I was about to review the third edition of Liz Pulliam Weston’s Your Credit Score several months ago when I found out that a fourth edition was forthcoming, so I waited until this new and updated edition was released to write this review. What I found was that the book remained a detailed and useful resource concerning how credit scores work in America.

Part of the challenge of credit scores is that the exact formulas for calculating them remain trade secrets. At best, companies like Fair Isaac issue guidelines on how to improve your credit score, but they don’t tell you exactly how they’re calculated.

Unsurprisingly, this can result in some serious confusion. Even worse, these scores are used for all kinds of things, from determining how trustworthy you are during a job interview process to determining your rates when you buy insurance.

Weston has written a pretty solid concise guide to understanding and navigating this minefield.

Why Your Credit Score Matters
If your credit score is good, banks will want to do business with you. They’ll provide you good rates on things like mortgages and car loans. If your credit score is bad, banks will pretty much avoid you because, to them, you’re not worth the risk. Even if you don’t really care about such things, it’s important to keep tabs on your credit score because it’s often the first way you find out that your identity has been stolen. People open up lines of credit in your name, use them for purchases, and you’re the one holding the bill – not something you want to have happen to you.

How Credit Scoring Works
Your credit score is calculated based on your credit report, which is a compiled document about you listing all of the sources of credit you have, such as student loans, credit cards, car loans, mortgages, and so on. You can get your credit report from the federal government at annualcreditreport.com. Generally, five factors make up your credit score: your payment history (have you been making payments?), how much you owe (do you owe a lot?), how long you’ve had credit (longer is better), your last application for credit, and how many different types of credit you use, and all of these pieces are obtained from your credit report.

FICO vs. “FAKO” – Competitors to the Leading Score
The primary formula used for calculating a credit score is called FICO (short for Fair-Isaac Corporation) and it’s the general formula that’s used for calculating your credit score. Unfortunately, the FICO formula is a trade secret, meaning we don’t know exactly how it works. Some companies offer alternatives to FICO, but none of them have caught on.

Improving Your Score the Right Way
How do you improve your credit score? First, get your credit report, as mentioned above, and then make sure you know what every entry on that report is and that it’s correct. Next, make sure to pay all of your bills on time, and then pay down your debts. Also, if you’re trying to improve your score and you’re carrying any debt at all, it’s probably not a good idea to close any of your credit cards or lines of credit.

Credit Scoring Myths
The biggest myth that goes around about credit scores is that your score will be helped by closing old credit cards or having your credit limits reduced. This actually can hurt your score if you’re carrying any debt because it alters the “how much you owe” element of your credit score, which is based on a comparison of your actual debt versus your credit limit. The closer you are to your credit limits on the whole, the worse off you are. So, if you have a $2,000 debt on a card with a $2,500 limit and another card with $0 debt with a $2,500 limit, you’re utilizing 40% of your credit limit. Not bad. But if you cancel that $0 debt card, you’re suddenly using 80% of your credit limit – not good.

Coping with a Credit Crisis
Many people tend to retreat into their shell when things get financially bad, but that usually just makes things worse. A much better approach is to handle it head-on. Look for ways to free up some cash by selling off things in your closet. Prioritize your payments so that you’re not going to lose your home or your car. Contact some of your lenders and discuss the crisis you’re going through – some lenders will put your debts into forbearance during a job loss or other such situations. Weston discusses credit counseling (and doesn’t give it much of a thumbs-up) and bankruptcy as final options after you’ve tried everything else.

Rebuilding Your Score after a Credit Disaster
Much like dealing with a bad situation, recovering from it also requires you to be proactive. Check your credit report regularly and make sure it’s correct with regards to your current situation. Resolve the bad spots still left on your report. Also, if you have the opportunity, make sure that you get positive things about yourself added to your report. If you have a line of credit that’s not being reported that’s in good shape, try to get that to appear on your report by contacting the company who is offering that line of credit.

Emergency! Fixing Your Credit Score Fast
It’s difficult to get changes made immediately to your report and your score. If you do try this route, you need proof of what you’re saying or else you’re just wasting both your time and their time. A much more reliable route is to focus on the positive change you can make over a month or two by doing things such as paying off as much of your credit cards as possible (improving your ratio, as described above), using your credit cards very lightly, and trying to get positive things added to your credit report.

Insurance and Your Credit Score
Insurance companies use your credit score as an element of determining how much to charge you for insurance, so one of the best things you can do to improve your insurance rates is to improve your credit score. Of course, that’s not the only factor in determining your insurance rates, as things like your deductible amount also influence how much you pay.

Can Bad Credit Cost You a Job?
Employers often use credit scores to help winnow down applicants for an open position, particularly in a poor job market. If an open position has a deluge of reasonably qualified applicants, employers are going to look for reliable and trustworthy people, and like it or not, credit scores are often used as a quick thumbnail to check how reliable and trustworthy people are.

Keeping Your Score Healthy
Pay your bills. Pay down your debts. Have an emergency fund. Have adequate insurance (for example, life insurance for you and your spouse). These things all go a long way toward ensuring that your credit score is healthy for the long haul.

Is Your Credit Score Worth Reading?
Weston’s book focuses in on credit scores like a laser beam. If you ever had any interest in understanding how credit scores work and how they affect your life in more detail, this is absolutely the book to pick up.

Keep in mind, though, that this book hits a home run with the topic at hand, but doesn’t really address much else in terms of personal finance (outside of issues directly connected to the topic), so if you’re looking for more of a full picture, you might want to pick up a different book and look at this one as a supplement.

Check out additional reviews and notes of Your Credit Score on Amazon.com.

The post Review: Your Credit Score appeared first on The Simple Dollar.

I don’t understand why I need credit at all. Credit just gets you into debt and you wind up paying interest to other companies. What’s the point of throwing my money away like that?

Samantha asks a really good question here – and in some respects, she’s spot on. Poor use of credit is a big net loss for people. Because of the interest payments, you lose far more than you gain.

However, there are a lot of upsides to healthy use of credit.

First, a good credit rating helps your insurance rates. Insurance companies use your credit rating as a factor in determining what sort of rate to offer you on homeowners insurance, auto insurance, and life insurance. The higher your credit rating – meaning the more reliable you are at obtaining credit, then paying the bills faithfully – the better you seem as a risk, because people with high credit are statistically more likely to be safe drivers, safe homeowners, and likely to live longer.

Second, a good credit rating helps you with employment options. Similarly, many employers run credit checks on potential employees and, again, are much more likely to hire people with strong credit because it’s a clear indication that they’re reliable.

Third, credit often offers great buyer protection. If you use credit to make a purchase – particularly credit cards – the cards offer a lot of protection against fraud, identity theft, and other serious problems. If you pay cash, you miss out on those protections.

Fourth, a good credit rating helps you with renting. Even if you’ve made the decision to entirely avoid credit and rent until you can write a check for a home, your credit still affects your housing because many landlords – particularly those in charge of higher-end housing – will check the credit ratings of potential renters and will reject (or charge a much higher deposit) people who have no credit or poor credit.

In the end, it pays to have a strong positive credit rating. This does not imply, however, that it’s good to be in debt. You can have a great credit rating without digging yourself into debt. Here’s how.

First, get a credit card. If you have no credit history, you can usually get one with a low credit limit pretty easily. Look for one that has some sort of bonus connected to a retailer you use. If you shop at Target, get the Target Visa. If you shop at Amazon, get the Amazon Visa. If you get all your gas at BP, get the BP card.

Second, use the credit card for routine purchases. If you stop for gas, use your card and pay at the pump. If you’re at the store buying some items you need and would buy normally, use your card for that routine purchase. Other than these events, forget about the card entirely.

Then pay off your bill in full each month. If you stick to just using the card for routine purchases, you should have no problem whatsoever paying off your entire bill each month. Thus, you never incur debt that generates interest.

Instead, you get all the benefits of a positive credit rating – lower interest rates, better job application success, buyer protection on some purchases, and better housing opportunities – plus the benefits of the rewards of a good credit card – discounts at the retailers you already use. Together, these add up to a net positive, and if you’re disciplined enough to keep yourself from using the credit card for purchases you would not make without it, it’s nothing but a positive.

Here’s another way to think about it. Your credit rating is simply the method many businesses use to figure out if you’re reliable or trustworthy. If you are, they see you as having more value – you’re likely to be a better employee, you’re less likely to have insurance claims, and you’re more likely to pay your rent. By avoiding credit, you’re sending no signal at all to them – and thus they’re unable to decide if you’re reliable or not and thus won’t offer you the best rates.

Positive credit helps you in many ways and saves you money consistently. Don’t avoid all credit because of a fear of debt – responsible people can enjoy all the benefits of good credit without the drawbacks of bad debt.

Good luck.

The post Personal Finance 101: Why Do I Need Credit At All? appeared first on The Simple Dollar.

I’m currently a freshman at Washington University. I know I need to build up some good credit for the future, when I have to get a car loan and such, but I don’t know where to start. I’m worried about getting way into debt like some people I know.

Building a positive credit rating was one of the things I did right during my college and early professional years, and it’s paid off time and time again with low insurance rates and good terms on student loans, car loans, and our mortgage.

So how do you go about building a positive credit history if you have never applied for any form of credit?

Knowledge Is Power
The first step is to know exactly what you’re trying to build. Your credit history is merely a summary of all of the places from which you have borrowed money over the past seven to ten years – a credit report is just a detailed listing of this information. There are three companies (credit bureaus) that are in the business of collecting the information for credit reports – Experian, Equifax, and TransUnion.

A credit score is a number calculated based on the information in your credit report. The most common type of credit score is the FICO score. While the exact formula for calculating your FICO score isn’t publicly available, MyFico does provide some basic information about how your score is calculated:

FICO scores are calculated based on your rating in five general categories:
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%

In other words, they provide a template for building good credit – all you have to do is take care of each of those areas.

Step 1: New Credit
The first thing you need to do is actually get some credit. The easiest way for most young people to get is to apply for a credit card – but just a single card.

Depending on the conditions of the credit market (and as I write this in September 2008, the credit market is tight), you might not be able to easily get an unsecured credit card. If that’s the case, save up your nickels and dimes and get a secured credit card. Get one issued by a major credit card issuer – Citi, Chase, American Express, or Bank of America – and make sure that they report this card to the credit reporting agencies. Contact these organizations directly – don’t use any sort of “middle man.” Here’s more information about secured cards, which you should definitely read before getting one.

In fact, getting a secured credit card is a brilliant way for anyone to start building credit, no matter what the conditions. A secured credit card is one where you “secure” the card by paying a specific amount in advance – often $500. Then, whenever you use the card, the bill is effectively automatically paid by the amount you’ve paid in advance. When you receive a bill, you’re actually just replenishing that amount you paid in advance to secure the card.

A secured card has several advantages. First, because you’ve secured it with money, almost anyone can get a secured card at any time. Second, because you’ve already effectively paid the bill, you can’t get into debt trouble with a secured card. Third, because it is a credit card, it helps establish your credit history.

As I mentioned before, you should only open one line of credit at a time, and wait a while before opening a new one. A line of credit includes any reason why you may want to borrow money, from a credit card to a payment plan, from a student loan to a car loan. If you open up several lines in a short period of time, you appear to be a risk to people who would loan you money – in terms of your credit score, the “new credit” portion will go down. So just stick to one line on occasion.

One effective way for a college student to manage this is to get a card exclusively for buying textbooks. Use this card at Amazon or at your school’s bookstore and then put it up until the next time you need to buy books.

You can also begin to build up credit through your student loans, if you’re the primary borrower. You’ll likely need a co-signer in order to get the loan, but that student loan will count on your credit report, establishing your credit history.

Step 2: Payment History
Once you have this line of credit, though, keep the payments up. Don’t be late on a single payment.

Each month, the credit bureaus request the status of your payments from your creditors. Are your payments up to date – or at least less than thirty days past due? If everything is good, it helps your credit score. However, if negative reports start to come through – more than thirty days late, more than sixty days late, in default, and so on – then your credit score will start to take a serious hit and those negative marks will show up on your credit report.

Don’t let it happen. Keep those bills paid.

Step 3: Amounts Owed
It’s never a good idea to charge up those credit cards. You should always strive to keep your actual balance at 30% or less of your credit limit, as that keeps the amount owed under reasonable control.

If you have a secured credit card or a student loan, this part is pretty much automatic, as your borrowed amount is effectively fixed and known. It’s really only a concern if you have something with which you can borrow a varied amount, like an unsecured credit card or a home equity line of credit.

The best method of all is quite simple: never use credit for an impulse buy. If you live by that, you’ll be in much better shape than many people.

Step 4: Length of Credit History
If you follow the first three steps and keep them up over a period of years, your credit will be in good shape. Even better, the longer you keep it up, the better your credit score will be (up to roughly seven years).

What does that mean? Pay the bills, steadily but surely, and keep that first credit card, even if you decide to stop using it, because it establishes the length of your credit history.

I still have my first credit card, tucked away. It has had a zero balance for years, but when I was getting my mortgage (which was manually underwritten), the underwriter actually pointed out that it was a good sign that I was reliable with available credit (even though the balance had been up and down quite a bit in the years preceding our mortgage).

It has a similar positive effect on your score. Keep up the good work – and you’ll be rewarded for it.

Step 5: Types of Credit Used
Another minor factor is the types of credit you have. If your entire credit history is based on unsecured credit cards, for example, you’ll get a small negative mark on your score simply because all of your credit is revolving.

How can you alleviate that? Balance credit cards with other forms of debt, such as student loans or mortgages. Since it’s often much easier to get a student loan, a car loan, or a mortgage if you have already-existing positive credit, getting such a loan and steadily making payments on that as well will further boost your credit.

Remember, though, that the types of credit used is a very minor factor compared to the other pieces of the puzzle. Focus on just getting credit first and keeping it paid. That will be enough to get you in position for things like car loans or student loans, which will provide diversity in the types of credit you have.

Checklist
If I were starting over today in building my credit, here’s what I would do.

1. Get a credit card, preferably unsecured. If I couldn’t get an unsecured one, I’d contact a major bank and attempt to get a secured one.
2. I’d lock the card up in a safe place and only use it for a small number of purchases – it wouldn’t be in my wallet so I wouldn’t be tempted to spend it without reason. I’d also keep that first credit card, even if I zeroed out the balance and stopped using it.
3. I’d pay every bill as it came in.
4. After some time, when it became reasonable in the course of my life, I’d apply for a loan of some sort – a student loan, a car loan, or a housing loan.
5. I’d check my credit report regularly directly from the FTC, not through a middleman operation like freecreditreport.com. If anything incorrect showed up, I’d do the follow up work, contact the credit bureau in question, and get the issue resolved.

Follow those steps and you’ll be fine. Your insurance rates will be lower and when it comes time for big loans, like your mortgage, you’ll be eligible for good rates.

The post How to Safely Build Your Credit History appeared first on The Simple Dollar.

What’s a credit report?
A credit report is a record of an individual’s history of borrowing and repaying. This includes information about lines of credit, late payments, bankruptcies, credit defaults, and so on.

In the United States, three companies, called credit bureaus, are in the business of maintaining credit reports on each person who obtains any form of credit or debt. These three companies – Experian, Equifax, and TransUnion – effectively operate in the same fashion. They have arrangements with almost every major financial institution to report to them the status of their consumer debts. These companies then collect this information and create reports on individuals, then sell these reports to other companies who are interested in issuing credit or loans.

So, for example, let’s say you have two student loans and no other debt. The student loan companies have shared the status of your loan with the three credit bureaus (this is standard procedure, part of the agreement you signed), and the three bureaus have assembled reports on you containing information about these debts. Then, you apply for a credit card. The credit card holder contacts one (or more) of these bureaus and retrieves your report, showing you have two student loans, how much you owe on each, and whether you’ve kept up with your payments. They’ll use this information to decide whether to issue you that credit card.

Because this information is shared by … well, almost everyone, it’s financially worthwhile to keep your nose clean. All sorts of companies rely on your credit report to determine what to charge you and how big of a risk you are, from insurance to mortgage and car lenders. If you make late payments, sign up for mountains of credit cards, or default on loans, you’re seen as a pretty big risk, and you’re going to be charged more for many services because of it.

Why are there three separate bureaus if they operate in almost the same exact fashion? For starters, the three companies collect and report information largely independently of each other (there is limited data sharing, but not full). This is actually useful for you, the consumer, because if one company makes a mistake, then the other two companies can be used as supporting evidence of an error. If just one company existed, it would be somewhat harder to identify and prove errors.

What’s a credit score?
A credit score is just a single number that summarizes most or all of the information in your credit report. Think of it as an “executive summary” of your credit report – all of the information boiled down to just one number.

How is that number calculated? Each of the credit bureaus uses a slight variation on the same formula, but that formula isn’t publicly known. From Equifax:

Why is my Equifax score different from my Experian and TransUnion credit scores?
There are several reasons for variations in your credit score among the different credit reporting agencies and even among different credit grantors:
+ First, your credit score from each credit reporting agency is based on the information in your credit file at the credit reporting agency, and the credit history information each credit reporting agency has about you can differ. This can result in your score at the other credit reporting agencies being different from your Equifax score.
+ Second, there is a slightly different FICO credit scoring model at each of the three nationwide credit reporting agencies due to the differences in credit history information they each have about you. Remember: your FICO score at a given credit reporting agency is only based on the credit data that credit reporting agency has about you.
+ Third, although the FICO® credit scoring model is the score used most often by lenders, each of the credit reporting agencies, including Equifax, has their own scoring models. These other models may evaluate your credit file differently from the FICO® model and, in some cases a higher score may mean more risk, not less risk as with FICO® scores.

The “FICO” mentioned above refers to the Fair Isaac Corporation, a company that developed a fairly standard method for calculating a credit score. Their methods are in standard use by all three bureaus (with slight variations, as mentioned above) and by all of the other lenders and credit-issuing companies that use these reports.

Surely we must know something about how it’s calculated! Fair Isaac has a very consumer-friendly site about FICO scores called MyFICO, which offers these basic guidelines:

FICO scores are calculated based on your rating in five general categories: Components of the FICO score
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%

This provides a general recipe of things you can do to keep your credit score high (and your credit report clean).

What’s a “hard pull” and a “soft pull”?
The terms “hard pull” and “soft pull” are very generic terms that describe different features offered by the three credit bureaus. “Hard pull” and “soft pull” each refer to a specific kind of credit report check offered by the bureaus. In general, the big difference is that hard pulls are ones where you’ve granted permission, they indicate that you’re actively seeking credit, they show up on your credit report for everyone to see, and they tend to have a slight negative impact on your credit score. Soft pulls, on the other hand, don’t require your permission, don’t indicate anything about your interest in seeking credit, only show up on the credit report you see, and have no impact on your credit score.

Let’s look at the offerings from each company.

TransUnion refers to “hard inquiries” and “soft inquiries” that generally match the definitions described above. Here’s what they have to say:

What are inquiries?
An inquiry is a record of someone checking your credit information. Inquiries come in two distinct categories: “hard inquiries” that occur when a business views your credit report for the purpose of an application and “soft inquiries” that occur when your credit is checked for other reasons. If you apply for a new credit card, a hard inquiry record will appear on your credit report and may impact your credit. When you check your own credit report, or when it is checked for a pre-approved marketing purpose, it is considered a soft inquiry and will not harm your credit score.

Experian does much the same thing:

Requests by others to view your credit history will show you who has received information from your credit report and who was given your name during the recent past, as allowed by law. According to the Fair Credit Reporting Act, credit grantors with a permissible purpose may inquire about your credit information without your prior consent. This section includes the date of the inquiry and how long the inquiry will remain on your report.

On your personal credit report ordered directly from Experian, information about those who inquired for the purposes of extending a pre-approved credit offer are included for your information. These inquiries are not revealed to creditors and do not impact your ability to obtain credit.

Equifax makes it a bit more confusing:

+ Inquiries are a record of companies and others who obtained a copy of your Equifax credit file. The Fair Credit Reporting Act (FCRA) requires that Equifax disclose to you who requested copies of your credit file. Depending on the reason your credit file was accessed, Equifax generally retains these for one to two years.
+ Some types of inquires you might see on your Equifax Credit Report™ are not reported to others or used in credit score calculations. These include:
– PRM Inquiry. A promotional inquiry in which your name and address were provided to a person who made you a firm offer of credit or insurance, such as a pre-approved credit card offer. These inquiries generally remain on your credit file for 12 months.
– AM or AR Inquiry. An Account Monitoring or Account Review inquiry in which one of your creditors performs a periodic review of your credit file in connection with reviewing your account. These inquiries generally remain on your credit file for 12 months.
– Equifax, ID, ACIS, or UPDATE Inquiry. Internal inquiries that indicate Equifax’s activity in response to your contact with us, for either a copy of your credit report or a request for research. These inquiries will generally remain on your file for 24 months.

To summarize, all three companies allow others to access your report and also record those who access it. A good rule of thumb is whenever you give someone permission to look at your credit report, it will be on your credit report for everyone to see and will give you a slight short-term negative on your credit score. Those are generally referred to as “hard pulls” – anything else (where you didn’t give permission) is a “soft pull” and won’t affect your credit score.

Recently, many banks have begun doing a “hard pull” on your credit report when you sign up for a new savings or checking account (asking for permission in the initial agreement). Not all banks do this (yet), but a sizeable number do.

Another tip: if you’re shopping around for a mortgage or an auto loan, don’t worry about hard pulls. According to Trans Union, the FICO model accounts for this:

You can still shop around for a loan; multiple inquiries for the same purpose in a short amount of time are commonly grouped into one less harmful inquiry session. Inquiries are also helpful for consumers because they can notify you of a potential identity thief applying for accounts in your name.

In general, you shouldn’t worry too much about the occasional hard pull, especially if you don’t have any major loans coming up. The “cost” of a hard pull is slight on your credit score, often not nearly enough to impact anything. You should only worry if you’re applying for a bunch of different kinds of credit very quickly or if you are looking at a major loan in the near future.

What can I do to maximize my credit score?
There are several very basic things you can do to keep your credit high, and the tips come from the components of the FICO score mentioned above:

Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%

In other words…

Pay your bills on time. Don’t get behind on any of your bills. Pay them on time and make sure that at least the minimum payment is made.

Keep your debts low. Don’t push your credit cards to the maximum. Instead, keep the balances as low as you can.

Keep your oldest credit cards. If you cancel your oldest card, you reduce the length of your credit history. Keep it around with a zero balance in a safe place.

Don’t apply for new credit cards on a whim. For example, if you’re at a store and you’re being offered the store credit card, just say no, especially if you’re going to be using your credit report for something else in the near future.

Having no debt but credit card debt looks bad, too. If you have a bunch of credit cards and no other debts, you look potentially risky. If you are debt free, keep the credit card count low.

The post Personal Finance 101: Credit Reports, Credit Scores, and Hard and Soft Pulls appeared first on The Simple Dollar.

I’m writing on behalf of a friend who just graduated from college two years ago and is trying to get on her financial feet. When she was young her mother used her identity several times to get loans and open credit cards. Her mother is a homeless nomad who has not taken responsibility for any of these accounts and has ruined my friend’s credit. She doesn’t even know how many loans and credit cards were obtained in her name, if any are paid of and to what degree, etc. She tries to run her credit report but can’t because she can’t answer the basic questions about her last address or last loan because it’s all her mother’s information.

Her mother has not used her identity for financial gain, that she knows of, in about three years. My friend is trying to be responsible. She has a good job, no debt of her own (just what her mother accrued!), and is trying to live more frugally. She’s been turned down several times for a credit card and obviously, can’t get any other sort of loan. Is there any way to get her mother’s mistakes off her report? It seems like identity theft to me, but I’m not sure how to advise her. Could a lawyer help her clear her report? It doesn’t sound like her mother will be able to pay for any outstanding charges, and I don’t know if suing her would do much good. Since many of these accounts were opened when my friend was under 18, I just can’t believe that she’d be held resposible for all of it. It’s just not fair, and I feel awful for her. Thanks in advance for your help.

Wow, that’s a mess.

First of all, reading stories like these really brings to light how lucky and blessed I was to have two incredibly wonderful parents. If you have a parent out there that loves you, even if your relationship is strained, read that story above one more time and think about giving your folks a phone call. I know I did – I just called my mother and had a good chat with her.

Now, how can this problem be addressed?

The first step I would take would be to contact each credit agency directly and ask them for suggested directions. Explain to them the whole situation, and work with them to work backwards through each of the creditors that have notes on the report.

This is going to be a long process and it will involve a lot of time on the phone. Be prepared for some serious time investment spread out over a long period. Expect to have to escalate this situation regularly, as the person on the phone when you first call probably won’t be equipped to handle this situation. Expect to get some rejections – keep trying and hammering away and escalating.

Second, get some form of credit monitoring service. Once the reports are straightened out, some sort of credit monitoring service needs to be put in place in case any of this happens again.

Third, consider changing your Social Security number. This can be done and is often warranted in cases of harassment – and I’ve got to think (though I don’t know for sure) that this constitutes harassment. Since the person in question is young, they have plenty of time to build up new credit.

Fourth, get involved with political movements pushing for individual credit reform. A big part of this problem comes from the fact that it’s actually quite easy to pretend to be someone else and get easy credit. There needs to be more evidence that credit is being granted to the actual person who the request appears to be coming from, not a paper entity. Identity theft is a real problem and it’s growing.

Finally, don’t give up hope. You didn’t do anything wrong, and anyone who studies your situation will be able to figure that out. Just be patient and realize that this is a sufficiently complex and knotty problem that will take some time to resolve – it won’t all be fixed in a day.

Good luck!

Do readers have further suggestions for this person?

The post Identity Theft and Family appeared first on The Simple Dollar.

The “Facts”?

Many people who disagree with this advice point out that one of the elements of a person’s credit score is the debt-to-credit ratio. In other words, the more cards you have, the higher your total credit limit is, and thus your debt-to-credit ratio is better.

From that perspective alone, then it is a bad idea to cancel your cards. But that pulls just one fact out of a big handful of facts. Let’s look at some more.

No one knows for sure how FICO (or other credit scores) work. As I stated in an earlier writeup about credit reports, FICO’s exact formula is a trade secret. They reveal “tips” on how to improve your score and have offered this as general guidance on what makes up your score:

35%,- punctuality of payment in the past (only includes payments later than 30 days past due)
30% – the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
15% – length of credit history
10% – types of credit used (installment, revolving, consumer finance)
10% – recent search for credit and/or amount of credit obtained recently

What do each of those mean? It’s not clear – the best we can do is try to interpret them.

The types of credit used is a factor. If you have a lot of credit cards, you have a lot of sources of revolving credit, the worst kind. That hurts the portion of your score that evaluates the types of credit you’re holding.

Anecdotally, manual underwriters for home loans do not like to see lots of credit cards. When I applied for my home loan, I had two open credit cards – my oldest one and a general use one. The manual underwriter flat-out told me that such a status was a good thing because it showed consumer willpower and less risk that I’d be opening a lot of lines of credit. We ended up getting a very good rate on our home loan.

The more open credit cards you have, the greater the chance of identity theft. Identity theft is a serious concern, and the more open credit card numbers you have floating around at banks, the more likely you are to get bitten by an accident at a bank or unethical use of business records. While this is a small risk, if it does happen, it can be devastating.

A lot of available credit is a psychological temptation. It becomes much easier to just push the plastic and buy something if you have $15,000 in available credit on your cards. If you find it very easy to put purchases on your credit card and worry about the bills later, this is a real concern.

What Does This All Mean?

In a nutshell, it means that there is no definitive and clear answer about what to do. Since the exact formula for credit scores isn’t known, we have to make some guesses about what to do to maximize our credit scores while, at the same time, balancing our other risks.

If your primary goal is to raise your credit score by a few points, you’re probably better off leaving your cards alone for the time being. It keeps your debt-to-credit ratio in a good place, for starters.

However, if you’re a compulsive spender or you’re looking at getting a manually underwritten home loan soon, you should get rid of the extra cards, as other aspects present a greater risk to you.

By default, the best thing you can do is to only have a few cards to begin with and, most importantly, don’t put a lot of money on the cards. That way, your credit-to-debt ratio is good and you don’t have a lot of sources of revolving credit and you don’t have a lot of credit numbers sitting out there, either. Because of that, when people begin paying off their cards and getting into good financial shape, I believe it makes sense to gradually cancel your unused cards.

The post Should You Cancel Your Unused Credit Cards or Not? appeared first on The Simple Dollar.

The problem is that there’s no obviously clear way to acquire this information. Credit reports are managed by three credit bureaus (Equifax, Experian, and TransUnion), and these companies make money by selling your credit report and your credit score to lenders. They also hope to make money by selling this information to you, too.

Even worse, there are sharks in the water out there. Programs like freecreditreport.com seek to trick you into signing up for subscriptions to stuff you likely will never use in exchange for your credit report.

Here are the best ways I’ve found to find out your credit report and credit score. Please, if you know of better sources than these, leave a note in the comments.

Getting Your Credit Report

Your credit report is just a listing of all of the accounts and debts that you have and whether you’ve been paying them on time. When you go to get a loan, lenders will use this to see whether or not you’re a reliable person who can be counted on to repay debts. The more reliable you look, the better the rates.

You can get your credit report for free, no questions asked, at annualcreditreport.com. This is a service offered by the FTC that allows you one free download of your credit report each year from each agency (Equifax, Experian, and TransUnion). Since most of the time the three reports are the same, you can effectively grab your credit report for free every four months.

Do not use other services to get your report – you’ll end up being forced to sign up for services and pay fees that you don’t have to pay. The worst offender here is the heavily advertised freecreditreport.com.

Once you have your report, you should read it very carefully to make sure it’s accurate. If you find something that isn’t, start calling. Get ahold of both the credit bureau and the organization that put the false info on your credit report. False information on your credit report does nothing but hurt you and you should seek to get rid of it as soon as possible.

Getting Your Credit Score

Unfortunately, a service like annualcreditreport.com doesn’t exist for one’s credit score. The exact method for calculating credit scores are actually considered to be a trade secret, held by the Fair Isaac Corporation. That’s why credit scores in the United States are often called FICO scores. Thus, you can find out all of the information that makes up your score, but you can’t find the score itself.

The cheapest option is to not find out your specific score. If you’ve checked your credit reports at annualcreditreport.com, you know what your credit report looks like. You can use that information, along with knowledge of your personal finances, and use a FICO score estimator to get a pretty strong estimate of your credit score. I tried this tool and found that it predicted a small range of potential scores – my real score was in fact within that range.

For some, though, an exact number is necessary, and you’ll likely have to pay for that. When I was in the process of shopping for my house loan, I looked at several services and finally used myFICO to get my credit score. They give you several options – the best one, for the long haul, is to get your FICO score from the credit bureau with the worst credit report (you checked them at annualcreditreport.com, right?) for a one time fee of $16. That’s the method I used to find my “worst” score – and it wasn’t bad at all.

There are other options (like getting your FICO score from all three bureaus at once at myFICO, or going to each credit bureau individually), but they’re more expensive. No matter what, though, you should definitely avoid any subscription services – credit monitoring is nice, but you can get the same effect for free by going to annualcreditreport.com regularly.

Now That I Have This Info…

Once you’ve downloaded your credit report, ensured that it’s clean, and figured out your credit score, you can use that information to get realistic assessments of the type of loans you can get. This tool provides a good estimate of the benefits of a strong credit score. With this information, you can make up your own mind about whether you can afford a big purchase right now – or if you need to focus on improving your credit right now.

Remember the biggest rule of thumb: don’t ever sign up for a recurring service unless you’re 100% sure you want it. For credit scores and credit reports, given the strong free and one-time services available, I don’t believe there’s any reason for the average person to sign up for credit monitoring subscriptions. Keep that cash in your pocket instead.

The post How to Find One’s Credit Report and Credit Score Inexpensively and Safely appeared first on The Simple Dollar.

Obviously, a wallet full of credit cards can be a problem: you have many more opportunities for identity theft and, often, with so many credit cards, your total line of credit may be high enough that it’s actually hurting your credit report. This doesn’t even cover the more aesthetic issues: extra paper management, an unreasonably fat wallet, etc.

So, if you have a mountain of cards, what should you do to trim them down? Here’s my recommendation for anyone dealing with a big pile of the cards.

First, identify one to be your primary spending card. There is no universal “best card” for everyone. You should look at your spending very carefully and choose one that best matches your habits. For us, we use the Citi Driver’s Edge card because we both commute for work and we earn a penny per mile driven in the form of a rebate on our next car purchase. It works well for us, but not necessarily as well for others. I actually have a second primary use card – we keep an Amazon card because we do a lot of our shopping there and it nets us 3% back on all purchases there, so we use the Amazon card exclusively for Amazon and the Driver’s Edge card for everything else.

Next, determine which card you’ve had for the longest period of time. Which is your oldest card? That card is the one that has the longest credit history, which is important for your credit report. For me, my oldest card is one that I got as a freshman in college. It has an atrocious “bonus” program associated to it (1/4% return in the form of “points”), but it was the first one I had and thus it’s been on my credit report for more than a decade, establishing that I’ve had positive credit for a long while.

Also, stop carrying this big, fat wallet full of cards with you. I only carry my two primary use cards with me. My oldest card is in my safe. All of the other cards I’ve ever had have been cancelled. This means my wallet is pretty thin, as I basically carry just a very small number of club and buyer rewards cards (library, Sam’s Club, Borders, Best Buy, etc.).

Then, start zero-balancing and cancelling all of your other cards over time. You can pretty safely cancel all of the rest of your cards that already have a zero balance. With the others, stop using them and start paying them off, making minimum payments on all of them and extra payments on whichever one charges the highest interest rate. When that one’s done, cancel it and start making extra payments on the next one and so on until they’re all gone, then cancel them.

What you’ll end up with is a much thinner wallet and a credit report in very healthy shape. The length of your credit history will remain unchanged and the ratio of your credit limit to your income will actually be in better shape than before.

The post I Have A Wallet Full Of Credit Cards – Which Ones Should I Keep? appeared first on The Simple Dollar.

I am following your blog daily and I found two conflicting ideas you suggest that I have a hard time reconciling them:

“Another tip is that by canceling credit cards, you’re actually hurting yourself in two ways. First, you’re reducing the total available revolving credit that you have without reducing the amount of current debt you have, thus raising your credit ratio. Second, by eliminating lines of credit, you’re shortening your credit history. Simply put, if you’ve already got a credit card and paid it off, don’t cancel it; put it away somewhere safe.”

VS.

“Keep the total amount of your credit cards’ available credit low”

So, if I cancel a card and/or if I have several cards – it’s bad BUT if I have several cards the combined credit limit reduces my debt ratio.

What’s the right way then?

These things are only in conflict if you carry a significant balance on your credit cards. Here’s what the game plan should be if you want to get your credit in good shape.

First, pay off all of your balances. Get those cards paid off, whatever it takes. Credit card debt is not healthy debt – the sooner you get rid of it, the better.

Once you’re on this level playing field, cancel some of your cards. I recommend keeping your oldest card and the one with the best bonus program and eliminating all of the rest, including the store-based cards. Why? A large total credit limit can be detrimental because it indicates to lenders that you have the potential to very quickly go deeply into credit card debt.

Once you’re there, use the bonus card, but try to keep the monthly balance under 20% of your total credit limit. For example, if the total limit on your remaining cards is $20,000, don’t carry more than $4,000 on the card if at all possible.

Doing this will keep the total amount of available credit low while not hurting you for eliminating lines of credit and altering your debt-to-credit ratio. The end result? A much better credit rating.

The post Continuing The Credit Building Discussion: Cancel Cards Or Not? appeared first on The Simple Dollar.

I’m 18, and recently applied for a credit card at Citibank. They rejected me on the basis that I have no credit history. I’ve had a savings account at a local bank for nearly my whole life with all of my money in it, and I’ve started budgeting my money for when I go to college in September. So I know how to handle money, and I know all about interest rates and avoiding debt (partly thanks to your blog). Citibank has some of the best credit card deals I could find. But how am I supposed to build credit if I can’t get a credit card in the first place?

Mark actually has several options for building positive credit without his own unsecured credit card. Here are some ways that Mark can build credit in this situation.

Have his parents add his name to their card. They don’t even have to give him a card, just add his identity as an authorized user on their own card. This will make their card account appear on his credit report and thus he’ll get the benefit of their good management of their card.

Get a secured credit card. A secured credit card is one where you’ve already paid a certain amount before you get it – say, $250 or $500. Then, each time you use the card, it’s immediately paid out of that money and then you are billed for that amount to replenish the balance. This builds credit, and when you cancel the card, you get the money back.

Make a moderate purchase on a store payment plan. For example, you could purchase a piece of furniture at a furniture store or an electronic item at an electronics store. Sign up for their payment plan; it’s basically a form of credit. If you have a purchase you’re planning in the near future and already have the cash to pay for it, this is a route worth considering.

Get your student loans. If you’re 18 and planning on going to college, student loans are likely in your future. Your parents may have to cosign on them, but they’ll be in your name and be a very good source of credit.

All of these options will put you in good shape for the future. One tip: when you start to build credit, you will be inundated with all kinds of offers. Forget them and shred them. If someone sends you an offer in the mail, there’s likely a better one out there that isn’t wasting marketing money on direct mail campaigns.

The post Personal Finance 101: Getting Credit Without A Credit Card appeared first on The Simple Dollar.

I just read your article: WHAT’S IN MY WALLET regarding credit cards. You mentioned that you pay your entire balance weekly. Would this work if you were trying to build credit also? How does building up credit work?

Good question. The technique of paying off your card every week certainly works for building up credit. Let’s start at the beginning, though.

The idea of building up credit refers generally to making a series of financial choices that results in positive growth of one’s credit score. So, in order to do that, one needs to understand the elements of the credit score. I discussed this in detail before, but here’s a refresher:

FICO scores are calculated based on your rating in five general categories: Components of the FICO score
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%

So how can one build up credit? By looking for improvements in each area:

Payment history Make sure always that the minimum payment is paid before the due date on any bill. You can do this however you wish, but whenever you receive a bill with a minimum payment, make sure you pay that much before the bill is due.

Amounts owed The actual dollar amount isn’t as important as the percentage of your total credit limit that is used on your last set of statements; the lower the percentage, the better. The way to keep this part low is to simply avoid carrying large balances on a card.

Length of credit history Your credit history generally starts the first time you acquire a credit card (or other source of credit). This is why it’s generally a bad idea to cancel your oldest card.

New credit Whenever you first apply for a source of credit, it provides a negative for your card. This is why it’s a bad idea to apply for several cards at once – your better solution is to apply for just one. Never apply for a credit card on a whim.

Types of credit Basically, if you have a lot of revolving credit out there (say, more than 30% of your annual salary), it will hurt your credit report. Keep the total amount of your credit cards’ available credit low – the best way to do this is, again, stick with just one or two cards. Credit comapnies like to keep lifting your credit limit if you carry a balance on the card but pay it off faithfully, so if you have several cards, the limits could skyrocket and end up hurting you.

Here’s a recipe for building credit that works in all respects:

Apply for just one credit card. Spend the time to research a number of them by visiting the sites of various credit card companies (Citi, Chase, Bank of America, etc.). Find one card with a rate and a bonus program that seems to fit you and apply for it. Don’t worry about a low credit limit – that’s good.

Use it for only small purchases for a year. Each month, buy two or three small things on it that you could have otherwise paid in cash. Don’t use it to finance things you can’t afford.

Pay off the balance in full by the time the next payment is due. You can do this in pieces online if you wish, or all at once by check. Just avoid carrying a balance from month to month.

After six months, request a credit limit increase, but don’t go above 20% of your gross salary. If you’ve used the card and paid it back, they’ll usually be glad to bump it up.

If you follow those steps and avoid carrying a balance on your card, your credit will start to steadily improve. Stick with making small purchases (try to keep your balance at any time less than 20% of your credit limit) and keep paying them off. You’ll end up having pretty solid credit when you go to apply for things.

Good luck!

The post Personal Finance 101: Building Up Credit appeared first on The Simple Dollar.

First of all, from their FAQ:

Do you pull my credit if I apply for Electric Orange and the Overdraft Line of Credit?
Yes. As part of your application, ING DIRECT will obtain information about you from a consumer credit reporting agency (a “hard pull”) to confirm that you are eligible for Electric Orange.

So, indeed, the standard practice for people who sign up for an Electric Orange account is that they check your credit report with a hard pull. A “hard pull” generally means about a -5 on your credit score that lasts for about six months, then goes away. MyMoneyBlog has an extensive explanation of hard pulls versus soft pulls.

So where did the idea that ING did not pull one’s credit come from? The story that I have been able to piece together is that when ING first sent out press releases for the account, their official policy was to give everyone a $1,000 line of credit without a credit check. Most of this initial information was sent out in January 2007 and was posted on various banking sites that post press releases and such.

Sometime shortly thereafter, ING changed their policy for new accounts. I spoke to a customer service representative at ING who basically said that this change happened a few months ago, implying that it was likely in February or March 2007. The change stated that ING did have the option to run a credit check at their discretion. Now, the policy is as stated above.

Why did they make this change? I have read many, many reports of people signing up for Electric Orange, immediately “overdrafting” their checking account, and using the overdraft protection as another credit card, which was not the purpose of the account at all – it was intended as an occasional protection against overdrafts. I would strongly speculate that this behavior warranted the change in policy from ING.

What can we learn from this? First of all, know what you’re signing up for, no matter what. If you read a four month old press release on a product, sign up for it without reading the documentation, and find out that things have changed, you’ve made a bad move. Don’t rely on second-hand information ever – investigate for yourself. Blogs like these are meant to get you thinking and point you in the right direction, but you have to do the investigation yourself.

Second, you need to ask yourself if a credit check like this is an issue for you. The credit protection offered by this account is exactly what I want. I’ve overdrafted once in my life and it was due to a mathematical error – but it ended up costing me almost $100 to deal with. With Electric Orange, it wouldn’t cost me a thing other than a few cents in interest. Plus, the account balance itself earns a 4.00% APY. My credit is stellar, so I’m not bothered by the credit check, but if your credit is poor or you’re sweating every single point on your score, this could be an issue for you.

The post Investigating The Electric Orange Credit Check Situation appeared first on The Simple Dollar.

My boyfriend was recently denied financing on a used upright piano because of poor credit. He actually has enough cash saved to buy it outright, but the fact that he couldn’t receive financing was a wake-up call.

Neither of us had checked our credit reports in about two years, so we both ran them through the government’s free program. His score is 611 and mine is 718. So, while I’m doing OK and already know what I need to do to get a higher score (namely just continue to pay down my credit card as quickly as possible), he’s in a trickier position. The key problem is that he’s never had a credit card and just doesn’t have much credit history; he was trying to be smart and not get caught up in credit card debt. He only has one late payment noted on his account and it’s from when he was 18 (he’s 26 now). I recommended that he open an account right away, use it to buy a few things every month, and then pay it off each month. He has a car payment and student loans which he pays on-time, but that’s about it.

Do you have any tips for improving his credit quickly? The two things he’s going to do now are: 1) Sign up for a credit card and pay it off each month; 2) Look into a couple things on the credit report that don’t seem quite right. I realize that it takes a while to build credit (I’ve had a credit card for 8 years, and it still says that one factor counting against me is a short credit history). It’s very likely that we’ll be getting married and looking to buy our own home in the next 5 years, and we want to do everything we can to set ourselves up for financial success.

First of all, his credit score is likely 611 mostly because of a lack of credit history. Most people begin to build their credit report – good or bad – during their late teens and early twenties largely with credit cards. Although he has some credit (the student loans and car payments), the lack of at least a small amount of revolving consumer debt (i.e., credit cards) has prevented him from having a higher score.

Now, about that late payment: if he made the error when he was 18 and he’s now 26, it should be very close to disappearing from his credit report, as late payments only stick around for seven years. If you pull out your full credit report (you did keep a copy, I hope), check and see when the exact date of the late payment ding was. When that’s more than seven years ago (right now, stuff in 2000 is starting to vanish from credit reports), it disappears from the credit report. If that’s truly the only negative mark on the report, his score should see some sort of bump after the late payment goes away.

So, what can he do to actively raise his score? The two suggestions you gave are both great ones (check out anything odd on his report and have him get his own credit card and use it regularly for small purchases). You didn’t really specify what the “odd” parts of the report are, but if you don’t know what something is on your credit report, you need to track it down and be sure. My wife and I went through this recently before we went in to get preapproved for our mortgage, and it was a good move.

About your credit score: Yours is 718. Keep doing what you’re doing now and you should be fine. Don’t cancel your oldest credit card, no matter what. If you keep the card paid faithfully and also don’t make other late payments on other bills, it’ll all work out just fine and your score will inch upward. Honestly, though, you don’t have much further to go before housing lenders will be 100% okay with your number.

Another thing that you both should do is really understand how your FICO score works and also know ten common mistakes to avoid when trying to raise your credit score. Both of those articles should offer some great additional advice to help you out. Good luck!

The post A Reader On The Cusp Of A Great Credit Rating appeared first on The Simple Dollar.

Anyone who has tried to get a loan in the last fifteen years or even anyone who has tuned into basic cable in the last year and a half is at least familiar with the basic idea of a credit score: it’s a number that lenders use to determine what interest rate to give you on your loans. But how does it really work? I’m going to discuss how credit reports work in the United States, but most of the general concepts apply to other countries.

So, what is a credit score? A credit score is a single number that represents how trustworthy you are from the perspective of someone who would lend you money. If you haven’t proven yourself trustworthy, your credit score is low; on the other hand, if you repeatedly show yourself trustworthy (by paying bills on time and such), your credit score will be high.

Who determines a credit score? In the United States, a small number of companies, called “credit reporting agencies,” are in the business of collecting information about you. They do this by exchanging information with companies that offer financial items, such as loans, credit cards, and so forth. The agencies generally care about three things: the money you’ve borrowed, the amount you owe, and whether you’ve been making your payments. They collect this information from everyone you are indebted to and create a picture of how trustworthy you are in terms of credit. In the United States, the three main companies engaged in this business are Experian, Equifax, and TransUnion.

Why? Think of it this way. Let’s say three people walked up to you and asked to borrow $5. You’ve known two of them for years: one is as trustworthy as can be, and the other one is the biggest backstabber and scoundrel you’ve ever known. The third, you’ve never met before. Who would you be more likely to lend money to? Obviously, I’d loan money to the person I trusted, then the person I didn’t know, then the scoundrel.

Now, let’s say you’re a bank and three people come in and ask for a loan. You’re going to want to have some way to determine who is the trustworthy person (who you would want to lend money to), the unknown person (who you would nervously loan money to), and the rogue (who you wouldn’t want to loan money to at all). This is the exact purpose of a credit score: it’s a number that says how trustworthy – or how much of a scoundrel – you are in terms of money.

What makes up a credit score? There are five main elements to the credit score in the United States. From MyFico:

FICO scores are calculated based on your rating in five general categories: Components of the FICO score
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10%
Types of credit used – 10%

What can I do to make my credit score better? The biggest thing you can do is pay down your debts, not open up new credit cards and such, and pay everything on time. Many people try all sorts of crazy things, but the truth is that most common moves people make to help their score are mistakes.

The post Personal Finance 101: What Is A Credit Score, And Why Is It Important? appeared first on The Simple Dollar.

On the post Deconstructing Dave Ramsey, Frank did a bit of extra research into Ramsey’s past:

Wikipedia has a nice summary:
“By enacting 26 U.S.C. S 469 (relating to limitations on deductions for passive activity losses and limitations on passive activity credits) to remove many tax shelters, especially for real estate investments, the Act significantly decreased the value of many such investments which had been held more for their tax-advantaged status than for their inherent profitability.”
http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986

Ramsey was hurt badly by the Tax Reform Act of 1986, but I neglected to fully explain why this had such a detrimental effect on him. Obviously, Ramsey held a lot of investments that had some major tax advantages before the Tax Reform Act but were simply a much worse investment after the act passed. This caused his bankers to question the risky loans Ramsey had taken out to build his portfolio and they demanded payment on a lot of loans at once – which forced Dave into bankruptcy and eventually led him to become the pundit that he is.

On the post The FICO Battle: Ten Common Tactical Mistakes When Dealing With The Credit Score Blues, Wendell wrote:

On what evidence do you base the idea that negotiating with creditors is better than bankruptcy? Negotiation works where you have capital to make a deal immediately; not for stretched consumers who have to accumulate the payments. High-cost negotiation services have popped up that are as bad or worse than bad credit counselors — and they depend on this sort of advise to thrive. The reality is that if your credit score is shot already and you can’t pay the debt off within a couple years, a bankruptcy will rebuild your credit faster.

The advice I offered in the post was to use FTC guidelines when selecting a credit counseling service. A reputable service (like the Consumer Credit Counseling Service) is going to be better for your credit than a service of questionable repute. Also, turning to a credit counseling service should not be the first step in seeking help with your debt; you should call your creditors and discuss various options with them; it’s usually much better for them to reduce your interest rate a bit than dealing with someone who might declare bankruptcy. Remember, bankruptcy stays on your credit history for ten years, while missed payments only last for seven.

Also, on the digg thread higlighting the FICO score post, iamnos had this to say:

Where I am right now, housing is a great investment. If I were to sell my house right now for market value, pay off the existing mortgage, subtract the mortgage payments and property tax I’ve paid since we moved in, I’d be about even. That’s right, that means over the last 6 years, overall, housing for my family, has cost me $0.

Had I not taken out a mortgage, and decided to rent for the last 6 years, I wouldn’t even be close to zero. Around here, a decent two bedroom apartment would have cost at least $800/month. I’d be down somewhere around $57,600, and that’s not including any interest.

For those of you quoting Ramsey, you might want to pay more attention, as he does not consider a mortgage to be debt. Why? Because its secured, and generally, is expected to appreciate in value. While he does mention that the deduction for the interest on a mortgage is not enough to counteract the mortgage itself, you’re still better off in today’s market to invest that money, even in low risk, low return investments, than to try and pay off your mortgage faster. If you’re drowning in debt, this may not be the best idea, but if your debt is very manageable, than your better off planning long term, rather than short term.

This somewhat ties together the “Dave Ramsey philosophy” and methods of getting a good credit score – or even why you should get a good credit score at all. The biggest reason for having a good credit score is to buy a house, and a home loan is one of the few arguably “good” kinds of debt, because that kind of debt is secured (thus it’s not sold at a frightening interest rate) and the asset you buy builds value over time. In general, I’m opposed to debt, but there is a lot of merit to a home loan.

On the post Money Magazine – February 2007, in response to a reference to inexpensive prices when traveling to South America, Jim Lippard had this to say:

I was just in Buenos Aires last week (and had great summer weather)–it’s not just the exchange rate, it’s that most travel-related expenses themselves are much less expensive in South America than in Europe. In particular, eating out in Buenos Aires is quite inexpensive for very high quality meals. And even if you stay in a top-of-the-line hotel and eat in restaurants in touristy areas, the prices are still significantly less than the European equivalents.

My family and I have been quietly planning an international vacation in a couple years and we’re leaning more towards South America by the day.

As always, thank you guys so much for reading and commenting on The Simple Dollar. Not only do I get a lot of value out of your thoughts, so do the thousands of others who visit the site daily. Your input really helps make a difference in people’s financial lives.

The post Digging Through The Comments: Readers Of The Simple Dollar Speak Out appeared first on The Simple Dollar.

Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:

35%,- punctuality of payment in the past (only includes payments later than 30 days past due)
30% – the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
15% – length of credit history
10% – types of credit used (installment, revolving, consumer finance)
10% – recent search for credit and/or amount of credit obtained recently

Mistake #1: Cancelling old credit cards. 15% of your credit score comes from the length of your credit history. Thus, cancelling your oldest credit card can often be a mistake. Also, if you have balances on other cards, cancelling an old credit card can also worsen your debt ratio, which makes up 30% of your score. If you don’t have other sources of credit that are older than seven years, you should not cancel your oldest credit card.

Mistake #2: Staying current on “most” of your cards. 35% of your score focuses on punctuality of payment, with only payments that are more than thirty days late affecting your score. If you’re going to be late on any cards, make up that payment before it’s thirty days late. Don’t keep up with all but one or two of your cards and let those go later and later; instead, juggle the cards a bit if you have to, but make sure you are not too late on any one card.

Mistake #3: Having too many open lines of credit. 10% of your score comes from the types of credit used. If you have a lot of sources of revolving credit (i.e., credit cards), you can be seen as a credit risk because you have the potential of racking up a lot of debt very quickly. Don’t open store credit cards just to get a discount, and if you have any recent store cards, cancel them once they’re paid off.

Mistake #4: Maxing out your cards. 30% of your score comes from the ratio of your credit card debt and your credit limits. Thus, if all of your cards are maxed out, your credit score is suffering even if you’re keeping up with the payments. Instead of charging and buying more and more, focus on paying down the cards with extra payments.

Mistake #5: Avoiding loans and debts. In the eyes of your credit report, no debt is effectively bad debt. If you’re a credit card teetotaler, you should still consider getting one and making an occasional purchase with it. I have a friend who has one credit card which is associated with his gas station chain of choice. He uses it just for gas purchases, racks up discounts on it, pays it off in full each month, and it helps him maintain a solid credit score in case he needs a loan.

Mistake #6: Requesting a credit limit reduction. Some people believe that they have too much credit and that they’re better off with a credit limit reduction. In fact, the only significant effect a limit reduction has on your credit score is a negative effect on your debt ratio. Only get a limit reduction if it has a huge psychological value for you; otherwise, it will hurt your credit score.

Mistake #7: Utilizing the first credit counseling service you hear about. Quite often, the ones that advertise the most are the ones that do the shoddiest job. Use the FTC’s advice and find a reputable credit counseling service in your area. Call several of them from the yellow pages and ask the questions from the FTC page to find ones that seem legitimate, then check with the Better Business Bureau before moving forward. Remember, your credit score will affect many of your financial moves for years, so don’t skimp out on your research if you’re thinking of using a counseling service.

Mistake #8: Declaring bankruptcy. Many people go forward with bankruptcy because they believe it’s the only way out. Instead of taking such a drastic measure, seek counseling first with one of the more legitimate sources mentioned above. Bankruptcy can really decimate your credit score for a very long time. Quite often, there are better solutions, such as negotiating with creditors and so forth.

Mistake #9: Practicing credit card arbitrage. This game can seriously damage your credit score if you’re not an expert. Shy away unless you’re financially stable and know exactly what you’re doing; if you make a mis-step, your credit score could easily be demolished.

Mistake #10: Never checking your credit report. Most people who behave well with their credit just assume that their credit is fine, but sometimes incorrect things can show up on your report. Visit annualcreditreport.com to get the free report that the United States government guarantees you from the three major agencies. Don’t go to freecreditreport.com; it’s a rip-off.

The post The FICO Battle: Ten Common Tactical Mistakes When Dealing With The Credit Score Blues appeared first on The Simple Dollar.

FreeCreditReport.com is advertising heavily on television lately, promising to give you this free credit report just by visiting their site. This seems appropriate, right? After all, everyone gets a free credit report… so we just go to FreeCreditReport.com and get it…

Don’t.

Instead of giving you the free credit report that is promised by the FTC, FreeCreditReport.com actually requires you to sign up for a program called Triple Advantage, a credit monitoring program that costs $12.95 a month. This service merely emails you if there is a change to your credit report at a very hefty cost, particularly when the government gives you a credit report for free every year. Don’t like that option? Well, you could instead just pay Experian $14.95 to give you your credit report instead … or, even better, pay $40 and get your report from all three credit agencies.

If you just want to see your credit report, don’t visit FreeCreditReport.com unless you want to pay for something that the FTC has already guaranteed you for free.

So how do I actually get my free credit report? Take a peek at the FTC’s page on the topic. The actual place to go for the free credit report from the federal government is annualcreditreport.com. This is the only site that will actually be able to give you your report without either allowing others to have access to the report or being required to buy other products.

Interestingly, this information is actually stated on the front page of FreeCreditReport.com, but it’s done in tiny blue text on a blue background that makes it almost impossible to read. Coincidence? What do you think?

The post FreeCreditReport.com Is Ripping You Off appeared first on The Simple Dollar.