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

Build Credit: Debunking the No Credit Equals Good Credit Myth

February 11th, 2011

typing on keyboard Credit is a tricky subject. Everyone thinks they know the right thing to do, and everyone seems to be an expert. The fact is, there are a lot of myths and untruths about the way your credit score is compiled. The biggest and first mistake most people fall for is believing that no or little credit equates to good credit. This couldn’t be further from the truth.

Imagine someone you didn’t know came up to you and asked if they could borrow money from you. They promised they’d pay it back to you in a week. How would you know they were responsible or even ethical enough to return your investment? Now, let’s say a trusted friend you’ve known for years came up to you and asked you for the same favor. Your response would more than likely be quite different than the one you had towards the unknown person.

When you have little or no credit, credit bureaus view you as the stranger asking for money. They have very little information on whether you are a good investment and whether they are likely to see a return. You have to become like the trusted friend and create credit history to have a valued and trusting relationship.

This doesn’t mean go out and apply for multiple credit cards and start taking out loans. While you need to show credit history, you also don’t need to go into debt. To create a good credit score, you need at least three credit cards with balances below 30% of your credit limit and an installment loan.

Now, you may be thinking that credit isn’t really a big of deal and you don’t want to have credit cards and loans because they are a hassle. This way of thinking can hurt you financially more than you know. Your credit score is used to determine a number of things including, believe it or not, your automobile insurance and even your job worthiness.

When it comes to purchasing a house, your interest rate is determined by your credit score. This means you could be paying thousands more for your home because of bad credit decisions. Think about this:

On a $300,000, 30-year fixed rate mortgage, a person with poor credit (below 620) would pay $589 more a month than a borrower with a 720 credit score. That’s $589 a month! Imagine what you could do with an extra $7,068 a year. You could buy a new car, save for your child’s college tuition or with wise investments, double, triple, or even quadruple the money!

The bottom line is, your credit score can either help or hurt you financially. Learning the ins and outs of how to maintain a high credit score will give you a great return on your investment of time and research. It may even help you live the life you dream without overextending yourself.

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

Tags: build credit, credit cards, credit score

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Bad Credit Is Bad News for the Unemployed

February 2nd, 2011

A recent report from Inc. Magazine says at that at least 60 percent of employers run credit checks on potential job applicants at least some of the time. This is a 17 percent increase from 2006.

And given the high unemployment rate, this is particularly concerning. With a much bigger pool of candidates to choose from, employers can narrow the pool of qualified candidates by looking at a job applicant’s credit score. Fearful that a poor credit score is a sign of irresponsibility, an employer might not offer a job to a candidate with bad credit.

This means that job applicants may be hit with a double dose of trouble. Not only are they out of work, but they also are unable to make regular payments on mounting mortgage and credit card bills, which is causing their credit score to plummet. Since many employers are making credit checks a mandatory condition of employment, job applicants with bad credit may find themselves stuck in a vicious cycle: No job translates to no ability to pay bills, which in turn causes poor credit, which means a person might be ineligible for jobs.

If you are a job applicant worried that an employer will run a credit check, your best bet is to be candid with possible employers and let them know about your experience. Since the recession has had unfortunate consequences for many people, the employer might be sympathetic to your plight. Pitch your situation as a learning experience so that you can show the employer that you are ready to move on from your mistakes.

Explain that you have started the process of learning how to build credit to minimize damage and improve your credit score.

By taking serious steps to repair your credit, your credit report might indicate that you have had a shift in the positive direction. If you walk into a job interview armed with a the facts about your credit score, how you have turned over a new leaf, and what your credit report indicates about your current behavior, a potential employer might be sympathetic, especially if you have extenuating circumstances brought on by the recession.

Though credit checks for job applicants might create barriers in the already-tight job market, employers are also likely to value an honest account of your situation. By being forthright about your past mistakes and offering evidence of your progress, employers will be more likely to look past a three-digit number and offer you the job.

Tags: credit, unemployed

The Credit-Scoring Scam of the Century

February 1st, 2011

Are you a victim of the credit scoring scam of the century? If you have a credit card, there’s a 50/50 chance that you are.

What Is the Credit Scoring Scam of the Century?

About half of credit card companies use a shameful tactic to keep their competitors away from you, and this tactic hurts your ability to build a good credit score.

It works like this:

When sending credit card solicitations, credit card companies target specific people to receive their offers. Imagine that all of your credit cards have low interest rates and credit limits of at least $10,000. A credit card company would not offer you a credit card with a high interest rate and a $500 limit. After all, you would never apply for that credit card.

But a credit card company might offer you a credit card with a $15,000 limit and even lower interest rates. And you just might take advantage of this offer and switch cards.

Obviously, your existing credit card companies don’t want you to receive these offers because they might lose you as a customer.

And this is where the credit scoring scam of the century comes into play.

To create their marketing lists, credit card companies buy information about you from the credit bureaus. While the credit bureaus do not disclose your specific financial information, they do provide information about the credit cards you carry. For instance, Whatchamacallit Credit Card Company might buy a list of people who have credit cards limits of at least $5,000. Whatchamacallit could then send a credit card offer targeted to these people

And here is the credit scoring scam: Your existing credit cards can keep your name off these lists by reporting a lower credit card limit than you actually have, and this slaughters your credit score.

Let’s use the earlier scenario as an example. Whatchamacallit is looking for people with credit limits of at least $5,000. You carry a Tweedledee credit card with a $5,000 limit. Technically, your name should be on the list Whatchamacallit buys from the credit bureaus.

But Tweedledee doesn’t want Whatchamacallit to steal your business, so it reports your limit as only $3,000.

Your name is not included in Whatchamacallit’s list, so you do not receive the competing credit card offer.

You do, however, receive a credit card solicitation from John Q. Credit Card Company, which offers a new credit card with a $3,000 limit.

When you receive the offer, you immediately toss it in the garbage, thinking to yourself, “Why would I get a John Q. credit card with only a $3,000 limit when I already have a Tweedledee credit card with a $5,000 limit?”

Voila! Tweedledee has successfully kept you as a customer.

But here is where the credit scoring scam gets really dirty. About 30 percent of your credit score is based on the amount of money you owe. Credit scoring formula want to know how much you owe based as a percentage of your credit limit. This balance-to-limit ratio is called a “utilization rate.” The credit scoring bureaus will award you more points if your utilization rate is below 30 percent.

For instance, if you have a $1,500 balance on a credit card with a $5,000 limit, you have a 30 percent utilization rate. If you have a $1,500 balance on a credit card with a $3,000 limit, you have a 50 percent utilization rate. In other words, you are utilizing 50 percent of the available limit.

So when Tweedledee reports your limit as lower than it actually is, your utilization rate appears higher than it actually is, and your credit score plummets.

The credit scoring bureaus assume that someone with a high utilization rate is suffering from a financial drought and might be unable to pay his or her bills. On the other hand, a utilization rate below 30 percent indicates that your finances are in order.

In other words, this credit scoring scam can mean the difference between a good credit score and a poor credit score. In turn, this can mean the difference between low interest rates and high interest rates.

How to Fix the Credit Scoring Scam

Start by pulling your credit report. Check your credit card limits and make sure they are being reported accurately.

If any of your limits are being reported inaccurately, call your credit card companies and tell them to report the accurate limit. They might refuse. (Shockingly, this credit scoring scam is legal.) If they refuse, tell them you plan to stop using that card until they report the proper limit.

You might even threaten to close the account, though I don’t suggest carrying through with this threat. Closing a credit card can hurt your score. Nonetheless, the threat might be enough to get the credit card company to report the accurate information

Next, send a letter to the credit scoring bureaus asking them to correct the information. Be sure to send your credit card statement as proof of your actual limit.

Then follow up. Keep calling the credit card company until they correct this credit scoring scam. Be sure to pull your credit report every six months to make sure the mistake hasn’t resurfaced.

The Retail Store Credit Card Scam

November 15th, 2010

Been hit up lately by sales clerks promising big savings if you apply for a retail store credit card?

Just about every major clothing, electronics, and department store offers a similar promotion: In exchange for applying for a retail store credit card, you will get a discount, coupons, or special offers reserved for cardholders.

But if you apply for a store-specific card, you will most certainly not save money. And you just might hurt your credit score, too.

Never Apply for a Retail Store Credit Card!

Let’s take a look at a typical interaction at a department store. Imagine that you walk to the cashier with your loot in hand—in this case, let’s say you are buying a shirt and a pair of socks for a total of $62.

The cashier immediately makes you an offer.

“Do you want to apply for a retail store credit card? You’ll save 15 percent on today’s purchases.”

Heck yes! you think, gung-ho to save $9.30.

But the cashier isn’t telling you a few pertinent pieces of information. Let’s take a look at two of the critical facts you should know before applying for a store-specific credit card.

Never Apply for a Retail Store Credit Card

Reason #1: You will pay more than you save.

Many stores promote their retail store credit card by offering a one-time discount on same-day purchases. But you will most certainly end up paying more than you saved. The banks and the retail stores promoting these store-specific credit cards are counting on you spending more money so that they can recoup that discount, and then some.

Consider all the ways the banks and the retail stores can make money off you:

1. If you are given a one-time offer to save on today’s purchase, you just might pile a few more items into your shopping card.

2. In the future, you will be more likely to engage in a little “retail therapy” if you have store-specific credit cards in your wallet.

3. You will be sent coupons and special offers that entice you to the store. Ever bought something just to take advantage of a coupon?

4. And, of course, you will pay interest and fees on the credit card.

Suddenly, that $9.30 savings doesn’t seem worth it, does it?

Never Apply for a Retail Store Credit Card

Reason #2: Your credit score might suffer.

I can think of three reasons your credit score might suffer from a store-specific credit card:

1. Keeping these cards active can be tough.

2. You might end up with too many credit cards.

3. You will definitely add a credit inquiry to your credit report.

Let’s start with the first reason: Keeping these cards active.

An important part of learning how to fix credit is to have the right number of credit cards. To earn the highest credit score, you should have between three and five revolving credit cards. And these credit cards should be active.

Credit-scoring bureaus want to know that you can responsibly manage your credit cards. If you let your credit cards go inactive, the bureaus have no idea whether you are able to manage balances and debt. In other words, inactive credit cards do nothing for your credit score.

But keeping a retail store credit card active can be tough. Are you going to buy a lawnmower from Sears each and every month? Are you sure you need a new Gap sweater twelve times a year?

Most likely, you will either keep the card active by making unnecessary purchases (which costs you money), or the card will go inactive. Either way, it’s bad news.

Let’s talk about the second reason a store-specific card might hurt your credit score.

Like I said, the credit-scoring bureaus are the happiest if you have the right number of credit cards. If you do not have at least three credit cards, they don’t have the information they need to make a judgment about whether you are responsible. If you have more than five credit cards, they know that you are in danger of getting in over your head.

Three to five is the sweet spot. So if you are limited to just three to five credit cards, why waste one on a card that will only be accepted by one merchant? You cannot reserve a car using your Banana Republic card, but you can purchase a suit from Banana Republic using a Visa.

Too often, people apply for retail cards each time they are offered a discount. These people must also carry American Express, MasterCard, and Visas for everyday expenses, traveling, and business needs. And they quickly find themselves carrying a lot more than five cards.

Finally, let’s talk about the third reason a retail card could hurt your credit score: credit inquiries. Ten percent of your credit score is based on the number of credit inquiries you have on your credit report in the past year. If you apply for a retail store credit card, your score could drop a few points, and this could cost you a lot of money in interest on future loans and credit cards.

Of course, department stores and banks will never tell you to avoid retail store credit card offers! Be sure to learn more of their secrets by downloading our free ebook: 35 Important Facts the Banks Won’t Tell You About Credit.

Tags: credit cards, credit scams, credit score

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