Your credit report

Your credit report and score are all the rage nowadays. Your credit report is checked when you open a bank account, line of credit, get a mortgage, apply for car insurance or even get a lease for an apartment. Most banks only know you by a number now, and that number is your credit score. There are plenty of people touting their own credit report business on TV and radio the past few years, all of them trying to scare you into getting one or make you think that you can save thousands of dollars by going to their site and paying for a service. Poppycock. Well, not totally, but most of it has nothing to do with the average consumer. Most people turn 18, get a few credit cards, maybe an auto loan and then struggle with their debts until they get a mortgage later in life and then the eventual consolidation loan or second mortgage, which they have so cleverly marketed as a “home equity loan”. So I’ll go a bit into how to get your credit report and what it means to you.

First you need to get your hands on the pesky thing. You can do that by going to Google, searching for credit report and clicking on pretty much any link that you see come up. Don’t do that. Instead, go to Annual credit report.com and get it for free, without having to sign up for any services. The Government mandates that every citizen over 18 be entitled to a free report once every year, to help protect them from identity theft. So go there, and no where else. Even at that site, there are always going to be advertisements to try to get you to sign up to monthly monitoring services ,you don’t need that for any reason, ever. No one does. Check it once a year for free and look for discrepancies and you should be safe for the most part.

Once you have your hands on the report, it will show you a few pages of information. Since I’m not looking at my report right now, I’ll not go into extreme detail, but most of it is self explanatory. You have a page showing all of your debts, past and present, with a total of how much you owe them, what your limits are and lists of the highest your balances have been for each account in relation to the limits.
It will also show a time line under each each account for the past three years, showing weather you have had any late or missed payments on the account in question. The reason they go back three years on the list, is because most creditors look back that far. If you clear your credit for that amount of time your in good shape.
The one thing you will notice is missing is your credit score. The score is of no value in protecting you from identity theft, so they don’t have to give you that information for free. If you want it, you have to sign up for the service, which I don’t recommend doing. If you do sign up, be sure to cancel it before the end of the following month, so you don’t get charged undue fees. The average score is generally around 650, with anything above 800 being near perfect and below 600 being pretty bad (although it is rated as fair).

HOW TO RAISE YOUR SCORE

As you can imagine if you are a regular here, there is no magic fix. Anyone who says they can help you is lying with the exception of a few non profit organizations. Even they can’t do much for you, because the report is based entirely on what the company you were indebted to decides to report to the credit bureaus. There are however some simple things you can do to slowly but surley raise your score.

One- Pay everything on time, always. There is no excuse to give a creditor for why your bills are late. Pay on time, every time.

Two- Keep zero balances on credit accounts. Holding a zero balance on cards will help you immensley when it comes to your score. It shows creditors that you can control yourself with reguards to money. It shows responsibility, and overall that’s what they want, responsible debts.

Three- Opt out. When you get all those offers for credit in the mail, look at the bottom and use the opt out feature. You don’t need that new card, and it certainly doesn’t help your credit to have people looking at it report 24/7.

Four- Stop applying for credit. The more often you apply for credit, the lower your score. Every time you apply for anything, your score drops about 6 points just for asking. It also looks bad to any potential lenders if your looking to take on a lot of debt suddenly. That doesn’t make them want to jump on the lending train any faster.

Five- Have a higher income. Most of the time it’s out of your hands, but the more you make, the more they are willing to lend. there are equations that are used to determine the amount of debt a person can handle. The larger your income, the larger the assumed ability to pay back debt.

Always be aware of your credit. Check it once a year at least signs of identity theft. You should be aware of how every decision you make affects your score and report and make responsible decisions at every turn. As always, if you are unsure Ask someone. better to feel foolish than be foolish.

Here is a short movie from an “expert” that explains the FICOscore.

-Jared

Get out of debt part 2, Payback time

   Time for part 2 of our getting out of debt series, paying back your debts. As I said in the previous post, there is no magic pill for fixing your financial situation, you actually have to payback all those bills. Don’t fret, it’s not as hard as it sounds, let’s grab our worksheet we created last time and get started.

    Now there’s no real right or wrong here on what to do. Some may say pay down the highest interest rates first because they charge you the most in fees each month, others will say pay the smallest debts first to get rid of them and then there’s the guy in the back yelling Bankruptcy! again and again. Once again, I’ll illustrate how I personally did it, and why.

    First you need to establish your goal in this step. Do you want to get out of debt as fast as possible or do you want to conserve as much money as you can while doing it? Lets start with the one that most of the pros like, keeping your money.

   Get all of your billing statements. Now take a look at the finance charges for this month. Write them down on a sheet of paper in order from least to most. Do the same for your monthly payments in a neat little column right next to it. Now you can kind of see how bad your interest rate really is. In one case I had a minimum payment of $220 a month, of which $196 was finance charges. That meant that for the $220 I gave them every month, my debt was reduced by $24 and that was at an interest rate of 25%. Seems a little more than 25 to me, but I’m no mathematician.
    What I want you to do now is take a look at your finance charges compared to your monthly payments. See where the biggest loss of money is occurring and we’re going to call that Priority one. From this point on, this is your biggest enemy. This is some guy, reaching into your pocket while you sleep and taking money from you. Let’s put an end to him shall we? Finish your list of targets by writing under Priority one the next biggest offenders until you have them all listed and move on to the next section.
    Break out the check book(or online bill pay if you were smart enough to listen to my previous posts). Write out the minimum payments to every other debt beside priority one. Now go to your worksheet and see how much disposable income you have. Come up with a number that you can be comfortable with not having in your account this month, the higher the better. Take that number and write it down for priority one, cause that’s how much you’re sending him right now. The more money past the minimum that you send, the faster the debt will disappear. Be sure to look for a check box somewhere on the bill to tell them that any money you send past the minimum is applied to your principle and not to further the payments along, or prepay interest otherwise, you’re kind of just sending them free money.
    I’m sure you’ve seen the old Warner Brothers cartoons. Bugs Bunny drops a pea sized snowball down off the top of a large hill and as it rolls down to it’s inevitable meeting with Elmer Fudd’s melon shaped head, it grows larger and larger until that once pea sized snowball is the size of Texas. Good stuff I know, but the point here is that you understand the “Snowball effect”. This is the tool that will get you out of debt faster than paying minimums ever will.
    Now that you’re sending money to Priority one at a rate faster than they can charge you interest, it WILL be paid off much sooner than they would like. When it’s paid off, you can now add the minimum payment from this bill to your disposable income every month as you change the balance to read $0.00. If you were sending P1 $100 a month and you have three other bills that require $50, when P1 is gone, you can start sending $150 to the next guy which is 3X the minimum. When that is paid off, you can start sending $200 to the next one, which is 4X the minimum. Each debt that you pay off, the snowball gets bigger before it hits the next debt, so each debt is paid off that much faster and easier that the one before it.

    If however you want to pay them off as fast as possible as I did and have no reguard for the amount of money lost over time, here’s how I did it. I listed my balances and interest rates next to each other as in the other example. I called all of my credit card companies and asked for balance transfers from the higher rate cards to the lower ones. I emptied every penny I could from the highest interest rate card and then paid off the balance that month. After my balance was $0.00, I called that high rate card and demanded my rates be cut if they expected me to stay with their card, since the power was all mine at this point(because I owed them nothing)they agreed and lowered my rate from 28.99% to 10.99%. Then I transferred the debts back from the next highest rate card to the now lowest rate and did the same thing to them. Now understand, a balance transfer can cost you up to $50 or more to do, but in my case, the amount of money I was going to save from the horrific interest rates I had was worth it. In the end I condensed my debts from 6 credit cards down to 4 and all at better interest rates. It cost me about $100 in transfer fees, because luckily some of my cards offered free balance transfers at the time. So at day one my monthly payments were reduced by over $80 that now became a part of my Snowball.

    After the maneuvering phase, I moved on to paying. I simply took the smallest balance I had, and paid it off first, with the help of my Snowball of course. Month after month, I saved and skimped everyday to build that Ball O’ Snow in to something huge and used it to crush my debts with in a years time. Now, I still have a personal loan, and my wife has a student loan, but those too are well on their way to being buried by this avalanche that we started a year ago. As it stands, all of our credit cards are 100% empty, we have only the two very easy to manage loans left, all of our utilities and monthly bills are paid for us, for free, by our bank every month and we have an emergency fund put away that is 4X our monthly expenses. Although I still try to live a frugal lifestyle for the most part, I don’t have to worry about the creditors attacking me, calling me, suing me or anything else’ing me and I can go ahead and make that occasional purchase to make myself happy, in fact right now I’m looking for a new laptop, because I can. That’s life without stress over money. It isn’t too difficult, and you feel the relief way before your balances hit zero.

Your turn. And be sure to tell me how it goes.

Nex post: I don’t know, I’ll come up with something.

Get out of debt part 1, Organize

    A few credit cards, a loan or two, maybe even old hospital bills. We all have debts at some point or another, some good and some very, very bad.
    Debt causes stress, anxiety, insomnia and countless other mental and physical problems to people everyday. I know this to be true, because I used to be one of them. I spent my days worked up over how much money I owe and how no matter how much I give them the balances just never seem to go down. I though that I was going to spend the rest of my life living paycheck to paycheck until the inevitable day comes where I can’t work due to an injury or illness, or even retirement, and it would all come crashing down on me.

Those days are over.

    It can be done, and it doesn’t take buying into a system or paying a credit councilor or avoiding your obligations. Let’s get this clear right now, NO ONE IS GOING TO HELP YOU. You have to do it on your own. The only way to do it is to research and learn. As Robert kiyosaki puts it, increase your “Financial IQ”. I’ll outline a simple method to start controlling and systematically eliminating your debts.

    You need to start with a list. Get a piece of paper and a pen, go ahead I’ll wait. Back? ok good.
Start by rounding up all of your bills. All of your monthly obligations like credit cards, loans, utility bills and anything else you owe to anyone, anywhere, from anytime.

    Now list them on the paper in groups. Start with credit cards, then loans etc.. until they are all listed. Add next to each, the following information if applicable:

• Total balance
• Monthly payment
• Interest rate or APY
• Due date

    Now add the numbers up to find out:

• How much you owe overall
• How much you pay out every month total

    Now you know exactly where you stand with debts. At this point you may be a little overwhelmed. Don’t be. At this step I owed over $40,000.00, which was a bit more than I expected. But As you continue you will see how this will be paid off, and the initial shock of what you really owe will fade.

    You need to know the difference between an Expense and a Liability. For your personal needs, consider an Expense to be any amount of money you have to pay out each month to maintain your lifestyle. These include rent or mortgage payments, utilities, car insurance, food and entertainment(yes, you have to add it up).
    A Liability is something that you owe, things that can’t be canceled or given up. In other words you have no choice but to pay it. Under this category you should add things like credit cards, personal and student loans and past due bills for services you no longer receive like hospital bills or that pesky BMG music service that just keeps billing you for crap you never wanted anyway. Notice, although a mortgage is a loan, and a big one at that, it goes under Expense and not here.

    Now take your newly created list and turn it into a newly created worksheet. Separate the Expenses from the liabilities and put them In two side by side columns along with the interest rates, dues dates, monthly payments and balances. Add the amounts of your Expenses and write the total below them. That’s how much money it costs you to live each month. Now do the same on the Liabilities side. You now have a total amount of debt owed, and how much that debt is costing you a month. Further down the page, add the monthly columns together and label it “Total Expenses”, we will come back to that later.

    Let’s talk about the money coming to you instead of away for a second, I’m speaking of course of Income and assets. Income is the money you make from a job. Yeah I know I’m not telling you anything new there, but the reason you need to know that is to differentiate Income from your assets. Assets are things that produce money, without you having to be around. Rental properties, Stocks, Bonds, companies you own, intellectual rights, Interest bearing accounts, annuities….you get the picture. This is money coming in to you each month that you don’t really have to ask for, it just comes.

    Get a new piece of paper, because you are going to create a list now of all of your Income and your Assets just as you did before for your Expenses and Liabilities. Add your Income from your Job(s) on one side, your assets on the other and get your totals down to the bottom of the page and label it “Total Income”. You should now know how much money you make every month and what your total assets are.

    Time for the big picture. Take Your “Total Income” and bring it to the first page. Slap it right on top of your “Total Expenses” and do the math. Label that new number the “Difference”.

    Now you have the clearest idea of your finances you’ve ever had right? You know how much money is coming in, going out and where and when it does. That’s it for todays exercise. Next I’ll show you what to do with your new found Information, until then Go read a book.

Next post: Get out of debt part 2, Decide and conquer

Online banking is awesome

   But Jared, what makes online banking so great? I’m glad you asked. Let me explain by telling you what I use my banks’ online services for.

   After my paycheck is direct deposited into my savings and checking accounts, I can view my balances right here on my computer. No going to the bank, no phone calls to bankers who want to sell me things I don’t need and no trying to find an ATM to pay a fee to check my balances for me. I have all my money on my screen in seconds. I’m also never a more than few clicks away from knowing where my money has gone, what checks have cleared, what checks I have received and what I still need to pay. It’s basically my personal accountant. I don’t keep bank statements, old checks or any paperwork and get this; I have never once in my life used a register book. Never. I have never had to balance a checkbook. Why should I have to balance ANYTHING? I’m not a trained seal, I’m a guy, and not even a trained one at that! The bank keeps all those records for me, that’s what I pay them for, that’s what the fees and interest they earn on my money are for.

   I also have them pay my bills for me. For free. I never miss a payment to a credit card, I never get hit with late fees, my phone doesn’t get turned off because I forgot to pay the bill.

   Here’s how it works. You use your banks’ bill pay service to set up payee information. This is usually the name of the company you want to send a payment to which is often referred to as a debtor. Then your account number for that company such as credit card number or customer ID number. Then the payment address of the company, which should be the place you normally send your payments by mail (sometimes a P.O. Box) And finally a phone number they can be reached at. I always give whatever number that I would call for customer service.

   Go to the page to make a payment. Go to the name of the company you wish to send a payment to and enter the amount you owe or wish to pay. Click send. Your bill will now be paid and taken directly from your bank account, normally within 24 hours on a business day.

   You can set up payments to be made automatically on a certain day of the month or you can choose to make them manually when ever you want. Once you set up an account it’s in there for good, so paying takes a few seconds from that point on. I for one have “balanced billing” on my utilities accounts, so I owe the same amount for 11 months out of the year. I have those accounts set to be paid automatically the first of every month so I never have to worry about it. When I had credit card debt, I set up automatic payments for the seventh of every month (due dates are the 18th) for my normal payments plus $20. I went in and paid them manually every moth and canceled the auto-payment, but if I ever forgot, It was paid anyway and there was no chance for a late fee or damage to my credit.

   Every bank has it’s own services and not all banks offer all of them, at least not for free like mine does. Look into you banks’ online features carefully before using them and know what your doing before automating your bills. Most importantly, make sure that if you choose to use these features as I have, that your income and deposits to these accounts outweigh the amount leaving the accounts every month by a healthy margin. Seems like common sense but it can get away from you fast and you’ll get hit with fees like crazy.

   Remember, your finances can be made automated, but NEVER lose grip on them. Check in to your accounts often and always know whats going in and out. In this case knowledge IS the real power.

Next post: Now you control your money, time to tackle your debts!
OR
The mystery of your credit history

Explaining direct deposit

   So, you have your bank accounts set up. Good work, now for this next exercise, I’ll assume you have a checking account, a savings account and a job. If you don’t have all of these three things, turn off the computer and walk away, I can’t help you. If you do, read on and I’ll explain this whole Direct Deposit thing.

   Simply put, Direct Deposit is the automation of payroll. What that means to you as an employee, is that when you wake up on payday, your check is in the bank already. No going to the bank, no waiting on lines, no standing next to people of questionable hygiene. Your employer takes a check from you(which you void out of your check book) to obtain your account information. They need your banks routing number, otherwise known as an ABA number and your checking account number. They enter this information into thier payroll services and when it comes time to pay you, they send the money , you ready for this?, Directly to your bank account.
   Most banks do not place a hold on Payroll checks either, so that means your money is available for withdrawal right away. So when you wake up on any given payday, your money is already in the bank and waiting for you. Saves you time and gets your money into your account faster, which helps save you from the overdraft fees we spoke about earlier.

   Easy enough for the employee right? So what about employers? Well using a Direct Deposit service can save your business time and money. After the initial setup, you can pay all of your employees in minutes from that point on. All you have to do in most cases is enter how much money you need to send each employee and hit the payment button. You can eliminate mountains of paperwork, and keep track of everything electronically. Why would you NOT do this? Some programs even come with handy worksheets that will figure out the pay for you. When you add an employee you add their rate of pay, tax rate and any deductions for say medical or retirement accounts. When you hit total, it will tell you how much to send the employee, how much to hold for taxes and how much to send to thier 401K or what not.

   In an upcoming post I’ll actually explain in clear terms how to use your direct deposit to help you boost your savings when you create a budget, look forward to the “How to build your first budget” post, coming soon to an RSS reader near you.

Next post: Use online banking or the earth gets it…

Step one in taking control of your money

   So where to start….

   The first and easiest thing anyone can do to take control of their own money is take a look at your bank accounts. More specifically, the rate and fee structures of said bank. Banks are a business, pure and simple. They are there to make money, off of you, by holding your money and lending it out. But most banks nowadays make a killing off of charging YOU fees every chance they get. Need to take money from an ATM? $1.50 please. Accidentally write a check for $5.00 when you had $4.98 in your account? “Sure we’ll pay the 2 cents for you…..that’ll be $30.00 please.”
   Learn how much your bank charges you and for what. If you don’t know, you can sit down with a personal banker next time you are there and ask them to explain your accounts to you. If you happen to save all your paperwork like some of us do, simply go back and dig it out, it’s a good read and can save you a ton in fees.

   Here are just a few examples of your money going into your banks’ pocket:

   -ATM fees- You pay the ATM owners fee of anywhere from$1.00 – $3.00 or more, but your bank may charge you a fee on their end matching or even beating(higher than) the original fee!

   -Overdraft fees- Every bank charges overdraft fees and it’s up to you to know how much. One of my now former banks used to charge $35.00 for overdrafts, even if it was only $0.02 as in the above example.

   -Account maintenance fees- What are they maintaining? never mind, I don’t want to know, but many banks charge you fees every month just to have your account open! I was charged $5.00 a month for an account I rarely used! There are plenty of banks that charge NOTHING, find one and use it.

   In my experience credit unions are the way to go. My current account earns over 1% when the old ones never payed more then 0.1%. The Maximum overdraft fee is $2.50. There are NO maintenance fees and they offer free online banking with bill pay services.

   Great banks are out there, take an hour to do research and you save yourself countless dollars in the long haul.

   How are some ways your banks have taken YOU for a ride?

Next post; Direct deposit, the secret weapon to create a savings

Day one 3/25/08

I’ve been reading personal finance blogs for about a year now. After talking to a few people at a new job about Personal finance, I realize that most people have no idea what money is or how it functions in today’s world. In the spirit of helping others and spreading the flow of information both ways(to and from myself) I’ve decided to jump on board the Personal Finance blog train. Hopefully I can help some people clean up thier finances as the blogging community has helped me.