Getting and Keeping High Credit Scores

A. The Importance of “Adequate” Credit Scores

Clearly, having an acceptably high credit score is more important in recent years than at any time since scoring models were developed. If your score is not sufficient, you will:

  • pay more to get mortgages, car loans, and other credit;
  • be less likely to get offered a job;
  • be unable to get many brokerage or bank accounts;
  • pay more, perhaps much more, for insurance;

Those are just the effects that are widely documented. Because the increasing use of credit scores by various agencies is controversial, we often don’t hear about their use.

B. “Adequate” vs. “Super” Credit Scores

A grading analogy might help demystify the importance of credit scoring. For most people, a credit score is more like a “high pass /pass / fail” grade than a letter grade.

If you score a “high pass”–roughly, between a 680 and a 720, depending on the model–then that’s “Adequate” for all practical purposes. Further improvements simply aren’t important, and won’t benefit you.

Moreover, the higher into the 700 range one gets, the more difficult it is to raise them still further. The bottom line is that in the vast majority of cases, once one’s true scores are well into the 700s, it simply isn’t worth worrying about them anymore.

The key is keeping a “high pass” or “Adequate” score.

C. Why would a “Super” credit score be helpful?

I can think of three reasons. First, super scorers sometimes receive the tastiest “by invitation” pre-approvals for new credit. Capital One has been especially aggressive about this, sometimes offering superb terms and huge lines to >760 credit scorers.

Second, very few lenders save their best rates for super scorers. Farm Bureau Bank, for example, will give a no-fee prime + 0 business LOC to super scorers (generally 760 or better) finally, it’s nice to have a “margin for error.”

For example, my credit profile is WAY too active to keep a score much above 750 on any sustained basis. But it’s very important to me that it’s always at least “adequate”, as I earn several thousand a month from my credit lines and would suffer real losses if some snafu shipped me into “sub-prime” status.

So, I like to shoot for the 740-760 range, so that I know that the minor issues (wrongly reported lines, unexpected inquiries, etc.) won’t drop me below 700.

SECTION TWO: GENERAL FEATURES OF CREDIT SCORING

A. Credit scoring models are intentionally ambiguous.

The three major credit reporting companies/agencies (CRC or CRAs) are Equifax, Experian, and TransUnion. They are private, for-profit entities.

They all maintain the position that their scoring models are “trade secrets,” and they fight tooth and nail to reveal as little as possible about their details. Moreover, they are regularly tweaked, in ways that are not publicized.

This is one reason why there can be no reliable answer to precisely how much a certain factor would affect a given person’s credit score.

This also explains why there is so much misinformation floating around on credit scoring, even from journalists and others who should know better.

B. Scoring model complexity prevents extrapolation.

Theoretically, two identical credit profiles, when faced with the same pertinent change (a new line, late payment, whatever) should have their scores change in the same way. But in practice, no two credit profiles are ever alike.

There are simply too many relevant factors. The age of each credit line, its type, its payment history, its size, the degree to which it’s used, and many other factors are getting put into the “black box” of credit scoring. When all these factors are considered no two people are really alike.

That’s why you should be suspicious of anyone claiming that “doing x will increase (or decrease) YOUR score by y points.” There is NO WAY that they or ANYONE else could know that information.

C. Scoring Depends on Reporting – which can vary considerably.

First, if a credit grantor doesn’t report the use of the credit, then it isn’t considered in your score. Most business credit lines don’t report to one’s personal credit at all–which is why business lines can be a great way to “hide” use of credit.

Most personal cards do report the limit, the balance (generally as of the close of the last billing cycle), and the minimum payment due (at that cycle close). A few do not. Capital One is probably the most prominent exception, reporting the “high balance” instead of the limit to the CRCs.

Counter to popular belief, such exceptions are rather easily worked around, and provided one knows they are there. (Note: Cap1 in particular is almost always willing to offer no fee balance transfers, and they will sometimes even offer “purchase checks” that allow you do deposit your CL into a bank account.

Simply pay the balance off before the cycle closes and your new “highest use” will be your credit limit, while your balance (which is measured as of the close) may be as low as zero.)

D. Scoring models and their key “inputs” are evolving significantly.

The ambiguity of scoring models and the changes in reporting mechanics complicates the tracking of changes in CRC scoring models. Even so, anecdotal evidence and occasional industry comments confirm that major changes have occurred over the past few years. Here are a few worth noting:

  • Inquires are often sent to the CRCs much more quickly than previously. Years ago, it wasn’t uncommon for all 5 inquiries made on a Monday to not show on one’s report until Tuesday or later.Now, most of them will show up almost instantly. Needless to say, this has implications for credit application strategies
  • Secured revolving lines are more accurately reported AND less damaging than they once were. Along with the HELOC boom of the early 2000s came many consumers whose credit was badly hurt by their >50% utilization on their equity lines.Gradually, equity creditors began to more precisely specify their lines as “secured revolving,” “heloc”, and the like, rather than the simpler “revolving” that all CCs are coded. Also, CRCs began treating them differently, recognizing that high use of a HELOC (at the prime rate or thereabouts, and secured by real assets) was a much lesser risk factor for creditors than similar balances on credit cards.
  • Multiple loan inquiries within short time frames are more often bundled. Not long ago, “rate shopping” for a mortgage or a car could really hammer one’s score, since every inquiry by each lender one spoke with would knock it down another notch. Now, CRCs allow for multiple inquires for certain products (generally mortgages and car loans) to count as one, provided they are done within a 14 or 30 day period. This more lenient treatment does NOT apply to CCs, however.

One key point can be inferred from the observations in the last couple of sections. That is, DO NOT ASSUME THAT YOUR CREDIT SCORING EXPERIENCE DICTATES WHAT OTHERS WILL EXPERIENCE.

I’ve seen MANY people make claims like, “credit scoring doesn’t work that way–I know because it didn’t happen to me.” Well, THAT SIMPLY DOES NOT FOLLOW.

E. Scoring seems headed towards consolidation.

The big recent news in credit scoring is the arrival of the Vantagescore. Among other useful revisions, this score will use an “Identical scoring algorithm and leveled credit characteristics across all three national credit reporting companies.”

That will make monitoring one’s score much easier, and using the score significantly fairer to consumers. There is debate over how long it will take before this revision is phased in.

F. Scoring is always individual, not “joint”.

Unlike income taxes, where spouses can file “jointly” as one unit, credit scores are always individual.

So, a wife can pay a household’s bills on time for 40 years, and if she’s never established credit in her own right, it WILL NOT MATTER if her husband dies, and she needs to get a mortgage or buy insurance on her own!

Thus it’s crucial that every adult establish the credit that they might need IN THEIR OWN RIGHT.

Home Opportunities with FHA Loans

FHA loans to finance the purchase of home differ from regular loans one obtains from a lender or a bank.

The rules are less stringent and there are a number of options which are available to the person making the purchase.

These home loan products are not difficult to obtain regardless of the home’s location.

Only certain homes are qualified for these loans. They can be single-family houses, condos, modular home, double-wide mobiles and two to four unit arrangements. They do not make loans on things such as hotels, clubs, boarding houses and so forth.

The FHA loan is not as strict on many things required to qualify with a regular loan. For example, the down payment is very low and, if unable to make this down payment, you are allowed to receive a gift for the funds.

Things such as a credit rating are not as stringent with mortgage than it is with traditional ones. However, it must show less than two months late payments in the past two years and a minimum score of 620. In some cases, no credit score at all is accepted.

Proof of being able to meet the monthly payments, such as steady employment for two years is required with the income being the same or increasing.

Also, any bankruptcy must be at least two years old or more and credit must be good for that period of time. A person must show that the house payment would not be more than 30% of the total income.

If one has had a foreclosure, it must be at least three years old with a good credit record since.

Occasionally one can purchase a HUD home. This type of home is where someone who purchased a home with an FHA home was unable to make the payments.

Such a home is usually sold by auction with an outside service. It is often possible to get one of these houses with an FHA loan at considerable savings.

Whether purchasing a newly built home, a foreclosed one or one that is just on the market an FHA loan is usually the best type of loan to get.

It is not as stringent in requirements, has a low mortgage rate, and offers a number of financing opportunities for the purchase.

Pros and Cons of Payday Loans

Payday loans, also known as cash advances, are small, short-term personal loans that cover the borrower’s expenses until the next paycheck.

According to “An analysis of Consumers’ Use of Payday Loans” by Division of Research and Statistics, Board of Governors of the Federal Reserve System and Financial Services Research Program, payday loans are used to cover emergency expenses or bills that cannot not be deferred.

The most important advantage of payday loans is that it is very easy to get a them online regardless if it is a small or a large amount.

Consumers need to fill in an application form and qualify for specific terms and conditions such as being a US citizen, being above 18 years of age and having a regular monthly income.

The terms of agreement vary from one lender to another as well as the maximum amount that the borrower can take.

If the consumer qualifies the required conditions, the application form is approved and the loan amount is electronically transferred in the appropriate checking or saving account.

On the other hand, although cash advances are short-term, they carry high interest rate that may range up to 400 percent depending on the loan amount and on the lender. So, consumers may end up paying more interest than the market price.

High interest rate makes it difficult to repay the loan because the loan amount increases daily. However, failing to repay the loan on time, typically results in large debt for the borrower in the long run.

Besides, consumers who use such loans do not have flexibility in their income. Even small expenses may ultimately cause financial problems and then, emergency situations become regular thus increasing the probability of borrowing from payday loans more often.

However, consumers who support themselves solely from their paycheck, end up being trapped in a vicious circle of debt that eventually becomes a frequent event.

According to the above mentioned study, only 2% of Americans are using payday loans. Most of these consumers share similar characteristics: they have children at home; earn lower or middle income (between $25,000 and $50,000); are educated (high school, college or degree); have limited liquid assets; use small loans moderately and benefit by them.

Demographics show that people of average income use short-term loans. However, the costs arising from late payments due to unexpected events trigger even higher costs, which can be unbearable for some consumers making them default on their debt.

All in all, these loans are used as short-term financing. However, frequent use may trap consumers into growing debt and potential default.

On the other hand, because they offer temporary financial relief, they reduce the frequency of financial problems and they help consumers getting out of debt.

To get full control over their financial issues, consumers need to be extremely careful when deciding on a payday loan.

Getting access to additional credit for unforeseen expenses requires good debt management.

Free Christmas Gifts and Holiday Money Saving

christmas timeChristmas is, without question, the most exciting time of the year. It also happens to be the most expensive.

Prices are purposely grouped and fluctuated to fool consumers into spending more, making their bank accounts thinner and thinner.

Often times this happens with bundles and other forms of tricky marketing that show themselves during the holidays.

Whether you have a big family to pay for or a small group, either way, you want to save as much as you can for the following New Year.

For this reason, it is hugely beneficial to find every deal you can to cut back on dishing out the green.

1) One place to start is a website called “Money Saving Mom.” This place, as the name suggests, keeps costs back and searches the internet for you in order to find free deals and opportunities.

Money Saving Mom has featured sites of the day, which show the best items for free or discounted that particular 24 hours. It is informative, easy, and links you directly to the deal you want.

2) Another website to check out is “I Love Free Things.” This place is a haven for freebies and samples, all of which can per perfect for regular gifts or stocking stuffers. Some features of this website include Black Friday deals, which of course is the busiest shopping day of the year, and direct links to bundles and insanely cheap pieces of technology like phones, TV and MP3 players.

This website also has a ‘Just For Kids’ section, so you are able to virtually shop for your children from the convenience of your home or office. Best news of all? A lot of the samples offered here have free shipping and thus you have no hang-ups whatsoever and not even a dime leaves your wallet.

3) “Free Stuff Headquarters” is also a fabulous home of bargains for the family. What is particularly cool about this website is how they have ‘Top 10 Freebies’ so you can see what everyone else is viewing and partaking in.

This place has everything you can imagine from free magazine subscriptions (which are great stocking stuffers) to free books, music, and even baby items. “Free Stuff Headquarters” is a jack of all trades so to speak, offering broad deals to serve the whole family ages young and old.

Because Christmas is a time of giving it is usually a time of stress, though it doesn’t have to be. The three aforementioned free and discount site destinations are just the tip of the iceberg, and from experience, I can tell you that you can have the area under your tree filled with presents you didn’t spend a penny on.

A Family’s Guide to Surviving Layoffs – 10 Painless Money Saving Tips

My family’s situation is not only typical for this economy but may border on being a cliche given the current unemployment rate.

We’re a dual income, a middle-class couple raising a 4-year-old. My husband and I make comparable salaries give or take 3K to 5K and have survived 2 job losses (both mine) since 2008.

unemployedThe first one came 4 months after the purchase of a new home which doubled our mortgage payments.

I was unemployed for 7 months and then found a job as the banquet sales manager for a high-end restaurant. This more recent layoff only proves that no one has the money for private banquets anymore.

Like most of the country, we work hard to afford a certain lifestyle which includes all the normal trappings of a first world country and serves as a daily reminder that our college degrees were worth the money.

If your parents were anything like mine college was viewed not as a place to expand your mind but more as an insurance policy that would pay off upon graduation with a full-time job and health benefits.

Unless you were raised in the Great Depression no one really prepares you for what to do in a bad economy or how to deal with sudden job loss.

Here are some tips and lifestyle adjustments which allowed my family to emerge from the dark days of unemployment pretty much unscathed and a bit more enlightened.

1. Pull your child out of daycare or fire the nanny.

This simple act can free up anywhere between $500 and $1,000 a month.

2. Put your cell phone bill under a microscope.

We lowered our bill over $50 a month by switching to a cheaper plan and taking a scalpel to monthly charges for internet, GPS service and unlimited texting.

3. Research options in health insurance.

Unemployment doesn’t come with health insurance and Cobra is usually very costly. Spend the time to thoroughly research different insurance plans.

If you’re healthy choose a plan with a high deductible that will lower your monthly premiums. Companies like Golden Rule offer discounted plans for individuals.

4. Do you really need a satellite dish or cable?

We all love having hundreds of viewing choices but these services can run up to or over $70 a month. Join Netflix for $10 a month and watch as many movies as you want.

5. Cancel memberships to health or fitness clubs.

Family memberships to these places usually range from $70 to $150 a month. Forget it. Buy a jump rope, drag your bicycle out of the garage or start power walking around your neighborhood. It’s cheaper.

6. Eat at home.

This goes without saying. Even the most reasonable restaurants cost more than cooking at home.

7. Find free entertainment or at least cheap entertainment.

Museums, parks, and beaches are free. Matinees are usually 1/2 the price of evening shows.

If a show hasn’t sold out many live theaters will offer 1/2 price tickets for shows a half hour before the performance starts.

Invite friends over for a potluck dinner where everyone brings a dish.

8. Discover thrift stores.

If you love to shop but can’t afford it, seek out your local 2nd hand stores.

Shopping at consignment or thrift stores can be a lot of fun and will offer some surprising fashionable finds.

9. Curb gift giving.

Talk to your spouse about temporarily suspending gift giving for each other during holidays or birthdays.

Or at least set a dollar limit consistent with your situation.

10. Got stuff? Have a garage sale.

Auction off items on eBay or advertise it on Craig’s List. All easy ways to make a few extra bucks from stuff collecting dust in your basement.

Money Saving Tips for Your Wedding: Who Do You Know?

It seems kind of silly to pay tens of thousands of dollars for a day that only happens once.

For many people, the fact that a wedding only happens once is what makes it worth it.

For the thrifty and the frugal among us, though, that money could be better spent elsewhere. And one of the biggest money saving tips for your wedding is to figure out who you know.

Family and friends will probably be willing to help you out with your wedding – they can count it as their wedding gift to you!

Do you know any professionals, or amateurs?

1) The first thing you should do is think about who you know that might have professional skills.

Or even amateur skills. You know, like a hobby. Flower arranging, photography, decorating and catering are all items that you can cast about for friends and relatives.

For my wedding, someone in my church congregation decorated cakes for a local caterer. She made our wedding cake as her wedding gift to us. My uncle is an amateur photographer, as is my husband’s sister. Between the two of them, our wedding photos turned out great.

Another friend of mine offers to do wedding photos as gifts to her friends and family. She loves it. Her acquaintances get free wedding photos, and she gets exposure as a photographer.

A friend of mine knew a florist, and, even though she didn’t get all the flowers for free, she got them heavily discounted. And the florist threw in the arranging for the reception and the ceremony as the gift.

Sometimes, if a religious leader is close to a family, he or she will perform the marriage free of charge. But that isn’t really something you can ask for.

A seamstress might be able to make your wedding dress (my mom made mine and my sister’s) for a discounted rate as part of your wedding gift.

2) Get creative

Additionally, you can usually find relatives and friends that have decorations that will work for your wedding.

One of my dad’s friends had a lovely trellis that he let us use for the reception. A friend of mine had a cousin who owned a pet shop.

For the centerpieces of their wedding, the cousin brought over brightly colored tropical fish to swim in bowls.

Another thing you can do is use hand-made centerpieces. A friend of mine had a grandfather who whittled well. All of the centerpieces were beautifully carved wood pieces. Of course, some of these things require advance planning, since months might be needed.

3) Have the wedding earlier in the day

Instead of an evening dinner reception, have an earlier wedding.

That way you can have a brunch or a luncheon instead. You will save a lot of money on the food, and there will be no need to buy more expensive alcoholic drinks.

(Bonus: if you know a caterer it might help you get your food for less money.)