Friday, October 13, 2006
How Debt Affects you Credit Score
Whenever you apply for a line of credit - whether it be a mortgage, a personal loan, or a credit card - your credit rating is the deciding factor in if you receive the credit... and what your interest rate will be. Most people realize this, however, they don't understand how their credit score is tabulated and what their debt and financial history has to do with the three numbers associated with their credit worthiness.
There are three major credit bureaus. Experian, Trans Union, and Equifax - and each of these use FICO (a credit scoring system devised by Fair Isaac & Co.) to establish that three digit number, which goes from a low of 300 to a high of 850.
Let's breakdown the equation used in determining this number:
1. One-third of the score is based on your payment history. Any late payments, skipped payments, and defaults will affect this portion of your score in a negative fashion. If you're a stickler about paying on time for at least the minimum amount, then you have nothing to worry about.
2. Another one-third is determined by how much debt you have as compared to what available credit you have, as well as what your total current debt is. So, if you tend to max out your personal lines of credit, this portion of your score will be affected negatively. Alternately, if you only hold a few lines of credit and tend to pay most, or all, of your balances off monthly - the effect will be positive.
3. The final one-third is a tabulation of three different factors. How long of a credit history you show; the amount of recent credit you've applied for; and what types of credit are in your history. Of these three, the length of your credit history has the heaviest weight. Those who have already established a long history of borrowing and repaying what they owe are looked on as a more favorable credit risk. Secondary to your credit history length is how many recent applications for credit you have. The higher the number, the lower the score. Lastly, the types of loans you've carried will show your overall spending practices and your consistency in repaying those loans.
Once your score is reached and given to prospective lenders, it is the primary; and in some cases, the only, factor that is used in deciding what interest rate to charge you. Therefore, the higher your score, the less money you will spend overall in any loan you receive. Interest rates can increase the base amount borrowed by a somewhat insignificant number up to a very significant number that is translated into dollars out of your bank account.
Also, credit reporting agencies are not always accurate. You should definitely acquire a copy of your credit report to search for inconsistencies and untruths. If you find any, you can dispute them with the reporting agency.
To save the most money you can whenever applying for any type of a loan; be sure you have the knowledge on how your credit worthiness is scored and that the information they have is absolutely correct.
There are three major credit bureaus. Experian, Trans Union, and Equifax - and each of these use FICO (a credit scoring system devised by Fair Isaac & Co.) to establish that three digit number, which goes from a low of 300 to a high of 850.
Let's breakdown the equation used in determining this number:
1. One-third of the score is based on your payment history. Any late payments, skipped payments, and defaults will affect this portion of your score in a negative fashion. If you're a stickler about paying on time for at least the minimum amount, then you have nothing to worry about.
2. Another one-third is determined by how much debt you have as compared to what available credit you have, as well as what your total current debt is. So, if you tend to max out your personal lines of credit, this portion of your score will be affected negatively. Alternately, if you only hold a few lines of credit and tend to pay most, or all, of your balances off monthly - the effect will be positive.
3. The final one-third is a tabulation of three different factors. How long of a credit history you show; the amount of recent credit you've applied for; and what types of credit are in your history. Of these three, the length of your credit history has the heaviest weight. Those who have already established a long history of borrowing and repaying what they owe are looked on as a more favorable credit risk. Secondary to your credit history length is how many recent applications for credit you have. The higher the number, the lower the score. Lastly, the types of loans you've carried will show your overall spending practices and your consistency in repaying those loans.
Once your score is reached and given to prospective lenders, it is the primary; and in some cases, the only, factor that is used in deciding what interest rate to charge you. Therefore, the higher your score, the less money you will spend overall in any loan you receive. Interest rates can increase the base amount borrowed by a somewhat insignificant number up to a very significant number that is translated into dollars out of your bank account.
Also, credit reporting agencies are not always accurate. You should definitely acquire a copy of your credit report to search for inconsistencies and untruths. If you find any, you can dispute them with the reporting agency.
To save the most money you can whenever applying for any type of a loan; be sure you have the knowledge on how your credit worthiness is scored and that the information they have is absolutely correct.
Finding Solutions To Debt
Many of us have debt problems, but one thing is for sure, not a lot of us have debt solutions. And even if we did, it wouldn't necessarily mean that one person's solutions would work for another.
With that said, there are still some ways that we can all understand and work towards solving our debt problems.
We need to understand debt before it becomes an unnecessary burden, weighing us down and choking the very life out of us. Some debt is okay to accumulate, and we refer to this as "good debt".
Going into debt with your first mortgage might seem like a lot of debt for instance, but it's a move towards completely owning a major real estate asset. Other good debt includes borrowing for an education. Sometimes this kind of debt can get out of hand and into the area of $30,000 or more. It's important to weigh your future earning potential against your future debt burden before you begin or continue.
Other debt should be avoided at all costs. Credit card debt, for example, typically has high interest rates and low monthly minimum payments. This way, you'll be mired in debt for the next 40 years. When spending on lines of credit, credit cards or on a loan, make sure your purchases are adding value to your life. For instance: renovating your house increases the value of your property when you sell, so this is a good option. Or, purchasing a reliable vehicle for a new job in which you will be required to drive is another smart move. Avoid accumulating debt for meals, clothes or vacations that won't help you in the long run.
Having a budget is the most important debt solution. It prevents you from over-spending and can often increase the amount of money you can put toward your debt each month. Track how much you are spending by writing down all the payments you will need to make in a month.
Example:
Gas: $200
Groceries: $400
Utilities: $200
Mortgage: $600
After that, compare all the spending you are required to do to how much money you earn in the month. Chances are there will be a nice chunk of money left over. That's the money you spend every month on things you don't need or on entertaining yourself. Lots of times, we don't even remember what we spend this money on. The next step is to a lot yourself a portion of that money for monthly spending. Part of the remaining amount can be set aside for emergencies and part of it can be put against the debt you owe.
If you have multiple debts, concentrate on paying down one debt at a time. Start with the debt that has the highest interest rate and continue to make minimum payments on the others. Put as much money as possible onto that debt and when it is gone move on to the debt with the next highest interest rate. You should never make only minimum payments on all of your debts. It will take you years to pay them all off with thousands of added dollars in interest.
If you feel like you can't get out of debt on your own, visit a financial institution or talk to a credit counselor. They can help you with more structured options.
With that said, there are still some ways that we can all understand and work towards solving our debt problems.
We need to understand debt before it becomes an unnecessary burden, weighing us down and choking the very life out of us. Some debt is okay to accumulate, and we refer to this as "good debt".
Going into debt with your first mortgage might seem like a lot of debt for instance, but it's a move towards completely owning a major real estate asset. Other good debt includes borrowing for an education. Sometimes this kind of debt can get out of hand and into the area of $30,000 or more. It's important to weigh your future earning potential against your future debt burden before you begin or continue.
Other debt should be avoided at all costs. Credit card debt, for example, typically has high interest rates and low monthly minimum payments. This way, you'll be mired in debt for the next 40 years. When spending on lines of credit, credit cards or on a loan, make sure your purchases are adding value to your life. For instance: renovating your house increases the value of your property when you sell, so this is a good option. Or, purchasing a reliable vehicle for a new job in which you will be required to drive is another smart move. Avoid accumulating debt for meals, clothes or vacations that won't help you in the long run.
Having a budget is the most important debt solution. It prevents you from over-spending and can often increase the amount of money you can put toward your debt each month. Track how much you are spending by writing down all the payments you will need to make in a month.
Example:
Gas: $200
Groceries: $400
Utilities: $200
Mortgage: $600
After that, compare all the spending you are required to do to how much money you earn in the month. Chances are there will be a nice chunk of money left over. That's the money you spend every month on things you don't need or on entertaining yourself. Lots of times, we don't even remember what we spend this money on. The next step is to a lot yourself a portion of that money for monthly spending. Part of the remaining amount can be set aside for emergencies and part of it can be put against the debt you owe.
If you have multiple debts, concentrate on paying down one debt at a time. Start with the debt that has the highest interest rate and continue to make minimum payments on the others. Put as much money as possible onto that debt and when it is gone move on to the debt with the next highest interest rate. You should never make only minimum payments on all of your debts. It will take you years to pay them all off with thousands of added dollars in interest.
If you feel like you can't get out of debt on your own, visit a financial institution or talk to a credit counselor. They can help you with more structured options.
Monday, October 02, 2006
Practical budgeting can help you pay off your debt
Many people want to pay off their debt quickly and efficiently and yet most people end up making payments on debt for their entire lives. Well, there is a reason why this happens. The debt systems that are in place are designed to make lenders money and to make money lenders need consumers who are willing to pay off their debt with added interest. So, already consumers are at a disadvantage. Luckily, there are some practical budgeting techniques that can help us all keep things on track.
1. It is important that you have a budget. This can be very complex or very simple and basically compares earning against anticipated expenses. If you can allot money for various items, such as groceries or gas, you can control how much you are spending on purchases we don't often measure. That way you can avoid spending money when it is not needed and you will end up with cash in your pocket. Plus, you will need to develop good spending habits.
2. Balance transfers can be a good thing. Transferring high-interest debt on to low-interest credit cards or lines of credit can lower your monthly payments and save you money, leaving you extra money to pay against your debt. There are some pitfalls to be aware of though.
- Once their credit cards are empty, many people will continue to charge on the new card and increase their debt load even more
- Only transfer your balance if you can control your spending on the new card; you should avoid increasing your debt load
3. Check your credit report regularly. You are entitled to one free copy each year from each credit bureau and this can help you keep your credit report free of any errors or inaccuracies.
4. Another good habit to start is talking to your creditors. As convenient as avoidance sounds, it's not a good idea. They can help you negotiate a lower interest rate or extend the loan so that you can pay them back.
5. If you use store cards, pay them off each month. Often the discount associated with the cards is less than the interest you'll pay if you maintain a balance.
6. Consider creating an emergency fund for you and your family. That way all of your money won't be tied up in bill payments and debt and if something unexpected happens, you won't have to charge it to credit. You can start with as little as $10 a month.
7. Pay with cash as often as possible. It is more tangible than credit or debit cards and you will be aware of how much you are spending.
8. Avoid making late payments as often as possible. Late payments can affect your credit rating and you can also be charged by your credits with extra interest or a flat fee.
9. Determine how much extra money you can afford to contribute to your debt. It will be paid of much quicker and save you thousands of dollars. Never make the minimum payments.
If you follow these simple concepts, your finances will be organized in no time.
1. It is important that you have a budget. This can be very complex or very simple and basically compares earning against anticipated expenses. If you can allot money for various items, such as groceries or gas, you can control how much you are spending on purchases we don't often measure. That way you can avoid spending money when it is not needed and you will end up with cash in your pocket. Plus, you will need to develop good spending habits.
2. Balance transfers can be a good thing. Transferring high-interest debt on to low-interest credit cards or lines of credit can lower your monthly payments and save you money, leaving you extra money to pay against your debt. There are some pitfalls to be aware of though.
- Once their credit cards are empty, many people will continue to charge on the new card and increase their debt load even more
- Only transfer your balance if you can control your spending on the new card; you should avoid increasing your debt load
3. Check your credit report regularly. You are entitled to one free copy each year from each credit bureau and this can help you keep your credit report free of any errors or inaccuracies.
4. Another good habit to start is talking to your creditors. As convenient as avoidance sounds, it's not a good idea. They can help you negotiate a lower interest rate or extend the loan so that you can pay them back.
5. If you use store cards, pay them off each month. Often the discount associated with the cards is less than the interest you'll pay if you maintain a balance.
6. Consider creating an emergency fund for you and your family. That way all of your money won't be tied up in bill payments and debt and if something unexpected happens, you won't have to charge it to credit. You can start with as little as $10 a month.
7. Pay with cash as often as possible. It is more tangible than credit or debit cards and you will be aware of how much you are spending.
8. Avoid making late payments as often as possible. Late payments can affect your credit rating and you can also be charged by your credits with extra interest or a flat fee.
9. Determine how much extra money you can afford to contribute to your debt. It will be paid of much quicker and save you thousands of dollars. Never make the minimum payments.
If you follow these simple concepts, your finances will be organized in no time.