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Credit Can Be a Powerful Tool

by zcommodore on 01/18/08

I am mostly a lender and have participated on Prosper since August, 2006. I have checked my credit grade as a borrower and found that I have AA credit due to six figures worth of credit available and very low utilization. The only balances I carry are on credit cards with 0% interest rates.

Commodore PerryA few years ago, I had an opportunity for a job where I had to move half-way across the country. To do this, I had to prepare my house for sale and get set up in a new location in a matter of weeks. I ended up using a lot of my available credit for a short time until my house sold but the credit was available and I had no problem paying off the ~$20K in debt that I incurred as part of the process for the short time I needed it. I think I ended up paying less than $100 in interest over that short period of time with no missed payments. If I had had poor or no credit available this move would have been a lot more difficult to do.

I’ve looked at a lot of borrower’s credit profiles on here and I see a lot of people whose problem is not that they have bad credit but that they hardly have any credit at all. I see people with one or two lines of credit, nearly maxed out trying to get a loan here with D credit in a rate capped state. If they had had 5 or 6 credit cards instead of 1 with a limit of only $500, they would have A or B credit and no problems getting a Prosper loan due to lower utilization.

You can never have too much credit. Credit scores or grades are a numeric estimate of trust. For example, if a friend wants to borrow your car, you are more likely to let them use it if you know your friend is a good driver. The same is true with lenders. If you appear to use your credit wisely, they are more likely to want to loan you money.

But don’t confuse credit with money. I know of people, when they get a credit card with a limit of $500 or $1000, they head straight to the mall and spend it all up then make minimum payments the rest of their life and wonder why they have low credit scores. They never have credit when they need it because they misuse what they have.

Utilization percentage on a credit card is one of the biggest factors affecting a credit score. If you have a lot of credit but use very little, it shows you are trustworthy. If you have little credit or use most of what you have, your credit score will drop and it will be hard to get a loan when you need it.

To build credit, consider these tips:

  • If you have very little credit, never turn down credit offers (unless they are unreasonably expensive). You never know when you might need it.
  • Never charge more than you can pay when the bill is due.
  • Pay your bills on time.
  • Keep your utilization low.
  • Don’t carry a balance. It’s not necessary in order to build credit and it costs you interest.
  • If you pay off a balance, don’t close the account unless it will cost you money to keep it. An open, unused balance will help your utilization percentage and your credit score.

You can read more about how credit scores are calculated at Wikipedia’s FICO Score page.

zcommodore is a Prosper lender and the group leader of Quality Assistance for Borrowers he also write about at his blog: Random Thoughts About Prosper.

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One Response

bignosebob | January 18th, 2008 at 5:42 pm

>> If you pay off a balance, don’t close the account unless it will cost you money to keep it. An open, unused balance will help your utilization percentage and your credit score.

I hear this last piece of advice quite often. I would merely like to point out that the more unused accounts that you keep open, the greater your risk for identity theft is. Depending on your level of personal diligence–it is easy to lose track of these unused accounts. Throw in a move or two without updating your address with companies that are extending you credit and you are left with little warning should someone gain unauthorized access to these accounts and make fraudulent purchases.

I only warn others as this exact scenario happened to me. I did not find out about the fraudulent purchase until a collection agency tracked me down. And at that point it was an insanely difficult process of getting the charge removed from the original company I had credit with, then getting the collection agency to back off and finally getting my credit report cleaned up.

I guess the moral of the story is to keep open accounts that you can watch like a hawk. There is a point where your number of credit lines becomes unmanageable.

posted in Lenders,Personal Finance Education 1 comment »

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