Since it’s back-to-school time, I want to share this great story I heard on NPR …
You can listen to the whole thing here, but the gist of it is this:
A mother of three (who is also an astrophysics graduate) wants to promote a cultural-makeover when it comes to math.
“You hear educated adults say, ‘I’m just not that good at math’ or ‘I’m kind of afraid of math.’ And that’s a totally acceptable thing for a well-educated person to say,” said Laura Overdeck in the interview.
“But you never hear them way, ‘Well, you know, I’m just not that good at reading.’”
She also said that the more parents talk about numbers, the better students perform in math.
This got me thinking about MONEY!
If parents talked more at home about money, the cost of things, their savings’ goals, and their investments, would kids be more money-savvy?
Probably. After all, you are your child’s first teacher. The culture you establish at home (or the culture you fail to establish at home) will have the largest impact on your child’s habits as an adult.
So why not start telling bedtime money stories? Or, if you are worried this will keep your kids up, how about giving them snack-time money stories?
Let me know what you think below!
Be sure to listen to the whole interview and subscribe to Laura’s blog.
Philip Tirone
Category: CREDIT BLOG
Teaching Kids About Credit Scores, by 720 Credit Score
Last week, I sent part one of my back-to-school credit tip.
I told you my “crazy plan” for helping your children build a great credit score.
Part two of this plan include an educational platform whereby your children learn about, budgeting, savings, interest rates, and credit scoring.
Last week, I reminded you that no one else will teach this information to your children—not the schools, not their future employers.
The responsibility lies with the parent.
So after making your children an authorized user, start talking to them about credit scores, interest rates, budgeting, and the like.
Then, establish something I call the “Bank of Mom and Dad.”
If your daughter wants to buy something, lend her the money and then sit down with her to create a weekly or monthly payment plan whereby you budget the payments, which should include interest, just like a credit card company would do.
If your child is late with any single payment, assess a late payment, just like a credit card company would do.
Expect your children to make mistakes, and use these mistakes as teachable moments. Don’t berate them, but make sure they understand the consequences of being late with a payment.
Once your child demonstrates continued financial responsibility with the “Bank of Mom and Dad,” consider providing an actual credit card to your teenager.
If you are worried that your children will be irresponsible with the credit card, my suggestion is this: Allow your child access to the card only if you are present and only long enough to hand it to a cashier. This way, the child will not be able to memorize the credit card number, nor will he have prolonged access to your account.
Then have your child repay you directly for the purchase. Because you are the primary cardholder, you can preserve your credit by making payments on the account regardless of whether your children are paying you.
The purchase can be small or large, depending on your budget and your comfort level. Make sure it is not so big that you will be unable to pay your credit card debt should your child default on payments to you.
Just like with the “Bank of Mom and Dad,” make your children pay interest on their credit card purchases. If they exceed the prearranged limit or fail to make a payment by the due date, you should access an over-the-limit fine or late payment penalty.
When the credit card statements arrive, sit down with your children and explain the statements. Discuss your annual percentage rate, annual fees, late penalties, over-the-limit fines. Ask your children to verbalize their plans for paying their loans in a timely manner.
Expect your children to make mistakes, and help them create plans for correcting their mistakes. If they splurge and end up owing more than they can afford, perhaps they can do extra housework in exchange for an increased allowance. And, of course, teaching children about credit means that you call their cell phones—perhaps at 8 on a Saturday morning—to inquire about any late payments!
Teaching your children about finances and credit is like teaching your children manners. It won’t happen over night. Your children will make mistakes. But it’s far better that you teach them—in the safety of your home—than allow them to enter adulthood without a shred of knowledge about credit scoring and finances!
Okay, that concludes my back-to-school lessons.
P.S. Do you still think my plan is totally crazy? Leave a comment below!
Did you get the right answer? by 720 Credit Score
Pop quiz!
If you had to raise your FICO score quickly, and you had a choice—either pay off your charge cards or pay off your mortgage—which would you choose?
Most people say they would pay off their mortgage to increase their credit score the fastest.
But when it comes to FICO scores, eliminating charge card debt is far more powerful than eliminating mortgages or car loans.
And if you think about it, it makes sense. When assigning a credit score, the scoring bureaus assess risk by asking a question: How likely will this borrower default in the next two years?
Most people prioritize their mortgage payments; they would rather skip a few meals than lose their home. So having a balance on your mortgage isn’t really that risky.
But people aren’t quite as responsible with their Visas and MasterCards. In fact, even the most financially responsible people make a few bad decisions when it comes to the allure of credit card spending.
So keeping a low balance (or no balance at all) on your credit cards is a far better indicator of your financial situation, and your ability to pay upcoming bills.
The moral of the story: If you want to increase your FICO score, get your credit card balances under control!
Philip Tirone
P.S. If you want a few ideas on increasing your credit score by lowering your credit card balance, here are a few articles you should read:
The Dirty Little Secret
Do-it-Yourself Tricks
A Penny-Pinching Tip
A back-to-school credit lesson, by 720 Credit Score
My two oldest kids started school this week, and it reminded me that this is a good time for a lesson about helping children build great credit scores…
So here goes…
Basically, I think you should make your children authorized users on your credit cads.
A lot of people think this is totally crazy, but unless parents decide to make a concerted effort to begin teaching their children about credit, how else will they learn?
Where Else Will They Learn
Our banks, educational institutions, and government officials tell us virtually nothing about credit.
Did you learn in school that no credit is just as bad as bad credit?
Did they tell you that you might not be able to rent a place to live unless you had a great credit score?
Did they tell you that you would pay hundreds and maybe even thousands of extra dollars each year if you didn’t have a 720 credit score?
No, they didn’t.
The job of teaching kids about credit belongs to parents.
Authorized User Accounts
And I think the way to do it is by adding your children as authorized users to one of your credit card account…
So long as it is in good standing.
When you add your children as authorized users, they are given the opportunity to “borrow” your history on that credit card.
Which means their scores will start to build.
If you don’t do this, consider what will happen…
Your children will enter adulthood with poor credit scores.
And since poor credit is just as bad as bad credit, they will pay sky-high interest on their first credit cards.
They will have a hard time getting a job or renting an apartment.
And they very well might get taken advantage of by lenders.
Setting Kids Up for Success
Helping them build their credit scores now, while they are at home, means they can enter adulthood one, two, or ten steps ahead.
Now, that said, I don’t think you should give your kids a physical credit card.
When you establish your children as authorized users, request that the credit card company not issue a card to your children, or simply shred the credit card when it arrives.
In this way, your children’s credit scores will benefit from the behavior on your account, and your credit will be protected.
Now, this is just part one of teaching your children about credit.
Stay tuned because next week, I’m going to tell you part two about my plan for teaching children about credit. In the meantime, read this article if you want to learn more about authorized user accounts.
Check out the best credit card offers most likely to approve people with poor to fair credit.
Part II: What does a credit score mean?
In “Part I: What does a credit score mean?” we took a look at the meaning of credit scores in being approved for a loan and in obtaining the best interest rates.
“Part II: What does a credit score mean?” looks at:
- What a credit score means in your job hunt.
- What a credit score means for your insurance premiums.
- What a credit score means in your search for a rental unit.
What does a credit score mean when searching for a job?
More than half of employers run credit checks on potential job candidates at least some of the time. This means that you must learn how to improve your credit score if you are one of the millions of unemployed Americans, particularly if you are applying for jobs that require you to handle money.
A potential employer considers a person’s credit score an indication of how reliable they are. And if the job requires you to handle money, a low credit score could also mean that you are financially strapped and might be tempted to skim a little money from the register. Whether you are a financial advisor or local hardware store cashier, a low credit score means that you might be less employable.
If you have a mediocre or bad credit, be sure to read my post about credit scores and jobs so that you can learn strategies for combating this problem.
What does a credit score mean for your automobile insurance premiums?
In some states, a low credit score will increase your auto insurance premiums! Auto insurers have found a correlation between a person’s credit score and the number of accidents in which they are involved, so the lower your score, the higher your premium.
What does a credit score mean for your rental application?
Landlords almost always run a person’s credit score before approving a rental application. The last thing a landlord wants to do is evict a tenant, a time-consuming and costly process. If your score is too low, you might have a problem finding a lease to sign. Be sure to read my article about renting and credit checks.
What does a credit score mean? A high credit score means that you are more employable, pay lower insurance premiums, and have more housing opportunities. A low credit score means you should learn how to improve your credit score!
Am I crazy? You be the judge… by 720 Credit Score
I’ve been saying it for years, and I stand by it!
I think you should add your children as an authorized user to one of your credit card accounts.
I know you probably think I’m nuts, so let me back up …
A couple of weeks ago, I sent an email encouraging parents to use family meetings as an opportunity to teach children about certain values (like financial responsibility). Otherwise, they might be influenced by peers, credit card companies, or banks … and the results might be ugly.
After all, schools don’t teach this to our children, and banks prey on people who are financially vulnerable.
So if you have children, you would be wise to start teaching them now about credit, money, and financial responsibility.
Teaching children about credit, as well as how to manage credit, will help you raise financially responsible adults, and it will open doors for your children down the line.
Okay, so why do I think you should add your children as authorized users? Let me explain a four-part plan:
1. Add your child as an authorized user but do not give her/him a card! Here’s the important part: Add your child to a credit card that is in good standing. This will allow your child to “borrow” your good credit score, which means his or her credit score will begin to increase.
2. Use family meetings as an educational platform where your children learn about interest rates, budgeting, savings, and credit scoring.
3. Once your children begin demonstrating that they understand the value of money and are financially responsible, you might want to provide children with credit.
You can do this by establishing something that I call “Bank of Mom” or “Bank of Dad.” If your daughter wants to buy something for $30, lend her the money (assuming you can afford it), and create a weekly or monthly payment plan.
Then insist on timely payments, and tell your daughter that she will pay interest if she is unable to pay within a specified time frame. If your daughter is late making a payment, assess a late payment fee as part of your strategy for teaching children about credit.
The goal is to replicate the credit card companies as closely as possible.
4. Once your children prove themselves by continuously repaying debts, you might want to give them actual credit cards. Now, I know this sounds crazy, so let me explain …
I suggest that you allow your child access to the card only long enough to hand it to a cashier, and only if you are present. This way, your child will not be able to memorize the credit card number, nor will he or she have prolonged access to your account.
Then, make sure that your children pay their debt to the credit card company. I suggest that your children pay you instead of the company; this way, you can preserve your credit by making payments on the account regardless of whether your children are paying you.
Then, when the credit card statement arrives in the mail, sit down and go over it with your child. Explain the annual percentage rate, fees, late penalties, over-the-limit fines, and minimum payments. Then ask your children to verbalize their plans for paying their loans in a timely manner.
Expect your children to make mistakes, and help them create plans for correcting their mistakes. If they splurge and end up owing more than they can afford, perhaps they can do extra housework in exchange for an increased allowance. And, of course, teaching children about credit means that you call their cell phones—perhaps at 8 on a Saturday morning—to inquire about any late payments!
What do you think? Do you like this plan?
Do you think I’m crazy? Do you love this plan? Leave me a comment below and let me know!
Philip Tirone
An Answer To John’s Question… by 720 Credit Score
Sometimes, I hear from people who are drowning in debt. They just don’t know what to do to get themselves out of their financial holes…
One of my readers, John, recently left such a comment on my blog, and I wanted to take this opportunity to answer it. Here is a summary of his comment:
I recently filed bankruptcy, and I know I need to open three new credit cards, but I cannot get the secured cards that you recommend because I have no extra money. Please help me. I’m drowning.
Okay, I have several pieces of advice…
First, if you have been through a bankruptcy, it is important to open three new credit cards after the bankruptcy has been discharged.
I recommend secured cards, which require you to pay a deposit. But if secured cards are not an option, then I recommend becoming an authorized user on someone else’s credit cards (in good standing).
If neither of these options are available, then and only then should you apply for subprime credit cards.
I dislike subprime credit cards because they usually come with high fees and high interest rates. You can’t do anything about the high fee charged to you upfront (or annually), but you can avoid the interest by charging only small amounts on your credit card to keep it active, and then paying the balance in full.
That said, I have another concern about John’s message: “Please help me. I’m drowning …”
This is my advice: Do not use credit cards as a method of paying for day-to-day life, especially post bankruptcy, unless you have a long-term budget that shows you can repay the debt.
If your budget does not prove that you can repay the credit card debt you plan on incurring to pay off your other bills, you will find yourself even deeper underwater in the months and years to come.
Yes, credit cards are a great tool for getting yourself out of a financial jam, but only when you know you have the means to pay your bills down the road.
You must—must, must, must—create a budget, take a hard look at your finances, and know exactly and when you can pay off those credit cards.
Sincerely,
Philip X. Tirone
P.S. As always, leave your comments and concerns below!
Part I: What does a credit score mean?
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:
- What does a credit score mean to a lender?
- 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:
- Your credit score.
- Your salary.
- Your savings.
- 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
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:
- 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.
- 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!
- 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:
- 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.
- Then, I have automatic reminders to review my statements on the 1st and the 15th of every month.
- 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.
Credit Lesson #6
FREE CREDIT EDUCATION
Boost Your Score To 720!
Over 200,000 people have rebuilt their credit with our proven strategies.
