PERSONAL FINANCE | 7 Steps to a 720 Credit Score

Good Debt / Bad Debt: The Top Inappropriate Use of Credit

August 25th, 2010

Much has been said about the good debt versus bad debt, and the latest report from the Federal Reserve speaks volumes into how often people are misusing credit. According to the report, Americans owed a whopping $2,418 billion in debt in June.

With this much debt riding on their shoulders, how can Americans earn a great credit score? Worse yet, how can we be expected to invest in our futures if we have a huge amount of debt to carry?

By learning to distinguish good debt from bad debt, Americans can turn their bad credit into good credit, and make wise investments in their future.

Over the next seven weeks, I will take a look at three of the top inappropriate uses of credit, as well as the four questions a person must ask to determine whether something is good debt or bad debt.

Good Debt / Bad Debt, Inappropriate Use of Credit #1: Using Debt to Finance Debt

The first rule of carrying good debt instead of bad debt is this: Unless you have a budget that proves a loan or credit card will indeed help solve your financial despairs, never take out a loan to dig yourself out of debt.

Using a loan to solve a financial problem can be a smart move, if you have the budget to prove it. But if you are just reacting to your financial stress by applying for more loans and credit cards, you are carrying bad debt. In fact, if you cannot prove that the loan will improve your financial situation, getting a loan to pay debt is the single worst use of debt out there.

How will the loan help you dig yourself out of debt? When will you break even? What do the numbers prove? How will this loan reduce your overall debt? Unless you can answer these questions, never apply for a loan as a method of solving financial problems.

Using a business loan to increase cash flow is wise. Another example of good debt would be applying for a lower-interest loan to consolidate your credit card debt.

But you must run the numbers, or you risk complicating your financial situation. Without proof that the loan or credit card solves your financial problems, you are simply postponing a financial breakdown, which will be far worse if you add more debt. Always base your financial decisions on substance rather than on emotions. If you are scared for your future and take out a loan as a reaction to this fear, but you have no idea how this loan will provide a permanent solution, you are taking on bad debt. Why bother? The loan is nothing but a band-aid that will eventually fall off to expose wound that has been made deeper.

There’s no two ways around it: If you are in debt, you need to either make more money or spend less money. Building more debt to dig yourself out of debt? In the good debt / bad debt debate, this one is a no-brainer!

Be sure to join us next week for the second part of the good debt / bad debt series. And while you are at it, learn how to improve your credit score by attending our free teleseminar.

Tags: credit score, debt, how to improve your credit score

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Get the Best Car Loan and Avoid Credit Problems at the Dealership

June 11th, 2010

A lot of car buyers hoping to get the best car loan have had embarrassing experiences at the dealership. The buyer picks a car and applies for financing from the dealer. The dealer offers an unfavorable loan package, telling the poor buyer that his credit is bad. The buyer is embarrassed. He feels silly for not entirely understanding the loan package, he has doesn’t have time to learn how to build credit. He has already been subjected to some high-pressure sales tactics, and he just wants to get out of there.

This is a sales tactic! It is a scenario intentionally manufactured by the dealer to get you to sign on the dotted line before you have had time to realize what a poor financing offer they have made you. Sometimes, it is even an outright scam: the dealer tells the buyer that he has bad credit just to get the buyer to agree to an expensive financing package.

I guess I can’t get the best car loan with my shoddy credit, thinks the buyer.

The number one way to avoid this unnecessary situation in the first place and get the best car loan is to already have the financing nailed down before you walk into the dealership. Dealers almost never offer the best loan packages, so it is almost always better to avoid bundling the purchase of the car with the financing, warranty, and trade-in of your old vehicle. Shop around for financing ahead of time, using banks, credit unions, and online auto lenders.

Then the dealer can make you a loan offer if he wants, but he knows you are going to compare it to other, probably better, offers. Even if you truly do have poor credit (unlikely if you have attended our free teleseminar), there are far better sources of sub-prime auto loans than the dealership.

If for some reason you still want to find out what kind of financing the dealer can offer you, then the second important step—after applying for financing from other lenders—is known as “The Folder.” The Folder has your credit reports, your credit scores, and some monthly payment calculations based on the target purchase price, interest rate, and loan term. It also has your financing offers from the other lenders. And it contains information about the price other sellers of your desired vehicle will accept. It is perfectly acceptable, and often less costly, to purchase vehicles online these days from dealers all over the country. Once your local dealership knows that you know this, it will be easier to negotiate. The Folder is hated and despised by auto salesman and puts you in charge of negotiations. If you want to get the best car loan, never enter the dealership without it.

The third important method to get the best car loan is simply this: get up and leave several times before agreeing to a deal. If the sales tactics are too heavy-handed—if the dealer is asking for your credit information even though you are not sure you want to apply for financing, if the numbers they are offering do not make sense, if it just feels like you are not going to get the best car loan—get up and leave. Shake the salesperson’s hand and tell him or her you will be in touch. Then walk out. If they tell you their offer is only good for a day, reply calmly and confidently that you are willing to take your chances, and then go.

Only once the dealer understands that you are knowledgeable, educated, prepared and willing to walk away will you start hearing their best offer. Have confidence and do not get emotional. You have financing from other sources, “The Folder,” and numerous other sources from which you can buy your chosen automobile and get the best car loan—and it is a buyers’ market

Tags: get teh best car loan, How to build credit, Philip Tirone

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The Faces of Identity Theft

May 26th, 2010

About 80 percent of people have errors on their credit reports, and many of these are a result of identity theft. Identity theft can be a devastating event that gets in the way of learning how to build credit. Once a thief acquires your personal information s/he can quickly suck your account dry or steal your identity, resulting in not only a tremendous financial loss but a considerable outlay of time to put your affairs back in order.

Now, more than ever, you have to be careful about leaving any scrap of personal information available to scheming identity thieves. Take safeguards to avoid leaving yourself open to identity theft, and be aware of the many ways identity theft might occur.

Dumpster diving. One of the more common forms of identity theft is when thieves find pieces of personal information is to rummage through a victim’s rubbish. For example, the credit card offers that you discard without a thought might be used by a dumpster diver to set up credit accounts in your name. Bank account statements that have your credit card number or bank account might even be used to purchase items online or over the phone. To prevent this, purchase a shredder and use it on anything with your personal information.

Open-access mailboxes. If you have a mailbox that is not secured or is a community mailbox, beware of identity thieves snatching your mail and setting up bogus accounts in your name. If you’re going to be away on vacation, protect yourself from identity theft by asking the post office to put your mail on hold so no one can grab it.

Pickpockets and purse-snatchers. Make sure you never leave your purse or bag unattended. Having access to your credit card and driver’s license is an identity thief’s dream. For that reason, never, ever carry your Social Security card in your wallet.

Phishers and Phreakers. Be especially wary of phishers and phreakers, the newest form of identity theft. Phreakers are people who search for personal information by eavesdropping on telephone calls. Phishers send cleverly disguised emails that ask you to provide personal account information. Using anti-virus software and a firewall is a good way to cut down on malignant attempts by criminals to access your information. Do not share your password with anybody and change it often to decrease the possibility someone may hack into your computer. Also watch out for spyware, which is often installed on your computer without your consent. It can monitor your computer for personal information, such as credit card numbers.

Keep a close lid on your Social Security number. This is your most sensitive personal information, and when an identity thief gets your Social Security number, s/he can easily steal your identity. Do not give out your number unless you started the call and can confirm the identity of the person/company you are calling.

Always keep track of your credit report. Regularly checking your credit report is the best weapon you have against identity theft. Request copies of your credit report at least four times a year. You can get a free annual credit report once a year. Follow up to see any suspicious information or other irregularities show up. Another important safeguard against identity theft is double-checking the purchases on your credit card and withdrawals from your bank account.

Tags: How to build credit, identity theft, PERSONAL FINANCE, Philip Tirone

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How to Qualify for a Loan

May 12th, 2010

In today’s rough environment, knowing how to build credit isn’t enough if you want to also know how to qualify for a loan.

Ideally, a loan sits on a stool with four legs: income, down payment, savings, and credit score. If necessary, a stool can stand with just three legs. It cannot however, stand on just two, and it is important for would-be borrowers to understand this when learning how to qualify for a loan.

You are going to need at least three out of four “stool legs” to get a worthwhile loan.

Before applying for a loan, understand that the lender is in the business of earning a return on its investment. The lender could invest in the stock market, bonds, annuities, mutual funds, or any number of other things. The lender is only interested in giving you a loan to you if the lender can earn a worthwhile return in the form of the interest payments you make as the loan is paid.

To make this determination, the lender considers the four stool legs we discussed.

How to Qualify for a Loan—Stool Leg Number #1: INCOME

The lender considers your income. The higher your income as compared to your existing debts (your “debt-to-income ratio”), the more likely you are to make your monthly payments.

How to Qualify for a Loan—Stool Leg Number #2: DOWN PAYMENT

Next, the lender considers the down payment you are going to make on a loan attached to property (such as a car or home loan). The bigger the down payment, the more protection a creditor has. First, the property has more equity invested in it, meaning it is more likely to have enough equity to be sold at a profit to pay off the loan. As well, the borrower has more invested in the property and is therefore more likely to prioritize loan payments.

How to Qualify for a Loan—Stool Leg Number #3: SAVINGS

The lender considers your savings. Also called “reserves,” your savings are important because they tell the lender your likelihood of weathering any rough spots in your life, getting back on your feet, and making those loan payments.

How to Qualify for a Loan—Stool Leg Number #4: CREDIT SCORE

Finally, the lender considers your credit score. The credit score gives the lender a glimpse into your character and how important it is to you to keep your word and repay your debts. It also further assists the creditor in analyzing your ability to repay by revealing whether you are already carrying large amounts of debt.

When considering how to qualify for a loan in today’s market, a person really needs four out of four stool legs, though some exceptions might apply. If the would-be borrower is strong on any three out of the four, a lender might make an exception, even if his fourth leg is weak. A strong income may make up for a lack of reserves. Or a high credit score can make up for a small down payment. In normal lending environments, a borrower with a strong income, lots of savings and a big down payment will probably be allowed to slide on a mediocre credit score, but s/he would pay high interest rates.

For major purchases, like cars and houses, it’s worth thinking about these four criteria at least six months to a year in advance of applying for a loan.

Keep your income as high as possible when learning how to qualify for a loan. You can get a second job or work to bring home additional commission. This will help your income, savings, and down payment. Dedicate as much of your monthly earnings to a savings account and maximize your reserves. Learn how to create a budget. If you have family members willing to help you with the down payment, get the money from them in advance so that when the lender looks back at several months’ worth of bank statements, the lender will see consistent higher balances. (Keep in mind that you should discuss the tax consequences for cash gifts with a tax consultant.)

Get a copy of your free annual credit report and review it for any errors. If you find them, contact the credit bureaus and follow their steps to have the information corrected. Make all you payments on time, and try to pay down your balances on existing accounts. Attend our free teleseminar so that you can learn how to improve your credit score quickly.

Although the four legs of our stool are the most important criteria, learning how to qualify for a loan means that you take a look at some smaller factors as well. How long have you been at your current job and address?

People who move around a lot are generally consider bigger risks than borrowers with proven job stability and a permanent address. From a lender’s perspective, a stable lifestyle—two or more years at the same address—equals a safe investment.
In addition, the lender wants to know that you have a history of making plenty of money to afford the loan. Ideally, your job should also be stable, meaning you have been employed for at least two years at the same company.

In today’s market, knowing how to qualify for a loan can be tough. Lenders have more stringent guidelines than ever before. Remember to start early and learn everything you can about building picture-perfect credit!

Tags: How to build credit, how to qualify for a loan, Philip Tirone

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Key Considerations About Divorce and Credit

May 6th, 2010

While divorce often causes a person to take inventory, many people forget the implications of divorce and credit. Many married couples or life partners jointly apply for credit cards, auto loans, and mortgages. Part of learning how to build credit means that you learn about how divorce can complicate your credit situation.

If you and your partner kept all credit separate during your marriage, you will not be impacted by your ex-spouse’s credit behavior at any time before, during, and after your marriage. However, if your spouse is an authorized user or joint holder of a credit card, an angry former spouse can start lots of problems with respect to divorce and credit. With joint accounts, both you and your ex-spouse are jointly responsible for debt and therefore are affected by each other’s financial decisions. For example, your ex-spouse’s late payments and collection notices show up on your credit report after the divorce if you have not split the accounts.

The best move is to cancel these cards rather than risk the negative effects of someone else’s mismanagement. Some credit card companies may require a special type of notice to cancel jointly held cards, such as a written notice. Doing this as soon as possible is in your best interest in terms of divorce and credit. After a divorce, your ex-spouse may need to charge many things to make up for reduced income. Even if your ex is not being malicious, this could harm your credit score by causing your utilization rate (the balance as a percentage of the credit card limit) on jointly held credit cards to increase.

If you and your ex-spouse own a home together, both are charged with paying off the debt unless you work out another arrangement. Aside from selling the house, your best option may be to pursue refinancing. Using a quitclaim deed, you can take your name off the title of the property, but this is not enough when it comes to divorce and credit. Your ex must also refinance, or your credit will suffer if he or she becomes delinquent on payments.

On the other side, if you retain ownership of the home and do not put the property in your name, you could be affected if your ex-spouse is sued. The house might be seized to pay off your spouse’s debts.

If you are separated, you may want to take a few steps to prepare yourself, especially if you think you are heading toward divorce. Pull your credit report and assess your financial situation, noting all existing credit accounts. Keep copies of everything in a safe place. If you have joint accounts, have a discussion with your spouse about who will assume payments for which credit accounts. If you are on peaceful terms with your spouse, have a frank discussion about divorce and credit, and how you can both protect yourselves. Consult an attorney, and create a plan to keep your payments on schedule and your credit protected.

To protect yourself from the pitfalls of divorce and credit, cancel your joint accounts, and make sure you contact all credit bureaus to ensure that your address information is updated.

Tags: credit-scoring, divorce and credit, How to build credit, PERSONAL FINANCE, Philip Tirone

Credit Bad? Want to Learn How to Build Credit?

Good Debt / Bad Debt: The Top Inappropriate Use of Credit

Get the Best Car Loan and Avoid Credit Problems at the Dealership

The Faces of Identity Theft

How to Qualify for a Loan

Key Considerations About Divorce and Credit

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