Month : June 2010

Debt Management Guest Post

Everything You Need To Know About Credit Agencies


Creative Commons License photo credit: paalia

Today, Mr Credit Card is going to give us a quick run down on credit bureaus and credit scores. Aside from reviewing credit cards, Mr Credit Card has also written about identity theft protection reviews. Please check out his site for the latest credit news

A couple of hundred years ago if you wanted a loan you might have to present your case to the lender for why you are “good for it”. If the lender didn’t know you, they might ask about you around town to see what your financial reputation was. Today, the Credit Agencies fill that role in an electronic way. Virtually all people in the United States have a file with Equifax, TransUnion, and Experian, the three major credit agencies. For a long time, the file consisted solely of the details of the accounts you hold with lenders that report to one of these agencies. For instance, your bank might report your credit card account, when it was opened, what your balance is, what your credit limit is, and what your payment history has been. Quickly interpreting all of this information became a challenge for financial institutions and the credit agencies boiled it down to a single number known as a credit score.

What This Means To You?

Every time you apply for credit, a record is sent to the credit agencies. If you take out a loan, or obtain a credit card they are informed as well. Over time, a picture of all of this information, including your payment history becomes your credit score. Your credit score is used by lenders to determine if you will be granted loans in the future. For that reason alone, it is important to maintain a good credit score. Unfortunately, credit scores are now being used for all sorts of reasons that have nothing to do with loans. Employers are increasingly using credit scores to screen applicants. Insurance companies have also been known to set rates based in part on customer’s credit scores. While I am strongly against such uses, everyone needs to be aware of this reality when making decisions that can affect your credit score.

How Your Credit Score Is Determined

The credit agencies actually have a policy of specifically not telling the public the exact formula they use to generate credit scores. Nevertheless, observers have deduced an approximation of how the score is computed. As one might expect, payment history is the most important factor making up 35% of the credit score. 30% is determined by debt ratio. Debt ratio is the amount of debt you have relative to the amount of credit your currently have. It might not be intuitive, but having more available credit actually increases your credit score as it lowers your debt ratio. 15% of your score is determined by the length of your credit history. Therefore, it is best to keep credit cards open for a long time, rather than cancel unused cards, especially if there is no annual fee. Of the rest, 10% is composed of the types of credit you have been extended, and 10% from the number of recent credit inquiries you have.

How To Increase Your Credit Score

Obviously, paying your bills on time is by far the most fundamental thing that you need to master to improve your credit score. Less obvious is the strategy of hanging on to your accounts for a long time. This will improve your credit history and debt ratio. Also, do not apply for credit too frequently. Many shoppers cannot resist the lure of the 10% discount frequently offered when opening up a store charge card a many chains. As a rule of thumb, I limit my credit card applications to situations where I am offered a sign up bonus worth at least $200. Anything less simply isn’t worth the hit on my credit. Finally, double check your credit reports regularly. Errors in credit reports are extremely common, and credit bureaus have little incentive to correct them. When requesting a copy of your credit report, go directly to the three major credit bureaus or through www.annualcreditreport.com, the only site that will actually offer you a free report (though the credit bureaus will always be trying to sell you their “credit monitoring services”). Many other similarly sounding sites exist to sell you some product or service in addition to supplying you your credit report. By law, you are required to be given a copy of the report every year, and you do not have to purchase anything to get it.

Having a Good Credit Score Saves You Money

With the huge impact that the three main credit bureaus have on society, it is worth noting that having a good credit score can save literally thousands of dollars in your mortgage interest for example. Even if you are not a credit addict, it always pays to maintain a good credit score as soon as you can.

The easiest way to build a credit profile is simply to use a credit card. But there is a big caveat here. You have to use it responsibly. That means paying your bills in full and using it for expenses you would have to make anyway (and not on impulse purchases). A college student (if responsible) can start building their credit with a student credit card. If you have no credit, you can start of with a secured credit card.

Your credit report is an important part of your reputation, and a good credit score is an extremely valuable asset. Learning how to maintain a good credit score is a key skill for financial survival in today’s economy.

Friday Night Likes

Friday Night Lights 6/25/10

Stadium LightsCreative Commons License photo credit: Jack Rydquist

Another week has ended, so lets all be thankful :). Thank you all for reading and hopefully you’ve enjoyed my blog so far. If you haven’t yet please check out my Facebook page and give it a like. Also, be sure to sign up for my weekly updates and exclusive email giveaways I’m going to be doing.

I’d like to send a big thanks to Jon over at Musings of a Financial Professional for reposting This 1 Question Will Change Your Spending Habits on his site. Now, check out this weeks Likes.

@MoneyMatters What Is The Best Way To Save For A New Child?

I’m not having a baby right now but if I were I would get a lot of help from this article. It goes over the different items you’ll need for a baby and how you can save on them.

@Studenomics Debt Consolidation Services– What You Need To Ask

Debt consolidation is a great way to help you get rid of your debt. Unfortunately there are a lot of places out there that just want to take you for a ride. This post does a great job of going over what you should look for when trying to consolidate your debt.

@MoneyCrashers How To Prepare A Will Yourself

Every one needs one. Check out this post to see how to do it on the cheap by doing it yourself.

@MoneyNing Learning to Say “No” to Your Kids

Saying “No” to your kids really does teach discipline and teached them that you can’t always get what you want, without hard work anyway. This article goes in-depth on saying no in today’s society.

@PTMoney 5 Good Things Your Money Can Do…for Others

I’m a big fan of giving to those in need. My favorite charity is ModestNeeds.org, check them out. Anyways, check out this article to find out 5 other ways you can touch someones life.

@FinancialSamura Overcoming The Wall

This is a great post on being invisible at work. I think the way companies have become today is shameful. They don’t care about the person very much (there are exceptions of course). Hopefully one day that will change, but I won’t hold my breath.

@DeliverAwayDebt The Debt Destroyer | The System

I like this system because it promises a lot and I think it can deliver… and because the name is bada$$. I’m going to be sure to check out the rest of the series and you should too.

Yakezie Thursday

Yakezie Thursday 6/24/10

YakezieThank you everyone for reading and welcome to another edition of Yakezie Thursday. I’m getting really close to my July 4th goal of 300,000. I’m currently at 356,428, so just a little more to go. If you haven’t yet, go download the Alexa Toolbar and keep visiting my blog:) Also, be sure to get Weekly Updates sent to you and you will also get the opportunity to be in exclusive giveaways. Now check out the Yakezie:

@ Narrow Bridge How IPOs Work: Tesla Motors Case Study

I really want to get into buying IPO’s. This is a great post on them. If you had bought Google’s IPO you would be very, very, very rich. But of course there are IPO’s that suck.

@Bucksome eBay Sales Woes

I’ve never sold electronics, just books, so thankfully I’ve never had this problem. Just goes to show you that everyone isn’t easy to work with.

@GrlRedBalloon Delayed gratification

I’m really liking Red’s blog. This is another great post about delaying gratification on some of the bigger purchases in life. I’m not a fan of debt also but some mountains are really hard to climb, like buying a house. That would be a really big goal to accomplish and it would be nice if I had the chutzpah to do that. Best of luck to her.

@ExtremeJacob Are budgets required or just a good idea?

I’m really starting to think over this question. Jacob does a good job of making a case for not using one.

@MoneyFunk How to Control Emotional Spending

I’m a big believer that emotions can always be controlled…ALWAYS. Christine does a great job of teaching you to control your emotions.

@DeliverAwayDebt Penalties for Failure to Pay Federal Taxes

The Feds can really get you if you mess up. Be sure to prepare yourself with what to expect.

@PFJourney Carnival of Personal Finance #262: 80s TV Edition

My girlfriend is a big Golden Girls fan so this weeks carnival made me think of her. Go check it out…P.S. I’m in it :)

Be sure to check out all of the other Yakezie

Debt Management Guest Post

Is Debt Snowball An Effective Debt Reduction Strategy

This is a guest post by David Brown, a content writer with Oak view law group. He writes on a variety of finance related topics with a strong focus on debt.

Are you submerged in debt and desperately looking for a way out of the debtors prison? Well, it is certainly possible for you to get out of the red zone without filing bankruptcy or consolidating your debt. The modern era we live in offers far too many strategies to combat debt. One of the better known approaches to eliminate debt is debt snowball. Can this approach really lead you to a debt free destination? Let’s discuss.

What is debt snowball?

The concept of debt snowball has been popularized by financial guru Dave Ramsey. Debt snowball is a process by which you list all your debts from lowest to highest and attack the lowest debt first. You need to pay minimums on each bill except for the lowest one. Pay as much as you can towards the lowest debt so that you can get rid of it as soon as possible. Next, you move on to the second lowest debt and the process continues till you are free from the rib crushing, spine tingling clutches of debt.

What are the advantages of debt snowball?

“Personal finance”, Dave Ramsey correctly points out, “is 20% head knowledge and 80% behavior”. Debt snowfall is based on this view. It rightly assumes that paying off smaller debts gives a sense of victory which motivates people to pay off all other debts.

It is relatively easy to pay off bigger debts using debt snowball method. Here you clear the smaller debts first. So by the time you reach the bigger debts, the extra amount that you can pay towards them increases. Consequently, it is possible to eliminate them quicker.

Another advantage of debt snowball method is the reduction of the total amount owed to creditors in a single month. This can save your neck in case you encounter an unforeseen situation like loss of job or medical emergency.

Debt snowball has often been compared with debt avalanche theory by which you try to eliminate the debt with the highest rate of interest first. This approach is mathematically better than debt snowball as you have to pay the least amount of interest. Nonetheless, the debt with highest interest rate can also be the one with the highest balance. This means it will take a long time to pay it off which can have a psychological impact on you. It is highly possible that you will try to get rid of it for several months only to give up because of a feeling that you are getting nowhere. This is where debt snowball scores over debt avalanche. The “quick wins” you get with the former, gives you hope-something very important, sometimes more important than money.

Some criticisms against debt snowball

It has been pointed out that by emphasizing on human psychology, debt snowball puts mind over matter which can result in monetary loss. As you focus on the debt with smallest balance instead of the one with highest interest rate, you have to pay more money in the long run. Thus, your “motivation” comes at the cost of some extra bucks.

Secondly, debt snowball does not take into account the difference between secured and unsecured debt. Problems often follow if secured debts are not addressed at an initial stage- foreclosures and repossessions being at the worst end of the spectrum.

Is debt snowball the right choice for you?

Debt snowball is a simple debt reduction method which is suitable for people who have a wide range of balances. It gives you tangible results and motivation which is missing from other similar approaches. While is it most effective for people who need some encouragement in the form of quick results, individuals with a lot of patience will benefit more with avalanche approach because it is cheaper.

Debt snowball can certainly help you to climb up from the trenches. However, you should remember that it cannot make you debt free with the wave of a wand. But if you stick to it till the end then your patience will be certainly rewarded.

Friday Night Likes

Friday Night Likes 6/18/10

Lights Well….it’s another Friday and all I can say is TGIF. I’m not really having a good week. My allergies are killing me and I got pinkeye…great. But anyways, plenty of time to heal over the weekend. If you haven’t yet be sure to sign up for weekly updates and email contests I’ll be doing soon. Also check out my Facebook page and be sure to Like it:) Now on to the Likes:

@MoneyHighway 5 Things Putting Your Retirement at Risk

These are things you really need to look into now so you can minimize these risks. I really like #2 because it will help you reduce your dependence on the stock market.

@BudgetsAreSexy Talking About Money Before Marriage (DO IT!!!)

I believe that talking about money with your partner is really important to the success of the relationship. This post backs up my feelings.

@MoneyCrashers What’s The Best Way To Get Out Of Debt?

This post goes over a couple of the popular ways to get rid of debt and lets you know the best way. Pretty good read.

@Trenttsd Saying “I Will Do It In The Future” Is an Excuse for Failure

Live in the NOW means do it NOW and stop putting it off

@FCN Financial Guide for the Unemployed

This is a great post that goes over the different things you should do if you become unemployed. It’s a checklist I’m going to be keeping around incase it happens to me.

@Wisebread Adjusting Financial Attitudes: Lessons for Parents and their Children

I really like this post. It goes over how disciplining kids (ex. chores) and money management are linked. Very interesting read for those with children or soon to have children.

And go check me out in the Carnival of Personal Finance this week.