Build Credit: The Three Keys to Creating Good Debt

February 28th, 2011

Money Tree At first glance, the words “good” and “debt” don’t seem to be a symbiotic match, but there are indeed some instances where creating debt does generate a surplus of income or personal wealth. There are certain schools of thought that agree if a debt is going to increase your potential for income, it could be a good opportunity. However, many people don’t stop and think before they agree to take on a new financial responsibility. If you’re currently considering obtaining a debt to help get you through a specific situation you may want to keep these following advice in mind.

Always Question Your Motives
A good rule of thumb to follow when considering creating a debt is to ask yourself the following question.

“How is borrowing this money going to help me make money or get me out of debt?”

If you’re using credit to do your basic living, you’re not helping yourself pay down your debt, or even create new income. You may feel temporarily relieved, but in actuality you’re increasing your debt and just pushing off the inevitable need to pay until another day. If you approach debt from the perspective of using it help you create wealth, you’ll have a much healthier personal financial situation.

So, in short, if your motive is to create more debt, it’s not a good idea to keep digging yourself into a hole. However, if you are using the debt to increase your opportunities to generate more or new income, it may be the right move for you.

Determine What Is A Good Debt
An easy way to decide what a good debt for you would be is to determine to what degree that debt will increase your wellbeing or expand your potential financial growth. For some ideas, consider these five scenarios for creating good debt:

Take out a loan to start a side business or to expand your current business. However, you’ll want to get the loan in your business’s name as soon as possible so that your liabilities are divided.
Get a college education.
Take a class or learn a skill that will help you be more employable. This can be anything from going to therapy to becoming a better communicator or even taking a sewing class so that you can sell your creations on Etsy.
Consider getting a consolidation loan with lower interest rates.
Buying a home or some other investment that is going to increase in value is also good debt, albeit with a bit of risk. Before you buy a home, you have to think worst-case-scenario: If this home never increases in value, can I always afford the payment?

Investing in Your Family
It isn’t a traditional approach to personal finance or debt to consider investing in your family, however, while it may not increase your revenue stream directly, it does increase the overall quality of your life and the future of your family. The main factor to consider before you agree to the debt is to honestly answer, “Can you afford to pay it back?”

If you don’t have solid proof that you can pay it back, it would not be financial prudent to consider it a good debt. The key here is establishing solid proof that you can pay it off. Many people have a feeling they can pay it back, but don’t run the numbers to determine whether that feeling is based on fact. To establish proof, you need to know exactly what you need to live on each month and exactly what income is coming in. If you have enough left over to cover the new debt comfortably, than it might be something of value to consider. Some examples of investing in your family include:

Investing in your family’s future by sending your kids to college.
Hiring a tutor for your children.
Sending your overworked spouse on a vacation to relive their stress.
Buying a home that your family is going to live in forever might be good debt even if it’s a seller’s market and the home is likely to lose value.

When it comes right down to do it, life is a balancing act. Some people preach that you should never use credit unless it can increase your income. All other debt is bad debt. That isn’t always the case, and you can’t live your life by absolutes. There are some times in life when you will need to use credit and pay interest for things that will increase you or your family’s well-being. The trick is in making educated financial decisions and balancing the risk of the debt versus the opportunities it will create.

How have you used debt to increase your wealth or help your family? Share your stories below!

Tags: build credit, debt, personal finance

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Build Credit: Debunking the Lower Credit Limits Myth

February 23rd, 2011

Credit Cards Similar to the belief that no credit equals good credit, having lower limits can actually be extremely harmful to your credit score. To understand how this works you need to understand utilization rates, or what we call the 30% rule. Credit bureaus look to see that you are maintaining less than 30% of your credit limit at all times. If you go over the 30% marker, you are considered to be living above your means and this will be reflected in your credit score.

The problem with lower limit credit cards is that it is far too easy to go over the 30% rule. If you only have a $250 credit limit, you can never have a balance of over $75 without creating a negative reaction to your credit score. In addition, many credit card companies report your credit limit lower erroneously. Meaning you may be right under $75 each month, but your credit limit is being reported at $200 instead, putting you over the 30% limit.

In some cases, when you’re rebuilding your credit you may have to work with these lower balances. This will take careful planning to avoid any issues with errors. However, if you have higher balances, you do not want to ask for your rates to be lowered. You can never have “too much available credit.”

The best way to make sure you don’t go over the 30% rule is to use auto payments. You’ll want to schedule a monthly payment for a bill such as a gym membership or other monthly payment you need to make to be taken directly from your credit card. Then, from your bank account, schedule another auto payment to pay the credit card for the same amount.

This may sound like taking a few extra steps, but it keeps your accounts active and you can control exactly what spending is happening on your cards so you don’t go over the 30% limit.

To learn all all the facts on your credit score, get the book that will walk you through the 7 steps to a 720 credit score.

Tags: credit cards, credit score, credit scoring myths

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Marriage and Credit: Join Lives, not Accounts!

February 21st, 2011

Most people approach marriage and credit with a one-for-all, all-for-one attitude. They open joint credit cards, apply for car loans as a couple, and stop building separate credit histories. After all, they have joined their lives together; why not marry their credit histories?

Though the sentiment is appealing, keeping some credit accounts separate has big advantages. Holding credit jointly puts a couple at even greater risk during times of financial crisis. Here are two common credit pitfalls of marriage.

Pitfall #1: Joint Credit Cards and Automobile Loans

Let’s imagine what would happen in a typical household by considering Jack and Jill, a married couple with joint credit cards and joint automobile loans.

Jack lost his job, so the couple is trying to make ends meet. After a couple of months, they start realizing that they cannot afford all of their bills. So they stop making payments on several credit cards and on one of the two car loans. The credit card bills are sent to collections and the car is repossessed.

And both Jack and Jills’ credit scores are in the trash.

Now let’s see how the same situation would play out with Peter and Paula, a married couple with separate credit cards and automobile loans.

When Peter loses his job, the couple creates a strategic plan about their forthcoming financial problems.

Peter and Paula know they can only afford to pay all their bills for three months; the money will run out after that. Peter searches high and low for a job, but is unsuccessful. After three months have passed, the couple decides to stop paying credit cards and car loans in Peter’s name. They stay current only on bills in Paula’s name.

Of course, Peter’s credit score suffers. But Paula’s remains pristine. This means that Paula is able to apply for loans in her name, while Peter learns how to rebuild credit.

Opening all loans jointly is among the biggest credit-scoring mistakes a married person can make. Let’s take a look at another one.

Pitfall #2: Holding All Credit in One Spouse’s Name

Opening all credit cards and loans in one spouse’s name is another big no-no for married couples.

This usually happens when one spouse works a nine-to-five job and the other stays home with the kids. The spouse with the paycheck opens all credit in his or her name.

But what happens if something happens to the working spouse? A bankruptcy, death, loss of income, or divorce would make the other spouse vulnerable. Because no credit is the same as bad credit, the stay-at-home spouse would have no ability to secure a loan.

There’s another problem with this strategy. Let’s switch this scenario up a bit and imagine that both spouses work. The wife has a part-time job with a small salary, so all of the credit is in the husband’s name. The couple decides to buy a home. To qualify for a loan, they need both spouses’ income.

The couple now has a big problem: The wife has no credit history, so her score is low. Putting her name on the home loan would endanger the loan. And the husband cannot qualify for the loan on his own—he needs his wife’s income for that extra boost.

Most likely, the couple would not qualify for the loan. At a minimum, the couple would pay a higher interest rate.

This pitfall can be avoided if both spouses build their own credit scores.

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Build Credit: The Truth About Living Debt Free

February 21st, 2011

Cut Credit Card For a lot of people, living with credit card debt is simply a way of life. We have all heard of the credit crunch where banks lent more to people than they could afford to pay back. When people fell behind on their repayments, the banks were in trouble and drastically cut back on the amount of money they were lending. This then led to a collapse in the housing market as a glut of foreclosures suddenly came up for sale. A lot of people, during this depression, decided that credit was actually a bad thing and they started to live a debt free lifestyle. While this is a great idea in principle, it is not a good idea to close your credit card accounts and attempt to live life on a cash only basis.

The problem is that your credit score affects many areas of your life. For example, car insurance companies now use credit scoring as a way to determine how responsible you are behind the wheel of a car. More and more companies are now using credit scoring to decide how responsible you will be as an employee. Also, if you ever need cash in an emergency, it is essential to have a good credit score to ensure you get the money you need quickly and at the best rate.

What most people do not understand is that not having credit is just as bad as having bad credit. We no longer live in a society where you can be good friends with your bank manager and he, knowing who you are and how you live, can decide whether to lend you the money you need. Most bank managers know little more than sales department managers.

At US Bank, for example, the local branch no longer has control over whether a check that overdrafts your account will be paid or bounced. If you call the branch and ask them to pay it, they will tell you that they have no control over it. They will tell you, however, that you should apply for overdraft protection so that it does not happen again, and they will happily help you fill out an application. Of course, whether or not they grant you overdraft protection depends on your credit score.

The problem with not having credit is that the credit bureaus will no longer be able to assess your credit worthiness. Rather than assume you are a good person to lend to and risk being wrong, they will err on the side of caution and assign you a poor credit score. This could lead to higher rates on your car insurance, mortgage or even stop you from getting a job or promotion.

Unfortunately, it is not a good idea to simply put the credit cards into a drawer and never use them either. A lot of companies will declare unused cards as inactive and therefore they will not count towards building your credit score. However, there is a solution that will not cost you extra money in interest and will still build your credit score.

The solution is to have between three and five credit cards and set them up to automatically pay one monthly bill each. For example, your cable bill could be paid out of one card, your car insurance could be paid out of another and your gym membership could be paid out of a third card. In order to avoid interest charges, you could then set up an automatic payment to these cards from your bank.

In essence, using this method, your money leaves your bank and arrives at the place it needs to get to; it just passes through your credit card accounts on the way. This allows you to essentially live debt free, but give you the benefits of a healthy credit score so you have access to the cash you need in case of an emergency.

For more information about your credit score, download our free eBook, What Your Banks Won’t Tell You About Your Credit Score.

Tags: build credit, debt, money saving tips

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Getting Unstuck

February 20th, 2011

Over the last months we’ve asked you to share your stories of credit and personal finance.

Well, I now have to confess that I’m a little embarrassed…

You see, I am about to share shocking stories I have never shared with anyone before. After all, you’ve shared your stories with me, so now it’s my turn…

www.NeverBeStuck.com

The purpose of sharing stories is to learn from another person’s life choices. I’ve had bruises up and down my arms, and I’ve been practically illiterate. I’ve spent $50,000 more than I earned. I’ve been in financial wreckage…

But I got unstuck.

And now I’m going to tell you the exact process I used to get unstuck financially each and every time I found myself in a jam. Because you so generously shared your personal story with me, I’ve created a series of FREE videos that teach you the exact formula for getting instant results, instant income, and instant change.

Here we go…

Philip Tirone

P.S. Once, I actually led a secret life. Watch the video now.

Tags: personal finance

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