Author: Philip Tirone

Part I: What does a credit score mean?

Posted on August 10, 2021 by - CREDIT BLOG, CREDIT SCORING

I spend a lot of time talking about the importance of building a good credit score, but a lot of people want to know: What does a credit score mean?
In this blog post, I’m going to answer that question, taking a look at two factors:

  1. What does a credit score mean to a lender?
  2. What does a credit score mean in terms of monthly payments?

What does a credit score mean to a lender?
A credit score is designed to give creditors an answer to one question: “What is the likelihood that this borrower will be more than three months late on a payment within the next two years?”
A credit score generally ranges from 300 to 850. A borrower with an 850 credit score (a rarity) is considered the least likely to default on payments while a borrower with a 300 credit score is considered the most likely to default.
A credit score above 720 is considered wonderful. These borrowers will qualify for the best loans and interest rates. Anything below 660 is considered weak credit, and anything below 620 is considered bad credit. A borrower with a score below 620 is considered “subprime,” which tells the lender that the borrower is highly likely to default.
A person’s credit score is the single most important factor in determining whether lenders will approve your credit card application, mortgage loan, and car loan. Generally speaking, lenders look at four things when determining your creditworthiness:

  1. Your credit score.
  2. Your salary.
  3. Your savings.
  4. Your down payment (for a home or car loan).

A person with a high credit score and a modest salary would be much more likely to receive a loan than a person with a modest credit score and a high salary.
What does a credit score mean in terms of monthly payments?
We always say that on a $300,000 30-year, fixed-rate home loan, the difference between a 720 credit score and a 620 credit score is $589 a month, or $212,040 over the life of the 30-year loan. Though this statistic is certainly an accurate representation of the difference a great credit score makes, the truth is that interest rates change daily. During the peak of the credit crisis, a person with a 719 credit score (normally considered a great score!) didn’t even qualify for credit.
The interest rates on a loan are updated daily in tandem with the Federal Reserve’s adjustments. As well, different types of loans call for different interest rates.
According to MyFICO.com’s August 2 listing of interest rates, a person with the best credit score would pay $753 a month on a three-year $25,000 car loan; a person with a 620 credit score would pay $919, a difference of $166 a month or almost $6,000 over the life of the loan.
As you can see, if you want to qualify for a loan and receive the lowest payments, you should learn how to improve your credit score.
And next week, we will take a look at several other reasons to build credit in Part II: What does a credit score mean?

This is terrifying

Posted on August 10, 2021 by - CREDIT BLOG

Holy cow. I just read an article that reminded me to be terrified …
If you have a 780 credit score, and you make one late payment, your score could plummet as much as 110 points.
That’s right—your score could drop from 780 to 670 in just a month. That could cause your interest rates to shoot through the roof.
Worse, it could cause you to pay a ton in interest payments.
So this week, I want to focus on the nitty-gritty…
I know that administrative housecleaning isn’t fun for anyone, but you cannot afford to put it off.
Take an hour this weekend to get your bill-paying mechanisms in order. Sign up for auto pay, make sure you know when your credit cards are due, and just make sure that you have a system that protects your credit score.
It might sound simple, but forgetting to pay one bill could be devastating.
Of course, even if you have the best systems in place, money might be tight one month. If you do need to pay a bill late, here are a few things to keep in mind:

  1. Your utility payments are not included in your credit score unless your account is sent to collections. If you have to make a choice between paying a credit card late or a phone bill late, pay the credit card on time and pay the phone bill late. This will keep your credit score intact.
  2. Most credit card companies do not report a bill as “late” unless it is past due by more than one billing cycle, which is usually about 30 days. So if your credit card is due August 5, it probably will not be reported as late if you pay it before September 4. Of course, you’ll still have to pay a late fee, but at least your credit score won’t be hurt!
  3. And finally, if you cannot pay a bill on time, don’t hide from the creditor. Just call them up and say, “I’m having a tough month. Could you give me a 60-day grace period to make some adjustments to my finances?” They might say no, but if you have been a great customer, they will probably say yes!

That’s it for this week’s blog. It’s short and sweet, but you have some homework …
Buckle down and spend an hour on the “nitty-gritty” by making sure you have a system in place so you pay your bills on time each month.
And if you have an innovate system for keeping your finances organized, I’d love to hear it. Leave a comment below.
Philip Tirone
P.S. I’m serious. I really want you to share your ideas below. I’m committed to building a financially savvy community, and we need your help in spreading ideas!
Here’s what I do to keep my finances organized:

  1. First, I make use of technology to pay all my bills. This means that I have “auto pays” set up for every bill, which includes utilities, credit cards, rent, car payments, and the like.
  2. Then, I have automatic reminders to review my statements on the 1st and the 15th of every month.
  3. I put all my “bills to pay” mail into a folder, and I review them every other week. I know this might seem simple, but before I implemented this easy step, I had envelopes scattered everywhere—my car, the kitchen table, and my desk. It made it tough to stay on top of the administrative stuff.

Please, thank you … and wow!

Posted on August 3, 2021 by - CREDIT BLOG

Wow! I got tons of responses from last week’s email and blog about how Lily and I created Tirone Family Meetings!
I want to spend a few more weeks responding to some of the comments, and sharing with you some other ideas I have about creating a family with great financial sense.
Here’s one of the comments from Mary:
“… I go out of my way to have impeccable manners with my son – everything from holding a car door open for him (now he opens mine) to phrases like, “May I please have the juice,” followed by “thank you.” While I’ve had friends ask why I “do that” they are also the first to tell me what a joy my son is to have in their homes; that he helps, includes younger siblings in play and is ‘very polite.’”

Okay, so here’s the thing she wrote that really hit me: “Modeling at home is critical to molding a good citizen.”
Right on, Mary! I couldn’t agree more. When it comes to being a good model for your children, this applies to everything, including your financial habits!
So if you have children, now is the time to replace your bad financial habits with great financial habits so that you set a good model.
Here are a few resources for teaching your children to be frugal about money, and also adopt a healthy paradigm about money.

  • Secrets of the Millionaire Mind by T. Harv Eker. What I like about this book is that it explains the financial blueprint that parents leave to their children.

 

Even saying something like, “No, you can’t have a new bike because we can’t afford it” can give your children a negative financial blueprint. It teaches a children that life is something that happens, not something that they create.

True, you might be unable to afford a bike, but imagine how motivated your child will be if you say things like …

“Yes! Let’s figure out how much bikes cost, and then let’s come up with a plan so that you can earn some money and buy a new bike. Here, I’ll help you. In fact, if you want me to put aside $5 each week out of your allowance, that can go into the pot too.”

This teaches children that money is a vehicle for achieving goals. It encourages your children to have goals, and it encourages them to be proactive about finding solutions.

And perhaps most of all, it teaches them to go out and earn money, to save money, and to decide when and how to allocate money to a resource.

  • Read at least one book from David Bach’s Finish Rich series. This includes Smart Couples Finish Rich, The Finish Rich Workbook, and Smart Women Finish Rich.
  • And be proactive about looking for any other financial management books or classes that seem interesting to you. The key is to break whatever bad cycle now so that you can transfer better values to the next generation by setting a great example.

In fact, in next week’s email, I’ll give you a great resource (for free) for teaching children about money, and for setting a good example.

Have you found other great resources for teaching kids about money, or for replacing your own bad habits with great financial management habits? Let us know by leaving a comment here!
Also, if you have questions about breaking bad financial habits, be sure to post them below.
Philip Tirone

Should I Add a Consumer Statement to My Credit Report?

Posted on August 2, 2021 by - CREDIT BLOG, CREDIT SCORING

The consumer statement does not change a person’s credit score; it simply gives the consumer a voice. The statement, which can be 100 words or shorter, can be used to dispute a mistake:
The Visa credit card account ending in 1234 does not belong to me, and I am currently in the process of disputing this with the credit card company and credit bureaus.

The statement can be used after bankruptcy to explain that a person’s bad credit was caused by a medical condition.

Example of a Consumer Statement on Credit Report

You will a bankruptcy on my report from January 2007. I was the victim of a hit-and-run car accident and was unable to work for eighteen months. As a result, I fell behind on my payments and declared bankruptcy.

Some say the consumer statement will hurt a person. After all, it draws the lender’s attention to derogatory information. Others say the consumer statement is pointless as it most often unread.

Still, consumer statements do have their uses. If you are trying to rent a home, the landlord might read the explanation. If you know a potential employer is running your credit score, you can be upfront—let them know about any mishaps, and direct them to the consumer statement.

How to write a consumer statement

A consumer statement should always be short and to the point. Never place blame on someone else (unless you are a victim of identity theft). If you decide to write a consumer statement:

  • Do not complain or present yourself as a victim (unless you truly are a victim of identity theft)
  • Take responsibility
  • Do not blame anyone or anything
  • Do not justify what happened
  • Keep in 100 words or less

Let’s take a look at two examples:

An effective consumer statement

I experienced bankruptcy because I naively expected the value of my home to go up. Instead, the payments grew and became unmanageable, so I began charging them to credit cards. Have since gone back to the basics and am working on building my credit and my savings. Also taking classes in financial management.

An ineffective consumer statement

The bankruptcy is NOT my fault.  I was sold a home that I couldn’t afford, and while the agent earned his commission, I lost my home, racked up huge credit card debt, and was stuck with poor credit! As far as I’m concerned, the mortgage broker should go to jail!

Do you see the difference? The first consumer statement makes the borrower seem responsible and mature. The second might sound entitled, immature, and irresponsible!