Credit utilization question

Graham1982

Hello everyone:

This question has been making me think for a while. I was of the understanding that it is not a good idea to have a constant or consecutive high credit utilization percentage. However, can someone please clarify this i.e:

If I opened a paypal credit account (I have) and use it to buy large (in relation to the limit) interest free purchases i.e. 850 limit 550 purchase which I clear in the three month window, clearly I have a high credit utilization score on this account. I mean I usually chip away at it so that it goes down in say 50 quid increments but sometimes I just wait until the term is about to elapse and clear it completely. Alas by effectively getting an account and then almost maxing it and then clearing it is this having an adverse impact?

Thanks

Graham

[Deleted User]

Not particularly. It's only one account and lenders see that it's on a promo rate.

monetxchange

It’s a better idea to have no debt than it is to be worrying about making a made up number like a credit score seem good. Forget about the juggling and pay it down and get some savings behind you to fall back on, not the idea of being able to get more credit. My credit score took a nosedive when I paid off £30k plus of debt and became a homeowner, but I’m obviously in a much better financial position now than I was when maxed out at 95% utilisation.

TheAble

monetxchange said:

It’s a better idea to have no debt than it is to be worrying about making a made up number like a credit score seem good. Forget about the juggling and pay it down and get some savings behind you to fall back on, not the idea of being able to get more credit. My credit score took a nosedive when I paid off £30k plus of debt and became a homeowner, but I’m obviously in a much better financial position now than I was when maxed out at 95% utilisation.

Agreed. Better to save up for these items instead. I can't stand all this "buy now pay later" stuff - just encourages folks to spend more.

bazzyb

Graham1982 said:

I was of the understanding that it is not a good idea to have a constant or consecutive high credit utilization percentage. 

…


Alas by effectively getting an account and then almost maxing it and then clearing it is this having an adverse impact?

One point you appear to have missed out from this is what is the endgame here?

Generally speaking lenders will look at overall utilisation rather than per account so if you have unused balances elsewhere it will keep the %age low. 

However if the reason for your question is because, for example, you are intending on applying for a mortgage soon then it’s probably best not to open new accounts and max them out prior to doing so. 

EssexHebridean

I do very much wonder if, in a few years further along the line allowing for the sheer number of people currently getting into debt via "soft" channels like Paypal credit, where the line of borrowing is offered to you so routinely that is simply seems "normal" to many, lenders will start seeing these sorts of debts as toxic in the same way that they now look at Payday loans. When those first appeared nobody saw a particular issue with them - indeed there was recommendation on MSE about how to use them very short term to gain cashback, for example. Now of course we know that a recent payday-style loan on your credit history is pretty much a kiss of death as far as many lenders go, and only those in true desperation would consider going there!

I've said before on here - Paypal credit is one to tread very, VERY carefully with - and the rapidly increasing number of SOA's on here which now include a sum owing to them under the debts column really does bear this out. 

Graham1982

Hello everyone:

Thanks for your replies. I understand people's apprehension with these things and this might/is fulled, I assume, by the fact I posted this on a debt free board. However, to address some of the comments:

1. I have savings/an emergency fund that I add to each month at circa 800 pounds and I am fortunate enough to work in a country/economy where things like car repairs etc are very cheap;

2. I have used PayPal credit three times to make a purchase like this and have always paid them off in the interest free window. It is just more convenient for me/my cashflow to utilize a service that enables me to genuinely buy now and pay later but in the interest free period. I could buy said item outright but haven't for the reasons explained.

3. I also understand people on here saying consolidation loans are a bad idea because it enables you to get into more debt. However, I did get a consolidation loan (which I am paying off) and have not used a credit card subsequently unless I clear the balance in full month on month. Surely the facilities aren't the problem but people not using them sensibly? Please note I am not saying this in a patronizing way, I was in debt previously hence consolidation loan but surely it should be assessed on a case by case basis. If you know where the debt came from and how to avoid it gong forward surely such a product isn't a bad idea?

Again happy to learn, and I hope this isn't coming across as ranty.

TheAble

I think one of the problems is, if you give people with a spending problem an easy means to pay, they will take it; whereas, had they not been given the means, they wouldn't have made the purchase. As EH points out, these buy now pay later debts that people have come up time and again on these boards. 

They like to say in their defence that "we don't charge interest" and while that might be true, they're clearly lucrative to the vendors who are paying them commission.

Graham1982

TheAble said:

I think one of the problems is, if you give people with a spending problem an easy means to pay, they will take it; whereas, had they not been given the means, they wouldn't have made the purchase. As EH points out, these buy now pay later debts that people have come up time and again on these boards. 

They like to say in their defence that "we don't charge interest" and while that might be true, they're clearly lucrative to the vendors who are paying them commission.

Well they don't charge interest until you get out of that interest free window, and then that service becomes a less useful credit card charging credit card style interest rates. Although I do believe you can get a PayPal credit card for that authentic debt model.

EssexHebridean

The reason we almost ALWAYS advice against consolidation is as simple as this - for every one person like you, who got into debt, learned their lesson, consolidated and didn't run up further debt, there are probably at least another 9 - possibly more - who will consolidate, but continue using the cards. Those folk we see back on the boards again a few years later - but rather than the £5000 debt they had to start with they have the remains of the £5k loan they consolidated to, plus a chunk on top, which is quite often far, far bigger than the original debt was. 

Consolidation isn't the problem in itself, nor is it "people not being sensible" really - it's that in too many cases consolidation is a short cut and simply doesn't teach people the lessons to enable them to budget effectively in the future, nor does it give them the degree of "pain" that paying off debt at a level which is a struggle to maintain does. It is so often that "pain" that serves to make someone stop and think later about whether they really need to make the purchase they are considering, or whether they'd be better to wait until they have saved for it... 

Aspiration

@EssexHebridean Pretty much has written the last 20 years of my life. 

I remember thinking that what a great idea getting a £7.5k loan was to resolve everything I’d built up from when I was 18 and moved out. 

It’s taken 20 years to wake up that no huge win is coming, there’s no easy way out and the grind is what was needed to clear the debt. 

My life experiences also advise strongly against consolidation! 

Aspiration