wrote a piece explaining what you need to know about credit ratings and how you can manage it. Hopefully you can use this information to your advantage.
Good Credit: How It Really Works & What They Will Never Tell You
Personally I never have any employers asking about credit score.
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Dec 3, 2004
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Life: How it really works and what they never tell you

Good book. Guarantee it doesn't mention a "credit score" anywhere in it.
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May 31, 2007
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jmc0 wrote:
Jan 12th, 2010 8:42 pm
Personally I never have any employers asking about credit score.
Government jobs are doing it a lot now, especially if you are in a position of trust.

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