How to Consolidate Your Debt

A consolidation loans is a loan, generally taken out by college students upon graduation, which is used to pay off various student loans that you have accumulated during your years as a college student. However, a consolidation loan is not restricted only to student loans. In other words, you can take out a consolidation loan for your regular debts (such as credit card debt).

The effect of a consolidation loan is that upon consolidation you have to pay back only one loan (the consolidated loan) instead of the numerous loans that the graduate took out during college or the various debts that you have as a result of credit cards. Make no mistake, the amount of the debt that you owe does not decrease. The only change that occurs is that you now have to make only one payment instead of several. Additionally, because after you consolidate you have to deal with only one company, your loan payments and interest rate are both lower.

Debt consolidation can offer many great benefits, such as a lower monthly student loan and credit card payments, as the case may be, reduced interest rates, the prevention of being assessed late and over-the-limit fees, and faster debt reduction, to name a few. However, there are also some disadvantages that accompany debt consolidation. In regard to consolidation loans for credit cards, you may have a freeze of your credit using privileges, closed credit accounts, and consolidation fees. Knowing how to weigh the positives against the negatives and becoming completely informed (or as well informed as possible) about consolidation are two important factors you need to consider before making a decision as to whether or not you should consolidate your student loans or your credit card debt.

The easiest way to consolidate your loans, whether they are student loans or credit card debts, is by contacting a debt consolidation company. Keep in mind that there are companies that deal exclusively with student loans and there are companies that deal exclusively with credit card debt. Therefore, make sure that you have contacted the correct company for the product that you need.

Once you have chosen a company, you will have to give the company all of your loan information for the loans that you want to consolidate. Basically, the company will either pay off all of your loans and then you pay back that company at a particular interest rate, or the company will talk to all of your creditors and work out a lower monthly payment that is combined with all of your other monthly payments so that a total lump sum payment is calculated that you pay each month.

That is the gist of what you have to do. Keep in mind that the entire process is relatively simple, but it can be tedious. Therefore, be patient and you will be rewarded.

Pros and Cons of Debt Consolidation

Debt consolidation can offer many great benefits, such as a lower monthly credit card payments, reduced interest rates, the prevention of being assessed late and over-the-limit fees, and faster debt reduction, to name a few. However, there are also some disadvantages that accompany debt consolidation, such as a freeze of your credit using privileges, closed credit accounts, and consolidation fees. Knowing how to weigh the positives against the negatives and becoming completely (or as well informed as possible) informed about consolidation are two important factors you need to consider before making a decision as to whether or not you should consolidate your credit card debt.

The first factor you should consider is the amount of your credit card debt. Many consolidation companies require that you have a minimum of $5,000 worth of credit card debt before you are allowed to participate in the program. Some companies require at least $10,000 worth of debt. The point is, if you have only a relatively small amount of credit card debt you can probably work the problem out by yourself. Additionally, because these debt consolidation companies charge an “administrative” fee every month, the longer it takes you to get out of debt equates to more money for the debt consolidation company. Therefore, they are not willing to help people who are only $1,000 or $2,000 in debt because it is not profitable to the debt consolidation company.

It is true that the debt consolidation company will combine all of your monthly debt payments into one monthly payment that you pay to the debt consolidation company who then distributes the payment to the various credit card companies. Additionally, it is true that the debt consolidation company will work with your creditors to lower the interest rates on your outstanding debt accounts. However, what they do not tell you is that sometimes credit card companies do not change the payment due date for your account. Thus, if your single monthly payment to the debt consolidation company is due on the 5th of the month, but one of your credit accounts is due on the 4th of the month, you may incur a late fee. Make sure that this situation is remedied before you start making payments to the debt consolidation company.

One of the negative aspects of debt consolidation is that your credit score will be lowered because all of your credit card accounts that are in this program will be closed. Closed credit accounts lower a credit score. Additionally, the credit accounts that are the subject of the debt consolidation program will be frozen. As such, you will not be able to use your credit card for any of these accounts. Therefore, you should choose carefully which accounts to consolidate. Do not leave yourself without an emergency (and I emphasize “emergency”) credit card. This does not mean that you keep your credit card for your favorite department store because there is a new clothes line coming in next week. This is not an emergency, and this way of thinking probably got you into the credit debt mess that you are currently facing. I suggest that you consolidate the cards with the highest amount of debt and with the highest interest rate. By doing this, you will be saving the most money.

Do your homework and do some comparative analysis if you are considering debt consolidation. Choose a company that you are comfortable with, that is easy to contact, and that has the lowest, or, if possible, no fee. If you are not comfortable with credit card debt consolidation, try solving the problem yourself. Contact the credit card companies and see if you can negotiate a lower interest rate or monthly payment. The point is, you have to take action to resolve your credit debt situation before it reaches the stage where bankruptcy is your only viable option.


Social Bookmarking

Do Credit Counseling Services Really Help?

In order to answer this question effectively, one would have had to actually participate in a credit counseling service. Fortunately for you, I have participated in such a service. There was a time in my life (mostly during college) when I would irresponsibly use my credit cards. I was deeply in debt and was having trouble making monthly payments. I decided that I needed to solve the problem by hiring the services of a credit counseling company.

Basically, these companies contact your creditors and get your interest rate and monthly payment lowered. Your credit accounts are closed (therefore, you can no longer use them and your credit score is negatively impacted, although not by much) and all of your debt is pseudo consolidated. These companies claim that your debt is consolidated into one, low monthly payment. Although it is true that you do only make one monthly payment, your debt is not consolidated. Each one of your credit card companies is still owed its respective debt amount. You only make one payment because you pay your credit counseling service, which in turn pays each one of your individual credit card companies its individual share. Additionally, the credit counseling company takes a fee for this service.

For the most part, these companies help you get organized and do help you pay down your debt. In my experience, they do not completely cover all of the ramifications of participating in such a service, however, if you do your homework and ask all the questions you may have, you will discover the whole story. If you do not like the answer you are given, ask the question again or ask for clarification.

The only problem I had with my credit counseling company is that they sometimes were not timely with my payments to my creditors. You have to make sure that your payments are being made to the appropriate creditors for the appropriate amounts. Additionally, you have to make sure that the credit card companies are recording the payments and are not adjusting your interest rate. It can be a tedious process, but if you put in the effort and weigh the benefits against the disadvantages, you should conclude that a credit counseling service is one viable solution if you are struggling with credit card debt.

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.

The Credit Card Trap

I advocate owning and using credit cards. I believe that if a person uses credit responsibly, they can greatly benefit from such use by way of a high credit score and a strong credit report. However, there are two common, credit card blunders that many people make. If you avoid these two common blunders, you can avoid the credit card trap of creating more debt than you can handle.

The first most common mistake that many people make is that they only pay the minimum payment due. Paying only the minimum payment is the worst thing you can do, monetarily. If you make consistent, on time, minimum payments, your credit score will positively reflect such. However, your bank account will negatively reflect the same also. If you only pay the minimum payment, you should just take your balance and double it because this is the true amount you will probably pay. By paying only the minimum payment, you are basically only paying the interest. For example, if you had an outstanding balance of $1,500 at 12% interest, and you paid only the minimum payment of $20 per month, it would take you over 11 years to pay off the debt. Additionally, you will have paid over $1,200 in interest in addition to the $1,500 balance. Therefore, a balance of $1,500 cost you $2,700 to pay off. That minimum payment is not looking so good anymore is it?

The second most common mistake people make is that they use a credit card to pay the bill of another credit card. This practice baffles me. If you use a credit card to pay the bill of another credit card in order to obtain rewards points, and you pay off the second card in full each month, then paying a credit card with a credit card makes sense. However, this is not the situation to which I am referring. The mistake people make is when they pay a credit card with another credit card because they do not have the money to pay the bill of the first card. All a person is doing is making the situation worse. By using credit cards to pay off credit cards, a person is actually making the debt larger due to interest. Why do that to yourself?

Avoiding these two very common credit mistakes will help you practice responsible credit use and will also help you avoid the credit trap.

How to Eliminate Credit Card Debt

There are many options you can use to eliminate credit card debt. Some of the options are fairly basic and will take time. Other options are extreme, and while they will eliminate your credit card debt, they will also heavily damage your credit score.

First, you can pay over time while eliminating credit card use. This is the most basic way to eliminate credit card debt. All you have to do is pay more than the minimum balance (and by more I mean 20% more than your minimum balance) while eliminating your credit card use. This means that you do not use any credit cards during the time period in which you are repaying the debt. What sense does it make to pay down one credit card while you are charging an equal or greater amount on another credit card?

It is important to note that you only want to stop using credit cards. You do not want to close the credit card accounts. Closing your credit card accounts will hurt your credit score and offer no benefits for you. Therefore, do not do it.

Second, you can call your credit card companies and ask for lower interest rate. This tip should be used in conjunction with the first tip. By lowering your credit card interest rate, your monthly payments will count more towards your principal. Thus, you will pay off your debt sooner.

Third, you could consolidate your debt. I am sure you have seen many of these kinds of companies advertising on television or on the radio. Basically, these companies call your credit card companies and negotiate a lower interest rate and a lower monthly payment. Your credit card accounts are closed (this is a negative because is negatively affects your credit score) and you send your monthly payment to the debt consolidation company. That company then sends your payments to the appropriate credit card companies. These consolidation companied are usually “non-profit” and take a small fee to cover “administrative costs.” Make sure you fully check out the company before giving them your business.

One other point on consolidation; your credit card companies will send you a letter once an interest rate and monthly payment have been negotiated. This letter will basically state that if you are late on a payment while you are using this debt consolidation program, the deal is off and your credit card will reset back to its original interest rates and back to its original monthly payment. Therefore, do not be late.

Last, you can file for bankruptcy. I am not going to pretend to be an expert in bankruptcy, therefore, if you choose this option, go see a qualified attorney. What I can tell you is that filing for bankruptcy will severely damage your credit score. Additionally, filing for bankruptcy will cost you several thousand dollars. The attorney fees for bankruptcy will be less than the interest fees you would have paid over the life of the debt (assuming the outstanding debt is large enough), however, bankruptcy should always be your absolute last resort. As I stated, if you have questions about bankruptcy, go see an attorney.

Many options exist for you to eliminate your credit card debt. Make your choice wisely because a wrong choice could damage your credit score for years to come.

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.

How Many Credit Cards is Too Many?

I am amazed when I read literature from people that advocate that credit cards are evil and that a person should never own one. The reason that these people give is that the credit card owner will incur a lot of debt quickly and will be trapped by these devices of evil. These people automatically assume that you are going to irresponsibly use credit. That is an unfair assumption!

In order to support there arguments, these credit bashing people back up their arguments by quoting statistics. Mark Twain once said, “There are three kinds of lies: lies, damned lies, and statistics!” The point Twain is trying to make is that people become slaves to statistics. For example, a statistic exists that states that 50% of first marriages end in divorce. Does this mean that you should not get married because it is doomed to failure? Of course not! The same holds true with credit cards. Just because there are people that struggle with credit card debt does not mean that you are going to struggle with it. Additionally, in this day and age, credit is a vital asset. Unless you plan on paying cash for your home and car(s), you are going to have to have credit in order to be approved for a loan.

If you are a responsible credit card user, the number of cards you have is irrelevant. However, for purposes of providing a finite number to the question presented above, I think 3 is a good number, but 4 at the most. My reasons are simple:

First, there are four major credit cards: Visa, MasterCard, American Express, and Discover. I am not a big fan of the Discover card, therefore, having one card from each Visa, MasterCard, and American Express would give you a total of 3 cards. However, if you like Discover, then that would be your fourth card.

Second, when applying for a home loan, a bank looks to how many credit accounts you have open for a specific term. Most banks require that you have at least three credit accounts open and current that are at least 3 years old. Therefore, owning only 1 credit card will not cut the mustard.

Third, different cards give different benefits. Therefore, if your Visa has a low interest rate and you are making a larger purchase that will take a couple of months to pay off, use the Visa so you do not get nailed by the interest rate (of course all of your cards should have a low rate to begin with). However, if your American Express offers rewards points for airlines miles or other merchandise and your purchase is relatively small, use the American Express. The point is, tailor your credit card use to your purchases and the benefit you seek.

Last, most wallets only have room for four credits cards, therefore, you should only have four credit cards! I am just kidding about this last reason.

When I stated above that the number of cards you own is irrelevant if you are responsible, I meant that it is irrelevant in regard to debt management problems. There is a one other reason why you should not have more than 3 to 4 cards. As you maintain these cards, your credit limit will increase. Getting more cards adds to your total credit limit. If you have ten cards and a total credit limit of $100,000 (ten cards at $10,000 each), but you only make $50,000 a year, a home lender may view this as a risk. Think about it; you could borrow twice your annual salary! A home lender will be nervous that if you utilize that credit limit and ended up owing more than you can afford, you will default on the home loan. Additionally, depending on how and when you opened these accounts, you credit score could be negatively affected.

Here is the bottom line, use credit responsibly.

What You Should Know About Credit Card Costs

Yes, credit cards can have costs. There are two main costs associated with credit cards: (1) interest rates; and (2) annual fees. However, even though these are the two monetary costs, there exist many intangible costs (such as customer service).

First, the monetary costs. Why oh why would you pay just to own a credit card? Annual fees are just nuts! Unless you have bad or no credit, have absolutely no other choice, and desperately need credit, then it may be... NO, scratch that sentence – there is absolutely no reason to pay an annual fee on a credit card. There are far too many credit choices from which to choose. Do not get a card with an annual fee, it is that simple.

In addition to annual fees, credit card companies charge other fees of which you may not be aware. If you are ever late on a payment, there is usually a fee. If you go over your credit limit, there is usually a fee. Know what these fees are and factor them into your decision as to whether to obtain that particular card.

How about interest rates? These can be pretty sneaky. First, you should notice that the interest rate is different for credit purchases and cash advances. Cash advances always carry a higher interest rate. Additionally, your monthly payment will not count towards your cash advance balance until your credit purchases balance is paid off. Why? Cash advances carry a higher interest rate, therefore, the longer that that balance remains unpaid, the more money the credit card company makes.

Also, make sure that the interest rate that is advertised is not an “introductory” rate or a “variable” rate. Introductory rates only last a couple of months (at most, one year). After that introductory period, your interest rate resets to the default rate. The default rate is usually a lot higher than the introductory rate. Therefore, be aware of what you are getting yourself into.

Variable rates change with economic conditions, therefore, you could have a great rate one month and a terrible rate another month. Do not play a guessing game with you credit card interest rate. Get a low fixed rate and you will be much happier.

Intangible costs can ruin a credit card. Have you ever called your credit card company only to listen to an infinite amount of menu options? When you finally get a real person on the phone that person tells you that you have called the wrong department. In an attempt to transfer you, the main menu comes back up and you are back to square one. At the least, this whole process is a waste of time. Why put up with this? As I said before, too many credit card options exist for you to have to settle for one with mediocre service. Your time is valuable; do not waste it on bad customer service!

Know the costs that are associated with a credit card. By doing this, you will be able to make the best decision possible based on your needs and wants.

Saving Money While Paying Off Your Credit Card Debt

Credit card debt can be a real financial drain. You have all heard the statistics and seen the commercials. If you made only minimum payments, it could take you over 7 years to pay off a debt of only $2,000! This is insane! Why pay off the interest when you could be paying off the principal? There are some simple steps you could follow in order to save money on your credit card debt.

First, you must make more than the minimum payment. If you broke down the minimum payment, you would discover that almost half of it goes to paying interest. This is money that you are paying that is not reducing your outstanding balance. If you pay more than the monthly payment, more money goes to the pay off the principal and thus, it takes less time to pay off the debt.

Second, you can utilize a balance transfer. This option is only good if your interest rate is high. Sometimes, credit card companies will offer to give you a card with a 3, 6, 9, or even 12 month interest free or very low interest rate (usually around 2%) introductory period. After the introductory period, the interest rate resets to the default rate. If this default rate is lower than you current interest rate, you should transfer your balance to this new credit card. It is a very simple procedure, you will save tons of money because you will significantly pay down your debt during the introductory period, and your default interest rate on the new card will be better than the interest rate on the current card thus, saving you more money. Everybody wins!

Last, you can call your credit card company and ask for a lower interest rate. You have to have good credit to do this and usually have to have had an account with the credit card company for over six months. However, if you can take advantage of this, I suggest that you do. Many people do not know that you can negotiate with your credit card company and raise your credit limit and reduce you interest rate. If they seem reluctant at first, threaten to close your account. Make them believe that you can receive a better deal elsewhere. Better yet, have a better deal waiting and see if your current company can match it. If they claim they cannot, tell them that you will no longer do business with them and hang up. However, do not close the account because this would negatively affect your credit score. Instead, never use the card and see if your current company comes around.

Saving money on debt is possible; you just have to know where to look and what to do. Take advantage of these easy to use tips, and you will be debt free for less money in a faster time frame!

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.

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?

Credit Score Conundrums

In my previous post, What are the Components of a FICO Score?, I discussed what the Fair Isaac Corporation takes into account, and each items respective weight, when calculating your FICO score. The interesting thing that I have noticed is that certain practices can both raise and lower your credit score. Lets look at a few of them:

(1) 30% of your score is based upon you debt to credit ratio, while 10% of your score is based upon the number of credit inquiries and “new” credit. The ideal situation is having a maximum of 25% of your credit in use as compared to your debt. Therefore, if you have $1000 in credit, you want to owe no more than $250 total.

As you continue to make consistent payments on your cards, you will most likely become eligible for a credit limit increase. However, you usually have to ask the credit granting company for an increase on your limit. This is good because it will lower your debt to credit ratio, however, you have just created “new” credit and just had an inquiry dinged against your credit report, and thus could lower your score. Interesting!

(2) Some experts state that you should pay off your outstanding balance in full while other experts say that creditors want to see consistent payments, thus you should always pay your bill over time. We now know that 35% of your FICO score depends upon timely payments. Nowhere in that calculation does the amount paid come into affect. Creditors send you a bill with the minimum payment set for you. Most experts agree that you should more than the minimum payment, but not for credit score reasons. You should make more than minimum payments so that you do not get hosed by the interest charges.

The bottom line is, paying off your amount due, whether in full or in parts, is not going to hurt your score (as long as those payments are timely). If you can afford to pay more than the minimum payment, do it. If you cannot, do not. I seriously doubt a creditor is going to penalize you (by means of a lower credit score) for paying back their money in one lump sum!

(3) 10% of your score is based on the type of credit you have. Most people build their credit score in order to take out installment loans, however, installment loans can lower your score. The situation that presents itself is an odd one. Most people build their credit score in order to purchase a car and/or home. However, taking out one of these loans can lower your score because some creditors may feel that this big monthly obligation could affect your ability to pay them back. Now we are back to the debt to credit ratio and the choice of whether or not to raise the credit limits.

The truth is, it seems that certain simple strategies (pay your bills on time, keep your debt low, and keep your credit high) have been to proven to build a credit score significantly. All of the other little things can either slightly chip away or slightly add to your credit score. As I pointed out, some strategies can have both a positive and negative effect. Therefore, if you want to play it safe, stick to the simple strategies and always be aware of the contents of your credit report and credit score.

Should You Obtain the Services of a Credit Monitoring Service?

As I have been discussing in previous posts, credit is a very important asset in today’s society. Differing views exist as to the overall importance of credit versus the importance of cash, however, supporters of the latter do not deny that credit can be a useful tool.

If you have credit, do you know how to protect it? As you may know, identity theft is one of the most “popular” (for lack of a better term) crimes to commit. Two problems exist with credit and identity theft. First, victims of identity theft have a hard time repairing their credit even though the victim is not the guilty party. Second, you are not aware you are a victim of identity theft until you try to make a purchase that requires a credit inquiry.

Many identity thieves use a different address when obtaining credit in the victim’s name. Therefore, the victim receives no bills, no late notices, and no phone calls about defaults and delinquencies. In the normal, everyday use of your credit card, you credit report is not inquired upon to see if you qualify for a purchase. Your credit report is only used if you intend to make a large purchase (such as a house or automobile). This can leave you “in the dark” as to any illicit credit activity for several months. In the meantime, your credit is literally being destroyed!

In order to prevent this, I use a credit monitoring service. The credit granting company I use offers such a service for $12.00 per month. It has every feature you can think of and gives me instant access to my full credit report and all three of my credit scores. I use this service because it will enable me to quickly identify any unusual information on my report, as well as show me if my credit score raising techniques are working. In addition to those services, the credit monitoring service also notifies me if any unusual activity is being reported on my report.

If you choose to obtain these services, make sure you follow some guidelines:

(1) Make sure the company is reputable. You are going to be giving this company all the information (including your social security number, your address, your birthday, etc.) it would every need to steal your identity. Make sure that the company has many safety features to prevent that from happening.

(2) A larger price per month does not mean better service or product. I have seen prices from $12.00 per month to over $100.00 per month for these services. Make sure you are getting some vastly superior product or service if you choose to shell out an addition $88.00+ per month.

(3) Make sure the service is easy to use and has a way to be immediately reached in the event that you notice suspicious charges on your credit report. You do not want to find something wrong and then find out that you have to submit a claim that could take weeks to process!

If you decide that these services are right for you, shop around, and find the best deal. Protect your credit now and you will be able to save yourself some frustration in the future. Think of this service as a necessary insurance in an identity theft rich time.

How Important is Good Credit?

Do you think that good credit is not an important asset? I have a friend that thought that very thing. Suddenly, not to long ago, reality slapped him in the face. His credit score was so bad that he could not get financed for a car! His lease was up and he tried to get another car, unfortunately, he was denied at every place he attempted.

You may be thinking that he did not look hard enough or was trying to get too expensive of a car. You may be correct, however, the point is that something like buying a car should be an enjoyable experience. Buying a car should not be an industrial pain that consumes one week of your life!

The sad truth about credit is that good credit is hard to get and bad credit is easy to get. If you have bad credit, you need to start today if you want to fix it. If you look at your credit report, you will see that negative information (such as late payments, charge-offs, etc) can stay on your credit report for years!

My buddy could not get financing for a $25,000 car. Could you imagine if he tried to get financed for a big purchase, like a house? That is too scary for me to imagine! Take care of your credit and you will be one step closer to financial freedom.

Tips to Raise Your Credit Score

In my previous post What are the Components of a FICO score?, I discussed the different components of a FICO score and their respective weights in determining your credit score.

This post will provide a few tips that you can use to raise your credit score. First, if you have no idea what your credit score is or what information is in your credit report, I suggest you get both. You can get a free copy of your credit report from all three credit reporting agencies by going to Annual Credit Report. This service is completely free (there is absolutely no catch) and is easy to use.

Your credit score is a different story. I am unaware of any website or company (except Washington Mutual that just started the promotion of giving you access to your credit score for free if you have one of its credit cards) that will give you free access to your credit score. If you really want to know your credit score and do not want to pay for it, there is a free way to obtain the information, although it is a little shady.

If you want to get a free look at your credit score, go car shopping! Better yet, just call a car dealership and tell them you are interested in a car. They will run your credit to see if you qualify for the car you are “interested” in. Once they say you qualify or not, ask the salesperson what you credit score is. They will almost always tell you. When the salesperson wants to move on with the deal, just tell them that you are doing some comparative shopping and price searching and that you will get back to them.

If you are uncomfortable with obtaining your credit score this way, all three of the credit reporting agencies will let you buy the information for around $15.00 for all three scores.

Once you have your credit scores and reports, you can see where you need improvement. There are some general things you can do to start to boost your score. Although you will no longer be able to use the authorized user method to boost your score, you can still, (1) pay bills on time; (2) keep your debt low; and (3) not open lots of accounts at once.

Those are general tips, but there are other things you can do and other information you should know.

(1) If you can prevent it, do not close credit accounts. Many people close credit accounts they hardly use or that they just paid off to avoid the temptation of using the card again. This is a bad move because 15% of your credit score is based upon the length of your credit history. If you find that one of your cards is not in use, start using it for a very specific thing (for example, only buy gasoline/diesel with that one card) and use it for nothing else. By doing this, the card is in use, and the payment will be low. This way, you get to keep your lengthy credit history, and you are building points by making your payments on time.

(2) Closing an account does not mean that you no loner have to pay what is owed. This seems simple enough, but you would be surprised how many people are under the false impression that closing a credit account means that they are no longer liable for the debt. This is a rookie move and should not be made by aspiring entrepreneurs! Do not close the account because you are having trouble paying, instead, stop using the credit card! None of the fees change and none of interest rates decrease by closing the account. Therefore, what is the benefit of closing the account? If you fear that by keeping the account open you will continue to use the card, destroy the card. Later, when you feel you have gotten things back in order, call the credit company and tell them that your card was destroyed (by the washing machine, the dryer, or whatever you can think of), and get a new card. By closing the account, you only hurt your lengthy credit history!

(3) Know that certain debts are weighed differently than others. Revolving debt is weighed more heavily in determining your creditworthiness. Revolving debt is money owed to a creditor who sets your monthly payment based on the current balance. This is different from installment loans, (such as student loans) where the amount owed is fixed (not based on your current balance), usually payable monthly, and almost never changes. Keep those revolving debts low and your score could increase.

(4) If you have bad credit and are having trouble getting a card, try a department store. If you find yourself having trouble getting credit from the “big boys” (Visa, MasterCard, Discover, American Express, etc.) try getting a card from a department store. Their interest rates are terrible, but they are usually much easier to get. This credit will help you start to reestablish yourself as creditworthy and will help improve your score, if you make timely monthly payments and keep the debt low.

(5) If department stores do not work, you can get a secured credit card. Secured credit cards are credit cards with a deposit backing. In other words, your credit limit is set by how much money you give the company. If you deposit three hundred dollars, your credit limit is three hundred dollars. Unlike a debit card though, charges do not come out of that deposit amount. You are sent a bill like a credit card and have to make the payments. Be cautious if you take this route because some of these companies are predatory and charge OUTRAGEOUS fees and interest rates! If you find out that you are paying more to possess the card they you are actually spending by using the card, dump it!