Personal Finance Blog by Debit versus Credit

The Carnival of Personal Finance #174

October 14, 2008 | Filed in: Personal Finance | 2 comments

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Greener Pastures is hosting the Columbus Day edition of The Carnival of Personal Finance, highlighting the best personal finance articles around.  My recent article on Debit versus Credit, Stock Market Basics: Investing for Beginners, was featured under Investing.

There are some fantastic articles in this week’s carnival.  In addition to the Editor’s Pick articles, here are some that I found interesting.

• Rate Cuts: What Does It Mean?
  
• Best Financial Advice You’ve Received
• Ten Ways To Save Money and Lose Friends

There are some of my favorites.  Make sure to check out the entire carnival.  It’s hard to believe how much great information is packed into this edition of the Carnival of Personal Finance.

Tags: Carnival of Personal Finance

4 Simple Ways to Improve Your Credit Score

October 14, 2008 | Filed in: Loans and Credit | 2 comments

Be honest with me here.  How is your credit?  Is it great?  Good?  Or… not so good?  The fact is that hundreds of thousands of Americans have anywhere from decent to borderline terrible credit.  It doesn’t take much you know.  A missed payment here and there, a bill that you never received, one too many credit card applications.  God forbid that you face all of these dilemmas at once.  It’s easy to ruin your credit score (which is an extension of your credit report), and one would think it’d be much harder to improve your credit score.  It’s actually not, however.  In fact it’s not much harder to get a great credit score than it is to get a terrible credit score.

…it’s not much harder to get a great credit score than it is to get a terrible credit score.

There are four simple things that you must do if you want to improve your credit score.  They’re not terribly difficult things to do.  They will take some dedication, however, and they will take time.  To improve your credit score you need a minimum time horizon of six months, with a year being preferable.

Improve Your Credit Score: Step One

Your credit score is a reflection of your ability to manage credit extended to you.  In other words it calculates how well you do at paying your bills on time!  So it’s only natural that if you don’t pay them on time your score will free fall.  Step one to improving your credit score is this: Pay your bills on time.

Improve Your Credit Score: Step Two

Hypothetical situation: You go to the mall and you buy a great new outfit or some electronic gadget.  The store offers their own credit card and upon approval will take 15% off of today’s purchase.  Do you apply for the card? If you answered yes, then you are either dangerously frugal or a possible credit card addict.  The short story is this: if you open up too many credit cards or credit lines within a small amount of time it appears to the credit agencies that you are reckless and irresponsible with your credit.  Therefore your credit score will likely be dinged.  So step two is this: Stop opening new credit cards.

Improve Your Credit Score: Step Three

The so-called “utilization ratio” is a magical number that refers to the amount of credit that you are using divided by the total amount available.  For example I have a credit card with a $3,000 dollar limit and I owe $500 dollars on the card.  My utilization ratio with this card is 16.6% (3000/500).  This is a good number.  You don’t want to use any more than 50% of your available credit.  Actually to maintain a high a score as possible I recommend keeping your utilization somewhere under 30%.  So if you have a credit limit of $3,000 then you don’t want to have a balance of anything more than $900 dollars.  Step three, then, is this: Don’t use more than 30% of your available credit.

Improve Your Credit Score: Step Four

With recent changes to the credit scoring system it’s become progressively more difficult to “cheat” the system by artificially inflating your credit score.  That’s not to say, however, that it’s become impossible.  If you really want to boost your credit score much more quickly (and ONLY AFTER DOING THE FIRST THREE STEPS!) then you can always piggyback off of another persons’ good credit.  To do so you’ll have to be a joint owner on one of their credit cards… which might require a fair amount of trust and coaxing.  If you can manage to convince them to add you as a joint owner on their credit account though it should definitely help to increase your own personal credit score.  The final step is therefore: Piggyback on another persons’ good credit.

I told you, it really isn’t that difficult to improve your credit score.  It will take some work and some time, but it will be worth it in the end.  Good luck out there, and please if you have any other ideas leave a comment!

Tags: credit score, Improve Credit Score

Credit Cards 101

October 13, 2008 | Filed in: Finance 101 | 4 comments

What is a Credit card? How do I choose one? Why should I use a credit card instead of cash? I’ve been asked questions like these over and over again, usually by young people who are just starting to learn about the world of credit and personal finance. However it’s never too late (or too early) to learn more about credit cards. Welcome to Credit Cards 101!

What is a Credit Card?

A credit card gives you easy access to a revolving line of credit which you can use to purchase products and services just about anywhere. There are four major credit card companies in the United States: Visa; MasterCard; Discover and American Express. These card issuers, while all structured differently, essentially provide the infrastructure to companies (such as Best Buy) who want to offer their customers the ability to pay with a credit card.

When you use a credit card the purchase amount is debited from your line of credit and paid to the vendor from whom you made a purchase. Within a month of your purchase (credit card bills are generally sent out on a monthly basis) you will receive a bill from your credit card company showing any purchases throughout the previous month, the full balance owed, and a minimum payment amount. The minimum payment is calculated as a percentage of the balance owed on your card, usually between 3 – 5%. Be careful paying only the minimum payment though, and here’s why:

Let’s say you owe $2,000 on a card with 15% interest and a 5% minimum payment rate. This would give you a minimum payment of $100 at first and lower every month as you pay down the principle. However paying only the minimum (without ever using the card again) will take you 84 months to pay the card off and will cost you over $630 dollars in interest!

Choosing a Credit Card

When choosing a credit card you want to read the fine print. The Terms and Conditions of the card you are considering must legally be provided BEFORE a card can be applied for. These are the things you should pay close attention to:

• Annual Percentage Rate
• Annual Fees
• Balance Transfer Fees
• Cash Advance Fees
• Late Payment and Overlimit Fees
• Minimum Finance Charges

You should look for a card with a low APR, no annual fees, a low balance transfer fee, and NO minimum finance charges.

Why Use a Credit Card?

So why are credit cards important? Wouldn’t it be better to just pay with cash? Credit cards can be a convenience but I make it a habit to think of them more as a tool, and a dangerous one at that.

To understand why credit cards are important, you have to remember that the world practically runs on credit. If cash is King then credit is the Queen, and we all know who is in charge in that relationship. Credit (and your credit score) is a reflection of your ability to borrow and to repay money. So when you purchase something with your credit card and then pay off the balance on time this is reported to credit scoring agencies, who then update your credit report and score on a monthly basis. The higher your credit score the easier it will be for you to qualify for loans of all types.

Fraud Protection

VISA cards offer a zero liability policy, which with a few exceptions basically protects you from all forms of credit card theft and fraud. If someone were to get a hold of your card number somehow and make a purchase with it all that needs to be done is to report it to VISA and you will not be held responsible under most circumstances. MasterCard, American Express and Discover likewise offer fraud protection. This is another reason why I prefer credit cards over cash; the security is far superior.

Credit Card Benefits

Did you know that by using your credit card to pay for a car rental that you are automatically protected with rental insurance?  There are many benefits that credit cards offer to their cardholders, some of which can save you money.

Take this knowledge and use it.  I don’t want to hear about any of my readers applying for bad credit cards.  On that note if you have any credit card horror stories or any further questions please contact me; I try to respond to all messages!

Tags: credit cards, Loans and Credit

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