Credit cards can feed a spending addiction. (Photo Credit: CC BY/Andres Rueda/Flickr)

Once you enter the world of credit cards, it becomes tantalizingly easy to buy today what you can’t afford tomorrow. Swiping magic plastic seems painless, but few things are as damaging to your credit score and financial future as unchecked credit card use. Here are some ideas for how to break the cycle of credit card dependency.

Track your credit card spending

Even if it means writing down every cent you put on your credit card, having documentation of your spending is essential. If your credit card bills are too many and too high due to over-spending, seeing hard evidence can be just the “scared straight” encounter you need. Use a pen and paper or a personal accounting program like Quicken.

Understand marketing messages

As wonderful as credit card companies make it seem, using a credit card won’t spirit you away to a blissful realm of contentment. Be aware that credit card companies aren’t in the business of making you feel better, no matter how many rewards programs or ephemeral references to peace and tranquility are hinted at in brochures and commercials. On the contrary, credit card companies are in the business of creating consumer debt.

Decide to change

Avoiding credit card debt is a logical choice, considering how fast compound interest multiplies. You must approach breaking the credit card cycle of addiction with both your heart and mind. It requires full commitment.

Minimize damage through consolidation

If you have the option to execute a balance transfer at a low APR, take advantage and save yourself cash until it is paid off. This is handy if you have multiple credit cards with smaller balances, too, as one card is generally easier to manage.

Pay in cash, cut the cards

A great way to avoid revolving debt altogether is to pay for everything in cash. If you are deep in the throes of credit card addiction, don’t even use a debit card. Cut up your cards, credit or debit. Once problem credit cards are paid off, keep them at zero balance rather than canceling them, unless again your credit card addiction is severe. If such is the case, cancel them all except for the card of longest standing, but only in the event that you’re applying for a mortgage, Yahoo! Finance advises. Put that one on ice and use it for emergencies only.

Save money for emergencies

If you don’t trust yourself to save that one card for emergencies, open a high-yield savings account that will allow automated deposits from your paycheck. Deposit a portion of your paycheck each pay period until you’ve saved 3 to 6 months of salary in the account.

Seek professional help

Battling credit card addiction alone can be debilitating. Various books can help you tackle addiction and its associated feelings of helplessness. Seek the help of a mental health professional if possible.

Sources

Credit Card Addiction Stories

Psychology Today

Yahoo! Finance

Living in a credit card nation

If your credit card statement is this frightening, take advantage of the provisions of the Credit Card Act. (Photo Credit: CC BY/Jason Rogers/Flickr)

In 2009, President Obama signed the Credit Card Act into law. One of the provisions of the law is that credit card companies, in conjunction with the National Foundation for Credit Counseling, must provide resources for consumers who have difficulty with their finances. While they’ve held up their end of the bargain, recent NFCC studies have found that consumers simply aren’t taking advantage, reports Bankrate.

Free credit counseling, fallen by the wayside

Only 150,000 U.S. consumers struggling with credit card debt have accessed the nonprofit help to which banks and the NFCC have access, said NFCC spokeswoman Gail Cunningham. The contact number is toll-free and printed on credit card statements. As credit card debit still weighs heavily on the average, recession-weary American, the lack of initiative is troubling.

“I certainly think one of the reasons for the low response rate from consumers could be attributed to a lack of prominence,” said Cunningham. “Perhaps the number is buried somewhere.”

Within the recesses of public prejudice might be where that number is buried. Experts believe that many consumers who see the toll-free Credit Card Act number on their credit card statement may think it’s yet another “service” from the big, bad credit card company to take their money. However, Cunningham has observed that the number has been absent from some statements, which would be a violation of law.

Credit card debt shrunk in 2010

A study by Credit Karma indicates that from January to December, U.S. consumer credit card debt decreased by 8 percent nationally, to an average of $7,404 per person. Eight states, including California, Colorado, Connecticut, Indiana, Oklahoma, Tennessee and Nevada, showed as much as an 11 percent improvement.Wisconsin made the biggest dent in credit card debt, slashing and burning through the credit jungle for a 31-percent improvement over 2009.

On the other side of the scale, states like Delaware, Iowa, Louisiana, Missouri, Nebraska and New Mexico grew their credit card debt by as much as 6 percent. Mississippi was the biggest loser in the Credit Karma Survey, with 8 percent growth.

Looking for credit card help?

Visit the National Foundation for Credit Counseling website at nfcc.org for the information on non-profits near you that can help. The Federal Reserve’s website also has a free calculator with which you can calculate how much you’ll owe if you only make the minimum monthly payment on your credit card. For your mobile, there’s a useful Android Market app called Personal Financial Calculator. Or, if you are looking to compare overdraft APRs of installment loans and other consumer loan products, check out our “Loan Overdraft Calculator,” linked below.

Sources

Android Market: Personal Financial Calculator

Bankrate.com

Federal Reserve

Loan overdraft calculator

National Foundation for Credit Counseling

Obama signed the Credit Card Act. Are you using its programs?

Applying for a loan will cause a credit score to take a hit. Photo: TrinityCreditServices/Flickr/CC-BY

The point of a credit score is so companies can project whether a person is a risk to extend to credit to. However, a person’s credit score takes a hit every installment loan or mortgage lenders ask to see it, meaning a person looks like more of a credit risk for trying to use credit.

Lose credit to use credit

Anyone who applies to get a loan of any kind, whether it’s a simple installment loan for personal use or a larger loan like a mortgage, is subject to a credit check. A lender gets applicants’ credit scores from one of a number of agencies. Unfortunately, the manner in which the score is requested can hurt a person’s credit rating. It’s called a “hard pull,” according to AOL News. When a lender requests a credit score from a credit rating agency with the intention of possibly lending to the applicant, a couple of points are taken off the top of the credit score.

Two-week window

One of the main incentives of maintaining a good credit score is to be able to get the best possible interest rates. Ironically, a good credit score can be negatively affected when a person applies for a loan that they worked hard to be able to get the best rate on. However, there is way to loan shop and avoid a precipitous drop. Shop for loans within a 14-day period. If all “hard pulls” are done within two weeks, all inquiries count as one. After that, don’t apply for any more loans until your credit score climbs back up.

Rating agencies not in the business of making it easy

Though credit rating agencies Experian, EquiFax and TransUnion are in the business of providing information to other businesses — not to consumers — they have come under fire for keeping so-called VIP lists, according to the New York Times. The three main credit rating bureaus have been accused of treating information for the wealthy and high-profile people in a more preferential manner and the Federal Trade Commission is currently investigating the allegations. The credit bureaus, according to Fox, deny that any such considerations are made.

Sources

AOL News

New York Times

Fox

Don't fret – overdrafts and other checking account shenanigans generally will not affect your credit score. (Photo Credit: CC BY/Dan Foy/Flickr)

Most people know that not paying bills on time or maintaining a high balance on several credit cards can result in negative marks against their FICO scores. However, there are some gray areas. For instance, will overdrafts affect a credit score? The answer may surprise you, suggests Bankrate.com’s Dr. Don Taylor, a Certified Financial Planner and Certified Public Accountant.

Bad checks won’t harm your credit by themselves

A college student worried that a checking account scam would harm her fledgling credit appealed to Bankrate’s “Dr. Don” column for advice. Someone had stolen her checkbook and written checks that caused her checking account to go into overdraft. While she was able to get her bank balance back into the black within a couple of weeks, she wondered whether going into overdraft would have an immediate effect on her FICO. Thankfully, no further identity theft occurred after she sent her bank and one of the three major credit bureaus a fraud notification.

According to Taylor, transactions on a consumer’s checking ledger do not have a direct affect on credit scores. Missing bill payments will, but overdrafts won’t in most cases. One exception is when a banking institution does a “hard pull” of a consumer’s credit history when a new checking account is opened.

Keeping tabs on your banking history, free of charge

Taylor suggests that all consumers who are interested in monitoring their banking history as a matter of periodic maintenance look into ChexSystems. This company enables consumers to pull one free banking history report every 12 months, as stipulated in the Fair and Accurate Credit Transactions Act (FACTA). Negative marks remain active for five years.

For those who have ever been denied when trying to open a fresh account at a bank or credit union, ChexSystems is often the perfect place to go for the information that can help consumers understand why they were denied. Even if that isn’t your scenario, it’s worth checking out ChexSystems Consumer Assistance page once per year to review your financial record.

Protect yourself from scams

If you are the subject of a financial scam involving fraudulent checks, contact your banking institution and law enforcement. In the event that you desire to contact your state’s banking commissioner so that others may be protected from similar scams, HSH.com has a list of relevant contact information.

Sources

Bankrate

ChexSystems

HSH.com

Get your bank account history once per year

Credit scores are important, and can be improved. Image: Flickr / pyxopatamus / CC-BY-SA

A credit score is a number intended to indicate how risky a financial gamble a person may be. There are three big credit reporting agencies in the United States, and each one reports its own score. There are numerous factors that affect your credit score, and you can control your credit score by taking specific actions.

The history of credit scores

Credit score reporting, in its current form, has been around since 1841. Store owner Lewis Tappan started keeping files on customers and their payment history. Tappan hired thousands of correspondents to report on the credit worthiness of individuals in their communities. These reports on individuals soon had hundreds of customers, and the modern credit reporting system was born.

How credit scores are used

Credit scores were originally intended for informing decisions about extending credit to customers. Credit scores are used much more extensively now. Many lenders check credit reports on individuals applying for a credit card or loan. Landlords, potential employers and insurers may run credit reports in order to inform their decisions. There is controversy over the use of credit scores to make decisions that do not deal directly with the issuing of credit or providing of financial services, but the practice is legal and widespread.

What goes into a credit score

Each of the three credit reporting agencies has a different formula for creating a single credit score. The FICO score, developed by the Fair Isaac Corporation, is the most widely used measure of credit in the United States. The general information included in these reports has been determined to be:

• 35 percent payment history – how often you make payments on time
• 30 percent debt – what type of debt and how much debt you have
• 15 percent length of credit history – how long you have used credit
• 10 percent credit diversity – how many different types of credit you make use of
• 10 percent hard inquires – when a creditor checks your credit report

Defining good credit

The FICO credit score ranges from 300 to 850. What is considered a good credit score depends on the creditor doing the checking. However, the relative risk factor associated with each score can be estimated. In general:

• A FICO score of 770 to 850 is considered “choice”
• A FICO score of 710 to 770 is considered “good”
• A FICO score of 600 to 710 is “average” or “medium” credit
• A FICO score below 600 is considered “bad” credit or “high risk”

Taking control of your credit score

The federal government mandates that every credit reporting agency provide a free copy of its credit report on an individual once a year. These free federal reports generally do not include the numerical credit score, but they do include all the information on your report. The government-supported AnnualCreditReport.com provides access to these free reports. There are also numerous services that provide a “free” copy of a credit report in exchange for subscription to services. Once you have a copy of your credit report, check it for accuracy. Credit report errors must be disputed in writing, with a copy of any relevant documents included. The agency has 30 days to investigate the dispute and inform you of the outcome.

Improving your credit score

Once you determine the information on your credit report is accurate, you can improve your credit score by taking a few simple steps. First, pay your bills on time. Second, take a close look at the debt you are carrying and how it is being used. If your credit card balances are close to their limit, pay down that debt. You should also try to keep your debt to income ratio – the ratio that compares your total monthly debt payments to your total monthly income – below 30 percent. For an income of $2,000 per month, a 30 percent debt-to-income ratio is $600. Rebuilding your credit really is simple – make payments on what you owe on time and in full. Once you are doing that, it simply takes time.

Sources

MyFICO.com
PBS.org
FTC.gov
Investopedia
CreditScoring.com

Pending home sales, or the number of people who have signed contracts to buy homes, increased during the month of March. Image from Wikimedia Commons.

Home sales and similar statistics regarding home sales have not been encouraging for months, but are showing signs of life. Pending home sales, or contracts to buy homes, were observed during the month of March, as spring is certainly the buying season. However, that still doesn’t mean that all is well yet.

Mortgage rates dip but more people sign the dotted line

The national average rate on mortgages took a slight dip recently despite it being the busiest time of the year for real estate, according to USA Today. Freddie Mac noted that average rates on a 30-year fixed mortgage dropped 0.2 percent over the previous week, and the 15-year fixed dropped 0.5 percent during the same period. Interest rates for 30-year fixed rate mortgages have steadily held under 5 percent for months and 15-year loans have similarly held at or around 4 percent. However, pending home sales, or contracts entered into for the purchase of a home, rose by 5.1 percent during the month of March. Analysts were expecting a rise closer to 1.5 percent, according to Bloomberg.

Wait to break out the champagne

Though there are signs of life and pending home sales did beat estimates, this does not mean that it is time to break out the bubbly and toast the end of recession. Pending home sales for March 2011 are 11.5 percent lower than for March 2010. Existing home sales also increased in March, according to CNN, increasing by 3.7 percent from the end of February. However, existing home sales for March 2011 are down 6.3 percent from March of 2010. Lawrence Yun, chief economist for the National Association of Realtors, credits the uptick as being “organic recovery,” or the market working on its own. That said, Yun expects the housing market to take until 2012 to return to pre-2008 conditions. The housing market still faces some challenges.

Job security and credit availability in the way

Part of the problem facing the real estate industry, tipped as being the single biggest factor holding back economic recovery, is both feelings of financial instability and tightening credit standards. High unemployment makes people feel less apt toward buying homes, but that is slowly starting to resolve. Credit standards are definitely tighter than in the past, though. Freddie Mac, according to the National Association of Realtors, noted that the average credit score needed to secure a mortgage had risen from 720 in 2007 to 760. The average credit score needed for a Veterans Administration or Federal Housing Administration loan rose in the same period from 630 to 700. Lawrence Yun has been quoted numerous times as saying that loosening up lending requirements would speed up sales dramatically.

Sources

USA Today

Bloomberg

CNN

National Association of Realtors

Used responsibly, credit cards can help consumers build a credit history. (Photo Credit: CC BY/Andres Rueda/Flickr)

Many consumers looking to establish a credit history are denied credit because they don’t have enough credit to begin with. Even if a person has an excellent FICO score, it’s still possible to be denied something as weighty as a mortgage because the credit report reads more like a leaflet than a book.

Avoid being financially super-responsible with credit

People who are super-responsible can never enjoy their own parties, and the same is true for consumers who are financially super-responsible with their credit. Paying off student loans right out of the gate, avoiding excessive use of credit and generally living debt-free will save money in the long term, but some creditors do not view the credit-phobic kindly. Even for those who use credit but are choosy, an excessive number of credit inquiries can also have a negative impact on the credit score.

Having little credit history and being a serial credit card applicant can impact credit negatively, says Rod Griffin, public education director for the credit bureau Experian. Showing an ability to manage a reasonable number of open, active credit sources over time is paramount in illustrating credit-worthiness to creditors, including mortgage lenders.

Pay off loans, but keep some credit active

Griffin claims that contrary to what some so-called credit experts say, it doesn’t hurt to pay off loans early. Positive marks on the FICO report remain visible for approximately 10 years, whereas negative aspects generally only hang around for seven years. Paying off loans with excessive zeal can lead a consumer into the “No, thank you” zone with some potential creditors, however. If there aren’t at least three open, active accounts on the credit report that have been around for 24 months of more, it’s possible some creditors will pass on a credit application.

Use credit cards, but sparingly

It’s a myth that college students who are just beginning to build credit should take on multiple credit cards. Used responsibly and in moderation, having one credit card or two is a fine path toward building credit.

But the weather may be changing, says Griffin. Credit bureau insiders see the new Credit Card Act established under the Obama administration as a possible hindrance to young people’s ability to build a credit history. By restricting credit card company access to college students, some experts see more limited opportunities for building credit history.

Avoid the cash-only lifestyle if you want good credit

While you won’t rack up revolving debt by living a cash-only lifestyle, you also won’t build your credit. Maintain active credit accounts where you pay more than the minimum each month, and look to such products as installment loans and no credit check loans when emergency funding is necessary. While such products do not traditionally report to the credit bureaus – and hence do not provide an opportunity to record positive marks on a credit report – they will enable you to avoid building up excessive revolving debt on credit cards.

Sources

MSN Money
U.S. News and World Report

Understanding the Credit Card Act

A bad credit score or unfixed credit score errors can rob a person of thousands of dollars over a lifetime. Image: CC everydayminimalist.com

Consumers who don’t know their credit score or don’t think a credit score is important are robbing themselves. A credit score factors into everything from getting a job to getting a good deal on a house or a car. The simple process of checking a credit report can lead to action that results in thousands of dollars in savings over time.

A bad credit score costs money

Just about everyone a person does business with, from landlords to mortgage brokers to wireless carriers, uses credit report information to decide how much credit will be extended and how low, or how high, the interest rate will be. The difference between a good credit score and a bad one can add up to $5,000 in interest payments on a $20,000 auto loan. Maxing out credit cards or not paying bills on time could add 25 percent to the cost of that vehicle. The time and effort it takes to optimize a credit score can save an individual hundreds of thousands of dollars over a lifetime.

Correct credit report errors

For most responsible people, ensuring accuracy is the key to a good credit score and credit reports should be checked frequently. Credit scores are available online through FICO and the three credit-reporting agencies: Experian, Equifax and TransUnion. The government site annualcreditreport.com offers one free credit report per year, but it does not include the credit score. The different credit reporting agencies interpret information in different ways, so the best approach is to check all three resources. Information on credit reports can often be erroneous. Federal law requires that credit reporting agencies must correct inaccuracies free of charge. However, the agencies are known for making the process of correcting credit report errors difficult. Sometimes the money spent hiring a law firm that specializes in correcting erroneous credit report information is worth the time saved.

A good credit score saves money

One of the best examples of how a bad credit score costs money is current mortgage interest rates. Mortgage interest rates are lower than they have been for decades, but not for everybody. Borrowers with weak credit scores will pay several percentage points more on a fixed rate loan. According to FICO, a borrower with an excellent credit score might get a 5.9 percent interest rate on a $200,000 30-year fixed rate mortgage and pay $259,074 in interest over the life of the loan. A borrower with a bad credit score, if he or she can get a loan, may qualify for an 8.5 percent interest rate and end up paying $355,200 in interest. The bad credit score will have cost more than $127,000.

Sources

MarketWatch

FinanceTalks

BankRate.com

Many NPSL card users have difficulty keeping credit utilization low and FICO scores high. (Photo: Andres Rueda/Flickr/CC-BY)

Everyone knows about the misleading and predatory credit card practices that characterized the pre-Great Recession personal finance landscape. We know how malicious credit card companies preyed upon vulnerable demographics, making money for themselves and dragging down Americans’ credit in the process. However, many people believe that these practices are largely a thing of the past, that the Great Recession is over and that the new credit card laws (CARD Act) have helped protect consumers. While these things are indeed true to a certain extent, unscrupulous credit card practices still persist, and not all target those with bad or little credit history. In fact, some of the most popular credit cards and charge cards for people with excellent credit are inherently deceptive products that have the potential to damage the credit standing of those who use them.

NPSL cards – the background

If you have a Visa Signature credit card, a World MasterCard credit card or an American Express charge card, you are in possession of what is known as a No Preset Spending Limit (NPSL) card. People with excellent credit gravitate to NPSL cards as a result of the common misconception that they provide unlimited spending capabilities.

In reality, however, NPSL cards do have limits; they just are not disclosed to consumers. Credit card companies refrain from providing users such crucial information in order to prolong the lucrative myth of endless spending. While this practice lines issuers’ pockets, it also creates problems for NPSL card users. Because consumers have no idea how much they can spend with NPSL cards, they are extremely vulnerable to their cards being unexpectedly declined, an occurrence that can be both logistically difficult to manage and downright embarrassing.

NPSL Credit Risks

NPSL cards also have the potential to drag down users’ credit scores. Although NPSL cards do have spending limits, issuers do not report them to the credit bureaus. Instead, according to a No Preset Spending Limit Card Study conducted by CardHub.com, they either report proxy limits for their NPSL cards or no limits at all. This is important because the largest credit scoring agency in the U.S., FICO, uses information about consumers’ credit limits to determine the balance-to-available-credit ratio, known as credit utilization, that factors prominently into their credit scoring calculations. Exhausting much or all of one’s available credit leads to high credit utilization and a lowered credit score.

However, according to the Card Hub study, no uniformity exists in what faux limits credit card companies report for their NPSL cards, and three of the top 10 issuers — Chase, HSBC and U.S. Bank — refuse to be upfront about how they report. Consequently, NPSL card users have difficulty keeping credit utilization low and FICO scores high.

Avoid NPSL Card Use

As a result, use of an NPSL card is simply not worth the risk. All they truly provide is a great deal of uncertainty and the potential to affect consumers’ credit standing in unpredictable ways, ranging from FICO not rewarding you for your NPSL card’s available credit to your FICO score falling because of high utilization. What they don’t provide is unlimited spending power. Therefore, people with excellent credit should refrain from using NPSL cards and open credit cards that reward rather than punish them for having such high credit standing.

This guest post comes from Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards and gift cards.

People looking to rebuild or establish credit could try secured credit cards like the kind offered by Wells Fargo and US Bank. Image: MoneyBlogNewz/Flickr.com/CC-BY

There’s a great tool for rebuilding or establishing credit called secured credit cards. Secured cards work just like traditional cards, except the limit is determined by an upfront deposit that secures the credit. Most major banks offer them.

For lousy or nonexistent credit, try secured credit cards

Credit cards are one of the most ubiquitous forms of credit in modern America. There is a way for people who have either a dismal or nonexistent credit history to get credit cards that will help with credit repair or establishing a credit score. They’re called secured credit cards. Secured credit cards have the backing of collateral in the form of an upfront deposit. The deposit, whether for a few hundred or a few thousand dollars, determines the credit limit. Other than that, they work just like typical credit cards. Payments have to be made, and discretion should be used making purchases.

Great way to get credit back on track

Just like trying to find the best personal loan rates, the interest rates and fees of card companies should be checked out thoroughly. Consumers should be cautious; there are perfectly legitimate companies out there, but others are out to rob people blind. If something looks too good to be true, it usually is. If e-mails show up from “Bank of the Gobi Desert,” don’t open them. Beware of cards endorsed by celebrities as well; the “Kardashian Kard” was rated among the worst prepaid debit cards in existence by US News and World Report. Wells Fargo, U.S. Bank, and other institutions offer secured cards. You should also consult with local community banks and credit unions. Community banks and credit unions invest into the local area, whereas huge multinational banks invest in ski chalets in Scottsdale and Aspen for executives.

Credit is important

Access to credit is an important part of modern American life, for good or ill. People who want to get a loan to buy a house or fly to Birmingham to watch an Auburn Tigers game but lack sufficient cash on hand, need to have the credit available.

Sample of secured credit cards

Here are the secured credit card offers from Wells Fargo and US Bank.

Get professional credit repair help

Speak to a professional today and take proactive steps to repair your credit. For a FREE credit consultation, call 1-877-563-2076.

Source

U.S. News and World Report

Knowing how to spend money is the most important factor in creating a budget that saves money. Image: CC Jake Wasden/Flickr

Unless you win a $380 million Mega Millions jackpot, smart spending is the only way to avoid debt and save for retirement. Becoming financially literate is one of the keys to smart spending. Having the commons sense to realize there is no such thing as “unexpected expenses” is another.

Financial literacy and financial independence

Most financially independent people don’t win the lottery or inherit a fortune. By making smart spending decisions every day, people become prosperous, live their preferred lifestyle and look forward to a secure retirement. To be a smart spender, one cannot simply rely on other people’s advice. Financial literacy is necessary to understand such things as how to create a budget that is sustainable. Elizabeth Warren, the head of the Consumer Financial Protection Bureau, recommends the 50-30-20 rule. Necessities like food and shelter take 50 percent. Buying things to support a particular lifestyle should constitute 30 percent. Save 20 percent.

Smart spending decisions

Even with smart spending, saving 20 percent of a paycheck is a daunting challenge to most. Just looking at what’s coming in and what’s going out won’t get the job done. Shopping around for the best prices on food, phone, Internet, TV and insurance will get a person closer to the 50 percent mark for necessities. Swallow your pride and start clipping coupons. Dedicated coupon-clippers can save up to 50 percent on groceries. A family of four focusing on coupons could save $5,000 a year, according to grocery spending numbers in the U.S. Consumer Expenditure Survey. Developing that level of discipline can be made easier by keeping financial goals such as college tuition, a vacation or a mortgage at the top of your mind every day.

Emergency fund based on credit as well as cash

When it comes to allocating 30 percent to support your lifestyle, an important aspect in that category should be an emergency fund. Anyone who owns a home, drives a car or inhabits a human body should expect expenses out of the ordinary spending routine. Personal finance gurus tell people to have an emergency fund to cover living expenses for a year. But that’s unrealistic for people who don’t win the lottery or inherit a fortune. Protecting access to credit by taking care of your credit score is just as important as saving as much cash as you can.

Sources

New York Times

NewsObserver.com

USA Today

Factoring savings into credit scores won the grand prize in a contest for ideas on how to boost a falling national savings rate. Image: CC Bureau of Econoic Analysis/Wikimedia Commons

Earlier this year an asset management company announced a contest for the best ideas to increase the U.S. savings rate. The winner of the $50,000 grand prize suggested a “Savings Credit Score” that factors savings into a person’s credit score. A FICO spokesperson praised the idea but said current credit scoring models made it impractical.

Credit based on saving instead of spending

“Raise the Rate” was a contest promoted on Facebook by TIAA-CREF asking for ideas about how to raise the national savings rate to 10 percent in the next two years. The winning idea was the Savings Credit Score proposed by Johnathan Chan, a 2009 graduate of Northwestern University. By incorporating savings rates into the credit scoring system, Chan told American Public Media’s Marketplace that currently credit scores are based on spending and debt. If savings were factored in, people would be motivated to improve their chances for going to college or buying a house by tucking more money away. Chan’s definition of what would qualify as savings included investing in home equity as well as personal savings accounts.

Can a Savings Credit Score work?

To incorporate personal savings into credit scores, Chan suggested such things as reporting savings on income tax returns and coordinating credit bureaus with online financial tools such as mint.com. FICO spokesperson Craig Watts told the New York Times that banks already consider savings and checking account history in lending decisions. Since lenders don’t report that information to consumer credit bureaus, it’s not available for FICO to factor into credit scores. Watts said, however, that FICO wasn’t discounting the idea of having more information available for better lending decisions

Saving needs a shot in the arm

According to the Bureau of Economic Analysis, personal saving as a percentage of disposable personal income in the U.S. was 5.7 percent in October and has been rising since the financial crisis. A survey by TIAA-CREF released in November showed that most Americans realize saving is essential for financial security. However, 82 percent surveyed didn’t know what it takes to save and 39 percent aren’t saving for retirement. The interest rate on savings accounts isn’t helping. According to Money-Rates.com, as of July 24, 2010, the average interest rate for savings accounts under $10,000 was 0.80 percent.

Sources

New York Times

Denver Post

Marketplace

Ignore debt relief ads and consider getting rid of credit card debt by taking out a personal loan with a much lower interest rate. Image: CC TheTruthAbout/Flickr

If you need credit card debt relief, pay no attention to the ads on the Internet or late-night TV. The best way to get rid of credit card debt is to do it yourself, perhaps with a personal loan. Take independent action to boost your credit score faster so you can save money on future borrowing with lower interest rates.

Why credit card debt is so expensive

To find a more manageable way to pay off credit card debt, consider a personal loan. Compared to a credit card, a personal loan can have a much lower interest rate, depending on your credit score. Interest on credit card debt overwhelms so many people because not only are the rates very high, the interest is compounded daily. Some credit cards sock consumers with interest rates as high as 29 percent. Imagine having $10,000 in credit card debt at 29 percent interest. If you paid the minimum monthly payment of $250 every month it would take 143 months to pay off — that’s 12 years.

Why personal loans are so interesting

Using a personal loan for credit card debt relief can save a lot of money with a lower interest rate. Shop around for the best rate possible. Some banks and credit unions have personal loans at between 5 and 8 percent. Call at least three financial institutions. Be honest, and don’t be afraid to explain your situation. If you can manage to find a lender who will give you a personal loan at 6 percent, that $10,000 could be paid off in 45 months (less than four years) with the same monthly payment.

How good credit saves money

By getting rid of credit card debt and faithfully paying down the personal loan, a better credit score will bring many future benefits. For example, a person with good credit can get an auto loan right now for about 6 percent interest. A person with bad credit will pay about 13 percent. That amounts to thousands of dollars over the life of the loan. For a mortgage loan on a $300,000 home, a good credit score will save hundreds of dollars a month in interest and could add up to $100,000 when it’s all over.

Sources

CreditLoan.com

WTOL.com

Get organized now to have a happy holiday season with debt-free gift-giving. Image: CC alancleaver_200/Flickr

The best way to have happy holidays is to enjoy them without the stress of adding to your debt. Retailers and credit card companies pull out all the stops in an effort to make people think buying gifts is what gives holidays their meaning. But you can celebrate the holidays with plenty of debt-free gift-giving if you keep your wits about you.

Santa knows what he’s doing

To avoid holiday debt, be like Santa. Make a list, check it twice … and shop around for the best price on the Internet. This strategy will help you avoid expensive impulse buying and cut down on shopping trips that result in tempting unplanned purchases. Realize that at Christmastime children get the most out of presents, and for everyone else they are often a waste of money. And family name drawing is always a great idea. It cuts down on gift-giving and is a great way to cap the dollar amount everyone feels obligated to budget.

Resist credit card offers

When you’re holiday shopping, every store in the mall is going to ask you to fill out a credit card application. It could be tempting to defer spending cash now on holiday gifts, but in the long run it just makes them more expensive. Also, be aware that every time you apply for a new credit card it can negatively effect your credit score, which results in higher interest rates, and even more hard earned money down the drain. Use cash, and if you can’t afford something, don’t buy it.

Use plastic wisely on the web

Internet shopping requires credit cards, so know your credit score before you make your shopping list. Knowing your credit score and protecting it will help you get better deals on big-ticket items. When you do your holiday shopping with credit cards, don’t max them out. Plus, don’t miss any payments on your credit cards or any other debts in the coming months.

Sources

San Francisco Chronicle

Personal Finance Mastery

District Chronicles

A debt consolidation loan can make sense with low interest rates and loosening credit standards, but do your homework. Image: CC lemonjenny/Flickr

If you’ve ever considered a consolidation loan to facilitate credit card debt reduction, now is a good time. Banks are reported to be loosening credit standards and interest rates are very low. However, make sure you’re consolidating debt for the right reasons, and do your homework to get the best deal.

Be aware of debt consolidation risks

Debt consolidation usually makes sense on paper for someone struggling to pay off credit card debt. Credit cards are the most expensive form of borrowing. They even have a higher interest rate than an unsecured personal loan through a bank. A strategy adopted by many people to consolidate debt is achieving lower monthly payments and a lower interest rate by using their home as collateral. This is the primary risk involved with consolidation loans: taking unsecured credit card debt consolidating that debt into a secured debt. If for some reason the borrower defaults, the lender takes the home.

What is your borrowing strategy?

Borrowers have to think a debt consolidation loan through to the end. When it comes to uncomfortable debt, relieving the symptoms does nothing to cure the disease. Simply wanting a lower monthly payment to improve cash flow is not a good borrowing strategy. Often a lower monthly payment means a longer term, which adds up to paying out a lot more money over the life of the loan. But simplifying debt reduction has its value. One payment at a lower interest rate can reduce the risk of missing a payment and help build or maintain a decent credit score.

Doing debt consolidation right

Debt consolidation, however convenient it may appear, is not a quick fix. Borrowers have to do their homework. Most importantly, make sure you know your credit score. Then analyze your debt situation. List all your debt and minimum monthly payments, plus the interest you’re being charged. Look on your credit card bills at the feature showing how much you need to pay each month to retire the debt in three years. Is a debt consolidation loan still a good idea? Be sure that you know what kind of interest rate your credit score qualifies you for. Shop around. Compare interest rates, monthly payments and fees.  Compare your current monthly payments with the debt consolidation loan payment to make sure you’re getting a better deal.

Sources

Americas News Online

Bankrate.com

Creditcards.com

Renting with bad credit is a challenge more people are facing. It requires a clear strategy to succeed. Image: Thinkstock

Renting with bad credit is a challenge a great number of people are facing these days, thanks to the housing crisis, mortgage lending meltdowns, unemployment, foreclosures, etc. Circumstances beyond their control have put many people in the bad credit doghouse. But a decent place to live, or simply a roof over one’s head, is a fundamental need that must be met. The bottom line is simply that the rent must be paid. For people with bad credit who can pay the rent, securing a place to live requires a strategy.

Know the facts about your credit score

It’s tough for renters with bad credit to lease an apartment or house, whether the economy is good or bad. AOL Real Estate says that credit scores, income and employment history, are the major factors landlords use to evaluate renters. The first priority a renter must address is to know where they stand with their credit. Anyone can get a free credit report at annualcreditreport.com. This is the official government site for the free credit report everyone is entitled to by law once a year. Credit scores are available for purchase from any of the nationwide credit reporting agencies providing the credit report via this site.

Stay away from a credit check

The best way to successfully rent with bad credit is to avoid getting a credit check. According to CNN, houses or apartments rented by an independent owner may be more easygoing than properties managed by a professional management company. Start by checking Craigslist, free newspapers and bulletin boards. Landlords advertising in these venues are trying not to invest any money in advertising rental units, and the odds are better they won’t do credit checks. When you ask about the place, ask them about the criteria they use to evaluate renters. If a credit check isn’t on their list, you’re a step closer to success.

Other bad credit rental options

The reality for renters with bad credit is that most landlords require a credit check and a completed application before they will lease an apartment. According to About.com, options are still available. Getting someone to vouch for your financial responsibility can help offset bad credit. A family member or good friend with good credit can also act as a co-signer on the lease. Getting a roommate with good credit could help. But keep in mind that if your name isn’t on the lease, you’re not building your credit with a rental history.

Why should students strive so hard only to disappear into a black hole of debt? Image fom Wikimedia Commons.

There are many components to the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, and one of the big items concerns aggressive marketing of credit cards to college students. College is an increasingly expensive undertaking, and many a student has wanted for debt relief upon graduation having to pay back the money lenders that helped finance their education as well as high credit card premiums. The State University of New York system, or SUNY, the state network of public universities that has 68 campuses, has decided to put barriers in place to help keep Joe and Jane college student and their credit scores out of harm’s way.

SUNY says no to marketing practices

According to CNN, SUNY has placed restrictions on marketing practices relating to credit cards on SUNY campuses. The action was spearheaded by Mario Cuomo, the State Attorney General. SUNY schools cannot provide information to credit card companies for the purpose of offering cards to students, without the written prior consent of students. Also, schools cannot receive any funds for doing so. Cuomo has recommended all universities in New York schools adopt the same reforms. Credit card company advertising on campus will also be monitored and controlled by the university.

Students uniquely susceptible

College students are one of the most vulnerable groups when it comes to credit card debt. Sallie Mae found that the average college student carries more than $4,000 in credit card debt upon graduation, on top of their unsecured loans to finance college. There are students that end up dropping out of college to pay off debt or go through lengthy loan modification in order to boost credit scores after graduation. Many employers check credit scores, and students that have had their credit score shot by cards have to put off their dream jobs even longer as a result.

The American Dream becoming a debt nightmare

The American Dream of going to college, getting a good job and making a start in this world is getting further out of reach for the middle class. It seems logical to address the spiraling cost of tuition.

Sources

CNN Money

More people are freeing themselves from the prison that credit card debt can become. Image from Wikimedia Commons.

Some of the good news about the recession is that many Americans are wanting to tighten their belts and get rid of debt. Many are adjusting their budgets so that a little fast cash can get applied toward debt, especially toward one of the most common and expensive sources of debt. Fewer people are using credit cards these days, and smaller balances are being carried. Not only that, but there are also fewer delinquencies. It seems that people are able to get debt relief by their own bootstraps.

Balances fall for credit cards

For the fifth financial quarter in a row, the average balance carried on credit cards has fallen. The level of outstanding credit card debt has not only continually fallen, it has fallen to a new eight-year low, according to CNN. That’s a low point in the economy that you want to have. Not having a credit card bill every month that can send you running for a payday loan is something that a lot of people are aspiring to, and it seems that the American people are doing something about it. Not only do your bills decrease, your credit score starts to increase. It’s like giving a cash advance to yourself.

Even better news

On top of that, there are fewer credit card delinquencies.  Defaults on credit cards, or 90 days past due payments, have plummeted to just 0.92 percent nationwide. That is a decrease of 17.1 percent from the previous quarter and a 21.3 percent decrease from last year. That means that a lot of people invested their tax return money wisely. Instead of buying a new flat screen or cellular phone, their returns went toward paying down debt. This is great for consumers, and credit card companies have to be somewhat happy about some more instant money coming in.

Lean mean saving machines

Something that has been made clear during the recession, it is that too much consumer debt is bad for you. It makes a person very vulnerable in case anything goes wrong, which is why it’s a great thing to see people tightening up on their borrowing.

Further Reading

CNN Money

Raising a credit score will save money on interest payments that can be invested to finance retirement. Thinkstock photo.

A good credit score is more important than ever. The  credit crunch has raised the bar on credit scores. Raising a credit score is necessary now to get a loan and get a good interest rate on that loan. A good credit score saves money. A bad credit score costs money. A FICO credit score of 650 is considered fair to poor. A FICO credit score of 750 is considered good to excellent. A select few, with discipline and focus have credit scores higher than 800. A man in Arkansas is doing everything he can to achieve a FICO credit score of 850. His diligence could translate into a rich retirement.

Raising a credit score to 850

A FICO credit score of 850 has been achieved by 0.5 percent of Americans, according to FICO. A CNN profile of Chris Plepinski of Rogers, Ark., chronicles his quest to achieve that elusive number. Plepinski is currently at 813, putting him ahead of more than 82 percent of his fellow Americans. His burly credit score will save him a fortune over his lifetime. But CNN reports that Plepinski won’t be satisfied until he hits 850. To do that he studies every factor of a FICO score in detail. He checks his FICO score every 90 days and adjusts his personal finances to squeeze out every possible point. He once took out a car loan even though he could pay cash, figuring that adding the variety to his credit mix could bump up his score.

FICO credit scores and how to raise them

A FICO credit score is distilled from credit report data collected by the Equifax, Experian and TransUnion credit bureaus. Bankrate.com reports that FICO scores range from lows of 300 to 400 to highs of 800 and higher. The number is a result of the following:

1. Payment history – 35 percent
2. Total debt load – 30 percent
3. Length of established credit – 15 percent
4. Types of available credit – 10 percent
5. Recent new credit – 10 percent

Based on the above, tips for raising credit scores include always paying on time, making up missed payments, maintaining low credit card balances, paying off debt instead of transferring it, not applying for new loans or credit cards and not closing existing credit card accounts.

A higher credit score brings a better quality of life

A fair-to-poor credit score can cost a fortune over a lifetime, according to Liz Pulliam Weston at MSN Money. Weston penciled out a comparison between two people over 50 years. One has a credit score of 750 and the other 650. She calculated the difference each person paid in interest on several loans, including student loans, credit cards, auto loans, mortgages and home equity loans. Over a lifetime of borrowing, the person with the 650 credit score paid $201, 712 more than the person with a 750 score. Weston divided $201,712 over 50 years and figured an 8 percent average return. In interest saved, the higher credit score could allow a retirement account to grow to more than $2.3 million.

Credit card companies aren't out to hurt your credit score, but they can. Image from Wikimedia Commons.

One of the rationales behind using credit cards, or at least using them on a semi-regular basis, is that if you use them occasionally and pay the balance immediately, it boosts your credit score. That may be partially true, but it may not actually be that simple. There are ways, in fact, that credit cards hurt your credit score. The credit card companies don’t always report things exactly the way they happened. Since the CARD Act passed, credit card companies have some new rules, but they may not always play by them.

Credit card reporting can hurt your score

It isn’t that having a credit card or using it will hurt your score. However, what the credit card company reports to the credit bureaus is what can hurt your credit score. Say you get a cash advance from your credit card of $300, about the size of the average payday loan. Let’s assume that you didn’t have a balance on it, and your limit is $3,000. Now, the credit card company should report that you used about 10 percent of your available credit, or the credit utilization ratio.

Reporting is not always accurate

Let’s say the biggest balance you ever carried before that was $600. In the above hypothetical situation, credit card companies can report that you used 50 percent of your available credit, as $300 is half of $600. In other words, they can calculate your credit utilization ratio as current balance to largest balance, not current balance to credit limit. According to US News and World Report, it isn’t that uncommon. You may have been better off getting a short term loan rather than using the credit card. You should regularly check your credit report and dispute anything that doesn’t add up.

They do not always play fair

Credit card companies have been accused of not being upfront with their customers. According to CNN Money, some credit card issuers have been notifying customers of the existence of penalty rate increases, but not how much the rate increase is. There are also plenty of stories out there of payments going missing, and a ding showing up for that. It isn’t that credit card companies aren’t honest, but like any form of credit, they carry risks.

Further Reading

US News and World Report

CNN Money