Tips for Successful Personal Finances
There was a time when our mailboxes were full of credit card offers. Now the offers have been replaced with policy change notices.
Credit card companies are racing to make changes before the new regulations hit in February 2010. They’ve have had a bad couple years. It used to be easy to make money in the credit card business, but things have changed.
The first issue is defaults. Because of unemployment, more people are defaulting on their debts. So, credit card companies have been lowering everyone’s credit limits to help reduce the risk. Their reasoning is sound. The less debt you have, the less debt they will have to cover. Expect your credit card limits to fall even if you have a good payment history.
The second issue is pay offs. More people are paying off their credit card debt because they’re anticipating layoffs. This means that the creditors are earning less from interest payments. They need risk-free revenue, so they’re looking at annual fees. Expect your credit card company to either add an annual fee or increase the fee you already pay.
Right now, under the old regulations, they can still make changes to your account with minimal notice. If you get an unpleasant policy change in the mail, you should definitely call the credit card company and try to get them to revert back to the original terms. If that doesn’t work you can always close the account.
Which saves you more money: a debit card or a credit card? Most people believe debit cards are cheaper because there’s no interest rate or annual fee. But what about overdraft fees?
Debit card overdrafts are now the biggest source of revenue for banks. The danger with debit cards is twofold: One, the transactions hit your account instantly and two, very few people keep track of their debit card transactions in a check register.
Debit cards are convenient and fast. We use them for everything from buying $200 worth of groceries to $1.50 take-out coffee. The problem is that we aren’t notified at check-out if our account is overdrawn like we would be if we had maxed out a credit card. And overdraft fees are expensive – approximately $30 per transaction. Some people have found themselves with $60 – $1,00 in overdraft fees in a single day because they continued to use their debit card while their account was overdrawn.
Please, take a moment to record your debit card purchases. Remember, too, that debit cards hit your account instantly but deposits don’t. If you deposit a check and use your debit card on the same day, the debit card transactions will hit your account before your deposit clears.
If you share a credit card account with someone else, you are either an authorized user or a joint credit card user. Knowing the difference can help protect your credit score.
If you’re an authorized user, it means you can use the credit card account, but you’re NOT responsible for the payments. You have a card with your name on it, but you’re not the “card-holder.” The account won’t appear on your credit report, so it won’t help, or hurt, your credit score.
In the past, parents could add a child as an authorized user. This helped the child start his credit history, making it easier to get that first car loan or student loan. Because of some abuse, credit reporting agencies stopped monitoring authorized users. It’s now more difficult for children to begin building their credit history, but not impossible.
If you’re a joint credit card user, you and the other person were considered equally when you applied for the account. You are both responsible for the payments and the account will show up on both your credit reports. Joint card-holders should make a habit of reviewing bills and payments together to help protect you both from mistakes or fraud.
Have you heard about the new credit card rules? Credit card companies must give you more time to review statements and rate changes, which helps you make better decisions when dealing with debt.
Statements must now be mailed at least 21 days before the due date. Credit card companies make a good profit from late fees and rate increases. To increase the amount of late payments, they began billing closer to the payment due date, sometimes forcing you to pay within a week. This allowed them to add fees and raise rates based on payment history. The new rule allows you a standard billing cycle to review your statement and remit payment.
Second, creditors must now notify you within 45 days of a rate change. This is better than the previous 15 days notice. The rule change gives you a chance to accept or decline the offer, and gives you time to shop for a new credit card company.
The rest of the Credit Card Act will go into effect next year, hopefully with more consumer protections. Remember: if you owe creditors a balance that can’t be paid in full each month, you give them power over your financial health.
A credit inquiry is when a potential creditor accesses your credit report. This can occur when you apply for credit.
For example, when you sign up for cell phone service, the provider checks your credit before they decide if they’ll work with you. If your credit is good, they’ll give you service. If not, they may refuse to work with you, or ask you to pay up front with a security deposit.
Your credit score is reduced every time someone makes an inquiry because each inquiry means a potential new account. As you’re wandering through the mall, allowing the check-out clerks to see if you’re eligible for a store credit card, you’re lowering your credit score. Please consider your priorities before allowing just anyone to check your credit. It’s not unusual to get declined for a reason of too many inquires.
Some types of major loan inquires will only count as one inquiry, as long as you don’t wait too long between. For example – if you are applying for a mortgage and are checking out several different lenders, then this is one inquiry as long as you’re doing it within a short period of time. Long periods will mean separate inquires. Note, that this is not true for student loans – each inquiry is separate and will reduce your credit score.
“Can you tell me how long it will take to pay a $2,000 credit card balance? I’m paying the minimum every month and the balance doesn’t seem to be going down.”
You could be right about the balance. First thing that you should know is that credit card minimum payments are only about 1.5% and 2.5% of the balance. So for a $2,000 balance, that would be between $30 and $50 per month. Included in that minimum payment is the finance charges (that’s how the bank makes its income – from the fees). To let you know how long it would take to pay off, I would need your interest rate (which I don’t have), but here are two examples:
$2000 Credit Card Balance at 6% Interest
| Rate | Minimum Pmt | Pay Off Time |
| 6% | $30 | 80 months or 6 years |
| 6% | $50 | 45 months or 3 years |
$2000 Credit Card Balance at 12% Interest
| Rate | Minimum Pmt | Pay Off Time |
| 12% | $30 | 108 months or 9 years |
| 12% | $50 | 51 months or 4 years |
You can see that little of your payment is actually going towards reducing the $2,000 balance. The estimate above also assumes that you aren’t using the credit card to make more purchases.
You do have a couple options for a quicker payoff.
Option 1: Pay more than the minimum amount. Paying as little as $10 more per month will help you see some progress. You’re saying you don’t have an extra $10 to spend on your payment? Take a look at your spending habits and see where you can come up with that money. Bring your lunch to work, borrow books and movies instead of buying, and get your hair cut every 7 weeks instead of every 6 weeks. Little things add up. The great thing about this, is that it’s temporary. Once your debt is paid off, you can breathe a sigh of relief, and go back to the 6 week haircut or treat yourself to a rental. Or, you may find you have new habits that will allow you to start saving money.
Option 2: Lower the interest rate. You can do this by transferring the balance to another card that’s offering a zero percent rate or a low rate. These are limited time offers. If you don’t pay it off on time, you’ll get charged interest again. Make every effort to pay off the balance before the special offer is up. This way you can make sure that most or all of your payment is going toward the balance and not toward fees.
One reader asked, “I just got turned down for a credit card. How am I supposed to establish credit, if I can’t get a credit card?”
Great question! It’s very hard to get credit today with our economy the way it is.
First, I would have you apply for a credit card at your own personal bank – the one where you keep your checking and savings accounts. They may be willing to work with you because you already have a relationship.
If your bank isn’t willing to give you a traditional credit card, then you should apply for a secured credit card. A secured credit card is one that is secured or guaranteed by your own bank account.
For example, if you have a savings account with $1,000 in it, then you can get a credit card with a $1,000 limit. The bank will use your savings account as collateral to guarantee your credit card. If you are responsible with the card, you will eventually be eligible for traditional credit cards or loans.
You must ask your bank this one very important question before you apply for a secured credit card: Does the Lender report the secured credit card information to the three major credit reporting agencies: EquiFax, Experian and Trans Union? If they don’t, you’ll want to get a secured card at a different bank. You won’t “establish credit” unless your credit habits are reported to the right agencies.
Credit Report Error
Looking at your credit report could be the most important financial thing you do this month.
How: To order a free credit report online go to www.AnnualCreditReport.com. To order by phone call 877-322-8228. To order by mail, send your request to Annual Credit Report, Request Services, P O Box 105281, Atlanta, GA 30348-5281. It’s that easy. You don’t have to pay a service to do it for you.
Why: Your credit report is so important to your financial life that I feel strongly that you should use your credit report as a tool to make your life better. What can it tell you?
Once you have read the report, correct any errors by following the instructions there. Errors can keep you from getting good deals on loans, credit, insurance and even employment.
Make sure that you order a credit report for every person in your immediate family, including the children, because children’s ID theft is becoming common. We are given a social security number at birth, but it shouldn’t be used until we are old enough to apply for credit or benefits. Surprise, some young people are finding out that they have been the victims of ID theft when they apply for credit for the first time. Don’t let your child be one of these.
When: You can order a free credit report three times a year because each of the three major credit reporting agencies (EquiFax, Experian and Trans Union) have to give you one annually if your ask for it. Take advantage of this.
I personally order a free copy through EquiFax in January, Experian in May and Trans Union in September. I figure that I owe it to myself to protect my finances, don’t you?
Join our Free Credit Report Reminder Program by emailing Val@JillRussoFoster.com. You won’t have to remember when or how to order your credit report with this program. A reminder with instructions will be sent to you three times per year.
You have all heard me talk about FICO scores and how important they are to your financial health. I’m going to walk you through a scenario so you can see how FICO affects you.
Let’s say that you are going to apply for credit. You may be thinking of buying or leasing a new car, opening up another credit card, purchasing or refinancing a new home. Whatever it is that you’re thinking about doing, it will involve the potential creditor accessing your credit report and score. This will help them decide if you are creditworthy and what terms you will be offered.
When the creditor prints your credit report, they will be looking at your credit from a specific date. They’ll see who you have credit with, your credit limit, how much you owe, how long you have had your accounts, your history of paying back your debts, and whether or not there is derogatory / negative information with an account. All this information is put into a formula to determine your credit score.
The credit score that creditors use was developed by Fair Isaac and Company (FICO) to determine whether you are a good credit risk and what the likelihood is that you will pay the credit back on time. The higher your credit score, the less risky you appear to a potential creditor. FICO scores go from 300 to 850 – with 850 being the best.
This is one of the major factors in determining your creditworthiness. Creditors have guidelines that determine if you can be considered for a specific program. For mortgages, your credit score has to be at least in the mid-range to even be considered for a mortgage program. If your score is one point below the minimum score, I cannot offer you that mortgage program. Auto loans have similar guidelines. When you see car financing commercials that offer people 0% financing for “well qualified borrowers,” they mean that you have to have a particular minimum credit score to be seen as “well qualified.”
So what happens if you don’t qualify for the best mortgage program or that 0% car financing? You may still be approved, but you will be offered lesser terms. Those less than favorable terms will mean that you will be paying more money out of your pocket. A $250,000 mortgage at 8% instead of 6% will cost you an additional $335.00 per month.
Bottom line: keep your credit score as high as possible, by doing everything possible from your own. This includes making sure your payments reach your creditors before the due date and checking your credit report regularly for suspicious activity.
