Brent’s Credit and Debt blog

<!–[if gte mso 9]> Normal 0 false false false MicrosoftInternetExplorer4 <![endif]–><!–[if gte mso 9]> <![endif]–> Becky has a JC Penney card, issued by GE Money Bank. She has never been late (she showed me her payment history online), and is well below her credit limit of $400.00. A few days ago, right after she made a large payment and paid the card off, she got a letter telling her that her credit limit would be reduced to $100.00 or her current credit limit, whichever was greater.

Now, fortunately for Becky, she had just paid off the card. Or maybe that was unfortunate. She now has a $100.00 limit on her JCP card. From the standpoint of her ability to spend, she doesn’t really care. She has worked hard to be able to live on a cash basis. However, from a total credit line standpoint, this really hurt her.

Part of your credit score is determined by your total credit used divided by your total limit. If your limit is decreased, your scores might fall, as your percentages rise. Since Becky is working on rebuilding credit, having this kind of a change might adversely impact her scores.

So why did JCP do this? Well, there is an easy answer. They are trying to weather the financial storm. They are taking clients who might be a risk and reducing their credit limits. How do they determine risk? Well, as is normal with their practice, they look at credit history, ability to pay, and how much credit a person has. If they find a situation that might cause a potential problem, they are within their rights to reduce the rate.

In Becky’s case, she had recently applied for, and been approved for, a new credit card with a $1500.00 limit. This was because she had taken care of her credit, and never missed a payment. However, that new card ended up being a big red flag for JCP. At some point, a creditor will look at your available limits, calculate the max payment you might have to make if you maxed out all of your cards, and then decide if they think you will be able to pay things back. If your creditors think you can’t pay back what you use on your cards, they may reduce your limits!

How can you combat this? Well, Becky called in and talked to a JCP credit service person. They told her that ALL accounts had their credit limits reduced! I can’t verify this, but in talking to 4 other people that have JCP cards, they all got similar letters. Of course, the people I spend time with talking about credit have all had some credit problems in the past, so they might not be indicative of the normal treatment of a customer by JCP. Becky was told she couldn’t get her limit raised.

What are your options? Well, you really have two. You can either live with the decision, or you can pay your account off and cancel it. Personally, I think canceling your card is a bad idea. First, it hurts your credit aging, and second, it reduces your total available credit by the credit limit on your card.

When you have a limit lowered, immediately start paying the balance down to improve your debt ratios. When you get it paid down, just stuff it in your sock drawer and leave it there for emergencies.

Your creditors can do damage to your scores, but you can recover quickly from a credit limit being lowered by a creditor. Make sure, if your limit is lowered, that you contact the creditor to find out why, and see if they will reconsider. But, unless you have a really good reason to do so, don’t close those cards as that can hurt your scores more than the reduced credit limit.

Have you ever made a late payment? How about going over your credit limit? Have you ever withdrawn cash from a credit card?

If you have done any of these wonderful things, you probably noticed that your bill was a bit higher than expected. To the tune of about $35.00.

It depends on your balance, of course, with a higher balance getting a higher fee. However, one or all of these fees may have applied:

• Late charges: These are fairly sinister. You forget just ONE payment, and you get hit with a fee. That hurts. The real problem, however, is that the card company is now more likely to raise your rate. To fight this, mail your payment at least 2 weeks early, or make the payment online and pay attention to the posting date. The credit companies LIKE these fees (they are free money for a bank), and may structure the receipt of payments to try to get more of them.
• Over Limit Fees: When your balance goes above your authorized limit, your credit issuer will be kind enough to reward you by charging you a fee. These usually range from $15.00 to about $40.00. The funny thing is that these can be caused by other fees. As an example, you are near your credit limit. You get a late fee for a missed payment. The late fee pushes you over your credit limit. Now, you get an over the limit fee. And, just to add insult, they will probably raise your rates. To avoid these, make sure you stay well below your limit so there is no chance of going over.
• Cash Advance Fees: These fees vary, but if you go to an ATM and get money, you could get charged 3% to 5% of the withdrawal. That means if you get $100.00 out of a machine, your will end up paying at least $3.00. These can add up quickly. To avoid these fees…don’t get cash out of an ATM with an expensive credit card.
• Annual Fees: This should be known as ‘added creditor profit’. The company that issued your card has already incurred any costs associated with you having the account. An annual fee is their way of saying ‘If you want the privilege of using our card, pay for it!’. The first year is probably legitimate to cover their advertising and acquisition fees, but if they insist on charging you for years 2 on, and won’t waive the fee, you should probably look for a new card. Call your creditor to try to get this removed.
• Application Fees: This is a fee designed to recover the cost of getting you as a customer. Now, once you are a customer, you are going to be paid interest, so shouldn’t this be a cost of doing business? Unfortunately, they usually don’t waive these. You are kind of stuck.
• Balance Transfer Fee: I love this one! You get this great offer of ‘0% interest for 1 year with a balance transfer’, so you sign up. They send you checks to pay off your existing bills and transfer the balance. And then, they charge you a fee to transfer the money to them! This fee is often 3%, so while not huge, it definitely takes a bite out of what you can pay on your cards. If you see this happen, ask them to waive the fee. But you should ask them about fees BEFORE you transfer money. If they want to assess a fee, find a different card.
• Returned Payment Fee: If your check bounces, your credit card company will charge you a fee. Like everything else these will vary in cost, but typically they are about $39.00. This is a penalty to make sure you won’t do it again. So make sure you have money in your account, and don’t do it again.

While these fees may seem like small amounts, if you look at them from the same perspective as an interest rate, they are hideously expensive. As an example, let’s say you have a $1000.00 card at 17% interest. Your monthly interest rate is about 1.42% per month, or about $14.20. That $39.00 late fee is 3.9% of your balance! That is nearly 3 times as much paid out for no real reason, other than the fact that you made a mistake. If you do that every month for a year, you are paying 46.8% interest! These fees are a huge cost to you. Avoid them if you can.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

We all get judged every time we want credit. The judge is impartial, has no compassion, and bases all of its decision on numbers. It doesn’t care what has happened in your life, or how you have changed, or how you deal with adversity. All it cares about is a number.

That number is your FICO score.

This little number, in a range from 300 to 850, is a measure of how responsible you are with your credit. It takes into account your past payment history, your credit line to credit used ratio, and public record entries on your report, how recently you have applied for credit, and several other factors. A score on the lower end of the range shows that you are not very responsible with credit, and a score on the upper end is a very responsible credit user.

So, what is a good score? Let’s take a quick look:

• Below 580: This is considered very bad. You will be able to get loans in the sub-prime market, but usually at very high interest rates. Often, you will have to spend time rebuilding your scores before you can get a large loan.
• 580 to 620: You are now in the ‘almost good’ range. In this range, you can get a credit card, or a car loan. You will need to provide extra documentation for many of your credit applications. You have a good foundation, or have cleaned a few things up. Now it is a matter of maintaining your report to make it better. You are still considered fairly high risk for default, but many companies now cater to your situation.
• 620 to 670: Scores above 620 are considered ‘good’. This puts you in the prime market for interest rates on loans. A 620 credit score will allow you to get better offers for credit, better interest rates, and you won’t have to prove yourself as rigorously as you would with a lower score.
• 670 to 720: Scores in this range are considered ‘very good’. You will have access to better interest rates, higher credit limits, and larger loans for mortgages and other high-dollar items. This is where most people with good credit end up.
• 720 to 770: You are golden. This is about the best most people can do. You have a long, established credit history, you take care of your bills, and there are no bad marks on your credit reports.
• Above 770: You are a ‘FICO High Achiever’. You get the best rates, the best service, and overall have a financial picture to be envied. Remember, though, as you get to these rarified heights, a single bad item on your report will drop you faster than at any other level.

There you have it. A quick definition of what a good credit score is. If your score is low, a little work can carry you a long way towards those higher scores. If it is higher, make sure you monitor your credit so you won’t get surprised.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

OK, you have bad credit scores.  That really isn’t helping your financial situation any.  You are having a hard time getting new credit, you can’t get a credit line increase on the accounts you have, and you feel a constant level of stress because of it.

And then, magically, you see that Internet ad: 

“We Can Fix Your Credit Scores Fast!”

Think about it.  Several hundred dollars, and you will have a clean, beautiful credit report NOW!

Well, it just doesn’t work that way.

These credit repair firms, and law firms that specialize in credit repair, have a couple of tricks they use.  Some of the tricks are legal and ethical.  Some aren’t.

One illegal trick they use is to claim identity theft for you and get you a new SSN.  If you get a new SSN without a real reason, you may be guilty of fraud.

Another trick they use is to write nasty letters threatening legal action to every one of your creditors.  This wipes out both good debt and bad on your reports.  And by the way, the collection agencies can spot the letters a mile away, and often ignore them.

The truth, though, is it took you a while to get in this mess, and it will take a bit of time to get out of it.  You spent months, or even years, developing a history of late and missed payments, and those records are likely going to stay on your report for a while.

But, you can make a huge difference in your scores.  What you have to do is be diligent, and spend a bit of time at it, and you can get the bad things off of your credit reports, keep the good things, open new lines of credit, and improve your scores.

A few things to look at are:

1)      Make sure all of the information on your report is correct.  If it isn’t correct, fix it.

2)      Stop making late payments.  Make your recent history as good as possible.

3)      Call your creditor and ask for a goodwill correction.  Make sure you have a compelling reason for them to work with you.

4)      Make sure you use your credit responsibly.

5)      Pay down some of your balances.

Surprisingly, it doesn’t take a lot of effort to fix this.  You just have to know what to do, and how to get there.  Get started today, get a copy of your report, and you can see a real difference in about a month.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

We all want nice things. New cars, a big house, a 52 inch flat screen TV (oh yeah!), new skis, that Harley your have had your eye on. These are all things that are wonderful to have, and which we seldom want to wait for. However, we usually don’t have the cash available to just run out and buy these things, so where do we turn? That’s right, we get credit.

For some purchases, credit makes a lot of sense. I personally don’t ever expect to be able to buy a car with cash, much less a house. For those things, credit will act as an extension of my earning ability. In other words, it stretches my cash position out over many years, so I can afford things that I would not otherwise be able to buy. But the difference in what you will have to pay over time is really amazing.

If you have a poor credit score, you will have higher interest rates. This may not seem like a big deal, but let’s take a look at what that means for just one purchase. Let’s say you want to buy a house. Your credit scores aren’t that great. You can qualify for the house, but you will get an 8% interest rate. Your will finance $200,000.00 on your house. You payment ends up being $1,467.53 per month for 30 years.

Now, let’s say your neighbor across the street has good credit and gets the same model house. They get a 6% interest rate on their house. Not much of a difference, right? Just a measly 2% interest. So what is the big deal?

Well, the big deal is that your neighbor will pay much less than you will. Their payment for the same $200,000.00 house would be $1,199.10. That’s right; they will pay $268.43 a month less than you will. Ouch!

Ok, you say, no big deal. That is a lot of money, but in the long run does it really matter? Well, the long run is where it gets you. You see, if you make those payments for a year at the higher rate, you will pay an extra $3,221.14 compared to your neighbor. That’s a lot. Over 7 years, which is about how long the average person stays in a home, you will pay an extra $22,547.96. That’s right, you pay more than $22,000.00 for having a 2% higher rate!

The question, then, is what can you do about it? The first thing you should know is it is never too late to start. You need to monitor and manage your credit to make sure that your scores go up, or at least that they don’t go down. To accomplish that, just follow a few easy rules:

Rule Number 1: Make Your Payments ON TIME!

OK, this sounds easy, but this is the one that gets most people. A single late payment, noted as a 30 day late on your credit report, can drop your scores as much as 60 points. That is enough to seriously impact your interest rates, or even your ability to get credit. If you can make your payments on time, and keep doing so for a number of months, you will begin to see your scores move up.

Rule Number 2: Don’t Go Over Your Limit!

This is a bad thing. If you go over your limit, your creditor will note that on your credit report. Going over your limit shows that you are not responsible with your credit. Creditors want to see you use credit responsibly, and going over your limit shows them that you don’t know how much you are spending. While this won’t hurt your scores as much as a late or missed payment, it still hurts.

Rule Number 3: Only Get Credit When You Need It!

There are three reasons for this, but one of the most important reasons not to go out and get a bunch of credit is that every time someone checks your credit you, they will do a hard pull. Each hard pull will get about a 5 point deduction. After about 6 months, you will get those points back, but if you have, say, 5 new checks against your credit report, you will take a 30 point hit for a while, which can affect your rate. There are other things to consider here, but too many pulls is generally considered a bad thing to a potential creditor.

Rule Number 4: Keep Your Account Balances Low!

Your scores can go WAY down with high balances on your cards. For instance, I had a 44 point reduction in scores by going to a 90% overall utilization across all my cards (it was, um, a test! Right, a test! To see what would happen. Really…). The rule of thumb is to keep your balances below 30 percent of your limit. So, if you have a $1000.00 limit, you need to keep your balances below $300.00 ($1,000.00 X 30% = $300.00). Again, it is all about ‘responsible use’. Creditors want to see that you don’t have to have credit, and instead use it for convenience or for those big purchases.

Rule Number 5: Check Your Credit Report!

Your really need to know when something changes on your credit reports. If you haven’t checked recently, you should probably go do it. You can get it for free right here: https://www.annualcreditreport.com. If someone has stolen your identity, or a collections firm has decided to come after you for something that isn’t yours, the only way you may find out about it is to pull your credit report. You can get on free yearly, or pay for one more frequently than that. You can get your reports and scores from http://www.myfico.com/.

The most import thing you can do to build and keep good scores is to make a plan and following it NOW! Good credit scores are vital in today’s economy, and it is up to you to make them the best they can be.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.

If you are looking at establishing a credit history, you have an interesting challenge ahead of you. There is this dilemma, you see, that creditors want you to have credit before they wilol give you any. Why do they want this, you ask? Well, it is pretty simple, really. Creditors want to know that you can use credit responsibly.

If you are a young adult, and are going to college, credit is pretty easy to get. You will be getting applications in your books, in handouts as you walk past other students, and in the mail. All you have to do is sign, and you get a card. The credit card companies know that, as an average student, if you get in trouble mom or dad will bail you out. So you are a pretty safe bet.

After college, however, or if you choose not to go, you suddenly have to prove yourself. They want to know how much you make. How much you spend. Your waist size. The name of your neighbors cat. Where you were on June 16th, 1963 (I know, you probably weren’t born yet). They want to know how worthy you are of having one of their cards.

Here’s the deal: They want to know you understand the responsible use of credit. They WANT you to use their card, because then they earn interest. They DON’T want you to pay your card off all the time, because then they make less money. (They still make money on every transaction by charging a store to let you use your card.) So, economically, they are looking for 3 things:

1) You will have the ability to keep making payments.

2) You are unlikely to stop paying them.

3) You understand that credit is a tool, and not a way of life.

The majority of people who default on a credit card have several cards, and they are all maxed out. They originally got those cards as a way to extend their purchasing power instead of as a mechanism to keep from carrying cash. So, having too many cards, or having them maxed out, can make you look less desirable to a credit card company.

There seem to be a few key utilization limits that the credit card companies look for. Utilization is pretty easy to calculate. As an example, if you have a $1000.00 credit limit, and you have charged $600.00, you have a 60% utilization rate (600 / 1000 = .6, or 60%).

Utilization percentage break points are at around 60%, 40%, 30% and 10%. Your ‘best’ appearance to a creditor is under the 10% level, but under 30% is also a really good mark. Higher than 60% utilization is a key indicator that you aren’t managing you debt well.

Another thing they look for is if your debt is all in one card, with the rest at low balances. Creditors prefer to have your debt spread out across multiple cards rather than a single large amount. If you have taken advantage of a consolidation offer, prepare to have a lower credit score for a while.

Another thing to consider is how many cards you should get. Credit companies call having too many cards debt pyramiding, which is a condition in which you have so much credit if you maxed all the cards out you couldn’t pay them all off.

Let’s sum this up:

1) Keep low utilization amounts on all of your cards, preferably below 10% per card.

2) Spread debt across several cards, rather than running up a large amount on a single card.

3) Don’t get too many credit cards, as you will look like a bigger risk.

Regardless of your current situation, you have to have credit to build credit. So, consider taking out charge cards from retailers, or a secured card from a bank if you are having trouble getting credit.

Store cards, such as JC Penney, Macy’s and Target, are typically very expensive in terms of the interest rates. However, Target in particular has a reputation for giving people a chance to build credit. Their standard procedure seems to be to give a new customer a $200.00 limit, and then up the credit limit to $500.00 after 90 days.

Can’t get a store card? Go secured. For a secured card, you will give your bank a certain amount of money, say $500.00. They deposit that money into an account, and give you a credit card that is secured by that account. You can’t spend more than the $500.00, and the payments will come out automatically.

As your credit improves, a mix of credit can be helpful. You may want to look at a car loan, or a mortgage, to give you a nice rounded credit portfolio.  Creditors like to see this instead of just a bunch of credit cards.  Again, it is a responsible use of credit thing.

Remember, though, that taking on too much debt is dangerous to your financial health. No matter how tempting that cool new widget is, make sure you can afford the payments, especially if something like the loss of a job happens to you.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.