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3 Very Big Questions (And Answers) About Personal Finances

young woman looking at credit cardPersonal finances are a bit like your health. You need to keep an eye on them just as you need to watch what happens to you physically. If you’re smart you’ll have a physical exam once a year just as you should give your personal finances the occasional checkup. And you probably have questions about your finances just as you have questions about your health. Recent college graduates were surveyed regarding their questions about personal finances and here are the three that came up most often.

Why not have just a debit card?

Since credit cards can be very dangerous why have one? Why not just use a debit card instead? Yes, credit cards can be troublesome. However, they do come with some benefits. If you have a credit card and use it responsibly, this will help your credit score. Second, merchants sometimes require a credit card rather than a debit card. If your identity is stolen, undoing the damage from a stolen credit card can be easier than with a debit card. If you run into a dispute with a merchant, it’s often better to have used a credit card as your credit card issuer will help you settle the dispute. Plus, almost every credit card now comes with rewards that can be beneficial – assuming you don’t go into debt or end up having to pay high interest.

The cons of debit cards

The money comes out of your account immediately when you use a debit card. In comparison, with a credit card you get a short-term free loan and your money stays in the bank earning a return. In fact, with most credit cards you would get at least a 27-day free loan every month. Given today’s historically low interest rates this may not amount to much but interest rates will go up eventually.

Is it better to have no credit or bad credit?

The problem with bad credit is that it’s very hard to fix. If you have bad credit the first thing you must stop running up more debt. You will need to create an emergency account and a budget that will require you to do and buy only what your income will cover. In addition, you will need to pay all your bills on time and in full, and pay down your debt. This includes everything even any accounts you have that were charged off. As you can imagine, this will require a lot of discipline and commitment – no matter why it was that you developed bad credit in the first place. If you have no credit it’s fairly easy to establish good credit. The reason why you want to do this is so that you will have it when you need it to get a home, a new car or for some other major purchase. You need to responsibly handle your savings and checking account and should get a debit card with no over-limit protection and maybe a secured credit card. If you have a secured credit card and use it responsibly then after six months you should be able to get an unsecured car with a low credit limit and no over limit protection. Of course, while you’re doing this you will have to pay all of your bills on time.

Girl looking worriedWhat’s the best way to pay off credit card debts?

The first thing you need to do is create an emergency savings account to make sure that if something happens you don’t fall into more debt. You also need an honest and realistic budget so you can see what you spend your money on and whether it is a wish, a want, a luxury or a convenience that you could do without. Once you have done these things the next step is to get to work and pay off those credit card debts as quickly as you can. There are several schools of thought as to the best way to do this. The financial guru, Dave Ramsey, recommends what he calls the snowball method of paying off credit card debts. What this amounts to putting your debts in order from the one with the lowest balance down to the one with the largest. You then focus all of your efforts on paying off the one with the lowest balance while continuing to make the minimum monthly payments on your other credit card debts. When you get that first debt paid off you will have extra money you can use to pay off the credit card with the next lowest balance and so on. Dave calls this the snowball method because like a snowball rolling downhill you will pick up more and more momentum as you pay off each debt. However there are other financial experts that believe it’s best to put your credit card debts in order from the one with the highest interest rate down to the one with the lowest. You then concentrate on paying off the one with the highest interest rate first as this will save you the most money. Which of these two methods would be best for you? It really boils down to a matter of personal choice. The important thing is to pick one and then stick to it.

How it used to be

Until very recently it was easy to understand how to handle credit cards to keep from having them negatively affect your credit score. All you had to do was… • Make every one of your payments – at least the minimums due – on time every month • Be sure to keep your balances below 30% of your credit cards’ credit limits. Of course, it’s better to have an even lower percentage but the difference that 10% or 20% make to your score is really very minimal when compared to 30%. • Make sure that you apply for a new credit card only when you need it. Your credit score can be negatively affected if you have a lot of recently opened accounts.

A new factor in credit scoring

But now there’s a new factor in credit scoring as the three credit bureaus are now using the amount by which you pay down your cards each month in calculating your score. It’s likely that other bureaus and scoring companies will soon follow suit. What’s the purpose of this? It’s to differentiate between people who pay down their balances in full each month (“transacters”) and people called “revolvers,” who carry forward their balances from one month to the next. The theory behind this is that people who pay off their balances each month are likely to be more credit worthy and so deserve higher scores. A spokesperson for FICO, the company that invented credit scoring, has said that it is still studying the data and hasn’t yet changed its systems. In addition to having invented credit scoring, FICO is the company whose credit scores are used in more than 90% of all lending decisions made in the US.

How this could affect you

If companies in the credit-reference industry and FICO begin to differentiate between “revolvers” and “transacters,” the “revolvers” could see their scores being downgraded even if they always make the minimum or higher payments on their credit cards on time every month. And this could lead to a significant change in how people view their credit cards and there could soon be fewer “revolvers.”

Bad news for the credit card issuers

In turn, this could be bad news for the credit card companies. Would you use your cards to borrow if you knew that this would probably make your home, auto and other loans more expensive? For that matter, the interest that credit card companies garner from those that roll forward their balances every month is an important revenue stream. One of the best-kept secrets of the credit card business is that people that always pay their balances on time are referred to as “deadbeats,” because they generate little or no profit for the credit card companies.

When Going Into Credit Card Debt Can Be A Good Thing

What You Can Learn From Successful People About Debt FreedomIt’s obvious that there are people who have too much debt. For that matter, one recent study revealed that the average US household has more than $15,191 just in credit card debt not including other debts such as a mortgage, personal loan, business loan or medical debts. And college graduates are now carrying an average of $33,607 in student loan debt.

But did you know there are people who actually have too little debt?

Should you live cash only?

It might sound like a good idea for you to shred all of your credit cards and pay for everything with a debit card, check or with cash. But if you live like this, it can trip you up. The problem is that if you have no debt, you don’t have a credit score. And this can complicate your life considerably.

Credit scores

Your credit score – if you have one – is created from monthly reports that lenders send to the three credit reporting bureaus. It will reflect how many creditors you have, how much money you owe, how quickly you pay, the size of your lines of credit and any defaults. Plus, it will have information from the courts such as tax liens and bankruptcies.

Why credit scores are important

Credit scores are important because lenders depend on them to determine how likely you are to repay a loan. The credit score that is used most widely comes from the company FICO. It ranges from a low of 300 to a high of 850. If you have a score of 750 or above, you generally can get a new credit card or borrow money on the best possible terms. If you have a score of 700-plus, you will still be able to get a competitively priced loan. However, if your score is below 620, don’t bother even asking. And of course if you have no score at all, you don’t even exist – at least so far as lenders are concerned.

Understanding your credit score

While no one except FICO itself understands the algorithm used to create credit scores, it is known that they are made up of five components as follows: your credit history, credit utilization, length of credit, types of credit and recent applications for credit. Of these five, your credit history and credit utilization are the most important as together they make up 65% of your credit score. As you might guess your credit history is just that – how you have used credit in the past. Since it is, well, history there is not much you can do about it. But credit utilization, which makes up 30% of your credit score, is something that you do have some control over. The way it’s calculated is to take the amount of credit you’ve used and divide it by your total credit limits. As an example of this, if you have total credit limits of $10,000 and have used up $3000 of it, your credit utilization would be 30%. Most lenders would see that as good. However, if you had used up $5,000 of your available credit, your credit utilization would be 50%, which would be much too high. You can calculate your credit utilization yourself. If it turns out to be above 40%, there are two things you could do to get it down. First, you might be able to get more credit or second, you could pay down some of your debts.

Here, courtesy of National Debt Relief is a short video with more information about understanding credit scores.

Open some new types of credit

You could also influence your credit score in a positive way by opening some different types of credit. In addition to a credit card, you might open a personal line of credit or take out an auto loan. The fact is that potential lenders like to see that you’ve had some different types of credit and have used them sensibly. But do keep in mind that this accounts for only 10% of your credit score so don’t go hog wild in applying for new types of credit.

Your score could disappear

Let’s say that you had credit cards or loans in the past. In this case you might assume that you always have a credit score – despite the fact that you are currently operating debt free. Unfortunately, this is not so. If you had no activity on at least one line of credit in the past six months, your score could vanish. And this is according to FICO’s Anthony Sprauve.

The disadvantages of being a member of the un-scored

If you find that you don’t have a credit score, this might not bother you – especially if you voluntarily gave up your debt and credit cards. Unfortunately, your credit score will affect your life in a number of other ways. If you don’t have a score or a high enough score, you might not be able to get a discount on your homeowner or auto insurance. When you sign up for utilities such as gas or water, you might have to make a higher deposit. In the event you need to rent an apartment, your landlord will probably require a good score before giving you a lease. Credit scores are even often checked to get cell phone service or cable.

Marrying a credit score

Did you know that if you’re married you get a credit score by by sharing a debt with your spouse? As an example of this, you would get a credit score if you apply jointly for a credit card. In the event that one of you dies, shared credit cards are generally canceled. This means to keep them you would need to reapply. Otherwise, you would lose your credit score.

One isn’t the loneliest numberwoman thinking while holding a credit card

You might remember that song from the 1969 about one being the loneliest number. Well, in the case of credit cards one isn’t the loneliest number – it’s enough. No financial advisor or expert will suggest that you get a mortgage or take out a car loan just to make sure your credit score stays alive. All you really need is just one active credit card. For that matter, if you want to get a good credit score you don’t even need to have multiple credit sources. One card is enough assuming that you’ve had it for several years and use it once or twice a month – at least for small purchases such as gas or groceries – and then pay in full when the bill arrives.

Is it still good?

If you’ve been using cash, checks or a debit card to pay all of your expenses but have one credit card you’ve been keeping in a drawer for emergencies, you need to get it out and make sure it is still good. If you haven’t used the card for 12 to 18 months, the credit card issuer could lower your credit limit or even close your account. If you want to reactivate that card, it’s possible you would have to apply for it all over again.

For those with too much debt

Credit cards can be a trickier issue if you have too much debt. For example, should you cut them up or not? You would be at a danger point if your payments were more than 40% of your monthly income. Among adults aged 55 and up who carried debt in 2010, 8.5% hit that dangerous mark. People age 65 and up are carrying debt and in larger amounts than was true 15 years ago. And here’s an awful statistic – bankruptcy rates have risen to new heights especially among those 75 and up. If you’re trying to dig your way out of debt than cutting up cards might make sense. But make sure you keep one and use it at least once a month to keep your credit score alive.

Revealed – The 4 Greatest Myths Of Credit Scoring

Credit Score highlighted in yellowHaving a poor credit score is no big deal, right?

Wrong.

A poor or bad credit score has some very serious consequences. For one thing it will cost you money. This is because there is an inverse ratio between your credit score and the interest rates you’ll be charged. In other words the lower your credit score the higher will be your interest rates. While this may not have much of an effect on a short term personal loan or a small credit card balance it can mean big money when it comes to auto loans, mortgages and other types of secured loans. As an example of this, a 30-year loan for $165,000 at 3.93% will have a monthly payment of $786. However, if have bad credit and are charged 4.46% (just half a point more) your monthly payment would jump to $830 per month. This would be a whopping $16,560 over the life of your loan.

In addition, if you have a poor credit score you may have to pay more for your auto insurance and might not be able to rent an apartment or get your utilities turned on.

Where do you stand?

Lenders usually evaluate credit scores in terms of these ranges:

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score
• Between 620 and 679 – Average or OK score
• Between 580 and 619 – Low credit score
• Between 500 and 579 – Poor credit score
• Between 300 and 499 – Bad credit score

If you know your credit score you now know how lenders will view you. If you don’t know your credit score, it’s time you got it. You can get it free (once a year) from any of the three credit reporting bureaus – Experian, Equifax and TransUnion – or at the website www.annualcreditreport.com. You can also get your score at www.myfico.com, which might be your best option as it’s the score most often used by lenders. The other credit scores such as the ones you would get from Experian and TransUnion will not be identical to your FICO score. But one of these should be close enough for you to know where you stand and how you would be viewed by a potential lender.

Great myth #1: A minor late payment won’t hurt your credit scoregrandma looking shocked

It’s said that a minor late payment won’t hurt your credit score if you quickly catch that account back up. While this may be true it’s only if that late payment is isolated and historical, which means the account is not currently delinquent.

There are two categories of derogatory information in the world of credit scoring. They are minor and major. The line that divides these two categories is very clear. If you have a historical delinquency that didn’t go past due by 90 days or more, it would be considered a minor derogatory item. This category also includes historical 30- and 60-day delinquencies. Everything else is considered to be a major derogatory item. This would include defaults tax liens, collections, judgments, repossessions, foreclosures, bankruptcy, any account that is 90 days late or worse and accounts that are currently delinquent.

If you are currently 30 days delinquent on a debt your score will be lower than if you had never been delinquent on anything. In fact it will be considerably lower − probably by 35 to 50 points. If you are more than 60 days delinquent on paying a bill (but not in default) it gets worse. Your score would probably be 100 points lower than someone who had never missed a payment.

Why do these cause your credit score to drop?

A scoring system such as FICO or VantageScore is aimed at predicting how likely it is that you will go delinquent by 90 days soon after you apply for credit. If you are currently delinquent – even for just 30 or 60 days – you make the credit score’s job simple because you’ve basically proved that you’re willing to be past due on credit obligations. This is what causes that drastic drop in your score.

Not well known

There is something else you should know about your credit score that is not a secret but isn’t well known by many consumers. It’s that if you have a “30-day late” on one of your credit reports this means you’re at least 30 days late on that bill and probably even later. This is because lenders are not allowed to report your late payments to the credit bureaus until you’ve gone a full 30 days past the due date. If you’re just a week or two behind on a loan payment this won’t be on your credit reports though you will likely have to pay a late fee. So, if there is a “30-day late” on your credit report, this actually means you’re 30 to 59 days late on that bill. And if you find a “60 day late” on your credit report, this really means you’re 60 to 89 days late on that obligation and so on.

The point here is that if you have a “30 day late” on your credit reports it’s likely that you’re really 40, 50 or more than 60 days late. This is another reason why FICO and VantageScore are so tough on consumers who have accounts that are currently delinquent.

Man climbing range of credit scoresGreat myth #2: All I have to do is catch up on the payment

A second great myth about credit scoring is that if you just catch up on your payment and avoid going 90 days past due your score will recover. This is true to an extent as your score will bounce back but not entirely. The reason for this is that lenders update your credit reports only once a month. In the event that you have an account that is showing up as being currently past due, it will actually be that way for an entire month. And it’s likely that your credit score will be lower and even considerably lower for 30 days.

“Account maintenance”

Many finance and credit card companies pull your credit scores every month just to determine if they want to continue to do business with you. This is called either “account management” or “account maintenance.” When you review your credit reports you may find a long list of inquiries that fall into those two categories. The problem with this is that if a creditor pulls your credit score during their account management process and sees that it has dropped because you have a currently late account, it’s likely to react by lowering your credit limits, closing your account or raising your interest rates.

Great myth #3: Your credit scores will take care of themselves if you just handle your finances responsibly

Remember what we wrote in an above paragraph that credit scores are a way to predict how you will handle credit in the future. If you quit using credit or use it in a way that the credit scoring formulas don’t like such as using just one card, closing down a bunch of accounts or maxing out your cards – even if you pay them off in full – your scores could go down. This is because it will look as if you were having some problem with credit.

Great Myth #4: Checking your credit will hurt your credit score

The truth is that getting your own credit report and scores will not affect your credit scores. Period. On the other hand if you were to ask a friend or relative at a car dealership or bank to pull your credit reports this would likely be treated as a “hard” inquiry and would ding your credit score. But it’s a non-event when you check your own credit.

This is a very bad myth because it can keep people from checking their credit reports to see what’s going on with their credit and their scores. A recent survey found that about 20% of all U.S. credit reports contain errors and that 5% have errors so serious they are damaging people’s credit scores and causing them to be turned down for loans or paying much higher interest rates. You really need to go to www.annualcreditreport.com at least once a year to get your credit reports from the three credit bureaus so that you could dispute any errors you find. And if you’re about to apply for a major loan such as an auto loan or mortgage, you should go to ww.myfico.com and buy your score so that you can see how lenders will view your application. Plus, you will get some good tips th`ere for improving your numbers.

Speaking of credit reports

If you’d like to know more about credit reports and how credit reporting works, here’s a short video that offers  some good information.

 

Why Your Credit Score Might Not Be As Wonderful As You Think

Credit Score highlighted in yellowYou say that you checked your credit score recently and that it’s great. Maybe you got your FICO score and it was 790. So you feel as if you were sitting on top of the credit world. Well, you might need to think again.

Great could be mediocre

As an example of this, your FICO score of 790 could be just mediocre on the VantageScore, which goes to 990. Beyond this, the eight credit scores most commonly used by lenders range from as low as 150 up to 990. Why is this? It’s because the three major credit bureaus – Experian, Equifax and TransUnion –have their own scoring models. The credit bureau TransUnion has its TransRisk scores that range from 300 to 850, while Equifax’s Credit Score goes from 280 to 850. In addition, there is an Experian score that goes from 360 to 840 and another that ranges from 330 to 830. And then there’s the VantageScore that the three credit bureaus created and that goes from 501 to 990.

What this means to you

What all of these scores mean to you is that it’s hard to determine how you would actually be evaluated by a potential lender. It’s true that most of them check FICO scores to determine how much risk an applicant represents but we consumers often get our scores from the credit bureaus and consumer websites such as CreditKarma.com or CreditSesame.com. While these non-FICO scores should be close to our true FICO scores, it can still be confusing.

Doesn’t make much sense

We’ve all grown up with systems that are A through F or 0 through 100 but now we have all these different ranges that can be bewildering. You might think you have a terrific score of 800 and then learn that it’s a VantageScore and maybe not so good. Or you might see that you have a score of 900 and think that this is wrong because you know that the FICO score tops out at 850. The problem is that you may not realize that the score you got was the VantageScore with it’s higher range.

In the same ballpark

Most scoring models – aside from the VantageScore – are not much different from the FICO’s range of 300 to 850. This means it’s generally okay to assume that your non-FICO score will be at least in the same ballpark. However, if you get a VantageScore and you assume that it’s identical to your FICO score, you may be in for a disappointment when you next apply for credit.

To see where you stand

If you want to get an idea of how you stand vs. credit applicants, you need to look at where you fall relative to the national percentile. As an example of this, to get the best credit you generally would need to fall in at least the 50th percentile. This converts to a FICO score of around 720.

This video from TransUnion explains more about credit scores, why they can different and why it’s important to pay your bills on time every month.

49 FICO scores

To make matters even worse, lenders aren’t neessarily looking at the same scores themselves. Within the FICO category, lenders could look at one of more than 49 different scores to assess your risk. In comparison, consumers usually get just their one standard FICO score. And research has shown that 20% of consumers will receive a score that is “meaningfully different” from the score that was used by the lender when deciding whether or not to grant credit.

Why so many FICO scores?

This is due to the fact that a potential lender can look at a different FICO score depending on the type of credit that you’ve applied for. If you apply for an auto loan, the lender might look up your FICO auto score. If you apply for a new credit card there is a specific FICO bankcard score your lender could check. There are also FICO mortgage loan scores and installment loan scores that focus on your history of how you’ve used finance companies. Plus, there is your generic FICO score, which is the most widely used, and is calculated based on your history with all the types of credit you’ve used.

How your FICO score is calculated

Your generic FICO score is based on five components.

  • Payment history
  • Credit utilization
  • Length of credit history
  • Types of credit used
  • Recent searches for credit

The top two, payment history and credit utilization together account for 65% of your credit score. What this translates into is that the most important things you can do to have a good credit score is first, make all of your payments on time all the time. And second, don’t use up a high percentage of the credit you have available. As an example of this, suppose that you have total credit limits of $10,000. In this case, you should not have combined balances of more than $3000, which would yield a credit utilization ratio of 30%.

Who do you trust?stressed old man

So with all of these different credit scores and credit score ranges, who should you trust? The best answer is to get your generic FICO score. It’s available on the website www.myfico.com for $19.95 or you could get it free if you sign up for a free trial of the company’s Score Watch program. But you might want to supplement this by getting your free score periodically from one of the three credit bureaus or a consumer website. The reason for this is because your credit score is not static. It’s generated every time you apply for credit. This means it could change literally from week to week.

One Sneaky But Legal Trick For Raising Your Credit Score

Man climbing credi score numbersWhether we like to admit it or not a little three-digit number rules our credit life that’s called our credit score. If you have a good credit score of, say, more than 750 you should be able to get just about any type of credit you apply for and at a good interest rate. Conversely, if your credit score is down in the dumps at 580 or less, you will have a hard time getting any new credit and if you can it will have a pretty stiff interest rate.

If you don’t know your credit score

Maybe you have never seen your credit score or haven’t seen it recently. If this is the case, you should get it immediately. The score that your lenders use when deciding whether to give you credit is called your FICO score. The only way you can get it is on the site www.myfico.com where you will either have to pay $19.95 or sign up for a free trial of the company’s Score Watch program in which case you will get it free. However, there are other options. The site www.CreditKarma.com will give you your credit score free but it won’t be your true FICO score. There is also the website www.credit.com, which offers a credit report card. This includes your credit score, a way to monitor your credit health, plus the ability to track your progress against your credit goals. It’s also possible to get your credit score from the three credit reporting bureaus – Experian, Equifax and TransUnion – though you may have to jump through some hoops in order to get it free. And again, this will not be your true FICO score.

The five components of your credit score

If you want to give your credit score a rapid boost, there is a way to do it. First, it’s important to understand that there are five components that make up your credit score. They are:

  • Payment history
  • Debt vs. credit available
  • How long you’ve had credit
  • New credit (number of times you’ve applied for credit)
  • Credit mix or how many different types of credit you have

Two = 65%

Of these five components, two make up 65% of your credit score – your payment history and debt vs. credit available. As you might guess, your payment history is based on how well you’ve handled credit – that is have you made all of your payments and on time. Debt vs. credit available, which makes up 30% of your credit score is really the amount of debt you have available versus the amount you’ve used. This is called your debt-to-credit-available ratio. Say that you add up all of your available credit (your total limits) and got $10,000 but had total debts of $8500. In this case your debt-to-credit-available ratio would be 85%, which would be too high and would make you look very risky to any new lenders. So a quick way to boost your score is to pay down your debts, which would immediately improve your debt-to-credit-available ratio.

The sneaky, little trick

Of course, paying down your debts can be easier said than done. In fact, if you could really pay down $3000 or $4000 of debts quickly, you probably wouldn’t be having a problem with debt in the first place. But there is an alternative. You could contact your creditors and ask them to raise your credit limits. Of course, if you had a debt-to-credit-available ratio of 85%, you might have a hard time convincing them to raise your limits. Some will and some won’t. But what you could do and here comes the sneaky, little trick is to get what’s called a sub-prime merchandise card tied to a line of credit that would allow you to buy merchandise from a single wholesale distributor. The thing is that everyone who applies for one of these cards is automatically approved. The distributor becomes the one who is supplying the financing because it wants your business. Of course, you shouldn’t get the card just so you could start racking up more debt. What you want is a new line of credit that the distributor will report to the credit-reporting bureaus.

How this helps

Let’s suppose you get a $10,000 line of credit on a subprime merchandise card. This boosts your total credit limit from $10,000 to $20,000. Your debt- to-credit-available ratio immediately drops from 85% to 42.5% and your credit score should increase accordingly and dramatically.

The real trick

Of course, the real trick is that you need to know where to go to get one of these cards and this may take some work. The problem is that these cards are marketed almost exclusively via email, telemarketing and direct mail. This is so they can make almost irresistible offers such as “$5000 credit cards – guaranteed! ..no credit check, … no co-signer … you cannot be turned down … everyone approved,” etc.


woman thinking while holding a credit card

The downside

The downside of these cards as mentioned above is that you can buy merchandise only through the one website or catalog and you must put down a deposit on whatever you purchase. For example, if you were to buy $1000 worth of merchandise you would have to deposit maybe $300 and then finance the remaining $700 on the merchandise card. This will be reported to one or more of the three credit bureaus and will appear as just another credit transaction on your credit report. This will have three important results:

1. It will, as noted above, increase your credit limit by the $5000 or whatever amount almost overnight and will look like any other unsecured revolving credit account.
2. Because you would be carrying a small amount of debt this would positively impact your credit report and show potential lenders that you are credit worthy.
3. If are sensible in how you use the card, you should eventually receive “legitimate” credit card offers in the future as other lenders rent your name from the credit bureaus.

6 Fairly Simple Ways To Increase Your Credit Score

how debt relief affects credit scoreThere are definitely things in life where less is better. For example, the fewer debts you have, the better off you are financially. On the other hand, there are cases where more is better. And one of them is your credit score. The higher your credit score, the easier it will be for you to get new credit and the lower your interest rates will be.

Credit scores

If you’re not familiar with credit scores they range 300 to 850. Scores of less than 580 would put you in the category of either “poor credit” or “bad credit.” But if you have a credit score higher than 750, you should be able to get any type of credit for which you apply and you should be able to get premium interest rates

How your credit score is computed

There is a formula or algorithm used to compute your credit score. It was developed initially by the company called Fair Isaac Corporation but is now just FICO. No one but FICO knows exactly how this algorithm works but it is known that it has five components as follows.

  • On time payments – have you used credit wisely?
  • Amount of credit used – the amount of credit you used versus the amount you have available
  • Length of your credit history – how long you’ve had credit
  • Types of credit used – the different types of credit you use
  • Applications for credit – how many times you have applied for credit recently

Six tips

If you want to quickly improve your credit score, here are six tips that can help.

Tip #1: Make your payments on time

One simple way to increase your credit score is to make all of your payments on time. Most experts believe that one single late credit card payment would lower your credit score by as many as 60 points. You could avoid this by setting up automatic payments. If you don’t have enough money available to make your payments when they are due, you should ask your credit card providers to move your due dates to a few days after your payday.

Tip #2: Lower your credit utilization ratio

This is in fact the quickest way to increase your credit score. Just decrease how much credit you’ve used versus your total limits. This is your debt-to-credit ratio, which you can calculate by adding up all of your debts and then dividing them by your total credit limit. For instance, if you had a total credit limit of $12,000 and had charged up $2000 worth, your debt-to-credit ratio would be 16%. Most experts believe that the ideal ratio would be 7% to 10%. There is actually a loophole here. If you pay off your balance before your statement closing date (don’t confuse this with your due date), these charges won’t be reported to the three credit bureaus. Alternately, you could contact your credit card providers and ask for higher credit limits – just make sure you don’t use any of that new credit./

Tip #3: Pay off the card where you balance is closest to its limit

This will help you with your credit utilization ratio. However, don’t cancel that credit card when your balance reaches zero. This would lower your total credit limit, plus it will decrease the “age” of your accounts, which would work against your length of credit history.

Tip #4: Contract a friend or relative

If you get your credit score and find that it has taken a hit recently, contact a friend or relative and ask if you could be added as an authorized user on one of his or her credit cards. This account would then be added to your credit report.

Tip#5: Open some new forms of credit

If you are using only credit cards and have no other form of debt, you might take out an installment loan, a personal loan or a personal line of credit. This would help with your “types of credit used.” Since this accounts for 10% of your credit score, this could translate into a quick boost as the FICO algorithm apparently likes to see that you have and can manage various types of credit sensibly.

Tip #6: Check your credit report at least once a yearCredit Report

It was recently found that 26% percent of all consumers have at least one error on their credit reports. You need to check your credit reports – from the three credit bureaus Experian, TransUnion, and Equifax – at least annually. There could be an error in one of those reports that’s having an adverse effect on your credit score. You can get all three of your credit reports free – once a year – at the website www.annualcreditreport.com – or individually from the three credit bureaus. Many people choose to get their reports one at a time every four months as this is a way to sort of monitor your credit year around. If you do find an error in one of your credit reports, make sure that you dispute it with the appropriate credit bureau. While all three of these bureaus have online forms where you could file your dispute, it’s better to write a letter and send it registered so you can make sure the bureau got it. It will then have 30 days to have the item verified from whichever institution provided the information. In the event that the institution cannot verify the debt or does not respond within 30 days, the credit bureau is required by law to delete it from your credit report. This could cause your credit score to take a very nice jump.

For more details about the five components of your credit score and why your score is so important, be sure to watch this video.

Are You Wasting Money Buying “Consumer” Credit Scores?

Man climbing range of credit scoresMost people today understand that they have a credit score and that it’s important they know it. But there can be differences between what are called “consumer credit scores” and FICO scores, which are what banks, credit unions and auto loan providers use when they decide whether or not to give you a loan

What you will learn in this article

  • Where your credit scores come from
  • Why there are different versions of your credit score
  • Whether consumer credit scores are worth the money
  • How you could get your score free – sort of
  • Why some of the “free” credit score websites require payment information
  • How to get your score totally free
  • What’s a good credit score

Where these scores come from

To understand this whole credit score thing, you need to know where they come from. FICO (formerly known as the Fair Isaac Corporation) has been using its algorithms for decades to predict default risks. To put this another way, the reason why your credit score is important to a lender is because it’s a predictor of risk – or how likely you are to pay back the loan. In addition to FICO there is now another credit score called the VantageScore, which was developed by the three credit reporting bureaus. While both the FICO and VantageScore systems are updated periodically some lenders don’t necessarily buy the most recent version. They may actually stay with an older version if they’re happy with how it works. The VantageScore as well as scores you would get from sites like freecreditreport.com and credit.com are the “consumer” scores.

Different versions

As you can see from this, there are a number of different ways to measure your credit score. It could be FICO’s most recent version, a FICO version from several years ago, last year’s VantageScore or its most recent iteration.

Still worth the money

Despite all of this, your credit scores are still reliable snapshots of your financial life. Of course, they’re not perfect. But they are better than nothing. If you pay around $15 for your credit score, this still represents a relatively cheap way to assess your credit worthiness.

Getting your credit score free – sort of

You can get your true FICO score for $19.95 at the website www.myfico.com or get it free if you’re willing to sign up for a trial subscription to the company’s Score Watch program. There are other websites where you can purchase your credit score for around $15 as noted above. There are also sites where you can get your scores free – sort of. For example, the website www.freecreditreport.com offers two options: You can get a free “Two Day” credit score or an instant credit report and score for $1. In both cases you will have to create an account before you see your score, which means typing in your name, address and email address. You will also have to add your Social Security number, date of birth and in the case of the $1 report, your payment information. Then there’s the fine print, “When you order your $1 Credit Report and free Score here, you will begin your trial membership in freecreditreport.com. You will be billed immediately $1 for your Report and Score. If you don’t cancel your membership within the 7-day trial period, you will be billed $19.99 for each month that you continue your membership”

The website www.credit.com also offers a free credit report and credit score but it turns out that free costs $1. If you fill in your name, address and email address, you’ll end up on a screen where you’ll have to provide the requisite payment information. And then again comes the fine print, “You will be billed immediately $1 for your Report. If you don’t cancel your membership within 10 days, you will be billed $12.95 for each month that you continue your membership.”

What these companies rely on

What these two companies and others like them rely on is that you’ll forget to cancel your membership so they can continue to bill you $12.95, $19.99 or whatever a month until you notice the charge on your credit card and cancel your membership.

 

Where free is really freeMiddle age couple happy about insurance

There are several sites where you can actually get your credit report free without the fine print. One that we like is www.CreditKarma.com. It will not only provide your credit score free but if you type in your credit card and loan numbers it will show you their balances and the total amount of your debt and the history of your credit score. However, do keep in mind that this will be your Experian score and not your FICO score.

All three at once

There is also a site where you can get all three of your credit reports simultaneously. It’s www.annualcreditreport.com. You will not be able to get your credit score there but you will be able to get all three of your credit reports free – at least once a year. If you need to see your credit reports more often than annually, you’ll have to pay for them. Many people choose to get their reports at the rate of once every four months, which is a sort of way to continually monitor your credit.

Here’s a video with good information about getting your credit report and credit score free.

What’s a good credit score?

When you do get your credit score, you may wonder whether you have a good one. If you’re not familiar with credit scores they range from 300 to 850 with the higher the better. They are generally grouped into ranges as follows.

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score
• Between 620 and 679 – Average or OK score
• Between 580 and 619 – Low credit score
• Between 500 and 579 – Poor credit score
• Between 300 and 499 – Bad credit score

Did You Know Women Are Better At Handling Credit?

Smiling woman with pen, paper, calculatorThe credit-reporting bureau Experian recently released a study showing that in general, women are better at handling credit than men. This study came from a sample of 750,000 credit reports nationwide.

Earn less but have better credit scores

Among other things, this study revealed that woman earn 23% less than men but have credit scores that are just a bit better. Their scores average 675 vs. 674 for men. The study also reported that men use 31% of the credit they have available and that women use only 30%.

Average debt

Women, the study found, carried an average of $25,095 in debt from personal loans, auto loans and credit cards, while the average man had $26,227. Men also take out larger mortgages (an average of $187,245) than women whose mortgages average just $178,140. And men have more of an incidence of late payments at 5.7% vs. women who have an incidence rate of just 5.3%.

Interesting but not as important

Experian pointed out it’s interesting to see that women are a bit better at handling credit than men but what’s more important is the value of building a good credit history. Today more than ever, debt and how we handle credit is critical. You need to pay attention to what’s in your credit report, make sure you never miss a payment and keep your credit utilization rates low as these are the three keys to financial good health.

What’s in your credit report?

I’m sure you’re seen the credit card TV commercial that ends with the phrase, “what’s in your wallet.” That might be important but what’s even more important is what’s in your credit report. Your credit report is used to generate your credit score and a bad credit score can make it practically impossible for you to get a mortgage, an auto loan or just about any kind of credit.

Conversely, a good credit score will actually save you money in the interest rates you’re charged. Here’s what I mean. If you apply for a mortgage, a good score of 750 and above could qualify you for an interest rate of 5.780%, while a poor score of 620-659 might result in an interest rate of 7.096%. Do the math and you’ll see that this represent a difference of 1.31%, which will mean thousands of dollars over the life of the loan.

Where to get your credit report

If you’ve never seen your credit reports (you have three) or haven’t seen them for more than a year, you need to get and review them. They are available free (once a year) from the credit bureaus – Experian, Equifax and TransUnion – or you can go to the website, www.annualcreditreport.com and get all three simultaneously. While this is easier and more convenient than going to the individual credit bureaus, some people choose to get their reports one at a time every four months as a way to sort of monitor their credit reports year around.

What to look for

When you go over your report(s) you need to look carefully for errors – especially negative items that could be hurting your credit score. A recent federal study reported that one in four Americans have errors in their credit reports and that about 5% have ones so serious they could be affecting their credit scores. When you go over your reports you need to look for items such as defaults, late payments and charged off debts that weren’t yours. If you find one (or more), you can write a letter to the appropriate credit bureau and ask that the item be removed from your report. The credit bureau is required by law to contact the organization that supplied the information for verification. In the event the reporting organization can’t verify the item or doesn’t respond within 30 days, the credit bureau must delete it from your credit file, which could result in a nice boost to your credit score.

8 Ways You Could Be Hurt By A Bad Credit Score

Young man trying to learn about debt reductionDo you think the only thing a bad credit score can do is keep you from getting a low interest rate on a loan?

If so, you’d be dead wrong.

There are a number of ways a bad credit score could hurt you, including some you might not have ever imagined.

Your relationships

Relationships have ended when one of the partners discovered that the other had a bad credit score due to a boatload of debt. And in the case of a divorce, credit scores are sometimes used in divvying up the couple’s net assets.

Renting a house or an apartment

A potential landlord can demand to see your credit score before renting to you. Depending on what they see, you might get turned down for that neat apartment or house you thought you’d soon be living in.

Finding employment

If you check that little box on an application form that gives the prospective employer the right to see your credit report, you might not get the job. Employers are legally allowed to use credit scores as part of the hiring process. However, if they refuse to hire you because you have a bad report, they must tell you this.

A higher auto insurance premium

Many auto insurance companies now believe there is a direct relationship between people’s credit scores and the likelihood they will have an accident. Some create their own version of a credit score with more emphasis on on-time payments than your total debt. Some companies then use this information to compute your premium or to even deny you coverage.

Homeowner’s insurance

This is similar to auto insurance in that some insurers see a correlation between a bad credit score and a lot of claims. Maybe they believe that people with less cash have more of a motive to file suspicious claims. In any event, if you have a bad credit score, you might end up paying more for your homeowner’s insurance than a person with a good credit report

Your utilities

Gas, water and electricity companies now typically check credit scores before starting services. If you have a bad credit score, you’ll still get the electricity you need to run that high-definition TV but you may have to put up deposits to get those services.

Professional licensing

Congress passed the Fair Credit Reporting Act a few years ago. While it provides us with some protections, it also has some downsides. For example, the governmental agencies that regulate professions such as doctors, lawyers and other such professions can use credit scores in deciding whether or not to grant licenses.

A mortgage

While credit scores have long been used in qualifying people for home loans, there are now rules that put even more of a emphasis on applicants’ creditworthiness. This is due mostly to the high number of foreclosures we’ve seen since the financial meltdown of 2007.

What’s your score?

You’ve undoubtedly seen the TV commercials that end with the phrase, “what’s in your wallet.” Today, as you can see an equally important question is “what’s your credit score?” If you haven’t seen it lately – or ever – you really need to get it.

Where to get your score

You can get your credit score from any of the three credit bureaus (Experian, Equifax and TransUnion) but you may have to jump some hurdles to get it and won’t be your true FICO score. The only place you can get your FICO score is at www.myfico.com. And it’s important to get your FICO score because it’s the score almost all lenders use in determining whether to grant you credit and at what interest rate.

Why Credit Scores Have Become King

Man climbing range of credit scoresWhether it’s good or bad, the fact is that our credit scores have become the king of our financial lives. If you apply for a credit card, a mortgage, , an automobile loan, an apartment or even auto insurance, guess what’s the first thing that will be checked. Yes, it will be your credit score.

Understanding your credit score

There are three credit-reporting bureaus – Experian, Equifax and TransUnion. They’ve been creating reports on people’s credit for many years. Lenders would review these reports and then make subjective judgments about people’s creditworthiness. However, in 1958 the company now known as FICO created the concept of a credit score. According to the online encyclopedia Wikipedia, “A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.”

How your credit score is calculated

Nobody outside of FICO knows exactly how credit scores are calculated. This is a carefully guarded and proprietary algorithm. However, it is known that credit scores are composed of five components – credit history or on-time payments, capacity used, length of credit history, types of credit used and credit applications. Of these five components, the first two are the most critical because it is believed that they account for 65% of your credit score.

Credit score ranges

Credit scores are grouped into ranges. They are as follows.

Between 700 and 850 – Very good or excellent credit score. one
Between 680 and 699 – Good credit score.
Between 620 and 679 – Average or OK score.
Between 580 and 619 – Low credit score.
Between 500 and 579 – Poor credit score.
Between 300 and 499 – Bad credit score.

People who have scores above 700 are considered to be “golden” and can get just about any sort of credit that they would apply for. Conversely, if you have a score of 580 or less, you’ll have a tough time getting credit and if you do get new credit, it will come with a high interest rate.

Why it’s become king

There is a simple reason why credit scores have become king. Credit reports are usually very long and complicated. Few lenders are willing to invest the time required to wade through the 12 or more pages of a report when they can just check your credit score instead.

An example of how credit scores affect interest rates

Here, courtesy of Bankrate.com, is an example of how your credit score would affect the interest you would pay on a mortgage.

760 to 850 tier 5.780% 620-659 tier 7.096%
700-759 tier 6.002% 580-619 tier 8.583%
660-699 tier 6.286% 500-579 tier 9.494%

As you can see from this table, it is much better to have a credit score of 760 or above vs. one of less than 580 as this could mean a difference of more than 3.5 points. And this would translate into thousands of dollars more you would pay over the life of a 30-year mortgage. Of course, the example of what you would pay if you had a credit score of less than 580 is relatively hypothetical as the odds are you wouldn’t even be able to get a mortgage.

What to do about a low credit score

Unfortunately, there’s not much you can do short term about a low credit score. If you have a score of 620 or lower, it’s probably because you’ve made some serious mistakes in in the way you’ve handled your credit. You’ve probably missed payments or even defaulted on a loan or a credit card. Worse yet, those bad items will stay on your credit report and continue to affect your credit score for seven years. This means you’ll just have to slog it out, take care of any unpaid balances or defaults and be sure to make your payments on time every time until those bad items fall off your credit report.

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