Archive for September, 2008
What is a PayDay Loan?
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A payday loan is basically a paycheck advance, also referred to as a payday advance and it is one of the biggest financial mistakes you can make.
Ever borrowed from a “loan shark”?
The purpose of this type of loan is to cover a borrower’s expenses for a short term, until their next paycheck comes in. I like to refer to these types of loans as “mafia loans” or “loan sharks” because of the amount of interest that is charged.
Most loans range from $100 to $500 and the balance is due and payable in two weeks. Interest rates can range anywhere from 400%, and even as high as 900% APR.
What happens to your credit score if you lose your Home Equity Line of Credit?
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Has your bank frozen your HELOC?
More and more banks are re-calculating the estimated value of your home because of the declining property values hitting our entire country. Let’s face it…..they’re scared.
If they determine that the current value of your home has dropped severely enough, one of the ways they can reduce their possible risk it to freeze your existing credit line, (if you have any portion that is un-used anyway) so you no longer have access to those funds.
How to Establish a Good Credit History
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A good credit history is established by keeping your commitments to repay credit cards or loans as agreed, making your payments on time and in the amounts required.
Neglecting to do so make it difficult and costly for you to borrow money for the things you need for yourself and your family. This can affect essential areas in your life such as renting an apartment or buying a home, getting insurance, an education or even medical care.
Plan for emergencies!
Things in life occur that are not under our control, such as losing a job, or getting into a car accident, which can impact your ability to repay your bills. This is why it’s critical to set up a savings account and contribute to it on a regular basis. This will ensure you have emergency funds available to honor your credit agreements in spite of any unforeseen challenges.
Unfortunately, creditors don’t care what your situation is. If you’re late on a payment, they’re going to report it as late, and that late payment will remain on your credit report for 7 years. It will also have an impact on your credit score for the first two years. That’s pretty harsh for just one 30 day late payment, but that’s how it works.
What if you don’t have credit?
If you have not yet established credit, or you do not use credit, it’s in your best interest to apply for one or two cards. It takes about 2 years to really establish a credit history with enough information in it for a lender to make a risk-based decision for large purchases. You do not have to keep a balance on your credit cards if you’re adverse to credit. Just charge a small amount every other month or so and pay off the balance. This will ensure the account remains open and active with the creditor, and updates will be transmitted to the credit bureaus accordingly, which will give you the credit history you need, along with a good credit score.
If you are trying to re-establish your credit, and you cannot qualify for a traditional credit card, then one option that is guaranteed for you is to obtain a “secured card”. With this type of card, you deposit typically $300 to $500 in an account with the creditor and that amount becomes your credit limit. Because you are using your own money, there is no risk to the creditor.
A couple things to make sure of when applying for a secured card:
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Make sure the company you’re applying with reports to at least one of the three major credit reporting agencies. If they do not, then move on, because if they do not report, you are losing a major benefit.
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Shop around for the lowest annual fee. All secured cards charge an annual fee, and some can be pretty hefty. Make sure to read the fine print first!
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Most secured card companies will allow you to get an “unsecured card” after about a year of making your payments on time. Be sure to check on this, because you don’t want to have a secured card any longer than you have to. It’s too costly.
If you belong to a credit union, ask them if they offer secured cards. About half of the nation’s credit unions offer secured cards to their members and they may offer lower interest rates and waive annual fees.
Use the secured credit cards carefully; paying off the debt each month. You do not get this type of card to carry a balance on it. Remember, you’re using your own money as collateral. You don’t need to pay the creditor interest on top of that.
Points to remember…
In summary, to establish a good credit history, remember to keep your overall debt at a reasonable level that is relative to your income. Generally speaking, your expenses should not exceed 20% of your net (after taxes) take home pay, excluding your housing payment.
Do you still get a credit score if you Pay-Off your balances IN FULL every month?
Posted by: | CommentsThere is conflicting information going around about whether or not you’ll still get a credit score if you pay off your credit card balances in full every month, and 
most of it is un-true. 
Yes, even if you pay-off your credit card balances in full every month, this practice will still contribute to generating a credit score for you. Some folks are under the wrong impression that they need to keep a balance on their account(s) in order to generate a score. This is completely false.
If you make charges on a credit card that you pay-off in full every single month, then in actuality, your credit report will NEVER show a zero balance. Why? Because the creditor updates your account with the credit bureau’s at the same time that your statement cuts off. So, every time your statement cuts off, you have a remaining balance, which is why it will never show zero and will always contribute to your credit score.
Now you may think that because you pay-off your account(s) in full each month, that you’ll always have a high score right? (This is assuming that all the other credit you have is paid-as-agreed.) This isn’t always the case and let me explain why.
Even if you pay off your balance in full, your credit score can actually drop…
Let’s say you have a high credit limit of $500 on the one particular credit card that you use and pay-off every month. This past month, you charged $400 on that card. That means you’ve used 80% ($400 divided by $500 = 80%) of that card’s available credit limit.
This affects your balance-to-limit ratio which, for the best credit scoring results, should be kept at, or under 30%, but no more than 50% maximum. If you go over these amounts, it’s going to drop your credit score during that period.
Not to fear…your score will go right back up again the following month as long as you keep your balance at 30% or under, so this will only affect you for a short period of time, but it’s definitely something you’ll want to keep in mind for the future!
Beware….not all Credit Scores are the same!
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When did credit scores come into being?
Around 1990 or so, the very first credit scoring system, which was created by Fair Isaac Corporation, began increasing in popularity with lenders. During the mid-90’s, Fannie Mae and Freddie Mac began using these FICO scores exclusively, which created the standard use of credit scoring today.
It’s only been fairly recently, since about 2001, that credit scores have been made available to the general public. The credit bureau’s capitalized on this, as they all began charging consumers for their FICO score. Due to the fact that they had to pay Fair Isaac Corporation royalties on every sale made, the bureau’s themselves decided to create scoring systems of their own. Ultimately this gave them a bigger piece of the pie and a chance to create more services to become even more profitable.
Beware of ads for “free credit reports”!
This is the reason that you see ads and commercials everywhere these days promoting “free credit scores”. These free scores are NOT FICO scores and the scores you receive may differ greatly from the actual FICO scores that are used for mortgage lending purposes.
There are many different scoring models being used today in many different industries. If you do not know exactly which scoring model you’re getting a score from, then it really doesn’t mean anything. Some scoring models have ranges up to 950, whereas FICO scoring model only goes to 850. If you choose to get your score from some unknown company, you might think you have a better credit score than you actually do.
These companies that are offering free credit scores usually make you sign up for some type of credit monitoring service that charges you monthly. Unless you’ve been a victim of identity theft, there really is no reason to need a credit monitoring service. You can check your credit report once a year at no cost to you, for all three bureaus thru www.AnnualCreditReport.com.
You know the old adage….
”If something sounds too good to be true, it usually is.”
How do I claim a short sale or short-refi on my taxes?
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The tax code has been temporarily amended because of the mortgage crisis that has hit our entire country.
This break comes in the form of "The Mortgage Forgiveness Debt Relief Act of 2007", whereby in certain circumstances, a homeowner does not have to pay federal income tax on debt forgiven on a loan secured by a qualified principal residence via a short sale, foreclosure, deed in lieu, loan workout or short refinance. ( A short refinance is defined as "where the loan amount was reduced and forgiven in order for the homeowner to keep the property".)
This is great news for many a homeowner, because in prior years, any remaining balance was considered income for which you would owe taxes.
Does it help your credit scores to close an account?
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Were you aware that positive credit history stays on your credit report forever? 
Did you know that when you close an account, becomes inactive after 6 months (meaning it no longer contributes to your credit score) and the entire account, history and all, gets automatically deleted after 10 years?
So contrary to popular belief, as long as an account is positive, meaning there are no late payments associated with it, then you DON’T want to close the account.
Now, if you don’t use it once every 3 months or so, the account will become inactive and will no longer be a contributing factor to your credit scores, which is the whole purpose of not closing it in the first place. So, charge $20 bucks on it every so often and pay it off when the statement comes in. This will ensure that the creditor will not close it or stop reporting the activity to the credit bureaus, and it will continue to add to your positive credit history and reflect positively in your credit scores too!
Thirty-five percent (35%) of your credit score revolves around your payment history and your scores get very happy when they have a long-term account that is always paid on time!
On the other hand, if you are a charge-o-holic, maybe the best thing for you is to actually close the account if you don’t trust yourself enough to leave it the heck alone. If this sounds like you, go ahead and close it until you get everything paid off. Get your finances and spending habits under control first, and if closing an account takes away the temptation to charge, then by all means, get rid of it.
As I always tell my kids, “you can always start over tomorrow”.
No benefit for “authorized user” on credit reports….
Posted by: | CommentsWhen someone finds a loophole in the IRS rules, you’re going to see a bunch of folks exploiting it until the 
IRS figures it out and takes the loophole away from you. Ahh…..it was nice while it lasted huh? The same thing has happened with “authorized users” in regards to increasing your credit score by “piggy-backing” off of another’s positive account rating.
The following is the definition of an Authorized User: “Person permitted by a credit cardholder to charge goods and services on the cardholder’s account, but who is not responsible for repayment of the debt. The account displays on the credit reports of the cardholder as well as the authorized user.”
Originally, the purpose of an “authorized user” was to allow a family member or close relative to be added onto your account and that person was allowed to make charges against that account. This was especially helpful for young adults trying to establish credit for the first time. A parent would add their teenager onto an existing account of theirs and typically, this would be the first type of charge account a young person would have. With the parent’s guidance, they could teach their teenager the advantages and disadvantages of using credit, along with teaching them the responsibility that comes along with it. If they managed this type of account well, then it would reflect as such, in establishing a credit history and a good credit score to go along with it. This practice enables a person to qualify for things that they wouldn’t, under normal circumstances, qualify for, which constitutes a form of fraud.
Of course, scammers found this loophole in the credit scoring system and decided to abuse it for monetary gain. In the past few years, these scammers would solicit people who needed to establish or re-establish credit and they would be offered the opportunity to piggy-back off of someone else’s positive account, (that they didn’t know) for a fee. Once they were set up as an authorized user on this account, that person’s account and the credit history that went along with it, would automatically reflect on the authorized user’s credit report and would therefore generate a good credit score for them.
Unfortunately, because of this abuse, Authorized User accounts are no longer a contributing factor in credit scoring, so they will no longer benefit the authorized user in that respect. These types of accounts are still available thru creditors, and they will still reflect on the owner’s credit report and the authorized user’s credit report, which will show the account’s history, but the greatest benefit of the account reflecting in the credit scores is now history.
Credit scores affect many things…
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Did you know that your credit score affects more than just your ability to obtain credit? Today, credit scores can determine the interest rate you pay on your credit cards. The ability to purchase or refinance a home are severely impacted if you don’t have a minimum credit score of 680. Your insurance rates will be much higher if you have bad credit. You may not be able to qualify for a job in the finance sector if you can’t demonstrate that you, yourself have the ability to manage your finances. Landlords routinely evaluate your credit to determine if you are a good risk to rent to. If you are able to find someone to rent to you, then you may be faced with a high deposit with the utility companies, if you have a low credit score rating.
Today, more than ever, managing your credit report is one of the most important factors of your life and can have a huge financial impact on your pocketbook. You’re perceived to be a higher risk when you have a bad credit score, and therefore limits your options, or hits your wallet in many areas. Now is the time to pay attention to exactly what affects your credit scores, and what you can do to increase them with some simple awareness and change of habits. A good credit score is going to save you thousands of dollars in the course of your lifetime. Check your personal credit on a regular basis with a free credit report supplied by www.AnnualCreditReport.com to ensure there are no erroneous errors showing, and if there are, be sure to dispute these right away. This is a simple way to increase your credit score rating immediately.
