September 25th, 2008 — Goal, Money, Personal Finance, credit score
While obsessing over a FICO score is not a good idea, this is a number that will have a lot of bearing in your life. This number determines whether or not you will be able to get a house, a new credit card, or in many cases, whether or not you will be able to rent an apartment. Lenders and businesses are relying on FICO scores more than ever, and it is have never been more important to make sure that your score is where it should be.
If you are just starting to build up your credit history, this is the perfect opportunity to watch your score and see how different variable affect it. Over time, with proper management, you have the ability to get your FICO score up over 800, but it will take some work. If you have already made some mistakes and your score is under 600, don’t despair. There are plenty of ways that you can restore your FICO score.
First, you need to know just how bad it is. You may even want to consider purchasing a subscription that will allow you to monitor your score over time. This helps you see what is happening with your credit and can provide you with advance notice if something is going wrong with your credit. We highly recommend monitoring your score, especially if you are getting ready to buy a house.
Once you have an idea of the number you are working with, it is easier to begin the process of restoring your FICO score. The average American has a score that is around 680, which is considered satisfactory. A score over 720 is considered good, and above 775 is considered excellent. However, scores under 620 are considered to be very bad and it can be difficult to get a loan.
The higher your score is, the less impact small good changes will have on it. For example, if you are already at 750 and keep making monthly payments, without opening any new cards, you probably won’t see much change. However, bad changes can have a very big impact on your score. For example, a collection can drop your score by as much as 20%, or a late payment may cause it to nosedive.
It is a lot easier to see more changes when you are working with a lower score, especially when you are rebuilding your credit. If it is in the low 500s, or even lower than that, making little changes can actually give your score a nice bounce. If you do decide to use a credit score monitoring service, these bounces are a great motivator to keep up the good work.
Now that you know what you are dealing with in terms of your credit score, it is time to work on putting together a plan that will help you restore it. Our next post will cover specific steps that you can take to get on the road towards a perfect score.
One resource you should be sure to check out is the blog at Credit Karma. At Credit Karma, not only can you get a free credit score and offers from partners with a pro-consumer vision, but also find extremely relevant information about your credit score or credit cards such as: Relationship Between Age and Credit Scores, How Often Does Your Credit Score Change?, or How A Credit Card Limit Is Determined.
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September 18th, 2008 — Debt, Personal Finance, bad debt, credit score
Whether you’ve lost your home or your job, or your money management skills over the years have left you severely in the hole, it is never to early to start turning things around. You can bounce back from financial trauma, but it will take some effort and dedication on your part. Here are some tips to get you back on the road to financial stability.
First, you’ll need to pull your credit report and see just how bad things are. This will help you get an idea of which creditors to handle first and will help you spot any potential errors. Remember, many creditors are willing to work out not only payment plans, but they may be willing to reduce your overall debt in exchange for a partial payment. It does not hurt to ask, and the worst thing they can tell you is no.
If your credit rating has already suffered, don’t despair. Assuming you have taken care of any collections and creditors, it is time to start rebuilding your credit. You can start by getting a secured credit card. This will require a small deposit of cash on your part, but this will go a long way towards building your credit history back up and repairing the damage that has been done. If you are facing creditors, make sure that you read the Fair Debt Collections Protection Act for consumers and know your rights.
The key is to learn from your mistakes. Once you have your secured card, remember that it is not free money. Instead of charging up to the full balance, use your card once a month for something inexpensive. Pay off the entire balance every single month, or at the very least, pay more than the minimum balance before the due date.
This will help establish a good payment history and this will factor in to how your lenders see you. Once you have been making payments on this card for six months, you should be able to apply for a “bad credit” or high risk credit card. Again, keep those balances low and use it only to show that you can be trusted to make your payments on time every month.
Next, you will need to start putting money aside. An emergency fund is essential and can help prevent another financial trauma from occurring. Aim towards putting three months of your salary away into your fund, or at least try to put a good sized portion in. Building up a savings account over time, even with small deposits, will pay off over the long term.
Now, it’s vital to take a look at why your initial financial trauma occurred. Was it due to circumstances beyond your control or are you to blame? By taking a hard look at the way you spend and how you view your money, you can help prevent any future financial traumas from occurring. After you are back on your feet, you can learn from these mistakes and start fresh.
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July 22nd, 2008 — Debt, Money, Personal Finance, bad debt, credit cards
The average American is currently carrying at least some form of debt, even if it is small. We live in a society where overspending is common and credit card debt has become a right of passage. In many cases, you need to be in debt in order to start building your credit history. Without this, it is hard to get a house or even a car. But the question is – how much debt is too much?
When you are first starting out, you may have a lot of student loans and this further compounds the problem. Ideally, the average person should limit their debt to three times their currently monthly salary. However, this may not be possible in many situations. There are some things that we cannot help but go into debt for, such as a car or school, but there are certain kinds of debt that you can avoid.
The key is figuring out the difference between good debt and bad debt. Good debt is hard to have too much of in most cases, especially if you are putting it to work for you. Bad debt is very easy to rack up, and can be hard to pay off. This should be the smallest part of your debts. So, what is good debt and what is bad debt?
Good debt is money that you spend on something that will give you some sort of return. For example, your student loans are good debt, since they were used to further your education and help you earn a larger salary. A car loan straddles the fence, but it is a necessity, so for the sake of argument, we’ll put this in the good debt column. A home loan is also a good debt as long as you do not overbuy.
Bad debt is debt that does nothing but cost you money. Credit card debt is the best example of this, especially when your cards are used to purchase non essentials. You can look at bad debt as something that will never have any sort of return. A $400 shirt may look nice, but it’s never going to do anything but cost you more money, ie: dry cleaning. In fact, there’s a huge risk that it will even end up being ruined and all that money will go out the door.
It is also important to remove emotional attachment from the concept of bad debt. It is easy to say, but I love that shirt and I wear it all the time. The bottom line is, it is doing nothing for your bottom line, and as such, it is bad debt.
Good debt also includes what is known as leveraged debt. This is a type of debt that you use to create another income stream. Examples of this include investments or dividends that are constantly paying you back. This kind of debt is very good indeed and will only serve to enrich you. While you should never get in over your head with any kind of debt, good debt is a lot easier to handle.
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June 19th, 2008 — Personal Finance
Many of us have been conditioned to think that living debt free is the only way to be. While there is some truth in this statement, if you’re completely debt free and using only cash, you’re hurting your chances of getting a new home, and you may end up in a situation that requires more money than you have without any recourse. Let’s find out why paying with cash is not always the smartest idea.
1. It hurts your credit rating.
You wouldn’t think this would be the case, but you do need to have some debt if you want to build up a credit rating. In some cases, people with absolutely no debt have a credit score in the mid 600’s, while those with two or three cards that they constantly pay on will have a score in the high 700’s. What’s the difference? In order to keep your credit rating high, you are going to need to have a little debt.
We’re not saying go run up ten cards and hope for the best. What we are saying is that having one or two cards with low balances is a great way to keep your credit score high. You’ll be getting the benefit of monthly reports on your credit history and you’ll be building that score up to the point where no one will be able to turn you down for anything.
2. Emergencies happen.
No matter how proud you are of being able to pay cash for everything – what would happen if you woke up tomorrow and discovered that you have a serious brain tumor that needs to be removed right away. The cost of the surgery is more than $300k and you don’t have any insurance. You’ve been paying with cash for years and your credit rating has suffered as a result.
In this situation, you may not be able to get a loan to cover your health costs and while some hospitals will work out a payment plan, they’re going to use your credit score to determine their risks. The problem with emergencies is that you never know when they will happen and they usually cost an arm and a leg. If you don’t have a savings account that is sizeable, you are literally one step away from financial disaster.
3. You won’t be making any extra money.
You know the old saying, it takes money to make money? If you’d like to get some extra income every month, you need to find a way to take advantage of opportunities for multiple streams of income, such as investments. Debt leveraging is one of the best ways to accomplish this since you won’t be using your primary funds for the new opportunity.
While debt has a bad reputation, there are good forms that are necessary if you want to make more money and have good credit. There is such a thing as good debt and if you manage your finances properly, there is no danger in having a little debt.
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