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Archive for the ‘Credit Cards’ Category

Fixing bad credit, building new credit, and how to be the tail that wags the dog

Monday, August 16th, 2010

Well, the floodgates are officially open.  Since I wrote the article on fixing your credit, if my email were normally a like sprinkle like a seattle afternoon, it has now reach Atlantic hurricane status.  It seems that a lot of people are struggling with bad credit from past bad decisions, bad luck, and bad ex’s.  Lets start with the great news; you are reading The Penny Saved so your decision making is obviously taking a turn for the better and soon your credit will be following right along.  The part about bad ex’s I can’t help you with, though I have some excellent whiskeys I can recommend.

So you fixed any mistakes on your credit score but now you need to deal with the mistakes that aren’t by credit bureaus or banks but rather by that good looking person in the mirror.  Here is our goal, you are going stop being slaves to credit, the tail on the dog getting whipped everywhere with no control.  Some people, such as David Ramsey espouse that you should snowball payments, pay off debt and cut up credit cards for the rest of eternity.  WRONG ANSWER.  You are going to be methodical.  You are going to fix the bad credit, build new great credit, you are going to become the tail that wags the credit dog.

What does this mean?  It means improving credit score, using it to your advantage and actually profiting off it.  Here are the steps to take;

Part One: Credit Damage Control

Do not hire a thief credit counselor
You do not need a credit counselor.  I am your credit counselor, this site is your credit counselor and you are your own credit counselor.  I promise you that free trifecta right there is better than any $100/hr pipsqueak you will find in the yellow pages (oooh here comes the hate mail from credit counselors).  If you see any credit counseling ads in my sidebar, don’t click them.  Or click them to satisfy your itchy finger, and then close them and come back.  I have had many different emails from people on the verge of hiring a credit counselor.  Don’t, don’t don’t.

Get everything current and pay off liens/judgments/collections
This is sort of the self explanatory step but you cannot start to rebuild until you have taken care of the worst of the worst.  I had several people ask about waiting and letting things get written off and then fall off the credit report.  There are several problems with this.  The first is that just because a credit card company writes off your debt does not mean that is the end of the ordeal.  There is a lot of misinformation going around about this,  the main thing to remember is, that unless it is not possible that you will be able to make any progress at all on your debt, pay it off.  One thing to remember is that once you are this far in trouble, the debtors are expecting less and less that they are going to be able to recoup money.  Use that to your advantage, tell them that you plan to pay it off, and would like help reporting the positives to the credit bureaus or removing all reporting about the collections.  If it increases the odds they will be able to collect, they will be happy to oblige.  Use this as much to your advantage as possible and you will be able to avoid the “reset the clock” problem you may have heard about.  The best bet is to get things in writing, so just be careful when dealing with collections.

Part Two: Steady as she goes aka the repair

The Paydown
If you have credit cards with balances get them on auto-payment, pay as much as you can per month but keep in mind the important thing is that you need to make consistent payments on-time.  That’s the key, consistently paying, and improving your credit to debt ratio.

Keep all payments on time
This means everything, including mortgage, car payments, utilities, and of course revolving (aka credit) debt.

Redistribute debt load
I know this one sounds a bit weird but here is the skinny;

First off, make sure any creditors report your credit limits to bureaus. When no limit is reported, credit scoring software scores the account as though your current balance is “maxed out”. For example, if you know that you have a $10,000 limit on your credit card, make sure that the limit appears on the credit report. Otherwise, your score will be damaged as severely as if you were carrying a balance of the entire available credit. Credit scoring software likes to see you carry credit card balances as close to zero as possible. If it is difficult for you to pay down your balances, read the following guidelines to maximize your score as much as possible under the circumstances:

  1. There are different degrees that scoring software can impact your score when carrying credit card balances.
  2. Balances over 70% of your total credit limit on any card damages your score the most. The next level is 50% of your balance, then 30% of your balance.
  3. In order to maximize your score without having to pay down your balances, evenly distribute your credit card balances among all of your credit cards, rather than carry a large balance on one credit card. For example, if you are carrying a $9000 balance on a credit card with a $10000 limit, and you have two other credit cards with a $3000 and $5000 limit, transfer your balances so that you have a $1500 balance on the $3000 limit card, a $2500 balance on the $5000 limit card and a $5000 balance on the $10000 limit card. Evenly distributing your balances will maximize your score.

If you do not have a credit card, get one, charge something on it, and pay it off
If you have no cards at all, find a low balance card and get it. Having a card that is paid on time will help your credit in the long run.  No card means you are not building credit.

Part Three: Wag the dog aka make money

Use a cash back credit card
By getting a card that gives a good cash back, you can actually make money on regular spending.  The steps are
1) Pay with card
2) Pay card off immediately
3) Repeat
4) Receive cash back

Use a points card
The usage is the same as above, however sometimes you can get better return when you use a points card.  The trick is get one that gives you extra points on things that you actually want and use.  An example would be the frontier visa if you fly frontier often (as I do).

Set up auto-pay
You get all the rewards without having to do anything at all after initial setup.  Pretty awesome!
1) Find a card that will let you use it to automatically pay bills.  American express is one such example.
2) Setup auto-pay for all of your bills
3) Setup your bank account to auto-pay that one credit card
Plus you get to save on ATM fees, Stamps, Letters etc.

Interest Free Loans
This is where we get even trickier.  If you have a credit card with a billing cycle that ends the first of each month, your payment may not be due until the fifteenth. Finance charges (interest) are typically assessed only on the previous balance on your card, meaning that if you pay it off in full each month, you pay no interest. This means that all the charges you make between August 1st and September 15th are interest-free, which is like getting a 0% loan from your bank.  Even banks pay interest on overnight loans from the Federal Reserve (albeit not much right now), so you’re really getting a great deal.

Protection from Theft
As anyone who has ever lost a lot of cash knows, carrying around cash is risky.  When I had my wallet stolen, the person immediately started racking up bills.  Imagine if I had had cash in there.  I was able to cancel my credit cards quickly.  Cash however would have been gone forever.

If you haven’t read part one, Fixing your credit score – Fight for your score go read it now!  Also featured in the Carnival of Personal Finance

Fixing your credit score – Fight for your score!

Tuesday, August 3rd, 2010

Now is a great time to refinance, there is no question about that.  Of course, with refinancing comes the fun of dealing with getting approved and getting approved for certain rates comes with the fun of dealing with credit scores.  One of the top questions I get regularly is “what should I do to fix my credit score? (or the variation what should I do to improve my credit score)”  which is usually accompanied by one of the following opinions:

1) Credit cards are Satan; evil creatures stalking their prey deep into the night..

2) The credit card companies are evil, taking advantage of the public

The truth is that credit card companies are machines.  They are giant revenue generating machines.  Unfortunately, that revenue comes at the expense of us, the consumer.  That being said, the responsibility lies with us.  There are harsh penalties when we get sucked in.  As soon as you sign up for a credit card you are accepting responsibility for your actions with that card.  That includes paying on time, paying at least your minimum payment, and not skipping payments.  Right about now, since you are here wanting to fix you credit score you are screaming at me “Jesse tell me how to fix my credit score

Lets talk first about fixing mistakes on your credit report

This is why I actually am writing today.  We are thinking of refinancing since we bought our house during the rate spike a few years ago.  I decided to pull my credit report just to make sure since I had my wallet stolen a few months ago.  As I was browsing through the report I noticed that all three credit agencies were reporting me 30 days late on a credit card payment for a credit card that I had never used (I got when I bought a TV from circuit city a while back, then I returned the TV and never had a balance on the card). Here are the steps to take to correct an erroneous entry:

1) Contact the credit card/bank/whoever that incorrectly reported. 
Ask them for details when/why/what etc and ask them to provide documentation.  Sometimes they will have documentation, sometimes they will not, and commonly if it is an old account they may not even have anything on file.  If this is the case, it may be as simple as filing a dispute with their own credit department (which most credit card companies have).  If they are not forthcoming or helpful, you may have to move on to the next steps.

2) Either report online or send a certified letter to the credit agencies to dispute the inaccuracy.

Here is what a template might look like:

(Date)

(Your name)
(Street address)
(City, state, and zip code)
(Phone number)

Dispute Investigation Department
(Business name)
(Street address)
(City, state, and zip code)

Dispute Investigation Department,

I am writing to inform you that there is inaccurate information on my credit report. The following data is not correct and should be updated:

(List each inaccuracy on your credit report. Include exactly why it is in inaccurate and what it should be replaced with)

I have attached a marked copy of my credit report to assist your investigation. In addition, I have included (list the copies of account records, statements, and communication records).
Thank you for your assistance with this matter,

(Your full name)
(Signature)
(Social Security number)

3) Submit your credit dispute

Submitting your dispute by mail is best, but only Equifax and TransUnion allow this kind of dispute. Experian requires all disputes to be submitted online. For phone or online disputes, you may need to provide the identification number located at the bottom of your recent credit report. Using the information you put together in Step 2, submit your dispute to each of the credit bureaus:

Equifax
P.O. Box 740256
Atlanta, GA 30374-0241
Dispute online
Experian
Dispute online
TransUnion
2 Baldwin Place
P.O. Box 2000
Chester, PA 19022
1-800-916-8800
Dispute online

4) Track what is going on with your credit report and credit score
The credit bureaus have 30 days to investigate your dispute and make changes to your credit report and thus help fix your credit score. Once this investigation is complete, they will send you a letter that includes information about what was and was not updated on your credit reports. If you were unable to get an error corrected, try submitting your dispute again with new documentation. You can also try working directly with the company that reported the error to have the matter corrected. Once you receive notification that an error has been updated or removed from your credit report it is a good idea to do a final credit check to confirm that the changes have actually been made to your satisfaction.

Next lets talk about fixing and improving your credit score
This is where the real legwork is because this is where you take matters into your own hands to fix your credit.

Dos:

1) Pay down your credit cards.
Paying off your installment loans can help your credit scores, but it won’t hold a candle to the effect of paying down or paying off those little evil revolving accounts such as credit cards. One of the factors that go into your credit score is the gap between the amount of credit you’re using and your available credit limits. Getting your balances below 40% of the credit limit on each card can really help.  Now I know that goes against what I normally say about highest APR first but in this case you have a different goal; maximize credit.  The main place this could be helpful is if you are raising your credit score to get, say, a 0% balance transfer card.

2) Slow or stop using your credit cards
It is going to be impossible to do #2 if you don’t do this. Another problem is that if you are doing large passthroughs, your balance may be reported at its highest point so while you are trying to boost score its best to avoid the cards all together.

3) Use an old card
Conversely, make sure that you keep old accounts active.  If it is inactive for too long a lender might request the account be closed which would hurt your credit history (longer is better!).  I suggest making a few small purchases and paying them off.

4) Check your credit limits
Make sure that your credit limits are being reported correctly on your credit report.  This goes back to the ratio thing; if it is showing a lower credit limit than you actually have, get it corrected so that your ratio goes down.

5) Pay everything on time
Everything.  Period.

Do nots:

1) DO NOT Pay loans late
As if the above do wasn’t enough, it also gets a top spot on my don’t list.  Whatever you do, do not make late payments, especially on things like your mortgage.  These will absolutely devastate your credit score.  I dont want to get any email from any of my readers saying “Hey I did what you said above, and I only missed one mortgage payment, but my score is shot and you lied about fixing my credit score! Im never reading again. WAaaaa” or anything else along those lines.

2) DO NOT Apply for new credit cards
New credit hurts your score temporarily.  How long it hurts for is hard to say and not worth risking. I had a case where I applied for a 0%, got it, transferred balances, and my credit score dropped 30 points for quite a while.  Its just not a good idea.

3) DO NOT Close old accounts
This goes back to the do’s; older credit is better.

4) DO NOT Wait for there to be a problem before contact a debtor you can’t pay
If you are in dire straights, chances are you can call the company and tell them there is no way you can pay and that you would like to make a plan.  Chances are good they will work with you because they don’t want you to go to collections any more than you do.  They have much less a chance of collecting from you if it goes to collections and they know it.

5) DO NOT Fall for credit counseling or consolidation scams
If in doubt, send me an email.  Seriously, I will write you back.  I care about the readers and I do not want you to put yourself in a worse situation than you are already in.

Remember, you can save yourself thousands of dollars in just a few years by taking steps to fix your credit.  So get out there and fix your credit score! After all, if you are paying 29% APR, you as well just be…

burning money
(In the Carnival of personal finance)

Are you a credit slave?

Thursday, May 1st, 2008

We have a buying problem. Our buying has given us a credit problem.  And our credit problem has made us slaves to the credit market.  Many Americans use their credit scores as a way to evaluate and judge their financial success in life. Through decades of marketing, product innovation, and the passing of personal finance myths from one consumer generation to the next, America’s financial services industry has most of us conditioned to focus our attention on improving the credit scores computed and maintained for each of us by America’s four major credit bureaus, Experian, Equifax, Innovis, and Transunion. Such effective conditioning comes as no surprise – it is, after all, the financial services industry that profits handsomely from us taking out mortgages, using credit cards, obtaining car loans, and otherwise borrowing money for just about anything we want to buy or do to enhance our lifestyles.

Your credit score helps someone, and its not you

Alas, the more we consumers borrow cash from the financial services industry, the wealthier the industry becomes and the poorer we become. This can readily be seen in the simplest definition of your wealth, which is determined by your net worth:

Net Worth = What You Own – What You Owe

The more you borrow from the financial services industry, the more debts you owe. The more you owe, the lower your net worth sinks toward zero, or even into negative territory. The financial services industry has a net worth too. But, what is true for your net worth is exactly the opposite for the financial services industry’s net worth – the loan you must repay to the industry is an asset the industry owns. The more the industry lends cash to you and other consumers, the more assets the industry owns. The more the industry owns, the higher the industry’s net worth rises.

Look at the recent VISA IPO.  Just have a look at it.  In a struggling market Visa is not only surviving but thriving.

From the financial services industry’s perspective, your focus on your credit score is a great thing. Your behavior helps the industry grow wealthier over time. The financial services industry has it good – the product it sells is cash, the price of its product is a given interest rate, the interest payments we make are the industry’s revenues, and thanks to the industry’s unique ability to scale by simply recycling our interest payments into still more revenue-generating product, the industry’s profits are hefty. The industry has made the rules of the game, and the ball used to “win” in that game is your credit score. So, as conditioned, you focus on the ball, trying to move it up the field toward the goal. But, clearly, your behavior – your focus on your credit score – is not such a great thing for you and your family’s wealth. While having ready access to cheap credit can be a good situation in which to be, obsessing about your credit score so that you can borrow more and more from the financial services industry could ultimately preclude you and your family from achieving true financial freedom and security in your lifetime.

I submit to you that you and your family don’t have to play the financial service industry’s game. You have a choice. You can change the game. You can freely elect to change your behavior. You can remove your focus on your credit score and, instead, focus your attention and effort on building net worth.  Get rid of what you owe, and add to what you own/save.  Its so simply, yet it will be your saving grace in the end, I promise.

What should I do if I lose my wallet or purse – I lost my wallet and I’ll tell you

Monday, March 24th, 2008

I have a serious problem with being forgetful. I think that my girlfriend will, in fact, kill me someday due to me forgetting something big. If I didn’t have a routine about where I put things down, I would be completely lost in the world. But I digress: The other day I had just gotten done working out at the gym so I stopped at a gas station on the way home to pick up some of that wonderful almost-$4-Gallon goodness. I always swipe my card, put it in my wallet, and put my wallet back in my pocket. You know, pretty much what everyone does every time they buy something. Well, this time I didn’t have pockets because of my shorts. So I pumped gas, hopped in my car, and off I went, wallet still on top.

I didn’t realize my wallet was gone until the next day. If you have ever lost your wallet and been late for work, Im sure you can envision the next hour or so.

We’ve all heard nasty stories about fraud thats committed in your name using your credit cards, or SSN. My Aunt had her identity stolen from losing her purse and it was an absolute nightmare and included her being (wrongly) arrested on the highway and laying face down in cuffs in front of her daughter for quite a while….not to mention she is still trying to sort out all the financial ramifications. It reminds me of those commercials, well, they are funny, Ill just post one.

What should you do if you lose your Wallet or Purse?

The absolute first thing to do if you think you have lost it in a public place is to make a quick call to the businesses to see if it has been found. If not, immediately call your credit card/debit card companies and cancel your cards. If it has been stolen, every second counts because thieves will do as much damage as possible as fast as possible. Its good to have the toll free numbers available.

Next, check all bank account balances and credit card records for unauthorized purchases. If there is activity file a police report immediately in the jurisdiction where it was stolen…this is mostly to show credit card companies you did your due diligence which will be important in getting reimbursed. Next call the three nation credit reporting organizations to place a fraud alert on your name and social security number. This is good because it means the banks will call you before any accounts or credit cards can be put under your name.

So what happened to my Wallet?

I was lucky, and someone turned it in later that day with everything intact. Its an inconvenience to have all of my usual methods of paying for things canceled, but its a small price to pay considering what could have happened if it had been found by someone less honest.

On a side note, I never realized until now just how FEW places take checks anymore…

If you liked this you might also like Identity Theft Repair Kit from Spend on Life.

Hidden Credit Card Fees and Costs- Credit Card’s sneaky secrets

Tuesday, March 11th, 2008

Credit card week here at TPS has been fairly busy and so in my endless digging to defend you Ive come up with some extra things to watch out for. Your credit card is costing you money in ways you probably didn’t even realize. Thats right, that innocent little piece of plastic you’ve come to love (or hate) is actually hiding some secrets away.

1) Annual Fee
If there is an annual fee, make like a flock of seagulls and run far far away. The ONLY time this is acceptable is if the rewards program FAR outweighs the annual fee. This happens just about 0% of the time.

rewards on credit card2) Rewards that really aren’t that rewarding
You finally saved up those 25,000 points to fly somewhere, awesome! Oh except you have to travel on certain dates….at certain times, and stay in certain places, oh and you have to book it a year in advance, oh and you can get bumped at any time….etc etc.

3) Cash advance fees
Never ever use your credit card to get a cash advance from an ATM. Card companies see these as loans. That means you’ll pay a 3% fee on the amount you withdraw, plus interest which starts accruing immediately. Interest rates on cash advances are generally ridiculously high. We are talking 10-30% kind of high. Thats a lot to pay just to get some cash out. Why on earth do you need cash that urgently anyway, and where the heck is your debit card?

4) Convenience checks are convenient for sucking you dry
Filling in convenience checks, which come with a lot of low-rate balance-transfer offers, is a terrible idea. These are treated as cash advances, and you may get smacked with a 3% fee, AND $5 to $10 minimum. As a sweet bonus not only do you get nailed if you use the checks, but card issuers will hit you with an average fee of $30 if the check is returned or stopped payment on. Even more awesome.

5) Lottery Tickets are treated as cash advances
Thats right , see #3 and don’t do it again!

6) Overseas? Get more Fees!
You will usually end up with 3% extra charged against you for “conversion” fees by both Visa/Mastercard and whoever the card issuer is. Ouch.

7) Pay by phone – More Fees
Paying by phone might cost you an extra $5-$20

8) Lose your statement? – More Fees
Thats another $15 probably. Unless of course you are using online banking (which you should be!)

9) Lose your card? – More fees
Theres another $20 most likely.

10) Late payment fee
This will cost you anywhere from $15-$25

11) Over limit uh oh fee
Go over your limit for even two seconds and you’re likely to get a nice $35 fee.

12) No balance at all fee
Thats right, you could get hit with a “Finance charge” for NOT having a balance. This is probably the most annoying of all credit card fees. Its small $2-$5 but it is absolutely BS.

13) Lack of use fee
This is rare anymore, but they may charge you for NOT using the card often enough.

14) Calculating interest from the time of purchase
Thats right, you could make a purchase, pay it off the next day and STILL get charged interest on the purchase.

15) Return Item Fees
You can be charged for returning an item you bought. Guess charging you interest on the day you bought it isn’t good enough, you need to pay a fee for returning it too.