Paying off a credit card advice

[crimsonred98]

When I was younger, about 19 years old, and before I knew how to handle my finances well, etc. I was talked into opening an overdraft protection credit card with my bank. Meaning that if my checking account ever overdrafted, it would come out of the credit card rather than charge me the $25 overdraft fee.

Since I was young and stupid I didn't even bother to look at the interest rate, I just said "Sign me up" because it sounded like it would save me a big amount of money if I ever used it.

As a lot of young and stupid people do, I saw it as free money that I wouldn't have a problem paying back later, and I ran it up to it's $2000 limit. I have done the math and making $100-$150 payments on it, it will take over 10 years to pay it off due to the joke of an interest rate.

My tax return I am getting back is more than enough to pay off the credit card. Which I plan on doing and putting the leftover amount into an existing savings account so that i can protect MYSELF from over draft fees without the disgusting interest rate.

The question I have is about how it will change my credit score. I have heard rumors that paying off a credit card with one huge payment can look bad, also that if I close the credit card rather than keeping it open with a $0 balance could negatively change my credit score.

Are any of these rumors true regarding closing credit card/paying off with one large payment hurting your credit score?

[dczech09]

I can help you with this I used to sell this overdraft protection for a bank I worked for in the past. I advise paying off the balance IN FULL. Who told you that paying it off would look bad? I bet it was someone who sells credit cards or works for a bank. The fact of the matter is that having a lower proportion of available credit used will help your credit. In other words, pay off the balance so that 0% of your credit line is used and it will look good.

I would not recommend closing the account unless you are completely revamping your credit picture. Closing the account will negatively impact your credit for a short period of time.

So yes pay off the balance but keep the account open. You said you're gonna save the rest? How much of your tax return will you have left? Do you have an emergency fund? Do you have any other debts that could be paid off with this money?

[greenskeeper]

once you pay off the card, you should adjust your withholding so you have more money in your paycheck to invest. Unless you like giving uncle sam an interest free loan during the year.

[cjscully]

Paying the card off will not negatively impact your credit score. Closing the account could.

[crimsonred98]

Originally Posted by dczech09

I can help you with this I used to sell this overdraft protection for a bank I worked for in the past. I advise paying off the balance IN FULL. Who told you that paying it off would look bad? I bet it was someone who sells credit cards or works for a bank. The fact of the matter is that having a lower proportion of available credit used will help your credit. In other words, pay off the balance so that 0% of your credit line is used and it will look good.

I would not recommend closing the account unless you are completely revamping your credit picture. Closing the account will negatively impact your credit for a short period of time.

So yes pay off the balance but keep the account open. You said you're gonna save the rest? How much of your tax return will you have left? Do you have an emergency fund? Do you have any other debts that could be paid off with this money?

I am not sure I really even heard it, but i thought I heard something about paying it off in full could hurt your credit.

Based on what I have found out here I am just going to pay it off in full and keep the line open.

My other debts will all be paid off before my tax return comes back, except for my vehicle loans. Also some student loans, but those do not need to be paid until 6 months after I graduate and they are not accruing interest, so I pay a little every month and put some extra into a savings account.

Only other question is, should I think about using the credit card to purchase small things, like gas, and pay it off in full every month? I would imagine making those payments would help build my credit rather than just keeping an account open with a $0 balance.

I am just trying to get back on my feet financially and be able to save money every month. I am a full time student and I also work full time. I have paid off debt, got rid of some bills that weren't a requirement (gym, etc) and have cut my monthly expenditures almost in half by doing this. Just trying to build my credit back to where it was before I maxed out that credit card and let a debt with a community college go into collections and save some money. Any advice I can get I would greatly appreciate.

[LuckyRobin]

I've closed several credit cards over the years. All that really happens is your credit score dips for about six months and then it bounces back up again if you haven't done anything careless with credit during that time. Unless you are planning on making a major purchase on credit (like a car loan or mortgage) and need those few points on your credit score, I really wouldn't even worry about it. I'd just close it.

As for building your credit score, if you really think you need to do that, get a gas card and pay it off in full each month. Something that has a low limit of $200 or something like that so you can't run it up to ridiculous amounts.

[disneysteve]

Originally Posted by crimsonred98

I am not sure I really even heard it, but i thought I heard something about paying it off in full could hurt your credit.

This is absolutely not true.

should I think about using the credit card to purchase small things, like gas, and pay it off in full every month?

That can help by showing your ability to responsibly use your card, pay bills on time, not overcharge your account, etc. Since you are doing it just for that purpose, don't ever charge more than about 20% of your credit line. So if the line is $2,000, don't ever put more than $400 on the card.

That said, if this card has crappy terms and no rewards, I wouldn't use it at all. If you want a credit card to actually use, find a better deal and a good rewards program.

[crimsonred98]

Originally Posted by disneysteve

That can help by showing your ability to responsibly use your card, pay bills on time, not overcharge your account, etc. Since you are doing it just for that purpose, don't ever charge more than about 20% of your credit line. So if the line is $2,000, don't ever put more than $400 on the card.

That said, if this card has crappy terms and no rewards, I wouldn't use it at all. If you want a credit card to actually use, find a better deal and a good rewards program.

So best route would be to pay this card off, not use it but keep it open and then try to open up another card with a better interest rate and rewards program for things like gas and occasionally groceries and pay the balance off every month?

I don't want anything with a big credit limit. So maybe just opening up a card from a gas station like LuckyRobin suggested would be a good idea?

[jpg7n16]

Originally Posted by crimsonred98

I am not sure I really even heard it, but i thought I heard something about paying it off in full could hurt your credit.

As a quick lesson about credit scores, imagine you were loaning money to a friend and giving them a score on how likely you are to get all your money back from them. Though I have some personal views about the real purposes of credit scoring, in essence that's what they do - determine how likely they are to pay you back.

So who would you give a higher score to: (of who you'd like to lend to again if asked)

- your friend that you and him had to come to an agreement that he'd only pay back 1/2 of what you owe, and you'd just lose the other half you lent to him?

- or friend 2 who was carrying a balance for a long time and then got a hold of his finances and decided to pay you back in full?

Ummm I'd choose door #2!

Obv you (as a lender) want to get all your money back (plus interest), so lenders should give people higher scores who repay everything in full.


I wouldn't lend to you again if you didn't repay everything you borrowed. But if you consistently pay off everything you borrow from me, I'd have no problem lending to you again. The longer we've had that relationship, the more confident I am that you'll keep paying me back. So after 5-10 years of you paying everything on time, I'll have much more faith in you than in the first few months. And if I hear from my friends that you borrowed from them too, and were paying them back with the same integrity, well that'd be even better. And I'd really feel more comfortable if you weren't always borrowing the maximum I'd let you borrow. Though you'd need to borrow something, or else I'd have no idea if you'll repay me or not. Maybe only 20-30% of the credit line, cause that's not a lot of risk to me as a lender.

That's what credit scoring looks at:
- length of account history
- consistency of payments (or missing payments)
- average balance (expressed as a percentage of credit line, ex. 24% of credit line)
- number of accounts (how many 'friends' have you borrowed from)
- settled accounts (this is bad)


So in essence, just be an upstanding person and pay back anything that you borrow in accordance with whatever terms you borrowed the money on, and your credit score will take care of itself.



When you look at it through the eyes of a lender, it's obvious what the best decision is, which you said yourself - pay it back in full.

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As far as rewards go, would you rather borrow from a guy who gives you 2% back on anything you borrow? Or gives you free airline miles the more things you buy with his card?

Or a guy who gives you nothing no matter how much stuff you buy?

Hey, if you want to give me 1-2% back on all my purchases that I was going to make anyways, sure! I'll take it!


But I'd keep my old card open, just because I want other lenders to see that my account with them has been around a long time. I'd pretty much never use the old card, cause I'd be missing out on a benefit I could have had.

[DanielB]

crimsonred98, if you want to see what's on your credit report (but not the actual score) for free, I recommend credit.com. I've been using them to pull a free report every 30 days. They will show an estimated score (not your actual score), as well as info on all your debt including balances, monthly payments, credit card debt-to-balance ratio, etc.

[littleroc02us]

Originally Posted by crimsonred98

The question I have is about how it will change my credit score. I have heard rumors that paying off a credit card with one huge payment can look bad, also that if I close the credit card rather than keeping it open with a $0 balance could negatively change my credit score.

Are any of these rumors true regarding closing credit card/paying off with one large payment hurting your credit score?

My question to you would be "Why use a credit card ever again?" It hasn't done well for you up this point. Pay cash for everything.

Also, why not join a credit union, they don't charge overdraft fees to transfer money between accounts if one were to come up short. I've never had a problem because I don't spend money I don't have in my account.

[crimsonred98]

Originally Posted by littleroc02us

My question to you would be "Why use a credit card ever again?" It hasn't done well for you up this point. Pay cash for everything.

Also, why not join a credit union, they don't charge overdraft fees to transfer money between accounts if one were to come up short. I've never had a problem because I don't spend money I don't have in my account.

I might just end up joining a credit union, but I am pretty sure they have overdraft fees as well. I am not talking about having to transfer money from a savings account to a checking account to cover some extra expenditures. I was referring to when I have $50 in my checking account and a bill for $150 goes through so my account is $100 overdrafted. I am pretty sure all financial institutions have a penalty for that. But I have enough money saved away and have my finances in order enough to not do that any more.

In regard to "Why use a credit card again?" Well, because my credit has taken a hit and I want to build it back up. The only way I know how to do that is borrow money against credit and pay it back every month. If I am not mistaken you get points on your credit score for every time you make a payment on time. If I just sit here paying cash for everything my credit score can't improve. Additionally, if it is just a credit card tied to a gas chain the limit isn't likely to be any more than $200-$400, so there is no danger of me being stupid and maxing out a $2k limit credit card. Since I would only use it for gas money, it is a finance that I already have included into my budget and if I pay it off every month I don't need to worry about insurance.

That gives me an extra credit card payment that is being made every month, which can only help my credit score.

[littleroc02us]

I might just end up joining a credit union, but I am pretty sure they have overdraft fees as well. I am not talking about having to transfer money from a savings account to a checking account to cover some extra expenditures. I was referring to when I have $50 in my checking account and a bill for $150 goes through so my account is $100 overdrafted. I am pretty sure all financial institutions have a penalty for that. But I have enough money saved away and have my finances in order enough to not do that any more.

My credit union just simply transfers money from my savings account which is tied to my checking account in case of an overdraft. No Charge!

In regard to "Why use a credit card again?" Well, because my credit has taken a hit and I want to build it back up. The only way I know how to do that is borrow money against credit and pay it back every month. If I am not mistaken you get points on your credit score for every time you make a payment on time. If I just sit here paying cash for everything my credit score can't improve. Additionally, if it is just a credit card tied to a gas chain the limit isn't likely to be any more than $200-$400, so there is no danger of me being stupid and maxing out a $2k limit credit card. Since I would only use it for gas money, it is a finance that I already have included into my budget and if I pay it off every month I don't need to worry about insurance.

That gives me an extra credit card payment that is being made every month, which can only help my credit score.

You have to realize who you are talking to, because I'm a big advocate of not using credit cards, except my wife and I keep one for Gasonline now and that's it. (I don't even like that) But you do know that you can buy a car with cash, clothes with cash, pay rent with cash or check and you don't need a credit score to get a mortgage. (It's called manual underwriting) If your interested in building credit than yes you will have to borrow money and pay it back.

[disneysteve]

Originally Posted by littleroc02us

My question to you would be "Why use a credit card ever again?" It hasn't done well for you up this point. Pay cash for everything.

Also, why not join a credit union, they don't charge overdraft fees to transfer money between accounts if one were to come up short. I've never had a problem because I don't spend money I don't have in my account.

I think there are many good reasons to use a credit card, but only if you can use it responsibly, don't charge more than 20% of the credit line, always, always, always pay the bill in full every month and pay on time. If you can't stick to those simple rules, then you shouldn't be using a credit card.

As for overdrafts, that's a simple one. Don't spend more than you have in your account and you won't ever have to worry about it.

[jpg7n16]

Originally Posted by disneysteve

As for overdrafts, that's a simple one. Don't spend more than you have in your account and you won't ever have to worry about it.

Or set up sweep protection from your EF account.

Sweep protection auto transfers money if your checking account goes over, for like $2 rather than $32.

Or just keep a portion of the EF in the checking account. Like never let the account get below $1k.

[disneysteve]

Originally Posted by disneysteve

As for overdrafts, that's a simple one. Don't spend more than you have in your account and you won't ever have to worry about it.

Originally Posted by jpg7n16

Or set up sweep protection from your EF account.

I disagree. The proper way to avoid overdraft fees is to avoid overdrafts. Don't spend more money than you have in your account. That is a pretty basic premise of banking. Balance your checkbook regularly and keep good records so that you always know how much is in the account at any given time. Then don't spend more than that amount. Don't write a check when you know the money to cover it isn't already in the account. Don't count on a deposit clearing in time to cover the check because that might not happen.

[jpg7n16]

Fair enough. Avoidance is always better.

I personally keep my entire cash EF in my checking account. There's no way I'd ever overdraft, because I'd have to have burned through my entire EF before that would happen.

And that's just not gonna happen

[crimsonred98]

1) I don't overdraft any more, and I am not going to be in danger of overdrafting any more. I set up the credit card when I first moved out on my own and was stupid in regards to my own finances. But even then, my overdraft charges came about when I had no other choice.

2) I realize that you can pay cash for everything. But I am a full time student and I don't have thousands of dollars tucked away in investments and savings account to drop a couple thousand on a car for if I decide I need to buy one. Up until I can get myself to that point, my credit score is going to be very important.

[littleroc02us]

Originally Posted by crimsonred98

1)

2) I realize that you can pay cash for everything. But I am a full time student and I don't have thousands of dollars tucked away in investments and savings account to drop a couple thousand on a car for if I decide I need to buy one. Up until I can get myself to that point, my credit score is going to be very important.

That right there my friend is how people get into debt! I was a full time student once and I worked 4 ten hour days while going to school.

[crimsonred98]

Originally Posted by littleroc02us

That right there my friend is how people get into debt! I was a full time student once and I worked 4 ten hour days while going to school.

Except for student and auto loans I am completely out of debt once I pay off this card. But my credit score is not where I want it to be. I am not really worried about getting into debt by opening up a credit card with a $500 limit and only buying gas with it. Gas is a monthly bill that I have factored into my budget, which I will not have any problem paying off, in full, every month.