My checking account balance yesterday read $4.32. It was very interesting because it forced me to think of options similar to people that do not have money to spend. Below are my upcoming expense and income:
| Expenses | Income |
| Credit Card Bill: $3739.12 | Employment: $2436.49 |
| Rent: $995.00 | Expense Check: $1477.39 |
| Expense Total: $4734.12 | Income Total: $3913.88 |
Short: $820.24 that I need by July 1st (tomorrow)
Even with my massive cash flow of $4.32, it would not be enough. I showed my fiancée the above table and we brain stormed various ways we can make up the short fall in cash. I’m showing these below along with some comments.
- My fiancée can help pay for the rent -This is a good option for people whom have a willing friend or family member. Even so, this cannot be abused as no one likes a person who always asks for money!
- Pay only the minimum on the credit card bill – The general answer is “do not do this because of the insanely high interest charges” but this is an interesting option for me because my credit card is still under the 0% APR period. The thing to consider here is that even if you don’t incur financial charges, your FICO score will go down. (Updated: One of the readers pointed out that the choice should not be limited to paying the credit card bill in full or the minimum because you can always pay something in between)
- Do not pay the rent – Just an idea but absolutely not a good option because we have to pay a $20 dollar penalty for every day it is late, not to mention the risk that my landlord will report this, affecting my FICO score
- Get a short term loan – usually a bad idea because of the interest rate
- Just take money from my taxable investment account because I can borrow money from there – The interest rate is 10.24%, not a great idea since it is higher than other choices (my 0% credit card)
- Buy something from Target and pay it using a credit card, and return it but ask for a gift card instead. Finally, sell the gift card on ebay for less than the value of the card and pay for the rent - This is only a “fun” idea since there is not enough time to pull this off, plus you are wasting money doing this (you cannot get 100% cash value for your card, plus all the transaction fees of selling it through ebay).
I have more than enough to cover my immediate needs through my savings and investments so this brain storming session was more an imaginary problem than a real one. I’m doing this also because it is always good to think ahead of what you can do if something ever goes wrong and you need money in a hurry.
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If you did not have enough in savings then the best option would be to pay the minimum on the card this month because it is at 0%. That is what I would do.
Lulu: That’s good advice for most people. It gets dangerous for those that aren’t disciplined to pay it off after the 0% period goes away though.
Why will your FICO score take a hit? Are you that close to your credit limit?
If you can’t pay the credit card bill in full, why do you think your only other choice is to pay the minimum? You can pay something in between the minimum and the balance due.
Engineer: The FICO score is a complex set of mathematical model that tries to determine the likelihood of a person paying back borrowed money. Anytime you do something that lowers this chance, you should assume that your FICO score will go down. If you think about it, paying anything but the full amount increases this chance. Not paying full once every 10 years might not make much of a difference, but it still increases it.
You are correct with that I can pay something in between the minimum and the balance due. That has been added to the article, thank you
Yes, I am familiar with what factors go into a FICO score, although as just about everyone I don’t know the exact weighting.
If you have a $3000 credit limit, then a balance of $2436 is likely to impact your score as you’re using a high percentage of your credit. On the other hand, if you have a $15,000 limit it will have no impact at all, since you’re using a low portion of your credit limit. I had FICO scores for a year and didn’t see the score vary, but I was using less than a third of my credit limit. My score is in the upper 700’s, BTW. Used to be over 800, but went down after I paid off my mortgage.
Your credit card balance can impact your FICO score even if you pay the balance in full. If the CC company reports the balance just before you make a payment, then that’s the figure that’s on your credit report and therefore what will impact your FICO score. So if you’re about to borrow a large sum of money for a car or a mortgage, give your plastic a rest starting a month or so before you start making your application, even if you have the money and pay the balance in full. Also, each credit reporting agency gets the balance at a different time of the month, which you likely will see if you get your free annual credit report from each of the 3 agencies at http://www.annualcreditreport.com. I spread my reports out every 4 months instead of getting them all at once so that there will be a shorter time before seeing something happening. The first round of reports resulted in a number of errors which I was able to get corrected.
Engineer: Thank you for the reply, as there is a lot of good advice there that readers will appreciate.
I wonder if it is the same (FICO score wise) if I max out one credit card and have 2 other credit cards that have no balances, or have all three credit cards used with the total balance the same as the one maxed out card.
There seems to be so many factors that changes the FICO score, and I bet the algorithm that calculates this always changes too.
As I understand it, they add up the total of your CC debt and divide it by the total of your credit limit.
In general, practicing good financial habits will improve your FICO score. Such as paying your bills on time, and not using credit unwisely. Best not to charge up anything on your card that you can’t pay off when the bill comes due.
As far as your zero-percent card, I still would not charge anything on the card unless I had that much money set aside to pay for it. And a good way to do that would be to put the money in ING Direct or similar online bank that pays a decent interest rate. Then when the 0% ends and the card would start paying interest, pull the money from the savings account and pay the balance in full.
Engineer: I have always wanted to do what you suggested “use the 0% card, pay the minimum and keep the money in a interest generating savings account, then pay it off in a year”. There are certainly many people doing this as I read on the internet. However, I have also heard from others that this affects your FICO score, and I’m afraid since I will be purchasing a home in the coming months.
I wonder if this will make a difference. I wonder if anyone would ever know the real answer to my question.
As I stated in an earlier response, I’d recommend paying the card down to zero and to not charge anything to it about a month before applying for a mortgage or a car loan. When they look at the mortgage you can afford, they’ll factor in the payments for other debt to see what’s left over to pay the mortgage. I think they’ll assume a little bit for consumer debt. So a small balance might not hurt. But if you’re concerned, why risk it? In any case, I’d keep the balance less than 30% of your credit limit.
Have you googled FICO to see what others are estimating as the effects of certain types of behaviors? My direct experience is limited, I’m relying somewhat on what I recall reading elsewhere about it, and I’m past the point of needing to borrow money, having paid off my mortgage and having paid cash for my last two vehicles (my last car payment was 16 years ago). But I do value my good FICO score none the less. My FICO score can effect the cost of car insurance. And if I lost my job and had to find other employment, a prospective employer might pull my credit score. And if the job were in a different city, I might need it to rent an apartment for awhile.
If you’re concerned about your FICO score, have you obtained your annual free copies of your credit reports from the 3 major agencies? If not, get them and have any errors corrected. In my case, one of the agencies had my record mixed up with that of another person. Fortunately, he had reasonably good credit habits. And all 3 of them had negative information that I was able to have removed. Once any errors are corrected, buy your FICO score to see what it looks like.
Engineer: I will definitely read up on FICO scores. Perhaps once I know enough, I will publish my findings here.
I’m just afraid that they look into the history also instead of just taking the current “snapshot” when they calculate FICO scores. What I mean is, if I max out my credit limit (which I would do if I take out money from the 0% balance transfer credit cards and not pay it for a year), then pay it off and look at my FICO score a month later, it will still reflect my old “bad” credit habit.
I honestly haven’t gotten those free copies this year, so I should do that. I’ve been putting it off but thank you for the suggestion! I definitely needed that push!