Tag Archive for 'credit'

Okay, I know, it's cruel to run an entry like this during the holidays. Telling people to get rid of debt just when there is all that pressure to spend like crazy. But I'm trying to save you a hangover--a spending hangover. You can thank me in January. So, starting now, we're going to get your spending utilization down and improve your bad credit.Credit utilization is the amount of credit you are using, divided by your total credit limits. So if you have 4 cards with a total limit of $10,000, and you are using $9,000 of it, your utilization is 90%. Guess what it should be for a good credit score? 30%! That's $6,000 of debt you need to unload before you can turn bad credit into good credit.

Okay, you say--I'll stop using my cards, make my monthly payments, and this time next year I'll have good credit and no debt. Not so fast. If you make the minimum payment, you will be in the same boat this time next year. Because credit card companies WANT to keep you in debt and comfortable with being in debt, that suggested or minimum payment isn't enough to cause you much pain when you write that check--and it isn't doing much to pay off your balance either. If your rate is 15% and you make the typical 2% payment on that $9,000 balance, which is $180 a month,this time next year you will still owe $8,132! And that's only if you incur no fees or late charges and your company doesn't raise your rate.

What Can You Do?

Well, you have a couple of options. If you have home equity, you may be able to consolidate your debt at a lower interest rate. If you had a 6% rate, you could wipe out that debt in 3 years by paying $282 a month! And the interest may be tax deductable. If you have good credit, you may be able to get a personal loan, or you may be able to consolidate your debts by transferring them to lower-interest cards--then pay them down like crazy while the introductory rates are in force. In just six months of zero percent financing, you could pay that $282 a month and knock almost $2,000 of your balance! You can't play that game too long, so it's best to throw as much cash as possible while your rates are down.

The Payoff

It's ironic--once you don't use much credit, everyone wants to lend to you. And they charge a lot less, too. You could find yourself paying a lot less for mortgage interest, car insurance, and other goodies. Start today, and next year's holidays really will be merrier.

According to an article in the LA Times, mortgage problems are becoming credit problems. While refinancing under making Home Affordable programs won't hurt your credit and may even help it a little, the same can;t be said for short sales. Many holders of under water property assume that a short sale won't harm their credit, or at least not much, but it really depends on how the lender chooses to handle the sale. Unless you live in a non-recourse state like California, your lender has the right to pursue a deficiency judgment against you. If it does, you could be liable for the difference between the sale proceeds and the loan balance. And even if you pay this in full, one large American bank still reports the transaction as a "charge off," which is little better than a foreclosure.

According to risk predictor VantageScore Solutions, about 36.6 million of 213 million consumers in the databases of the three national credit bureaus in the first quarter of 2008 had super-prime credit ratings. Those borrowers made up 17.2% of the country's consumers. However, by the end of the second quarter of 2009, roughly 33.3 million of the 213 million consumers tracked by the three national credit bureaus in the first quarter of 2008 had Vantage scores above 900--by the end of the second quarter of 2009, 3.3 million people had dropped out of this top-drawer credit category.

In addition, by the second quarter of this year, another 5.8 million people joined the 34.4 million who were already in the lowest credit category last year--for a total of 39.8 million in the credit basement.

This shift, with fewer people having excellent credit and a lot more having bad credit--has been caused by late payments on home mortgages, serious delinquencies, and short sales and foreclosures, according to VantageScore researchers.

So how do you keep minimize your own damages? Most people go through several months of not making payments while they wait for a modification or short sale. If you can possibly do it, keep making your payments through negotiations. if you don't get a modification, or your bank tries an eleventh hour end run to try and force you to pay a deficiency in a short sale, bankruptcy may be your best option. By making your payments until you file, the fallout from bankruptcy may not be as much as the hit from a short sale, foreclosure, or deficiency judgment if you skip your payments.

Life is harder for those with no credit--and more expensive too. Talk about being kicked when you're already down--you're already young and broke--now you can't buy a house, rent a car, or even reserve a hotel room. You've got to have credit to get credit, and it's harder to earn a nice credit rating when you have less money but everything costs more.

Fair, Isaac, the company that compiles our FICO scores, has created an expansion score, which is derived from non-traditional credit, including utility payments, layaway charges, and bank deposit records. However, this doesn't completely solve the problem because in many places it's illegal to report utility records and it can be difficult getting nontraditional creditors to bother reporting credit data (there isn't anything in it for them and it does entail an expense).

Today the system has been improved further, allowing you to get your rental history included in your credit rating. By paying a small fee and registering with Payment Reporting Builds Credit, you can get credit for your payment history including daycare, cell phone, rent, and insurance payments. Fair Isaac promised that it will include data from RentBureau and PBRC when compiling your score.

Registering with PBRC, opening a secured credit card, and piggybacking as an authorized user on a relative's account are all strategies that can accelerate the acquisition of a usable credit history for a young borrower. Of course, all this reporting doesn't do you any good if what's being reported isn't favorable. So if you go through the trouble of getting your payment history recorded for posterity, make sure it's worth recording.

Which should you make and which should you miss? A couple of decades ago one creditor was known for being so sloppy with it's records that no one took delinquencies from them seriously. "Oh, don't worry about that one; it's just Sears" was heard in many trade groups and credit bureaus before the retail giant got its act together. But are there accounts you can pay late these days? Yes, and no.

First, if you are going to be late on anything DON'T let it be your mortgage. Next on the list is your car payment. Then look at the rest of your accounts--it's better to miss a payment on one big account and pay all the little ones on time--the number of delinquencies is more important than the size of the debt.

And finally, missing a utility payment will get you a late charge and maybe your service turned off (if you let it go too long) but it won't show up on your credit rating. If you are trying to repair your credit it might be worth taking a hit with late fees and preserving your history. Other bills that probably won't get reported are medical bills, insurance payments, daycare fees, newspaper subscriptions, and layaway payments. Make sure these get paid before they end up in collection (ugly) and you'll be fine as far as your credit report goes.