Expert: Regan Shinski - 4/16/2009

Question
QUESTION: hey there,
i was lucky to graduate college with no loans and just paid down (like from $6000 to $1500) my credit cards last month.

i am an MBA student halfway through and i have been paying out of pocket to avoid loans but the flip side is that i dont really have savings.

i didnt want to take out loans for obvious reasons but at thesame time, i kinda sorta might be hurting myslef by not building a personal liquid egg.(i.e funds to live off for at least 4 months)

should i just keep doing what im doing..paying out of picket ange and strive to graduate without loans OR take out a loan and start saving towards paying off that loan?

ANSWER: Hi Tobi:

This may be more of a personal decision than a credit decision.  I can tell you that a huge part of a credit score is POSITIVE tradelines reporting!  A second important part of your credit score is the age or length of time you've had credit.  A third part of your score is having various TYPES (revolving, installment, mortgage) of credit.

So...if you have little credit history (you mentioned credit cards but I don't know number and for how long), it may be wise to open a loan or two now so you start to tackle these issues - getting more POSITIVE tradelines, starting to get AGED accounts, and getting different TYPES of credit.

You may see a short term DECREASE in your scores when you first open these loans, so if you have a higher priority issue (like you need a car) it may be better to get that first.  However, once several payments have been made, your scores should jump above where it is now.

Of course all this is dependent on your making timely payments and keeping revolving balances in line.

Again, this is strictly from a credit standpoint, not a lifestyle or financial planning one.

---------- FOLLOW-UP ----------

QUESTION: Great!
thanks.
i have been building credit since like 2001 and i have had car loans on it and credit cards (about 4 of them). i have made on time payment probably 90-95% of the time in the last 5 years.

any changes in ur thots?

Answer
No changes in my thoughts.  You will likely see a good jump in credit score just from the reduction in debt.  30% of your overall score is based on balances compared to available credit.  So, if I understood you properly, you just went from $6000 in balances down to $1500 in revolving debt.  Say you have $10,000 in credit limits.  You then would have just went from a 60% ratio to a 15% ratio.  FICO recommends keeping this ratio under 35%, others say even less.  Also, it is better to have ALL cards under 35%.  Ex:  It's better to have the $1500 in debt spread over 3 cards with $500 balances and $3000 limits than to have zero balances on 2 cards and a $1500 balance on 1 card with a $3000 limit because that means the one card has a 50% ratio.

90-95% on time payments is good, but to get REALLY high scores, this has to be 100%.  Be vigilant!  They only report negative if you are 30 days or more late, sometimes even longer but risky to wait.  You may want to dispute any lates already reporting.

Sounds like you are on the right track.

Good luck!