Manage Your Credit & Identity

12 Months Free Financing – No Money down

Reader Question: The store is offering a buy now-pay later deal – is there a catch?

The only catch is that you might cheat yourself.

Many stores offer these deals and they are legitimate. If you pay the loan off on time (and it is a loan) you won’t have to pay interest. If you don’t pay it off on time, you pay interest for the length of the loan – that could be 15% interest for 12 months on a $5,000 purchase. Ouch. Some bargain.

The real problem with these deals is that most people don’t pay off the loan on time. The rule is simple: if you can’t afford to save up for a purchase, then you probably can’t afford to make the payments.

I am not in favor of this type of offer. I strongly encourage you to start saving and wait before you buy. If you hate your furniture, take some pride in saving for a new set. In fact, brag it up. Saving for purchases is smart. You might find that you can get a deal on much better furniture if you save ahead of time instead of buying the sale items that the store is trying to unload with their “buy now-pay later” deal.

However, if this is truly an emergency purchase that can’t wait, like a furnace or hot water heater, then make paying it off a priority, even if it means cutting back. I’ll discuss clever ways to cut expenses in future posts.

Refinance Now?

Reader Question: Mortgage interest rates seem to be coming down, how do I know if it’s a good time to refinance?

Refinancing is a long-term numbers game. Many people refinance thinking that a lower mortgage payment means they’re saving money. It’s not necessarily true. To find out if this is a good time for you to refinance, let’s do some math! Let your math savvy spouse, friend, or child help you with this if needed:

Take the refinance principle and interest payment and subtract it from your current principle and interest payment. This would be your savings per month.
Assume that the closing costs of the refinance will be about 4% to 6% of the mortgage amount. Example: Closing costs would $10,000 on a $250,000 house if they charge 4%. Figure out your closing costs and write that down.
Take the number from step 1 (your monthly savings) and divide that into step 2 (your closing costs). This is the number of months it will take you to recoup your closing costs.

Now that you know how long it will take you to recoup your loss, you should decide whether you’re going to be living in the house that long. If you are sure that you will be there past the months it will take you to recoup the closing cost, then refinancing might be a good idea. If not, then don’t refinance.

What Is A Credit Inquiry Doing On My Credit Report?

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.

Why It Isn’t Enough to Pay the Minimum

“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.

How to Establish Credit When You Can’t Get Credit

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: How, Why and When

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?

Find out if your accounts are considered paid “on time” by your creditors.
Find out who has requested your credit history.
Find out if your personal information matches your real circumstances.
Find out if someone else has created an account in your name.

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.

Credit Card Shaving is Cut & Paste Fraud

Credit Card Shaving – it sounds like what you would say if you were cutting back on your credit cards, but that’s not what it means. This is the latest credit card scam and there is nothing you can do to prevent it. Isn’t that scary?

Q & A on Credit Card Shaving:

How do they get your credit card number? The thief makes a random list of 16 digit numbers. Then he starts trying to make purchases online with different combinations. If one works, then he knows he has a legitimate account. He doesn’t need to steal your card, or go through your trash. You still have your card and have no idea that someone is using your card numbers.

Why is it called “Credit Card Shaving?” The thief literally shaves the raised numbers off of other credit cards (usually cheap gift cards) and glues them onto a new card in the correct order. He now has a legitimate-looking card with your number. He can even use his own ID with the fake card to charge everything to you.

What about the magnetic strip on the back? The thief doesn’t need to change the magnetic strip, he just “scores” or scratches it so it can’t be used in the automated stripe reader at the check-out counter. Whenever a magnetic strip is damaged, the cashier simply enters it manually using the numbers on the front of the card. We’ve all had this happen with worn out debit cards or poorly working stripe readers.

What can you do about it? Since you can’t do anything to prevent it, the only thing you can do is monitor your accounts. Check your credit card statements for unusual purchases as soon as they arrive. If you check your accounts online, you can check anytime during the month for new charges.

Too much work? We use credit cards for convenience. We treat them like pre-approved micro-loans, or feel they’re safer than carrying cash because they can be canceled if stolen. In reality, the more cards and accounts you have, the more work is required to watch over them. Unfortunately, many people only learn that after it’s too late. Don’t be one of them.

My Friend, My Co-Signer

Have you ever loaned a friend money? If you’re like many people, you found out that he wasn’t planning on paying you back anytime soon. Not before buying himself Guitar Hero, that new graphic novel, and definitely not before his big vacation.

But loaning cash isn’t the worst financial mistake you could make. There is one big mistake that I never want you to make: Never co-sign a loan for a friend or relative. Okay, you may think I just don’t care about other people, but I am looking out for you.

Who has to make the payments? When you co-sign a loan, you’re telling the bank (Lender) that you are responsible if your friend (the Borrower) doesn’t make his payments. That doesn’t mean they expect you to nag your friend for them until he agrees to pay. It means they expect you to pay the loan off. Anytime he doesn’t pay, you have to pay.

What’s the worst that could happen? That would be when your friend doesn’t tell you he’s not making payments. You won’t know the loan is past due until the Lender contacts you, and your credit report is already damaged. You not only have to come up with two or three payments right away, but your other loans (Creditors) may already know that you (not your friend) are late on your obligation to pay off a debt. See, your creditors don’t care about your deal with your friend, they just see your name and a past due loan. That means that all of your creditors could increase your interest rates on totally unrelated accounts. Can they do this? Oh, yes. Your credit card could go from an affordable interest rate of 10% to over 30%, making it nearly impossible to pay off.

That’s why you should never co-sign a loan. It’s better to help a friend learn how to fix his credit so he doesn’t need a co-signer than to drown in debt along with him.

FICO Has Something to Say About You

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.