America has been facing financial difficulties in the past several years. The reason for the financial woes can be attributed mostly to debt. Debt can arise from many different areas such as mortgage loans, student loans and credit cards. Credit cards have for years been a way for people to buy misc. goods and/or services without needing the money up front. This type of consumer spending is what led America to the financial crisis that it faces today.
Credit cards normally charge a reasonable interest rate as long as you pay the balance every month. Conversely, credit cards normally charge outrageous rates when you are late on a payment, sometimes making it impossible for the customer catch up on his or her payments. All the while this is negatively affecting this person’s credit report. A credit report is a numerical assessment of a person’s ability to repay a loan that is not based on a person‘s income. Many credit card companies use this report as a means of determining whether or not they’ll grant customers the card.
Many consumers are unaware of their credit score and don‘t know whether or not they are helping it. The government has made credit reports available to all consumers for free once a year in order to be fair. Credit cards can be a great way to increase your credit rating if you decide to purchase an item and can make the payments on time, every time. In this way you will be able to reap the benefits of having a credit score that will enable you to purchase items of higher value in the future.
Companies that help consumers keep track of their credit report can be a good way to help them become financially responsible. The reason for this is if you have someone that is constantly keeping track of your credit report and whether good or bad it would be easier to go about taking care of unpaid debt. For instance, if your credit score was low it would probably because of poor decisions in the past in regards to credit decisions.
Maybe paying credit card payments late, not paying the bill on a mobile phone service, or becoming delinquent on any kind of loan will negatively affect your credit score. The credit report would detail what areas in your credit file need help in order to progress the credit score to a level more suitable to qualifying for future credit. A good credit repair company could tell you what type of steps you can take in order to create a better score.
If you get your credit report and your credit score is to your liking, a credit monitoring company would be able to aid you in maintaining such a score. Steps to be taken can be to take a small loan in your name and gradually pay back the loan over the course of a year. This type of financial responsibility will show up in a credit report.
Credit reports are normally given out by three main agencies, Equifax, Experian and TransUnion. Most credit reporting agencies base their scores on FICO which is created by Fair Isaacs Cooperation. Some financial institutions use other means of determining whether or not the person will be eligible for the financial services in which they offer. This means that even if your FICO score maybe good that you may still not get approved for the financial service in wish you hope to receive.
If you have not checked your credit score in the recent past, now would be a good time to do so. It is becoming more and more difficult to get credit extended to you based on the current state of the economy and unless you have a high enough score you probably don’t stand a chance of qualifying for anything with a decent interest rate. Get your free credit report and score online and keep track of building better credit. You will be so happy you did.
At the best of times we have trouble keeping our credit scores within an acceptable range, but with the current debt crisis it is almost impossible. Although the debt crisis is called by a number of different names such as a recession or an economic downturn, the bottom line is still the same. Most of us are literally robbing Peter to pay Paul. If you have any hope of surviving the current debt crisis in order to come out the other end with a decent credit score, there are some things you might want to be aware of.
If You Have a Job Keep It!
Statistics have shown that there is a real jobs crisis. Just take a look at the fact that President Obama and current legislators have extended unemployment benefits and you will see that people just are not finding work as they were a year or two ago. In fact, Great Britain recently decided to eliminate 500,000 government jobs as part of their austerity measures. This was under the premise that it would enable them to cut back on corporate taxes which would then enable companies to snatch up those unemployed government workers. The tax money saved was meant to help them grow their businesses.
This didn’t happen and according to a report in the NY Times and it isn’t about to happen any time in the near future. Companies are going bust by the hour. You may be looking for upward mobility, but current conditions are not favorable for changing jobs. With so many businesses closing their doors, you just might land an employer who is about to be bankrupt. Without access to their books, you have no way of knowing how solid that business is. If you have a job, keep it!
The Great Credit Card Dilemma
It has also been reported by almost every major consumers’ group that people are now using their credit cards to pay monthly bills such as their utilities and to shop for groceries in order to make ends meet. Inflation is skyrocketing but wages are at a virtual standstill. The best advice here is to try to avoid using your credit cards if at all possible. Keep in mind that you will be paying interest on those expenses which is making already high bills even higher! What you might want to do in a situation like this is make sure that the amount you charge can easily be paid within thirty days so that those charges don’t accrue interest.
Of course, that pre-supposes the fact that you have a credit card that doesn’t charge interest if the balance is paid in full within that billing cycle. If you already have a balance which cannot be paid in full it will not work. What most financial advisors are suggesting is that you get rid of all your higher interest credit cards and only keep one on hand for emergencies only. (The operative word here is emergencies!) Most utilities companies and other debtors will gladly set up payment arrangements if you contact them timely before the due date. Once you have passed your due date it becomes much more difficult to get a payment plan.
In the end it is up to you to cut back wherever and whenever you can. Only use your credit cards as an absolute necessity and keep your job even if you feel you are not making enough money. You may find a better job and you might not, but hang on to the one you have until you are certain you have a better position. Take the time to check out a new employer before making the change. Surviving the debt crisis will take extra planning, cutting back on expenses and a little extra fortitude, but it can be done. With a little effort you can come out the other end of these trying economic times with a decent credit score. Save now – spend later.
After incurring a significant amount of debt and successfully repaying all of your credit card balances, it can be easy to make the decision to close the accounts in order to avoid future temptation to create new debt. However, closing a credit card account may not always be the best course of action. In fact, closing an account can have variable outcomes on a person’s credit score or credit report, depending on how many accounts they already have, the status of those accounts, and the status of the account being closed. The amount of credit accounts that you have open also has an effect on the debt to credit ratio (utilization rate), as closing an account could decrease your available credit, causing your outstanding debts to become a higher percentage of your overall credit line. Knowing when to close a credit card account when trying to recover from debt can mean the difference between an incredibly slow or fast recovery.
When Closing Account Is Detrimental
It is never beneficial to close a credit account when there is still an outstanding balance, as this would cause immediate harm to the credit score. Once you’ve repaid a credit card account it is important to determine whether your current credit score will allow you to obtain approval for a card that carries more attractive terms and conditions than the card that you just repaid. Many people hastily close credit accounts after repaying them in an effort to avoid future debt, only to find they are unable to be approved for any other credit cards and therefore cannot begin rebuilding their credit as quickly as possible.
When Closing an Account Is Beneficial
If you have multiple credit cards that you’ve just repaid, and several of them are incurring debt with a penalty interest rate applied to the balance on a monthly basis, it is crucial to keep a certain number of accounts open to keep your utilization rate from dropping too low. The utilization rate, also known as the debt credit ratio is the percentage of debt in comparison to your available credit on all of your credit cards. If you have four credit card accounts, and each one has a $1000 spending limit, you have $4000 in available credit. If you still owe $1000 on one of your cards, you currently have a 25% utilization rate (which is underneath the recommended 30%). However, if you close one or two of those accounts your available credit drops causing the utilization rate to rise to levels that are detrimental to your credit score. Thus, it is important to be selective when choosing which credit cards to keep, and try to repay all of the cards before choosing so that you’re not forced into keeping less than ideal accounts open simply to repay them.
Which Accounts Should You Try to Keep Forever
If you had a credit card for several years and have a consistently good payment history with it, but recently failed to make a payment on time or in full, there is no reason to close the account. This is especially true if you have been earning points towards rewards, such as frequent flyer miles, free gasoline, vacations etc. Any credit card that offers benefits, has a relatively low interest rate, and does not charge unfair fees should be kept for as long as possible. Ideally, if you want perfect credit or you want to repair your credit as fast as possible it would be best to never close an account at all and simply keep all of your debts paid.
Trying to overcome the challenges associated with credit card debt can be a difficult task for anyone, especially if you’re already committed to other financial obligations. As new expenses and bills continue to accumulate, it can become an overwhelming task to make repayments towards existing debts without making late payments towards other bills.
In fact, simply avoiding a declining credit score may seem impossible, let alone attempting to obtain an exceptional credit score. Unfortunately, many people make unnecessary mistakes when rebuilding their credit due to the pressure of having to figure out a way to escape the debt quickly before the interest compounds and the debt increases exponentially. The following are some common credit rebuilding mistakes to avoid.
Applying for New Loans
While applying for a new loan to pay off all of your existing debts simultaneously may seem like an appealing option, it simply creates a new debt, which in many cases accrues interest at a higher rate than the original credit card debt. If you have poor credit it is very likely that you’ll only be able to obtain approval for loans that carry higher interest rates and stricter terms than your current credit agreement.
While the average credit card carries an APR of about 12-18%, bad credit loans like paycheck advances can carry interest rates as high as 30% or more, and are notorious for having overly strict interest rate penalties that are applied after a single late payment. Thus, rather than applying for a new loan and creating a new high-risk debt to pay off your existing debts, it would be advisable to pay off the card balance gradually. For example, if you currently owe a $500 balance on a credit card with an interest rate of 18% APR, you could repay it over 11 months at the cost of approximately $50 per month (with about $45 allocated to interest).
Many people make the mistake of using too much of their available credit, under the presumption that making more purchases and then repaying their balance in full at the end of each month will give them accelerated results. Although it is possible to significantly improve the credit score by consistently using about 30-50% of your credit line and paying off your balance in full each month, using more than half of your available credit for several months consecutively may signify financial desperation from the perception of financial institutions, and therefore often leads to degradation of the credit score.
Instead, it would be better to have 2 or 3 cards, and then utilize approximately 30% of each credit line each month, primarily through smaller purchases, making sure to repay the balance in full and on time every month. By using several cards to conduct smaller individual transactions and never carrying over balances you can safely maximize the number of repaid transactions and expedite the process of rehabilitating the credit score.
Consolidating all of your outstanding credit balances to a single card that has a 0% introductory rate is perhaps the best way to centralize monthly repayments, while also reducing the amount of interest that accrues on your overall debt. However, many credit cards carry exuberant balance transfer fees that can negate the interest saving benefits of transferring balances to the card. It should be noted that it is possible to further damage the credit score by closing too many accounts at once, so it would be advisable to leave a small balance in each account so that they remain active.
Ultimately, determining whether to conduct balance transfers to consolidate the balances of several cards to a single card would have to depend on the rates, terms, and conditions of the balance transfer card.
Although we have heard it over and over and over again just how important it is to have a good credit score, somehow we just never seem to take it to heart. If you could count all the opportunities in life that pass you by because you have a less than perfect credit score, you just might be motivated to do something about improving it.
Credit Scores – the Good, the Bad and the Ugly
So then, what is a good credit score and how high does it need to be in order to get the best interest rates on loans, the lowest premiums on insurance and a good chance of getting that apartment rental or job you are applying for. Actually, you should always shoot for a credit score which is above 700, the higher the better. If your score falls below 620 you will be considered a poor credit risk and if you get any credit at all it will be at sub-prime rates. Any score above 760 is considered to be the upper echelon and will qualify you for almost anything.
As noted above, most people are looking to improve their credit score because they are looking to have credit extended to them. This could be credit cards (revolving lines of credit), mortgages, car loans, personal loans and even installment plans on dental or medical bills. Any time you want credit extended to you, it is imperative that you have a score well above 620 points, over 700 if possible, or you may be denied or subject to extremely high interest rates.
Lower Insurance Payments
Then there is automobile insurance to consider. That auto you are driving is extremely expensive and insurance companies look at your credit rating as a risk factor. Other types of insurance underwriters also base premiums on creditworthiness. If you are looking for private health insurance, for example, your credit score will certainly factor into rates as well as the condition of your health and any preexisting conditions you may have. The lowest possible premiums on any kind of insurance, including homeowners’ insurance, are always offered to those with excellent credit scores.
This is another area where people get into difficulties if their credit score is less than perfect. Apartments, houses and any type of property that is for rent is an investment for the landlord and he/she will want to make money on renting the unit. If you expect to find decent housing, you will need to have a good credit score in order to show that you can afford to pay the rent and that making timely payments is important to you.
Finally, a good percentage of Americans just don’t realize how many employers run your credit before they even call you in for an interview. Along with your work history and criminal records, your creditworthiness indicates what kind of moral character you display. Whether or not you will be handling money or other valuables, your creditworthiness is a reflection of who you are.
It is about time we realized that having a good credit score is of vital importance in almost every area of your life. From applying for loans to getting good premiums on automobile insurance, your credit score will impact how much you pay, and whether or not you are even eligible for credit. Take the time to learn what you can do to improve your score if it is below 700 and also get a free copy of your credit report and score to make sure there are no errors or cases of identity theft. Your whole way of living will improve by building good, solid credit.
Although the laws are changing, there was a time when the only thing consumers were entitled to for free was a copy of their credit report once each year from each of the three major credit reporting agencies. However, as reported by Bloomberg Business Week, now recent legislation is making it possible for consumers to get a free copy of their credit score if they have been denied credit based on that score. As laws continue to change, one thing remains constant and that is our inability to understand just how we are graded in terms of creditworthiness.
One of the first things that confront us is in understanding just what a credit bureau is. There are local credit bureaus that call us whenever we become delinquent in payments but there are also the national credit bureaus (Equifax, Experian and TransUnion) that keep tabs on anything and everything related to what we have and what we owe. Sometimes these credit bureaus are referred to as credit reporting agencies, which is actually a much better name for them. They are not the folks who call us when we are in arrears on payments but they are the ones who tell potential lenders, landlords and employers whether or not we deserve whatever it is we are applying for.
Credit Score, Credit History & Credit Report
Another area which is oftentimes confusing to the average consumer is the difference between a credit score, a credit report and a credit history. Actually, they are all related but a simple way of looking at it is that the credit report details your credit history. Think of it like a report card when you were in school. Your history is all the tests you took, the assignments you handed in and whether or not you were absent or late on any given days. That is all tallied up to give you a ‘report card’ which is your credit report. Based on the history detailed in your credit report, each of the three reporting agencies have some fairly complex mathematical formulas to come up with your credit score. This would be like your final grade at the end of the year.
Benefit of Checking Your Credit Report
Unlike your report card in school, at least you have the option to dispute any errors or fraudulent entries on your credit report. Students usually don’t question the grades their teachers give them. They may complain, but rarely dispute those grades. However, you are given the legal right to dispute any entries on your credit report if you feel they were made in error or that it could be a case of identity theft. In fact, you are encouraged to get a free copy of your credit report from each of the three reporting agencies once a year for just this purpose. If something is not right you can take steps to have it corrected.
The language of credit may be confusing but there are plenty of resources out there to help you have a better understanding of what it all means. Whether you are looking at ways to improve your credit score or are simply looking at how to correct an erroneous entry, help is available. Understanding your credit score may be another matter altogether as each agency calculates your score a bit differently. Even so, if you find a way to keep your payments current, don’t spend more than you make and can show that you use the money you earn wisely, your credit score should not be a problem. The real problem is understanding the language, but have no fear – there are plenty of interpreters out there who are willing to help!
Anyone who spends any amount of time at all on the internet has probably seen a million and one ads and telling them that they can save thousands of dollars each and every year by refinancing their homes. Be careful since this may or may not be the case.
So many times we take what we are told as gospel truth, but in reality it is just a sales ploy to drum up business for lenders. In a recent Wall Street Journal article posted on Yahoo! Finance, it was made clear that many of those ads are posted by lead generating brokers who make it their business to match lenders with potential borrowers. As a result, it is not uncommon to find information on their websites that is either erroneous or incomplete.
For example, when you plug your data into their ‘calculators’ to get a rough estimate on what you would be saving by refinancing, there are several key factors which aren’t taken into consideration. First of all, there are origination fees, closing costs, title searches and a myriad of other oftentimes hidden upfront fees that can significantly reduce the amount of savings you would realize.
Then, of course, there is your credit history and credit score. Most consumers have absolutely no idea what the exact status is of their personal credit rating which is why those calculators often only ask you very broad questions. You won’t typically be asked for your exact score; rather, you will be asked if your credit is excellent, good, fair or poor. This tells them nothing and has no effect on the rate you will be expected to pay! Remember, even those with less than perfect credit can qualify for a mortgage loan but they often pay double (and sometimes more!) the interest than someone with a great credit score.
As a rule of thumb, refinancing your home can cost you anywhere from 3% of your unpaid balance to 6% or more. The point is, you will not be told that after paying these refinance charges you are saving little, if anything. In fact, there have been cases where refinancing actually cost borrowers rather than providing a savings. The ‘rule’ many people go by is called the 1% rule or the 2% rule. You will be told that if the interest rate you are being charged is at least 1% less than what you are currently paying you will save money. Beware! This is not always the case.
Again, the bottom line is your credit score and credit history which combined will be analyzed by a lender to predict your creditworthiness. Also, keep in mind that every time a lender runs your credit history it will automatically result in losing a few points on your credit score. It would be far wiser to get a free annual credit report from each of the three credit bureaus in order to know exactly where you stand. Actually, you can go one step further as there are credit monitoring companies that will also keep you informed of any changes as they occur. This helps to prevent identity theft as well as giving you the heads-up that there may be an error which has been entered to your history.
Nevertheless, there also may be times when refinancing your mortgage could indeed save you a bit of money each year. The point is, talk to a disinterested third party such as a consumer advocacy group prior to finalizing a new mortgage. If you will realize a savings even after all those hidden refinancing charges, then this may actually be a great plan. Just make sure to look before you leap.
Working to restore your credit is not always an easy endeavor, especially if you have more than one account in arrears which is affecting your credit score. With an easy to use online credit score estimator, sometimes referred to as a credit score calculator, you can estimate approximately what your current score is as well as what it will be in the future.
Six Questions to Answer Using a Credit Score Estimator
There are actually six different categories which most online credit score estimators use to calculate a rough approximation of your current score. Of course you will need to know what has been reported to the credit bureaus (Equifax, Experian and/or TransUnion) along with how much money you currently owe in back debts. This will also include current debts, such as outstanding balances on credit cards. The questions usually fall into these categories:
- Negative items listed on your credit report
- Number of open and closed accounts listed on your credit report
- Total of all credit card accounts
- Sum of all current credit card balances
- Within the past 6 months, how often you have applied for credit
- The age of your oldest loan or open credit card
However, the second question usually has multiple parts. The number of open and closed accounts listed on your credit report also fall into rough categories. For example, you may be asked how many of the following accounts are listed on your report:
- Credit Cards
- Finance Accounts
- Auto Loans
- Student Loans
- Other types of loans or revolving lines of credit
Each web site you visit will have a different variation of these questions, but they will be quite similar. The purpose for this is because your FICO score is based on certain criteria and in order to estimate your score it is important to have the information handy for the calculator to evaluate and give weight to.
How to Get a Copy of Your Credit Report
There are a few ways in which to get your credit report, all of which are free but some ways will not reflect on your credit score. The first thing you should realize is that every time a creditor runs your credit history it will reflect on your credit report. If you apply for credit and are denied, you are legally entitled to a copy of your credit report for free but keep in mind that each inquiry is reflected on your report as is the fact you were denied credit. The law also states that each and every consumer in the United States is entitled to a free copy of their credit report from each of the three credit reporting agencies one time per year.
Many people contact each of the reporting agencies individually but this can be time consuming. There are, in fact, credit monitoring companies that can help you get your free credit reports while also monitoring any changes that occur. There is a fee for the credit monitoring service but the reports themselves are free. Every time a change occurs on your credit report you are notified of the change which enables you to keep tabs on whether or not there are any errors or fraudulent entries being made.
Once you have a copy of all three credit reports for free, you simply plug in the information requested on the credit score estimator and you will have a pretty close approximation of what your FICO score will be. Remember, the government entitles you to a copy of your credit report so that you can monitor what is being reported but you would need to pay for a copy of your credit score. For this reason, many people regularly take advantage of free online credit score estimators.
It would seem as though three years of economic turmoil would be enough to send anyone over the edge, but Americans are still being beaten down day after day with the debt crisis that is assailing not only us, but the entire world it seems like.
According to finance professor Werner De Bondt and his associate Richard H. Driehaus from De Paul University Center for Behavioral Finance, we are in a vicious cycle from which there appears to be no end. Americans are starting to feel the weight of the problems besetting them since the mortgage meltdown of 2008 ushered in what is being called “The Great Recession.”
Actually, the pair feels that, for the most part, Americans have three different reactions to the current financial problems besetting our economy. Some are angry at the debt crisis and the way in which government attempted a bailout. Others are expressing anxiety, not only about their own future but the future of our economy on the whole. A third group of people are simply resigned to the situation and feel that there may be no way out.
In a recent article in the Personal Finance section of the MSNBC website, De Bondt is quoted as saying that Americans “have had it…..with this whole thing,” referring to the elite group of Washington politicians and Wall Street big businessmen. He says that our worries are only natural if you look at what has been transpiring over the past few years.
Literally millions of Americans are out of work and have no hope in the near future of finding a job. Companies are downsizing, homeowners have been foreclosed on and millions of loans have gone into default. It seems as though the bubble burst just as many of us were pulling ourselves up out of debt that we incurred when the credit card wars lured us in.
For years, vying for our business, credit card companies were mass mailing credit cards to consumers around the country in order to get them to sign onto high interest rates. Unfortunately, tens of millions of us fell into the credit trap which led to bills we just couldn’t pay. For a while all went well until they kept raising our limits to the point where even paying the monthly minimum was beyond what we could afford.
At some point many people became aware of what they were doing to their credit scores and simply tore up those cards. Now they are paying the price for it because the economy is still on a downward spiral and it is becoming increasingly difficult to keep up with current bills let alone pay off old debt.
Actually, people are behaving fairly rationally, according to George Loewenstein, economics and psychology professor at Carnegie Mellon University. They are spending less, saving more and recognizing that the economy is not recovering as quickly as Washington said it would. The time has come to rely more on our own resources and less on government – a message which appears to have been heeded.
If you are looking for some sound advice to help you weather the current debt crisis, the first thing to do, as Loewenstein observed is save more and spend less. Secondly, keep tabs on your credit report. If you are like 90% of working class Americans, you are probably worried about whether or not your job will still be there tomorrow.
This means it is time to sincerely think about paying down the debt you have without running up any more. Make sure that your report details debt that is truly yours and not an error or case of identity theft. By keeping a tight reins on your finances and monitoring your credit, you should be able to withstand the current problems until the economy bounces back.
Most of us are struggling just to make ends meet and to keep current on bills as they come in each month. We worry that if we don’t keep a decent credit score we may not be able to borrow money in case of an emergency and we worry that we won’t get a good job, a good apartment or will not be able to arrange medical payments ‘on time’ if we can’t maintain a decent credit history. Not so for the super affluent as they are invited to carry a credit card that is by invitation only.
What Is an Invitation Only Credit Card?
According to Yahoo! Finance, most of the major credit card companies and several banks such as Chase have their own versions of an invitation only credit card. Unfortunately, little is known about these cards as they are cloaked in secrecy. Only those members who have been privileged with an invitation actually know why someone would want one. What we do know is that many of them come with an extremely high initiation fee, sometimes as much as $5,000, and that they may carry high annual rates as well. It is known that the American Express Black Centurion is one of those cards that carries a $5k initiation fee and the annual fee is $2,500. Oddly, most of us would like to have a credit score worthy enough to have a $5,000 credit limit on a basic card!
What Do You Get For All That Money?
Besides the prestige of having an invitation only credit card that is offered to the wealthiest card holders (or at least those who have probably charged hundreds of thousands of dollars in a single year), there are reputed to be some pretty nice perks along the way. Among the ‘known’ benefits are travel perks above and beyond those frequent flyer type miles such as extra special service at hotels around the world. These cards hold private discounts and as mentioned, free upgrades for all sorts of travel arrangements and accommodations. Some of credit card companies also hold dinners for invitation only cardholders at which they are given a ‘bag of personalized loot.’
Achieving a Happy Medium
While most consumers could never hope to be a member of such a select few who would qualify for such a swank invitation only credit card, we can work towards achieving a happy medium. By keeping tabs on our credit score we can work our way up the credit card ladder in order to perhaps qualify for a credit card with low annual fees and perhaps even a fairly high credit limit. Unless you have a bank account with perhaps $20+ million which would qualify you for one of those ritzy bank invitation only credit cards that is about the most you can hope for – a credit card which has low rates and a high limit.
Take the time to get your free annual credit report to keep tabs on what could be affecting your credit. If there are any errors, contact the credit reporting agency (Experian, Equifax or TransUnion) that reported erroneous information. Make sure that you are not the victim of identity theft and then look at how your creditors have been ‘grading’ you. Have you been paying bills on time and in full? Did a creditor report that you had paid off a loan? These are the types of things you should be looking for that will affect your credit score and future credit. You may never qualify for an invitation only credit card, but why would anyone want one? Don’t you think they could purchase so much more than they are getting with that $2,500 annual fee? I guess we’ll never know.