Can Applying for Loans Bring Down Your Credit Score?

A credit score has many components. Each component weighs differently on your credit score. For example, having a late payment recorded on your credit report will cause more damage to your credit score than will having too many inquiries on your credit report. However, it is important to know that regardless of what the negative information is, such information will stay on your credit report for many years. As such, you will want to weigh the consequences of the negative impact on your credit score against the advantage of applying for and obtaining a loan.

Applying for a loan can negatively impact your credit score in more than one way. First and foremost, whenever you apply for a loan (whether it is for a house, a car, a student loan, a personal loan, etc.) the bank or lending institution to which you applied is going to run a credit check on you to calculate the risk involved in lending you the money. The riskier you are, the higher your interest rates and/or fees will be. If you are too risky, you will be denied a loan.

When the bank or lending institution conducts a credit report check to calculate the risk level involved, each check is recorded as an "inquiry" on your credit report. Banks and lending institutions look to see how many inquires are on your credit report for a set period of time. If you have "too many" inquiries, this tells the bank or lending institution that you are trying to borrow money and thus, this means that you are acquiring or attempting to acquire a lot of debt. As such, you may not have the money to pay back a loan. Therefore, this makes you a risky loan and you will either have to pay more interest and fees or will be denied outright.

However, even though these inquiries are recorded on your credit report, this does not mean that every one of them negatively affects you credit score. The key is not to get "too many." The exact number that crosses the "too many" threshold is not exact, but to be on the safe side, you should try to keep the inquiries to no more than 3 per year. Remember, every time that you apply for a credit card or any type of loan, an inquiry is recorded on your credit report.

The other way that applying for a loan can damage your credit score is if you are approved for the loan. If you are approved for a loan, it will affect your credit to debt ratio. If you get a loan, this will create more debt. The closer you are to "maxing out" your credit limits, the worse off your credit score will be. The reason for this is because if you have no available credit, banks and lending institutions will be concerned that you have reached your limits and will have trouble paying off your debt. As such, there is a higher chance that you will default and thus, a higher chance that the bank or lending institution will not get paid.

As stated above, because of these negatives, you have to weigh the cost of getting a loan against the benefits of obtaining the same. Make sure you are applying for and receiving a loan for a good purpose (buying a home that you can afford, getting a college education, making a good investment) and are not obtaining a loan for something you do not need.

Is the Credit Rating System Fair?

The main reason that the credit rating system is fair is because each person controls his/her own credit rating. Your borrowing and payment habits are what dictate your credit rating. If you abuse your credit, your credit rating reflects the same. However, if you are a responsible credit user, your credit rating will be favorable.

Lenders need a system that can help them determine whether a person is a borrowing risk. By using the current credit rating system, lenders have some kind of barometer for measuring credit risk. Without such a system, obtaining a loan would be extremely difficult because lenders would require, among other things, years of financial records to help determine the potential borrower's creditworthiness. Our current credit rating system conveniently compiles all of a person's financial records and uses them to create a nice, neat number that lenders use to make lending decisions.

The people that complain most about our credit rating system are the people that have low credit scores. These people claim that their low credit scores are somehow not their fault. These people claim that the credit card companies kept sending them more and more credit, and that they just "had" to use this additional credit. Are these people serious? We reap what we sow. It is amazing to me that a person can abuse their credit privileges, and then complain about the penalties that are assessed as a result of their abuse. These complainers are proof that the system is fair and is effectively working. If the credit rating system was unfair, these credit abusers could continue to take advantage of their credit privileges to the detriment of responsible credit users.

Another common complaint that people make is that they have no credit score before they apply for credit. The argument that these people make is that they have never had debt, therefore, they should have a high credit score. How does this make sense? A credit score measures a person's creditworthiness. Therefore, how can one have a credit score without first having credit? This is not a hard concept to understand.

The system is not perfect, but it is fair. I have had my credit score reduced due to negative information being placed in my credit file that was not mine. I had to get the information removed by contacting the credit bureaus. I would be lying if I said that the information was immediately removed. In fact, it took a couple of months to get the information removed. I was not happy, but mistakes happen. If the system was perfect, there would be no complaints.

The point is, the system is as fair as it can be. If you feel that the credit rating system is unfair or unreliable, pay cash for everything. If you cannot afford to pay cash for everything, stop complaining about the system and use the system to your advantage. If you use your credit responsibly, you will have nothing to worry about.


Social Bookmarking

What Does a Credit Score Mean to You?

There are many frequently asked questions by people who are not entirely clear as to the significance of a credit score. These people understand that a high credit score is good because it will help them get loan approvals and lower interest rates, but these same people do not know how high their credit score needs to be in order to obtain these advantages.

A FICO score ranges between 300 to 850. Obliviously, if you have a credit score of 850 you have nothing to worry about. You have reached the pinnacle of credit worthiness and will get the best interest rate and best loan, guaranteed. However, what if I have a score of 720? Will a score of 720 get me a better interest rate than a score of 715? A score of 720 is higher than 715, thus, many would conclude that a 720 would get favorable interest rates and loans. However, such is not the case. Lender will treat a score of 715 and a score of 720 the same. Why?

In addition to being scaled between 300 to 850, most lenders create credit score categories. These categories have various different names depending on the lender, but generally, the credit scores are broken into 5 categories and have names similar to (1) Poor; (2) Fair; (3) Average; (4) Good; and (5) Excellent. The lender will then take your score and put it into the appropriate category. Once you are placed in a particular category, you are given interest rates and loan terms based upon that category.

Generally, a lender’s ratings are as follows: (1) Poor is equal to credit scores 619 and below; (2) Fair is equal to credit scores 620-659; (3) Average is equal to credit scores 660-720; (4) Good is equal to credit scores 721-749; and (5) Excellent is equal to credit scores 750 and over. So, what is the point I am making? The point is, a score of 715 is not different from 720 for lending purposes. Therefore, you do not need to worry about these couple of points when applying for a loan. The only thing you should worry about is the point difference between the categories. In other words, if you have a 720, you should try to boost your score a couple of points so that you can get the more favorable terms and interest rates given in the “Good” category.

Additionally, remember that your credit score is based upon the time it is pulled. Therefore, your 720 today could be 718 or 725 tomorrow. Everything such as paying a bill, taking out a loan, getting a new credit card, getting a larger credit line on an existing credit card, and/or having a credit card for more than three years will affect you credit score. Because many people do at least one of these things several times per month, your score will thus change several times per month. This is one of the reasons why lenders do the category system.

The point is, take care of your credit score, do not worry about the points in the same category (because, based on our example, a 660 will get the same rates and loans as a 720), and strive to get your score into the highest category.



Social Bookmarking

How Bankruptcy Can Affect Your Credit Report

A bankruptcy is probably the worst, one trick pony that can happen to your credit report. Before you decide to file for bankruptcy, you need to think long and hard about the benefits and penalties. The most obvious benefit is that most of your debts will be discharged (with the exception of certain debts like mortgages, student loans, and IRS liens), however, a bankruptcy also means that your credit report and your credit score will be severely damaged.

There are many people that advocate against using or even obtaining credit. I have actually read articles that suggest that Americans are completely ignorant as to the purpose of a FICO score, and that anybody who tries to obtain a higher credit score is a fool. In my opinion, these advocates are nuts! There is more potential harm in not having a credit score than there is in maintaining a good credit score. What does this have to do with bankruptcy? Well, if you care nothing about your credit score or credit report, a bankruptcy probable will not be a big deal for you. Your debts are discharged and off you go. However, if you are a person that realizes that a high credit score could be a great asset to possess during your journey towards achieving success, you need to know the harm that a bankruptcy will cause to your credit score and credit report.

First, your credit score will be greatly reduced. By filing for bankruptcy, you demolish your creditworthiness. You are basically telling potential creditors that you have a very high risk of defaulting on any loan, therefore, you will not qualify for most loans.

Second, if you file for bankruptcy, that bankruptcy will be reported on your credit report for up to 10 years. I would like to believe that the bankruptcy report is automatically deleted from your credit report after 10 years, but the truth is, you will probably have to contact all three credit reporting bureaus and tell them to remove the bankruptcy from your file.

Last, because a bankruptcy severely damages your credit score and credit report, you better not plan on moving or buying a car for at least 10 years. Unless you have cash to afford these things, you will either get denied for a loan flat out or your interest rate will be so high that it is not worth taking out the loan.

If your credit score and credit report are important to you, consider all of your debt management options before deciding that bankruptcy is the best choice.

Credit Report Disputes

Many times, inaccurate information will appear on your credit report. In my experiences, one of the most common mistakes credit reporting agencies make is that they mix up the credit information of family members with the same name. For example, my father and I share the same name. I cannot tell you how many times my father’s credit accounts have shown up on my credit report. It is very frustrating, however, all one can do is fix the inaccuracy.

The easiest way to remove inaccurate information is to dispute the inaccuracy. The three main credit bureaus (Experian, Equifax, and TransUnion) all have options where a person can dispute inaccurate information through the respective credit bureau’s website. First, you should only dispute the inaccurate information to the credit bureau that has reported the inaccurate information. Therefore, if the inaccurate information is reported only in your Equifax report, there is no need to dispute anything in your TransUnion report because the inaccurate information is not in your TransUnion report. It is important to note that these three credit bureaus are completely separate entities. Therefore, for example, if inaccurate information appears in your TransUnion and Equifax report and you successful get the inaccurate information removed from your TransUnion report, that does not mean that Equifax has to also remove the information.

I wish the process was as easy as sending in a dispute of inaccurate information and waiting for the inaccuracy to be removed from your credit report. However, it is not that simple. Credit reporting agencies are very stubborn. Things will not be easy and you may have to dispute the same inaccuracy more than once. However, with persistence, you should be able to remove inaccurate information.

Should you Transfer your Credit Card Balance?

A credit card balance transfer is when you take the balance on one credit card and pay off that balance with another credit card. The balance on the first card is thus effectively transferred onto the second credit card. Why would anybody do such a thing? Put simply, people do this to save money on interest rates. However, there are some dangers that can defeat the purpose of a credit card balance transfer.

As I stated, people transfer credit card balances in order to save money on interest rates. If you have a credit card that has a 23% interest rate and another card with a 15% interest rate, why not transfer the balance on the 23% interest rate card to the credit card with the 15% interest rate? You will save money and you will only have to make one payment instead of two.

The first problem that people run into is that sometimes a credit card does not have enough available balance in order to receive the transfer. Therefore, if you need to transfer $500, but only have $300 available balance on the card to which you want to transfer, obviously you cannot transfer the whole amount. I would caution transferring $300 of the $500 because then you will have one card “maxed out.” This will negatively affect your credit score, and could lead to trouble with fees (over the limit fees) down the road.

The second problem people face is that sometimes they transfer a credit card balance to a card with a teaser rate. You might see a credit card that advertises a 0% interest rate for six months on all credit card balance transfers. You may think, “This is great!” However, you have to check the fine print. Most of the time, the interest rate after the six month introductory period changes from 0% to 20%+. Make sure that the default interest rate is lower than the current interest rate on your credit card or else the whole purpose for transferring your credit card balance will be defeated.

Third, make sure that there are no fees associated with your balance transfer. You should not have to pay additional money for transferring money. If the credit card to which you want to transfer your balance wants to charge you a fee, find another credit card.

Balance transfers can be a benefit. Avoid the teaser interest rates with sky high default interest rates. Additionally, if you conclude that a balance transfer will save you money, make sure that the card to which you transfer has a noticeably lower interest rate. It is a waste of time to transfer from a 22% interest rate credit card to a 20% interest rate credit card. If you use balance transfers effectively, you could literally save thousands of dollars.

How I Raised my Credit Score

About two years ago (October of 2005) my credit score was in the 620s. In case you are wondering, a score of 620 is not particularly good. In fact, it is a bad credit score. Today, my credit score is over 740. A score of 740 ranks in the top tier of creditworthiness. How did I raise my credit score over 100 points in less than two years? Before I answer this question, I need to give you a little background information.

My credit score was low because I had late payments on my credit report. Late payments can stay on a credit report for up to 7 years. I did not want to wait 7 years because I had plans for certain types of investments. These investments required a decent credit score, and thus, I needed to find a solution.

First, I obtained a copy of my credit report. I noticed that some of the negative accounts on my credit report were not even mine. One of the negative accounts was opened when I was 6 years old. I called the credit card company and asked them when the started giving out credit cards to children in the first grade. The stunned silence on the phone proved to me that they got the point. The negative accounts that were not mine were removed from my credit report. This increased my credit score.

Second, I got a referral from my real estate teacher for a company that will fix a credit report. I called the company, paid a small fee, and followed the instructions that they gave me. Basically, I was told to continue to pay my outstanding balances in a timely manner and to refrain from using and applying for any credit cards. The company would contact the credit reporting companies and dispute any negative information on my credit report. Less than two years later (which is far better than 7 years) I sit with a score of over 740.

If this plan of action does not work for you, you can always pay your cards on time, reduce your outstanding balance, and wait for any negative information to be removed from your credit report. The choice is up to you.

Credit Card Applications for Beginners

Credit card applications are fairly straight forward and need no special training or education to fill out. However, there are some things you should know.

First, put your full, legal name of the credit card application. The credit card company uses this name to check your credit report to determine whether or not you are approved. Therefore, if you use a shortened name (for example, if your name is Christopher, do not put Chris on your application) on your credit card application, you are going to cause confusion amongst the credit reporting bureaus and are thus going to set yourself up for a credit report dispute in the future. Avoid all of this by always using your full, legal name.

Second, do not lie about your monthly or yearly salary. You are not going to get a higher credit limit by doing this, and additionally, your credit report is not going to support this contention. The point is, do not lie on your credit application.

Third, sometimes you are a student and you are employed, therefore, which should you put down when the application asks for employment status? In my opinion, you should use whichever job title (student or full-time employed) gets you the most benefits for the card for which you are applying.

Last, use internet applications whenever you can. I do not feel comfortable mailing or giving so much personal information (e.g. phone number, address, full name, social security number, employer, employment status, yearly income, etc.). Therefore, submit your credit applications through secure websites. Additionally, when you apply online, you usually can get an answer on your application within 30 seconds.

Following these tips will help make your credit card application go faster and more successfully.

Common Sense Credit

The term “common sense” is a misnomer. Some people believe that it is common sense to get only one credit card. Other people believe that credit cards are evil and, therefore, it is common sense to never own a credit card. Still, others believe that credit cards are a necessity in today’s financial times and, therefore, it is common sense to own more than one credit card. Who is right? The truth is that they could all be right, and they could all be wrong. Everybody has a different situation, therefore, “common sense” for their situation will dictate.

My “common sense” tells me that most of us will buy a home and/or a car in our lives. Therefore, unless you are paying cash, you will need to have established some kind of a credit score in order to qualify for the loan that is necessary to pay for these things. You cannot establish credit unless you open a credit account. The most common type of credit account is a credit card. It is true that you can get loans from your bank, but without an established credit report, you will have to secure these loans with some sort of collateral.

If you do own a credit card or credit cards, there is “common sense” advice for you to follow. First, use your credit responsibly. People do not get into financial trouble overnight. It is a gradual process that people refuse to acknowledge before it is too late. Constantly monitor your spending habits and financial statements so that you know when to stop spending or when your finances will allow you a little more leg room.

Second, pay your bills on time. You would be surprised how many people, who have the money to pay the bill, just plain forget to pay. As a result, their credit score suffers. If you are that forgetful or lazy, as the case may be, set up an automatic bill pay through your bank’s internet site. If your bank does not have such a feature, there are many companies that can set up an automatic bill pay for you.

Last, get updated, monthly credit reports from the credit reporting bureaus. By doing this, you will be able to see if any incorrect information is reporting on your credit report. By checking monthly, you will be able to dispute inaccuracies as soon as possible and, thus, minimize your damage. It will cost you about $12-15 every month to get all of your reports, however, think of it as financial insurance against inaccuracies and identity theft.

Do these “common sense” things and you will be able to obtain and maintain a high credit score and sound financial health.

What are the Pros and Cons of a High Credit Limit?

A high credit limit can be a great thing. First of all, it gives you more flexibility for purchases. Second, it gives you a lot of spending power. Last, it can increase you credit score because you debt to available credit ratio will be smaller. However, there are also some negatives that come along with a high credit limit.

As stated above, you will get more flexibility with your purchases, and you will have a lot of spending power with a high credit limit. While good in some respects, a high limit can get you into to trouble if you abuse it. If you have a high credit limit, this means that you have practiced responsible debt management. However, like most things in life, in you fall out of practice, you can get into trouble. Here, just because you have more spending power does not mean that you should utilize it unless you are making a planned purchase for a particular purpose. Do not make a big purchase just because you can. Doing this can turn the “pro” of having a high credit limit into a very big “con.”

Increasing your debt to available credit ratio can have a positive effect on your credit score. The interesting thing is that it can also have a negative effect on your credit score. It is all about timing. If you dramatically increase your debt to available credit ratio in a short amount of time, a credit reporting bureau may see this as you stockpiling credit in order to make a big purchase. This makes credit reporting bureaus nervous because they believe that you may not be able to pay off the big purchase (if made). Therefore, if you are going to increase your debt to available credit ratio, do it over a sizeable time frame and increase your credit limit in small monetary increments.

Both pros and cons exist with a high credit limit, but if you practice responsible debt management and increase your debt to available credit ratio over a sizeable amount of time, your high credit limit can be a powerful asset.

Comparing Credit Cards and Debit Cards

Debit cards are cards that draw against your checking account. Basically, when you make a purchase with your debit card, the purchase price is deducted from a pool of money that you already have on deposit with your bank. If you spend more than you have on deposit, you are likely to pay overdraft fees and whatever other fees your bank is allowed to charge based upon your debit card agreement.

Some of you may have used your debit card as a credit card at the gas station and/or grocery store. In other words, you may have pushed the “credit” button on the payment machines available at these locations. You did not have to enter your pin and you had to sign a receipt or enter your zip code. Even though the transaction was executed and approved like a typical credit transaction, your debit card purchase is not reflected on your credit report and the purchase prices is debited from your checking account within a business day or two. Therefore, although transacted like a credit transaction, it is not in fact a credit transaction when you use your debit card. You do not get any credit report benefits and such transactions and subsequent debiting on your checking account does not affect your credit score.

Credit cards, on the other hand, are not secured by a checking account (there are some credit cards that are secured by a deposit and are known as “secured” credit cards; however, these cards have the affect of a credit card transaction although they work very similarly to a debit card). Most unsecured credit cards have a credit limit. This limit is the most amount of money you can “borrow” to make purchases. Absent a cash advance, you do not actually get the cash in hand. However, you do get make purchases against this credit limit.

Your charges are accumulated during a set billing period and (unlike a debit card where the entire purchase price is taken out of your checking account), only a portion of that amount becomes due and payable at the end of that billing period. If you do not pay back all the money you “borrowed” to make your purchases, the balance is charged an interest rate. This interest charge increases your outstanding balance. Timely and untimely payments are recorded on your credit report and affect your credit score accordingly.

The differences are many. However, if you know how to use these cards effectively, you will be able to build a great credit score without getting into any debt management problems.

Protecting Yourself Against Credit Card Fraud

Identity theft has hit epidemic proportions. This used to be a random occurrence, but with the rise of internet banking, debit cards, and other electronic cash alternatives, identity theft is a crime that the normal, everyday person has to safeguard against. Like taking vitamins to ward off disease, preventive measures exist to ward of identity theft.

First, you can call your bank and credit card providers and ask that they call you and get verbal confirmation before approving an amount over X amount of dollars. The dollar amount is going to be different for everybody depending on his/her threshold. For example, you could call your bank and tell them that any withdrawal or purchase over $750 needs to be cleared by verbal confirmation. Therefore, if a purchase over $750 is attempted on that credit card, the company will call you on the phone number that you have provided (usually a cell phone) and will ask if you are making a purchase of X amount of dollars. If you say yes, the amount is approved and on you go. However, if somebody else is trying to do this, the purchase will be denied and the thief will be caught.

The effect of this measure is that you account is protecting against “abnormal purchases.” This measure does not prevent you from buying something over your confirmation amount. All this measure does is create an additional layer of protection so that if somebody tries to use your credit cards, they will not be able to make a “big” purchase.

Second, you can sign up for a credit report monitoring company. By doing this you will know if a new account has been opened or if an inquiry has been made on your report. The credit report monitoring company will immediately notify you and ask whether the opening of the account or the inquiry is valid. If it is not, the account will be disputed and the thief will again be unmasked.

Third, do business with a bank that will guarantee to replace all stolen funds within a short period (24 – 120 hours). This way, damage to your account is minimized. If you check your account balance everyday, this measure will be extremely effective because you will immediately know whether a fraudulent purchase or withdrawal has been and where it was made.

Last, be careful and avoid things you do not know. For example, I have seen letters from identity thieves that were sent via US mail. The letter usually purports to be from a large bank and asks you for your account number, social security number, or some other private account information that is necessary to steal your identity. These letters will provide a phone number to call in case you have any questions. If you randomly get a letter or e-mail like this, NEVER call the number provided. Open up the phone book or call information and get the bank’s number. Call that number and see if the bank really sent out such a letter. NEVER reply to these kinds of letters through the mail. Think about the situation; why would your bank want this kind of information? The bank provides you with an account number, so why would they need to “verify” it through the mail? Additionally, why do they need you full name and address; didn’t they just send you a letter?

Protect yourself and protect your assets using these safety measures.

Getting a Credit Card with Bad Credit

Getting a credit card with bad credit is not as hard as you may think. The types of credit cards that can be obtained with bad credit is the real problem.

There exists a financial practice called adverse selection. Adverse selection is the process of singling out potential customers who are considered higher risks than the average. Credit card companies combat this risk (the risk that people will default on their credit cards) by charging higher interest rates and annual fees. However, this is where the problems begin. If I have a great credit score, why I am going to get a credit card with high interest rates and high annual fees? The answer is, I would not get the card. Therefore, because people with good credit do not want the card, only people with below average credit scores (people that are “high risk”) apply for and obtain the card. Thus, a vicious circle is created. As the credit card companies charge more interest and fees on particular cards to offset the potential of default by high risk cardholders, those particular cards are only obtained by high risk cardholders. Thus, the behavior that the credit card company set out to deter is actually being promoted by the credit card companies’ practices.

So, if you have bad credit, where does this leave you? This leaves you with bad options as to credit card ownership. First, you could get one of those high interest, high annual fee, and low credit limit cards. You will probably pay more in annual fees and interest than you will principal. However, having the card (as long as it is a major credit card; Visa, MasterCard, American Express, or Discover) and using it responsibly will help raise your credit score.

Second, you could obtain a secured credit card. This means that you have to put down a deposit. The amount of the deposit is the amount of your credit limit. It works as a debit card except that it is reported as a credit card (which is a benefit), but it also has high fees and interest rates (these are disadvantages).

Last, you could obtain a merchant credit card (Macy’s, Dillard’s, Sears, etc.). Having this kind of a card will help boost your credit score. However, the interest rate is going to be very high. These cards usually do not have annual fees, but the high interest rate is a great disadvantage.

Even though options are limited and not the best, they are options. Start reestablishing your credit today so that you can help finance your future and save money.

Evaluating the Need for Credit Cards

If you have endless cash, you will never have a need for credit. You will never have to take out a loan because you will always have the money to cover any cost. However, many people do not have this option.

As a general rule, you should not purchase something on credit if you cannot afford to pay for the item in cash. This does not mean that you have to have the entire amount in cash currently available. This means that you have to be able to use your cash, without financial strain, to pay off the bill.

In this day and age, credit cards are essential for building your credit score. Why is this important? Like I said, if you have endless cash, this is not a problem. However, like most of the people in this country, a big purchase, like a house, if something that cannot be afforded if cash was required. Therefore, in order to qualify for a big loan (like a house, car, etc.) we have to build our creditworthiness. Building your creditworthiness is accomplished by raising your credit score. Raising your credit score is accomplished by the correct use of credit cards.

Therefore, the need for credit cards is important in order to be able to afford shelter for yourself and your family and to provide a convenient mode of transportation. If used correctly, credit cards can be a very powerful financial tool. Learn to use your credit cards correctly and you will be able to open financial doors that would otherwise remain closed to you.

Should Teens Have Credit Cards?

A teen should have a credit card in order to teach him/her about financial responsibility. Of all the subjects we learn in school, we are never taught about finances, credit, or money management. This lesson is usually left to our parents. The problem with this is that many parents are not qualified to teach their children about money management. Therefore, the children walk blindly down the financial road only to meet numerous pitfalls and debt traps. One way to combat this potential for financial failure is to teach children about money management.

I use the term “children” loosely. I am not advocating that you sit your six old down and tell him/her about interest rates, credit scores, and investment risk. Absent you child being a financial prodigy, a six year old will not understand any of these subjects. However, once your child reaches fourteen, fifteen, or sixteen, lessons about financial independence should begin. I advocate these ages because these are the ages when most teens get their first job.

Bill Gates could lecture you about “how to become a billionaire,” but none of the information will be useful unless you can put the information into action. I feel the same way about teens and credit. You could lecture your teen about how credit cards work, the importance of timely payments, credit limits, and credit scores, but until a teen actually uses the card and pays a bill, he/she will never fully grasp the principles of this important financial tool. This does not mean that you should drop a $10,000 limit gold card into your teen’s hands and tell him/her to “go nuts.” However, there are many credit cards with a $300 - $500 limit that should be used as the teaching card. This amount is high enough so that your teen could actually use it, but low enough so that if your teen has a job, he/she will not get into trouble.

The credit lesson has to be taught carefully and slowly. It is very easy to lose track of how much you are spending with a credit card. Therefore, it is vital that a teen learn that a credit card is not a substitute for cash. Meaning, if you cannot afford to buy something, you should not put it on your credit card.

Teens should have credit, but only as a privilege used as a tool for financial education. A credit card, like a driver’s license, is a privilege, not a right. Therefore, teens should first be educated, and then be allowed the privilege of credit card use. They should always start small and SLOWLY build their credit limit. As a parent, you can always monitor your teen’s credit use to insure that your teen is using credit correctly.

What is Universal Default and How Does it Affect Your Credit?

Universal default can be a big problem. Have you ever looked at the terms and conditions of a credit card? Somewhere in the fine print you might discover that your particular credit card is subject to universal default.

What is universal default? Universal default is a practice in the financial industry where a loan that you have goes into default (whatever the default terms are under the agreement of said loan) when you default on another unrelated loan. In other words, if I have two credit cards, Credit Card A and Credit Card B, and Credit Card A is subject to universal default and I have NOT defaulted on said credit card but I have defaulted on Credit Card B, Credit Card A would then be in default.

Why is universal default a problem? Universal default is a problem because it can negatively impact your credit score. If you are never late on any payments, then this financial practice is unimportant, however, if by misfortune, mistake, or some other accident you are late on a loan payment (and thus in default) you can get dinged twice (once for the account for which you are in default and once for the card that practices universal default) for one accident. This in turn has a double negative impact on your credit report and credit score.

Universal default does make some sense if you think about it. A person’s credit worthiness is based on how likely a person is to pay back a loan. The more risky a person, the more unlikely he/she is to pay back a loan. Think about it like this: If a person defaulted on Loan A before applying for Loan B, that person would most likely be denied for Loan B. Why should this change if said person already has acquired Loan B? Is not that person still just as risky before acquiring the loan as he/she is during (post acquisition) the life of that same loan? Although this may be true, my thought is, why put yourself in harms way? Do not take on more risk than you have to. There are plenty of credit card companies that do not practice universal default, therefore, acquire those cards and save yourself the headache should you accidentally or even intentionally miss a payment on one loan.

Credit trap: Keeping Young Adults on the Right Track with Credit Cards

I will never forget the time I got my first credit card. I signed up on my college campus. It was great because I got a university t-shirt when I applied for the card. The people working the kiosk basically guaranteed that I would be approved. I was sold! I took the application, filled in my details, and impatiently waited for my shiny new card to arrive in the mail.

It is funny when I think back about how young and naïve I was. I did not care about annual fees, interest rates, or credit limits. If I would have known then what I know now, I would have set a booth right next to that credit card kiosk and passed out fliers about how bad the credit card offers are on university campuses.

There is a popular military strategy called “shock and awe.” Basically, a military will use overwhelming force and spectacular displays of power to paralyze the enemies on the battlefield and destroy their will to fight. The same strategy is used by these university credit kiosks. They promise young and financially naïve adults all these great benefits, but fail to inform about high annual fees and interest rates. Eventually, the college kid finds himself/herself in a debt trap from which he/she cannot escape.

My advice is to do your homework. Make sure that the credit card offer is not all smoke and mirrors. Ask about the annual fee and interest rates. If the person working the kiosk does not know the answers, do NOT get the card. There are too many places where a credit card can be obtained, therefore, you do not have settle for the sub par cards that they hand out on college campuses.

Testimonies: How Debt Can Make You Feel

Okay, time to confess a secret. At one point of in my life, I could no longer manage my debt. I did not file for bankruptcy and all the debt is now paid off (it was all credit card debt), but there was a time when I did not know what I was going to do.

The constant worry is a nightmare. You never know how you are going to pay next months bills, and you are always wondering how long you can keep it up. The funny thing about credit card debt is that it does not suddenly appear. It is a process over many months. You keep spending and paying the minimum balance. Before you know it, your cards are maxed out, and paying the minimum no longer works because the interest on your balance is more than the minimum payment.

I had trouble sleeping and when I did sleep, I would have dreams where I would lose my teeth. I looked at that particular dream in a dream dictionary and found out that dreaming about losing your teeth means financial hardship. Crazy, huh?

I decided to do something to change my situation. My solution was to do debt consolidation. The advantages were that my debt was consolidated into one, low monthly payment and that the interest rates on the credit cards were reduced. Therefore, I was able to pay down the balance a lot quicker. The disadvantage is that once you choose this option, the credit card accounts that are included in the consolidation are closed. The disadvantage of this is that it negatively affects your credit rating. Your credit rating is not substantially lowered, but the decrease is noticeable. Additionally, when you are enrolled in the debt consolidation program, a note appears on your credit report that your are enrolled in a debt consolidation program.

This is how I dealt with the debt. Today, I am very responsible with my credit. My credit score has been completely revitalized, plus more, and I am debt free. Being debt free is the best feeling. Have you ever been in a similar situation? How did you deal with it or are you still dealing with it?

How to Give your Kids a Financial Head Start

Money management can be difficult regardless of your age. However, if you want to get your young ones off on the right foot, there are some strategies and tactics you can do to help them achieve financial success.

First and foremost, you, as the teacher, have to be proficient in money management. You cannot expect a student (in this case, your children, nephews/nieces, grandchildren, etc.) to follow your advice if you say one thing but do another. Make sure you practice what you preach and make sure that what you preach is helpful!

Good credit is an important asset these days. Why not get your kids off on the right foot? There are many components to a credit score (that is an article for another day), however, one such component is the length of time a credit account has been established. Currently, there is a credit score loophole that allows an authorized user to gain the benefit of the primary account holder’s entire credit history. As of recently, the Fair Isaac Corporation, the company behind the FICO credit scores, reported that it was going to stop giving these benefits to authorized users. However, adding a person as a joint account holder will give them the same benefits as the authorized user loophole used to. Therefore, I suggest that you add your child(ren) onto one or two of your credit accounts. The accounts have to be major credit cards (Visa, MasterCard, American Express, or Discover) and the accounts and your credit report have to be pristine and have to remain that way! There is absolutely no reason to add your child to a credit account that has delinquencies, late payments, charge-offs, or any other negative information. You are trying to build a good credit score for your child, not make it harder for him/her to establish credit.

Teach your kids about the stock market early. I once read a story about a family. The grandfather taught his grandchildren how to find and read stock quotes in the daily newspaper. He also taught them how to read financials so the grandchildren could have an understanding of a financially sound company. After teaching them this, the grandfather set up an individual stock account for each grandchild. Every year on the respective grandchild’s birthday, the grandfather has the grandchild pick a stock. The grandfather then buys a certain number of shares of that stock for the grandchild. Can you imagine the portfolio these kids are going to have by the time they are eighteen? Not to mention the understanding they will have of the stock market. If you can set up such a plan for your children, I would strongly recommend you do that. If you know nothing about the stock market, find somebody who does and teach your kids from an early age about the power of investment.

Kids appreciate money more when it is their own money that they are spending. Therefore, I suggest that you have your kids get a job (when they are the appropriate age). Making money for themselves will teach them what it takes to earn an honest dollar. Additionally, you can take this lesson a step further and have your kid open a savings account. Have him/her automatically deposit 10% of every check into the savings account. Make sure you find an account with a high interest rate (you may want to stay away from the major banks and look at small savings and loans that are FDIC insured or credit unions that are FDIC insured because their rates will be far higher than Wells, BofA, Wamu, Citi or any other “major” bank). By doing this, your kid will be building a nest egg and you will be able to teach your child about the power of compound interest.

Last, teach you kids the basics of good credit management. When your kid gets his/her first credit card, teach them (among other things) to pay more than the minimum payment, to not have a high balance, and if they cannot afford an item they should not buy it on a credit card. If you helped them by placing them as joint account holders on a couple of your major credit card accounts, teach them not to ruin this head start by getting in “over their head.”

These strategies will give your child a huge head start on the journey to financial success. All of the strategies are easy to initiate, and all are inexpensive to do. Help give your child the head start that you never had.