Monday, September 10, 2012

Be Credit Smart


I am writing this blog to give people knowledge about how to make it financially. I know there are financially hard times out there and I want people to have certain knowledge. And learn from my mistakes as well. I am human, I have been in dept. Now the only dept I have are my student loans. I am a business major going for my master in Accounting and my Bachelors in Finance. 

How credit score works and why you need it

In today’s day and age credit is needed and few people can live without it. One needs credit to buy many things like a house, car, and maybe a TV.  You need a credit score to show the lender (person loaning you the money) that you are able to pay them back.  It is in lack of better terms how credible you really are to keeping your commitments.   Now is a quick break down of how credit is scored.

Now the real way of calculating credit is much more complex than they method I am about to try to break down for you. And I think that the method is owned by Fair Issac not to mention it is really complicated and confusing.  So basically a credit score ranges from 300-800 (300 poor and 800 being really good)

35 percent of your credit score is calculated on your payment history.  The reason this is the biggest part of your credit score is because a lender wants to see how good you are paying your bills and to see if they can trust you with their money. The factors that will affect this score are late bills, bills in collections, and any bankruptcies.  Now the less each of those is better.
30 percent of your credit score is based on outstanding loans and debt.  This will be one of our misconceptions so I will go more into detail about this later. But it is basically how many loans you have out there and how much credit have you maxed out or near its limits. Too much of this and it can negatively impact your score.
15 percent of your credit is based on the length of time you have had credit. One cannot expect to build good credit overnight.  It takes time and a lot of work and careful planning.
10 percent is based on new credit. Each time you ask for someone to check your credit or you want to open a new credit card it impacts your credit in a bad way for a short amount of time.
10 percent is based on type of credit you have.  Example of this would be installment loans which is your car loans and house loans. There are more out there than just installment loans that is just one example.
Now that you better understand credit how it works and why you need it let us move on to how to improve it and a lot of common misconceptions about it.

Less is more
When it comes to credit the less you have is actually better. What I mean by this is that the fewer amounts of credit cards you have and the least amount of outstanding debt you have is better.  Many people out there think that you have to borrow money and pay only the minimum payment to get eventually get good credit.  Well those people couldn’t be further from right.  The less amount of your credit that you are give you use the better your score will be and the faster you will build it.  As a general rule of mine I do not use more than 15 percent of my available credit. And that is at max, I personally use 5-10 percent.  I do this because I do not want to put on my credit card more than I can pay off at the end of the month. Not to mention this makes you look better in the creditor’s eyes. And here is why, it shows that you are responsible with your credit and at the same time it shows that you can pay it back.
A lot of people out there think that having a balance at the end of the month and paying the minimum payment is the best way to build credit. While they are somewhat right, it is just not the best way to go about it.  It is the best way because, not all of the minimum payment goes towards the principle. Some of it depending on your interest rates goes towards that then the rest goes towards you actual balance.  Not to mention you pay back more than you borrow, and that is just money in the long run that could have went towards something else like a new PS3 game perhaps or other bills.  An example of this is if you borrow let’s say for this example $1000 and the minimum payment is $40 dollars with interest at 19%  it will take you about 4 years to pay back and you will have paid an extra $500 give or take.
By not making random charges on your credit card and keeping your balance low you will learn how to control your spending.  Many people fall into credit card trouble because they buy a lot thing that they do not need or should have paid with cash. If you go look at someone’s credit statement you will see that many of the items they have bought recently were really not that expensive at all, yet they added up. One dollar here and there adds up to $500 by the end of the month.  This is the perfect reason one should only use ten to fifteen percent of their available credit each month. It will keep you from buying stuff you never needed in the first place but all of the sudden you do, all because you have a plastic card in your hand.

One big mistake people make and I have run into this a lot while doing research for this book. Is that the more credit cards you have the better off you are. This is not true it is good to have one good credit card and sometimes depending on the card another one just in case a business does not take American express for example you will have to pay with Visa or Master Card. But that is the only time I would recommend having more than one credit card. Otherwise that is just asking for trouble not to mention it will make a financial institution worried that your spending more than you are making.  Remember the number of credit cards makes up about ten percent of your credit score so one card does it all.  Avoid the urges to open credit cards at all costs because in the long run it will hurt you not help you.
By sticking to less is more you will never have to worry about closing a credit card or credit cards because you have to many to handle. It is also never a good idea to close any type of credit card unless your credit is good and can withstand to close it.  Remember each time you open or close a credit card it hurts your credit.  And just because you close a credit card does not mean that you no longer owe money on it.  The best way to handle the I got to many credit card problem is to not use the card anymore and it will eventually close by itself not harming your credit.


College the perfect time to build or ruin a credit score

While college should be a fun experience and used to make new and ever lasting friendships; it is also a good time to build your credit. While most college students think that the only way to build credit is to use a credit card they have not thought about the biggest loan they have to take out over the course of their four plus years in college. With that much time on your hands building credit is super easy. A good way for a college student to start building credit without mom and dad’s help is to pay small amounts of their loan off.  Here is what I mean by this. We all know that student loans acquire interest  over their life time and it is hard to pay them back sometimes. The best thing to do while in college is to try to pay fifty dollars a month on them. This will help you build credit that you need to later on get a credit card or other types of loans. This is how I started building my credit. I used my student loans to build my credit. I started off by paying about fifty dollars a month sometimes a little bit more if I could afford it, and in about a year or so my credit score was at 650. Now that is not the perfect credit score; however, from there this allowed me to get myself a credit card to further build my credit.
Don’t get me wrong while your college years are a perfect time to build your credit score it is also where most people ruin it. Many college students finally now have this new found freedom and want to get stuff they have never had before. Only problem is that most of them do not have money for some of the stuff they want. So what do most of them do? They get a credit card and max it out and then they find themselves barley being able to make the minimum payment each month.  And now instead of starting out their life after graduation with good credit or on the right path to good credit and little debt if possible; most have already declared bankruptcy which will haunt them for about 7-10 years of their lives.

Credit Card Terms
We all know that when it comes to credit cards they have all these terms that make your head spin.  Luckily there is help out there.  A great website that anyone owing a credit card that wants to understand credit card terms and anything associated with a credit card is this website is very helpful and very useful.   There are a lot of terms out there; from buying a house to buying a car each use their own language and I have personally found this website to be the most helpful out off all of them.  I am not going to list all the credit card terms out there because that would take up probably the next twenty to thirty pages. Instead I am going to list some of the most common lexicon that you will run across while credit card shopping.
You've heard the horror stories about people carrying thousands of dollars in credit card debt, and you don't want to be one of them. Before you get your first credit card -- and certainly before you go putting purchases on plastic -- become familiar with these credit card terms. By taking a few minutes to educate yourself about how credit cards work, you can prevent mistakes before they happen -- and perhaps save yourself a lot of money and headaches down the road. (Back to glossary of common credit card terms.)

Annual fee -An annual fee charged by a credit card company for use of a credit card .
Annual percentage rate (APR) - The annual percentage rate is the interest rate charged for borrowing their money.
Fixed APR- An annual percentage rate that does not change throughout the year. The best to have, if you can get this get it.
Grace period-The grace period is the time during which you are allowed to pay your bill. Know your grace period this will come in handy to make sure you are not late with a payment.
Over-the-limit fee -A fee charged when your balance goes over your credit limit. Know what that fee is, but try to never reach that point. As a rule of thumb never use more than 10-15 percent of your credit limit or what you can pay back at the end of the month.
Schumer Box -- The Schumer Box is a standardized disclosure "box" disclosing terms ... (more)
Secured credit cards -Secured credit cards are those that require collateral before they will issue you credit.  This is a good way to start building your credit if you not using a student loan or any other type of loan. You can usually get these from your bank or credit union.
Variable interest rate -With variable-rate cards, the APR changes when interest rates. Make sure to try and stick away from these. While right now they may seem like a good idea who knows what interest rates will be like in four to five years from now.

Get to know your credit report
Your credit card is like a record of your financial life.  Credit reporting agencies keep track of the credit card companies you do business with and report it each month.  The companies include but are not limited to Equifax, Experian, and Transunion.  You are allowed once a year to check your credit report for free.

They use that information to create a record that includes:
·         Personal information to identify you, including name, current and previous addresses, and Social Security number.
·         A list of your credit accounts, including reports from lenders on their history with you.
·         Public record information and information from collection agencies, including delinquent accounts, bankruptcies, foreclosures, lawsuits, wage attachments, liens and judgments.
·         Credit inquiries—a list of everyone who has asked to see your report in past two years.

Knowing what is on your credit report can be the difference between getting that nice house you have always wanted at a great interest rate or getting the worst possible interest rate and your house is not quite what you have wanted.   Also credit card companies are not perfect and do not expect them to be perfect. They will make mistakes just like we make mistakes, so always check your credit score and credit report once a year to make sure that all the charges you have made were actually made by you.

Good Credit Cards to Start Out With
 I have had many people ask me this question. Which credit card do I start out with? Well the answer is simple do a lot of research on the type of credit cards out there.  A great site to start out at is  this to me is by far one of the best website to do research on about the different credit cards out there. Now there are many out there and shopping for a credit card is like going car shopping.  Know what features you want and what you can afford aka your credit score.  Now another place to get a credit card that will be good for starting out is at your local bank or credit union. I recommend trying a credit union first they have the best rates around.   If you do not belong to a credit union go to one and become a member and it is easy and simple to do. Also if you have a credit union in your area or certain miles from your house you might already have member privileges.  Just do your own research and know what you want and are looking for.  Once you have this figured out getting your first credit card should be a snap.

Knowing the world of credit and credit cards can be very advantageous. The more you understand how credit can impact your life both in a good and bad way the better off you will be. As you start out your journey to getting a good credit score always remember that less is always more and that knowing your credit score will save you a lot of headache. And that shopping for a credit card is a lot like shopping for a car. Know what features you want and what your budget is aka your credit score. 

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