One of the easiest ways of throwing away your hard-earned money, next to taking a trip to Las Vegas, lies in buying a car. The auto retail industry is one of the greatest money traps ever devised and the average consumer has little hope of beating the odds when purchasing a new or used car. Here are some tips on how to avoid losing your shirt at the dealer's table next time around.
Read to the bottom of the page and you will find a car loan calculator for estimating your payments.
Doing your research
Never walk into a dealership before researching your intended purchase by talking to friends, your neighborhood mechanic or trolling the internet. There are many internet sites that offer free information on prices for the basic car, and in particular, option packages. Markups on some of these packages can run as high as 100%. Having narrowed your choices to a few models you may want to start thinking about the long term effects of what you are buying by running the numbers through a car loan calculator.
Start by gathering information on reliability issues and repair costs. This can save you some grief later if anything breaks just outside of the warranty period. You may want to think about buying an extended warranty while you are doing your research and now is the time to start adding that figure to your total purchase price. If you intend to keep the vehicle for the life of your loan and beyond, an extended warranty could save you gobs of cash should your transmission or engine give out. Many vehicles come from the factory with expensive navigation and audio systems installed so make sure your intended warranty covers those as well. And never, ever purchase an extended warranty from the dealership as the price will include their markup too.
Gap insurance
Here’s where you can avoid a nasty surprise. Let’s say you bought a car for $20,000 and after two years you are broadsided at an intersection by the town drunk. You would expect to call your insurance company who would cut you a check for the value of the car so you could pay off your note and go buy another car. But you may be surprised.
After two years, you may owe $15,000 say on your car loan. But as car values often plummet 25% in their first year, by year two your vehicle may be worth only $12,000. Guess how much money you will recover from your insurance company? You will find yourself on the horns of a dilemma as you are $3,000 short of paying off your loan. Of course, this is a rough example and gaps may vary. Gap insurance covers the difference between the insurance valuation and the remainder of your loan. And, as before, don’t buy this at the dealership either.
The fine print
Having done your research and walked the gauntlet at the dealership, you will be invited into the inner sanctum of the finance office. This is where the dealership often recoups what they lost on the sales floor in order to make the deal. And this is where the numbers often do not add up. The finance office makes its money by selling you extras that don’t come from the factory, such as the aforementioned extended warranty and gap insurance deals. The markups can often be more than they made selling you the car itself. Then there’s the paperwork.
Quite often you have been left in a weakened state sitting in the sales office for three or more hours. I have a friend who spent 7 hours in a dealership buying her dream car and was very groggy by the time she got to the finance office. She did, however notice that the finance manager was offering her a 10% car note despite the fact that her credit score hovered around 750. This is the point at which your laptop or car loan calculator becomes your friend.
Add the numbers
Make sure you inspect, then add the numbers on the contract and ensure they add up correctly. You would be surprised! Your next step is to run the numbers through a car loan calculator or downloaded program that will tell you whether the cost of the vehicle plus junk fees at the quoted A.P.R ends up at the monthly payment you expected to find.
If you suspect the numbers are not adding up you may want to consider walking away. Remember, no matter how much you love the car, there’s another one very much like it on the way from the factory to the dealer down the street. Now is a good time to visit your bank or credit union with the negotiated price of the vehicle in hand. Credit unions rates are often the lowest available but dealers may sometimes offer financing from their captive finance arms that not even a credit union can match. Arrange your financing carefully and you may find that you have saved yourself several hundred, and sometimes, several thousand dollars over the life of the car loan.
Sunday, September 23, 2007
Friday, September 14, 2007
Debt consolidation works for you
Ever get offers in the mail that promise to cut your debts dramatically and make you debt-free in only 48 months? I get them weekly and I am fascinated by the magnitude of the offers. Debt consolidation offers usually come in three different disguises all with variations on the theme. Let’s look at how you can use either of these three debt consolidation methods to your own advantage and let’s examine the some of the shortcomings of each.
The most common of these are credit card balance transfer offers followed by loan offers that roll all your debt into one payment, then come the debt consolidation companies who take over the responsibility of paying your credit card or other debt payments provided you send them a check once per month.
Credit card offers
You should know that credit card deals that offer balance transfers usually come with a few strings attached. Most cards require you to make all your transfers at the time you take up the offer. Another drawback is that most offers are made “up to” $5,000 or $10,000. You never know what you are getting until after the credit card company has run your credit, so don’t be surprised if you are unable to consolidate all your outstanding debt in one go.
The interest rates on credit cards with balance transfers are not all zero. There will often be an introductory period as short as six months, so read carefully to determine what rate will be applied to purchases and what rates are on offer after the grace period. They will often not be the same. A little known fact is that if you also use the balance transfer card for purchases, any payments you make will be applied to the higher rate item before it’s applied to the low-rate transferred item. But if you are using balance transfer credit cards for debt consolidation, it is unlikely you would want to make additional purchases if you are serious about getting your debt under control.
Credit cards that allow you to transfer your debt from other cards often have a fee attached. Most cards charge three percent of the value of the transfers. Others come with one-time fixed fees. Over the long run you will save interest charges by using these and you can calculate the interest saved and apply it to your debt payments. But you must make sure to pay on time as credit card issuers will raise your rate on a zero percent card to the default rate if you miss a payment date.
High interest rate loans
Debt consolidation offers are often made by finance companies who offer the prospect of lowering your monthly payments. We’ve all seen the TV ads that promise to lower your monthly debt payments by twenty, thirty or even forty percent. For some people, the thought of writing one check instead of keeping track of four or five separate debts is very attractive. It saves them the burden of remembering separate payment dates and amounts and they get to keep a little extra money in their pocket. The drawback, of course, is that finance companies and their like may charge you as much as 21% or higher to consolidate your credit card debt into one payment. You will save money in the short run but pay out more in interest charges in the long term.
Debt consolidation loans may work for you if you are willing to sacrifice the higher interest payments for a modicum of convenience. If you can’t summon the self-discipline to make those four or five individual debt payments it may be worth consolidating them. For one, you will run less risk of missing a few payment dates and having late debt payment charges pile up on you.
Debt consolidators...some do some don’t
Most debt consolidators claim to be non-profit and while that may be so, they do require money to stay in operation. Some make a living from charging you ten percent of the payments you are consolidating, while others collect a percentage from the credit card companies with whom the negotiate on your behalf. Debt consolidators however, don’t do an awful lot that you couldn’t do yourself.
Essentially they do two things: they call your creditors and arrange a deal for them to accept a lower payment than you currently are making or a smaller balance than you actually owe. Then they collect your payment and write checks to the companies on your debt payment list. Creditors tend to favor dealing with debt consolidation companies because of the promise of a steady stream of payments they offer. Unfortunately, that steady stream could become a late stream if you run into a debt consolidator with shady practices. If they happen to miss payments your credit report score could at risk if you are reported to the credit bureaus for a late payment.
Do it yourself with equity
If you have the time and are willing to make a few disciplined moves, you can finesse your own debt consolidation. I have met a few people who are adept at playing the balance transfer game, deftly switching their debts from one zero balance credit card to the other just before the teaser offer on the credit card runs out. But not everyone has the time or willingness so to do. You will need to remember to send each credit card company a formal request to close your account as you could otherwise negatively affect your credit report score by leaving too many accounts open at the same time.
You can become your own debt consolidation expert using one of two approaches. Let’s assume you own a home and have substantial equity in it. Negotiating a home equity loan to pay off your debts could be a wise move as you will likely get one at a much lower rate than the rate on the debts with which you are now struggling. You can then decide to pocket the savings but a better idea would be to keep your payment level same as when you were paying multiple debts and pay off the home equity loan faster.
Refinancing your home to pay off credit card debts is also an option but you must resist the temptation to start using your credit cards again. Otherwise you will have effectively changed short-term debt to long-term debt and started on accumulating short-term debt again. I personally prefer to keep my mortgage separate from my unsecured debt but your preferences may vary.
Do it yourself without equity
If you do not own a home or if you have very little equity in your property, there are steps you can take to become your own personal debt consolidator. The first and simplest approach would be to get a personal loan from your credit union. Rates are likely to be much lower than the credit card rates you are currently paying and you will be able to tackle your debt without the use of collateral.
Pick up the phone and call your credit card companies and ask for a better interest rate. Quite often, account reps or supervisors are allowed a band in which they can reduce your debt rate but you wouldn’t know if you don’t ask. If your debt consists of charged off items, most holders of the debt will be inclined to offer you favorable terms consisting of lower payments or longer periods. If you have a windfall around tax time you are the debt consolidation king! Call and negotiate a settlement yourself. I have heard of 35% settlements but usually these are offered on large debt balances of $5,000 and above. And make sure you get these settlement offers in writing.
Another strategy is to pay the minimum payment on all your debts except one. Use the money you saved paying minimum payments to tackle your highest interest rate debt with the most money you can spare. Having seen off that debt, move to the next one with the same strategy, adding the payment you were making on debt number one to the minimum payment on debt number two. Rest assured, you will eventually dig your self out from under your debt mountain. When you are through, start paying yourself the money you used to pay out to the holder
The most common of these are credit card balance transfer offers followed by loan offers that roll all your debt into one payment, then come the debt consolidation companies who take over the responsibility of paying your credit card or other debt payments provided you send them a check once per month.
Credit card offers
You should know that credit card deals that offer balance transfers usually come with a few strings attached. Most cards require you to make all your transfers at the time you take up the offer. Another drawback is that most offers are made “up to” $5,000 or $10,000. You never know what you are getting until after the credit card company has run your credit, so don’t be surprised if you are unable to consolidate all your outstanding debt in one go.
The interest rates on credit cards with balance transfers are not all zero. There will often be an introductory period as short as six months, so read carefully to determine what rate will be applied to purchases and what rates are on offer after the grace period. They will often not be the same. A little known fact is that if you also use the balance transfer card for purchases, any payments you make will be applied to the higher rate item before it’s applied to the low-rate transferred item. But if you are using balance transfer credit cards for debt consolidation, it is unlikely you would want to make additional purchases if you are serious about getting your debt under control.
Credit cards that allow you to transfer your debt from other cards often have a fee attached. Most cards charge three percent of the value of the transfers. Others come with one-time fixed fees. Over the long run you will save interest charges by using these and you can calculate the interest saved and apply it to your debt payments. But you must make sure to pay on time as credit card issuers will raise your rate on a zero percent card to the default rate if you miss a payment date.
High interest rate loans
Debt consolidation offers are often made by finance companies who offer the prospect of lowering your monthly payments. We’ve all seen the TV ads that promise to lower your monthly debt payments by twenty, thirty or even forty percent. For some people, the thought of writing one check instead of keeping track of four or five separate debts is very attractive. It saves them the burden of remembering separate payment dates and amounts and they get to keep a little extra money in their pocket. The drawback, of course, is that finance companies and their like may charge you as much as 21% or higher to consolidate your credit card debt into one payment. You will save money in the short run but pay out more in interest charges in the long term.
Debt consolidation loans may work for you if you are willing to sacrifice the higher interest payments for a modicum of convenience. If you can’t summon the self-discipline to make those four or five individual debt payments it may be worth consolidating them. For one, you will run less risk of missing a few payment dates and having late debt payment charges pile up on you.
Debt consolidators...some do some don’t
Most debt consolidators claim to be non-profit and while that may be so, they do require money to stay in operation. Some make a living from charging you ten percent of the payments you are consolidating, while others collect a percentage from the credit card companies with whom the negotiate on your behalf. Debt consolidators however, don’t do an awful lot that you couldn’t do yourself.
Essentially they do two things: they call your creditors and arrange a deal for them to accept a lower payment than you currently are making or a smaller balance than you actually owe. Then they collect your payment and write checks to the companies on your debt payment list. Creditors tend to favor dealing with debt consolidation companies because of the promise of a steady stream of payments they offer. Unfortunately, that steady stream could become a late stream if you run into a debt consolidator with shady practices. If they happen to miss payments your credit report score could at risk if you are reported to the credit bureaus for a late payment.
Do it yourself with equity
If you have the time and are willing to make a few disciplined moves, you can finesse your own debt consolidation. I have met a few people who are adept at playing the balance transfer game, deftly switching their debts from one zero balance credit card to the other just before the teaser offer on the credit card runs out. But not everyone has the time or willingness so to do. You will need to remember to send each credit card company a formal request to close your account as you could otherwise negatively affect your credit report score by leaving too many accounts open at the same time.
You can become your own debt consolidation expert using one of two approaches. Let’s assume you own a home and have substantial equity in it. Negotiating a home equity loan to pay off your debts could be a wise move as you will likely get one at a much lower rate than the rate on the debts with which you are now struggling. You can then decide to pocket the savings but a better idea would be to keep your payment level same as when you were paying multiple debts and pay off the home equity loan faster.
Refinancing your home to pay off credit card debts is also an option but you must resist the temptation to start using your credit cards again. Otherwise you will have effectively changed short-term debt to long-term debt and started on accumulating short-term debt again. I personally prefer to keep my mortgage separate from my unsecured debt but your preferences may vary.
Do it yourself without equity
If you do not own a home or if you have very little equity in your property, there are steps you can take to become your own personal debt consolidator. The first and simplest approach would be to get a personal loan from your credit union. Rates are likely to be much lower than the credit card rates you are currently paying and you will be able to tackle your debt without the use of collateral.
Pick up the phone and call your credit card companies and ask for a better interest rate. Quite often, account reps or supervisors are allowed a band in which they can reduce your debt rate but you wouldn’t know if you don’t ask. If your debt consists of charged off items, most holders of the debt will be inclined to offer you favorable terms consisting of lower payments or longer periods. If you have a windfall around tax time you are the debt consolidation king! Call and negotiate a settlement yourself. I have heard of 35% settlements but usually these are offered on large debt balances of $5,000 and above. And make sure you get these settlement offers in writing.
Another strategy is to pay the minimum payment on all your debts except one. Use the money you saved paying minimum payments to tackle your highest interest rate debt with the most money you can spare. Having seen off that debt, move to the next one with the same strategy, adding the payment you were making on debt number one to the minimum payment on debt number two. Rest assured, you will eventually dig your self out from under your debt mountain. When you are through, start paying yourself the money you used to pay out to the holder
What’s in your Credit Report?
If you have less than perfect credit and are thinking that you may not qualify for your next mortgage, car loan or credit card, think again. Rather than listen to what friends and family may be telling you, find out for yourself what kind of financial shape you are in. Start by getting a copy of your annual credit report from Equifax, Experian, or Trans Union, the major credit bureaus.
Some states mandate that you must be given two free copies of your report upon request every year. All three bureaus have websites or 800 numbers that will allow you to order a copy of your credit report though they are not required to give you your credit report score and may charge you for that service.
You may be thinking “What’s in my credit report and how does my credit report affect me?” The answer to both is “a lot.” Your annual credit report is a compilation of records of all the credit items you have had and a history of your record of payments. Your score is an analysis of the amount of credit you have available and are using, combined with the record of payments you have made over the past few years. Your credit report score is calculated using a complicated and secret algorithm that assigns you a rating between 400 and 800, your “score”.
Detailed Records
Let’s look at what else is shown on your credit report. It starts with a record of your social security number, current address and telephone numbers and may contain your spouse’s name and social security number and your date of birth. Any public records linked to your name will be displayed on your credit report, including bankruptcies, judgments against you and the like. Next up are detailed records of your credit cards, mortgages, student loans, car loans and most other credit items. Utility companies, rental properties and many other types of creditors may report to the credit bureaus as well.
Most entries on your credit report will show the date the credit item was opened, the credit limit of the account, the highest balance you have used and the monthly payment due. A date next to each item shows the last date you paid and another entry shows whether the account was paid, charged off or still active.
Signs of trouble brewing
Your annual credit report is your financial scorecard and can make all the difference in your being turned down for a loan, credit card, insurance or employment. Late or unpaid items on your credit report indicate to a potential lender that you may represent a risk at some future date, as indicated by your past behavior. Of course, your behavior may have been intentional at the time, as sometimes happens when you lose a job or become incapacitated. Unfortunately, your credit report doesn’t show the whether your failure to pay on time was intentional or beyond your control.
Paying a higher interest rate on a car loan is a painful reminder that you may have been a little careless in the past. But higher interest rates are only a part of what you may pay. Your insurance application could be turned down and so could your job application as many employers now treat poor credit as a predictor of job performance. Rental and utility companies frequently run credit checks before allowing you service and a spotty credit record may mean hefty deposits on your part.
Errors on your report
Errors on your annual credit report can have as adverse an effect as if you had defaulted on a debt. It is possible that your credit report contains erroneous information meant for someone with a closely related social security number, a similar name or a nearby address. Even errors in addresses could cause good credit information to be left off your report, and that can have as much effect on your credit score as bad news. If you are trying to build or rebuild your credit, you want as much good information as possible to show up on your credit report. Should you find any errors on your credit report, send a formal request to the credit bureaus and have the incorrect information removed. If you don’t have the time to do it yourself, there are online credit report tools that can walk you through the process.
You are allowed by law to request a detailed statement substantiating your debt from any company that posts information to your credit report. The Fair Debt Credit Reporting Act requires creditors to give you a response within 30 days of your request, otherwise they must remove the item from your credit report. If the statute of limitations has run out, you can request removal of the item from your credit report. But do not take this to mean that you don’t owe the debt any longer, as I do not endorse walking away from one's obligations.
There are many other details to learn about your annual credit report and about improving your credit score but you can start now by calling the three main credit-reporting agencies: Trans Union (800-916-8800), Equifax (800-685-1111) and Experian (800-682-7654).
Some states mandate that you must be given two free copies of your report upon request every year. All three bureaus have websites or 800 numbers that will allow you to order a copy of your credit report though they are not required to give you your credit report score and may charge you for that service.
You may be thinking “What’s in my credit report and how does my credit report affect me?” The answer to both is “a lot.” Your annual credit report is a compilation of records of all the credit items you have had and a history of your record of payments. Your score is an analysis of the amount of credit you have available and are using, combined with the record of payments you have made over the past few years. Your credit report score is calculated using a complicated and secret algorithm that assigns you a rating between 400 and 800, your “score”.
Detailed Records
Let’s look at what else is shown on your credit report. It starts with a record of your social security number, current address and telephone numbers and may contain your spouse’s name and social security number and your date of birth. Any public records linked to your name will be displayed on your credit report, including bankruptcies, judgments against you and the like. Next up are detailed records of your credit cards, mortgages, student loans, car loans and most other credit items. Utility companies, rental properties and many other types of creditors may report to the credit bureaus as well.
Most entries on your credit report will show the date the credit item was opened, the credit limit of the account, the highest balance you have used and the monthly payment due. A date next to each item shows the last date you paid and another entry shows whether the account was paid, charged off or still active.
Signs of trouble brewing
Your annual credit report is your financial scorecard and can make all the difference in your being turned down for a loan, credit card, insurance or employment. Late or unpaid items on your credit report indicate to a potential lender that you may represent a risk at some future date, as indicated by your past behavior. Of course, your behavior may have been intentional at the time, as sometimes happens when you lose a job or become incapacitated. Unfortunately, your credit report doesn’t show the whether your failure to pay on time was intentional or beyond your control.
Paying a higher interest rate on a car loan is a painful reminder that you may have been a little careless in the past. But higher interest rates are only a part of what you may pay. Your insurance application could be turned down and so could your job application as many employers now treat poor credit as a predictor of job performance. Rental and utility companies frequently run credit checks before allowing you service and a spotty credit record may mean hefty deposits on your part.
Errors on your report
Errors on your annual credit report can have as adverse an effect as if you had defaulted on a debt. It is possible that your credit report contains erroneous information meant for someone with a closely related social security number, a similar name or a nearby address. Even errors in addresses could cause good credit information to be left off your report, and that can have as much effect on your credit score as bad news. If you are trying to build or rebuild your credit, you want as much good information as possible to show up on your credit report. Should you find any errors on your credit report, send a formal request to the credit bureaus and have the incorrect information removed. If you don’t have the time to do it yourself, there are online credit report tools that can walk you through the process.
You are allowed by law to request a detailed statement substantiating your debt from any company that posts information to your credit report. The Fair Debt Credit Reporting Act requires creditors to give you a response within 30 days of your request, otherwise they must remove the item from your credit report. If the statute of limitations has run out, you can request removal of the item from your credit report. But do not take this to mean that you don’t owe the debt any longer, as I do not endorse walking away from one's obligations.
There are many other details to learn about your annual credit report and about improving your credit score but you can start now by calling the three main credit-reporting agencies: Trans Union (800-916-8800), Equifax (800-685-1111) and Experian (800-682-7654).
Monday, September 10, 2007
Your credit score and what to do about it.
If you are concerned about your credit report score and wondering what to do about it, read the following tips on taking charge of your credit future and raising your credit report score. With a little patience and a lot of persistence, you may be able to add significant numbers of points to your credit report score within a few months.
Paying on time
Late payments on regular monthly bills will quickly reduce your credit report score and should be avoided at all costs. Bank loans and credit card debt are probably the easiest to miss paying as they are not as life-threatening as forgetting to pay the electricity or gas bill. If you are internet savvy, one of the best ways of avoiding late payments is setting up automatic payments through your financial institution’s website. Credit unions are perhaps the most amenable to this form of bill payment as some banks may charge for the service. Automatic payment of your major bills will help you avoid the hit to your credit report score from going more than thirty days late and is handy for the perennially forgetful like myself.
If you are in danger of a job loss, you can take steps to protect at least your credit card debt from showing up as late payments if your severance or unemployment benefits run out. Most major credit card issuers offer programs that will cover your monthly payments if you lose a job or become disabled. Of course you won’t want to wait until you are out of work before you set these up. And you won’t be surprised that they come with fees attached.
Closing Accounts
Credit scoring companies put a lot of weight on the length of your credit history. I have spoken to many people who thought shutting down their credit cards would improve their credit report score. Sadly, this is not necessarily so. Closing newer credit accounts may well improve your score by reducing the amount of credit you have available and the chance that you may go out on a shopping spree. But closing your oldest accounts reduces your credit report score because it removes you longest history of payments from consideration when your score is compiled.
Accounts you will want to close are the obvious ones like utility and telephone services if you move houses. You would be surprised at the number of instances I have encountered of well-intentioned people who move across the country and wrongly assumed they had got the final, final bill from their gas or electricity company. If you have moved recently, or are planning a relocation, make sure your utility or cell phone provider has a forwarding address. I closed an account in December with my natural gas provider, only to be surprised by a residual bill the following March.
Moving abroad is particularly tricky as your mail may never follow you for several weeks, if not months. And if you are in the military and stationed abroad, be very careful to ensure that someone back home is taking care of your bill payments. Some military personnel incorrectly assume that the Soldiers and Sailors Relief Act suspends their obligation from paying recurring bills.
Credit card imbalances
Let’s says you have three credit cards with limits of $10,000, $5,000 and $4,000 each and you are carrying balances on all of them or are about to make a large purchase using one of the cards. You would assume it may be best to use the card with the lowest interest rate and this may be the one with the $4,000 limit. But your credit report score could take a hit while you are trying to minimize interest charges. That’s because your score can be adversely affected by having a high debt to credit ratio on one of your credit cards. If your big purchase cannot be avoided, use the card with the higher available total credit to lower the impact on your credit report score.
Paying down your debt
Lowering your total debt to income ratio can have a dramatic effect on your credit report score as the scoring algorithms are reported to weigh heavily in favor of your ability to “cover” your debt. If you are running on fumes from month to month, as I have done at some point in my life, you know it will take serious discipline to chip away at your debt. One of the most obvious ways to reduce your monthly outlay of cash and thus provide more funds for your debt-reduction plan is to avoid recurring expenses like the plague. And the ugliest of recurring expenses can be that old staple, the car loan.
I have avoided paying a car note since 1982 by buying a succession of modest used cars that I have rigorously maintained. I can hear you groaning now and I realize this is not for the faint of heart, but if you are struggling under a $400 or $500 installment loan, you may be shoveling your hard-earned paycheck down a pit. You could save yourself one or two hundred dollars each month by switching to a used car and purchasing an extended warranty.
Goosing your credit report score
What if you are fresh out of college or just stepped off a plane and have no credit? You may be surprised to learn that no credit is worse than bad credit just as no track record is worse than a spotty but existing track record. If you have made it though college while avoiding the credit card trap to which many college kids succumb, one of the easiest ways to jump start your credit report score is by applying for a secured credit card. You can do this by depositing some cash in a restricted account.
Most banks will issue you a credit card with a limit set by the amount of cash you have deposited. If you use the card regularly and pay on time, they may then lift the restriction on your deposit and change your account to a non-secured designation. After you have developed a feel for paying your credit card on time, it may be a good idea to call your credit card issuer and ask them to raise the limit. Remember, the higher your debt to credit ratio, the higher your credit report score is likely to be.
Oddly enough, an auto loan can work wonders for building your track record as a disciplined payer, and building a flawless credit profile will improve your score, provided your income comfortably exceeds the debt you are taking on.
Avoid card collecting sprees
I have seen many instances of consumers carrying credit cards from several well known department stores and electronics and computer manufacturers and retailers. You should avoid a proliferation of credit cards with small limits like the proverbial plague. And be very careful what you sign up for, whether on the internet or at in-store promotion booths.
Paying off old debt
I am reluctant to advise you to avoid paying off old debt as I am a stickler for living up to my personal obligations. This may become a matter of personal choice for you but you should know that paying an old debt that has languished on your credit report for years revives the account as a current collection activity, a certain means of lowering your credit report score. Better to boost your score, sign your loan, then pay off the old debt.
All this sounds simple enough when you are reading about it but can be difficult to put into practice. Remember that there is no quick fix for boosting your credit report score. It will take discipline and patience and will create some annoyances in your life, but in the long run it can save you bucketsful of cash.
Paying on time
Late payments on regular monthly bills will quickly reduce your credit report score and should be avoided at all costs. Bank loans and credit card debt are probably the easiest to miss paying as they are not as life-threatening as forgetting to pay the electricity or gas bill. If you are internet savvy, one of the best ways of avoiding late payments is setting up automatic payments through your financial institution’s website. Credit unions are perhaps the most amenable to this form of bill payment as some banks may charge for the service. Automatic payment of your major bills will help you avoid the hit to your credit report score from going more than thirty days late and is handy for the perennially forgetful like myself.
If you are in danger of a job loss, you can take steps to protect at least your credit card debt from showing up as late payments if your severance or unemployment benefits run out. Most major credit card issuers offer programs that will cover your monthly payments if you lose a job or become disabled. Of course you won’t want to wait until you are out of work before you set these up. And you won’t be surprised that they come with fees attached.
Closing Accounts
Credit scoring companies put a lot of weight on the length of your credit history. I have spoken to many people who thought shutting down their credit cards would improve their credit report score. Sadly, this is not necessarily so. Closing newer credit accounts may well improve your score by reducing the amount of credit you have available and the chance that you may go out on a shopping spree. But closing your oldest accounts reduces your credit report score because it removes you longest history of payments from consideration when your score is compiled.
Accounts you will want to close are the obvious ones like utility and telephone services if you move houses. You would be surprised at the number of instances I have encountered of well-intentioned people who move across the country and wrongly assumed they had got the final, final bill from their gas or electricity company. If you have moved recently, or are planning a relocation, make sure your utility or cell phone provider has a forwarding address. I closed an account in December with my natural gas provider, only to be surprised by a residual bill the following March.
Moving abroad is particularly tricky as your mail may never follow you for several weeks, if not months. And if you are in the military and stationed abroad, be very careful to ensure that someone back home is taking care of your bill payments. Some military personnel incorrectly assume that the Soldiers and Sailors Relief Act suspends their obligation from paying recurring bills.
Credit card imbalances
Let’s says you have three credit cards with limits of $10,000, $5,000 and $4,000 each and you are carrying balances on all of them or are about to make a large purchase using one of the cards. You would assume it may be best to use the card with the lowest interest rate and this may be the one with the $4,000 limit. But your credit report score could take a hit while you are trying to minimize interest charges. That’s because your score can be adversely affected by having a high debt to credit ratio on one of your credit cards. If your big purchase cannot be avoided, use the card with the higher available total credit to lower the impact on your credit report score.
Paying down your debt
Lowering your total debt to income ratio can have a dramatic effect on your credit report score as the scoring algorithms are reported to weigh heavily in favor of your ability to “cover” your debt. If you are running on fumes from month to month, as I have done at some point in my life, you know it will take serious discipline to chip away at your debt. One of the most obvious ways to reduce your monthly outlay of cash and thus provide more funds for your debt-reduction plan is to avoid recurring expenses like the plague. And the ugliest of recurring expenses can be that old staple, the car loan.
I have avoided paying a car note since 1982 by buying a succession of modest used cars that I have rigorously maintained. I can hear you groaning now and I realize this is not for the faint of heart, but if you are struggling under a $400 or $500 installment loan, you may be shoveling your hard-earned paycheck down a pit. You could save yourself one or two hundred dollars each month by switching to a used car and purchasing an extended warranty.
Goosing your credit report score
What if you are fresh out of college or just stepped off a plane and have no credit? You may be surprised to learn that no credit is worse than bad credit just as no track record is worse than a spotty but existing track record. If you have made it though college while avoiding the credit card trap to which many college kids succumb, one of the easiest ways to jump start your credit report score is by applying for a secured credit card. You can do this by depositing some cash in a restricted account.
Most banks will issue you a credit card with a limit set by the amount of cash you have deposited. If you use the card regularly and pay on time, they may then lift the restriction on your deposit and change your account to a non-secured designation. After you have developed a feel for paying your credit card on time, it may be a good idea to call your credit card issuer and ask them to raise the limit. Remember, the higher your debt to credit ratio, the higher your credit report score is likely to be.
Oddly enough, an auto loan can work wonders for building your track record as a disciplined payer, and building a flawless credit profile will improve your score, provided your income comfortably exceeds the debt you are taking on.
Avoid card collecting sprees
I have seen many instances of consumers carrying credit cards from several well known department stores and electronics and computer manufacturers and retailers. You should avoid a proliferation of credit cards with small limits like the proverbial plague. And be very careful what you sign up for, whether on the internet or at in-store promotion booths.
Paying off old debt
I am reluctant to advise you to avoid paying off old debt as I am a stickler for living up to my personal obligations. This may become a matter of personal choice for you but you should know that paying an old debt that has languished on your credit report for years revives the account as a current collection activity, a certain means of lowering your credit report score. Better to boost your score, sign your loan, then pay off the old debt.
All this sounds simple enough when you are reading about it but can be difficult to put into practice. Remember that there is no quick fix for boosting your credit report score. It will take discipline and patience and will create some annoyances in your life, but in the long run it can save you bucketsful of cash.
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