Every Saturday, The Credit Toolbox does a review of good read around the blogosphere. Here’s what caught my attention this week:
Money Progress presents Sacrificing Time to Make Money.
Studenomics warns you not to Be Childish With Your Finances.
Personal Finance Software Reviews Mint Online.
Looking for Tools to Track Your Budget? My Findependence Day has some reviews.
Mighty Bargain Hunter suggests Make your kids buy some of the groceries
Growing Money has a wonderful post on How They Cut Down On Food Expenses.
Apply for Credit shows you How to Dispute Charges on Your Credit Cards.
The Smarter Wallet tells, why No Credit History? Here’s Why Building Credit Is Important.
Leave Debt Behind talks about How Does Debt Consolidation Works
Reversing Fraudulant Charges and Paying Your Mortgage Instead of Your Credit Card, great tips by Ask Mr. Credit Card.
Carnivals:
Carnival of Personal Finance
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There are a variety of factors a credit agency considers when determining your credit score. While the exact algorithms and computations are closely guarded by agencies, the basic formula is fairly well known.
The most important single factor in determining a credit score is a person’s payment history. Thirty-five percent (35%) of the determination is made by examining how well you make payments. If you consistently pay a good number of bills on time without being late, your score on this section will be higher.
If you have had bills sent to collection agencies, bankruptcies or unpaid bills, then your score on this section will be lower. The more recently you had a late payment, the more influence it will have on your credit rating.
The next most important factor is outstanding debt, which has a 30 percent bearing on your score. The most important aspect in this rating is the ratio of debt to possible debt. You should attempt to keep your debt at or below 30 % of your possible debt limits, and no more than 50 %. The ideal is to pay debt off altogether, where possible. Balances that are close to credit limits hurt credit scores.
The next factor considered with a 15% weight is the length of credit history. The longer you have had an account, the better your score is. For this reason, it is sometimes advisable to leave unused accounts open, at least as long as the credit companies will allow you to do so.
The recent inquiries on your report will have a 10 percent impact on your score. If you have “hard hits,” or inquiries initiated by you in a search for new credit, they will have a negative affect on your credit score. “Soft hits,” or inquiries initiated by companies wanting to offer you credit, do not negatively affect your score.
The type of credit you use also has an effect on your score. Specifically, loans from finance companies that specialize in high interest, high risk loans such as Beneficial Finance or American General, can cause you to have a lower score.
To improve your score, there are some simple steps you can take. First and most important, pay all bills on time. Even one or two late payments can have negative effects on your credit rating. Keep balances low on any revolving credit accounts (like credit cards or electronics programs), and pay off balances as quickly as possible. Avoid applying for credit except in cases when it is absolutely imperative.
If you have put in the hard effort it requires having a solid, high credit score, then use that score to save money whenever possible.
The most obvious and immediate advantage to those with a high credit score is that they can receive favorable loan terms, especially for cars and homes.
When you are ready to make a major purchase, it’s a good idea to apply for pre-approval for a loan prior to deciding on a home or vehicle. When you do so, ask for your credit scores – whichever ones your lender uses.
Getting pre-approved from a certain lending institution does not obligate you to use that institution when you do decide on a home or car, and it gives you powerful tools in negotiating terms for borrowing.
Besides giving you leverage when you make an offer to purchase, having the FICO score also tells you what kind of loan terms you should be getting from lenders. Armed with that information, you can shop around and push lenders a little to get the favorable interest rate and other terms your FICO score indicates that you deserve.
Use a good score to your advantage. Over 30 years, even a half a percentage off in the interest rate can save you thousands.
Another key benefit you can get by knowing your high FICO score is help in negotiating car insurance rates.
Automobile insurers use a buyer’s financial history to set insurance rates, because their actuaries (statisticians who calculate numbers based on thousands of actual customers) tell them that those people who have a poor credit history also have a high risk of insurance loss.
This means that the rates for these individuals are generally higher than the rates for individuals with higher credit scores.
Even if you are in other high risk categories, if you have your high FICO score, you can again shop around to insurance agencies and promote your good credit score. Some agents will be able to adjust your rate more than others based on that factor, and it could help you find a lower rate.
Credit card companies also make heavy use of credit scores. They will generally pull a credit report or run an inquiry (which doesn’t affect your credit) before they even send you a free offer for a new card.
If you a apply for a card, they will request a FICO number. A higher number will mean better terms, such as a lower interest rate or higher credit limit.
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There are two types of inquiries that a bank, credit card company, or other potential loan originator can make on your credit score.
These are called either a “soft hit” (”soft inquiry,” “soft pull” or “soft credit check” are synonymous terms) or a “hard hit.” (again, “hard inquiry,” “hard pull,” and “hard credit check” mean the same thing).
These terms are not official technical terms, but are instead lender jargon used to refer to the groupings of credit inquiries. Any inquiry that was, generally, initiated by someone else and doesn’t necessarily indicate an intention on your part to borrow money is known as the soft hit.
On the other hand, a credit inquiry that does represent a fairly immediate intent to borrow money is known as a hard hit. These are sometimes called voluntary credit inquiries, because you generally initiated them when you went in to apply for a loan.
A soft hit generally does not affect your credit score. These hits occur when a credit card company wants to evaluate your credit score, or when you ask for a copy of your own credit report. Lenders do not see these inquiries when they pull a copy of your credit report, and they do not negatively affect your credit score.
The credit agencies generally consider it a soft hit when a credit agency is verifying information that you gave them by running a credit inquiry. Banks looking at account status are also considered to be soft hits.
A hard hit, however, will negatively affect your score, if only slightly. These hits generally mean you have gone into a lender, filled out an application and have requested credit. If you go to a variety of banks and credit unions to get preapproval from each for a car or home loan, then each inquiry will show up on your credit reports.
These hits negatively affect your credit scores, since the very time that you decide to increase your debt load by borrowing money, you become at least a slightly higher risk for not paying it back. Clearly, if you had no debt, you’d be a great risk for having no problems paying it back.
Because the higher the amount of debt, the more difficult it becomes to repay, the credit agencies adjust your score in advance to reflect this slightly higher risk.
The Canadian government provides an official, legal arrangement for people in debt difficulty to negotiate with their creditors to repay debt on different terms that those they originally entered into.
This device, called a Consumer Proposal, is different from bankruptcy, and gives the debtor some significant advantages over bankruptcy or paying the debt back over the full terms of the loans.
The advantages to the consumer with a Consumer Proposal are that:
1. The interest rates on all debt are frozen.
2. The consumer is able to negotiate to repay a portion of what (s)he owes, if the creditor agrees.
3. Creditors are unable to take legal action against you, and the credit bureaus stop calling.
4. Any wage garnishments in place, except those for child support or alimony, are ended immediately.
5. A majority of your creditors must agree to your proposal or it is void. However, if a majority (over 50%) agrees, then all creditors are considered to have accepted.
6. The maximum time period for paying the debt is 5 years.
7. The credit ranking for a consumer proposal is slightly better than that of bankruptcy.
With a consumer proposal, the debt is not eliminated, but is nearly always reduced. The creditor agrees to make payments of a certain amount each month for a specified length of time.
With bankruptcy, the debtor is determined to be insolvent; in other words, owes at least $1,000 and is unable to make payments when they are due.
In the case of bankruptcy, there are limits on the value of personal belongings, household goods, tools for work, farm tools and vehicles that a person in bankruptcy is allowed to keep. If the value of any of these items exceeds the moderate limits set by statute, then the debtor is required to liquidate them and divide the money between the creditors.
Additionally, a bankruptcy involving assets over $10,000 are reported in the newspaper and the mark stays on the creditor’s credit report for seven years.
However, creditors do stop calling, and the debtors are allowed to keep all wages after the filing, allowing them to make a new start.
If the debtor has the ability to make payments under a consumer proposal, it is often a better choice, since creditors can oppose a bankruptcy discharge if a debtor had the means for a consumer proposal and chose not to utilize it.
The affect on the credit score of the debtor is also lower with a consumer proposal.
