Viewing entries tagged
Credit-Education

Why Credit Avoidance Is a Bad Strategy

July 20, 2014

The title of this piece alone is enough to ruffle the feathers of the die-hard believers in the cash-and-carry lifestyle. So, before I even begin with my explanation of the many ways that swearing off credit can come back to bite you, let me begin by stating that you can still live a debt free lifestyle while building a solid credit score. Don't believe me? Has your favorite financial guru told you otherwise? Before you shake your head and move on to the next item in your newsfeed, take 5 minutes to hear me out. Trust me, you will be glad that you kept reading.

Your Credit Score Is NOT Your Debt Score

Despite what you may have heard, credit scoring models do not reward consumers for going into debt. In fact, the truth is quite to the contrary. The idea that you have to carry a lot of debt in order to have good credit scores is completely false. It is 100% possible for you to be debt free and still have very good credit scores.

Credit scoring models like FICO pay a lot of attention to a consumer's debt load. Many consumers find it surprising that a whopping 30% of their FICO credit scores come from what is known as the "Debt Category" of their credit reports. Credit scoring models are constructed so that the more you owe, the worse it is for your scores. This fact is especially true when it comes to credit card debt. However, if you have credit cards with zero balances you will be heavily rewarded in the credit score department. Having credit card accounts which you keep paid off shows the credit scoring models that you are a good credit risk. Conversely, charge up more credit card debt than you can afford to pay off in a month and not only will you waste money on interest fees but your credit scores will also suffer.

Credit Matters In More Ways Than You Think

If you have experienced a financial disaster, bankruptcy, illness, or just plain bad financial decision making in the past then the idea of swearing off credit all together and adopting a cash-and-carry lifestyle can be tempting. Deciding to close your accounts and never again apply for another credit card or loan is a drastic decision, but plenty of people have proven that it is possible to live a life free from these traditional "trappings" of the credit world. However, what followers of this cash-and-carry lifestyle fail to consider is the fact that pretending their credit doesn't matter can cost a lot of money in the long run.

Thinking that your credit will only have an impact on your life if you intend to apply for a credit card or a loan is completely unrealistic. Like it or not, we live in a very credit driven world. Here are just 7 of the negative consequences to not having good credit.

Without good credit:

It can be hard to qualify for an apartment.
Getting a cell phone contract can be very problematic.
Higher insurance premiums are probably in your future.
Getting a job or a promotion may be difficult.
Security deposits on utility accounts are higher.
Receiving a security clearance for a job could be very tough.
Qualifying to purchase a home might be impossible.

The Truth About Credit "Temptation"

Again, I agree with those who believe that debt is bad. Excessive debt will waste your hard-earned money, it will lower your credit scores, it can be bad for your marriage, and it can cause you a lot of worry and stress. However, the idea that swearing off credit cards in order to avoid the temptation to go into debt is an overly simplistic approach to a complicated problem.

The root of the problem which people who are afraid of credit need to address is the fact that having credit cards is not what caused their financial and credit problems. Problems of this nature are almost always caused by poor money management habits. Saying that credit cards cause people to go into debt is like saying that spoons make people fat.

Closing your credit card accounts is not going to eliminate the temptation to over spend. In fact, for the person who has truly mastered proper money management habits, the temptation to charge more than he/she can afford to pay on a credit card is no greater than the temptation to spend too much on a debit card. Cutting up your credit cards is simply not the answer to your financial problems.

If you have made credit or money mistakes in the past, you are not alone. Don't allow the mistake of your past to define you. Instead of feeling defeated and ashamed you can challenge yourself to try again.

You should not allow let fear or misguided advice cause you to believe that a life free from the world of credit is your answer. After all, in reality there is no such thing as leading a life which is unaffected by your credit. You can embrace this knowledge or you can try to hide from it. Either way, your credit is always going to have a big impact upon your life.

Michelle Black is an 12+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.

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Credit Report vs. Credit Score - What's the Difference?

February 13, 2014

Credit Reports versus Credit Scores

Let’s face it, for most people the world of credit can be a very confusing place. If you can’t explain the difference between a credit report and a credit score, you are not alone. People often use the terms “credit reports” and “credit scores” as if they were interchangeable. However, credit reports and credit scores are two totally different animals. Here is a crash course in credit terminology to help you make sense of this confusing topic and turn you into the super savvy consumer you always wanted to be.

Credit Reports

There is not merely one, but rather three major credit bureaus who compile data from lenders, credit card companies, collection agencies, public records, etc. The credit bureaus are Equifax, Trans Union, and Experian. The data is compiled into credit files which are then used to generate credit reports (basically user friendly versions of the credit files themselves). In fact, the credit bureaus compile credit data about millions of consumers and sell credit reports to lenders and directly to consumers themselves.

If you have not checked your credit reports in a while, it is a good idea to do so right away. After all, it is ultimately your responsibility to monitor your credit reports for errors and for fraud. You can access a free copy of each of your credit reports (NOT your credit scores) each year at www.annualcreditreport.com. Credit reports do not exist to judge your credit management history, but rather to simply lay out the facts regarding how well you manage your debts.

Credit Scores

Contrary to popular belief, the credit bureaus themselves do not calculate your credit scores. Where a credit report simply lists a record of your credit management history, a credit score actually exists to evaluate and rate that data into an easy to understand number for lenders. A low number indicates that the consumer has a history of poor credit management. A high number indicates the opposite.

The original and most popular credit scoring model by a huge margin is FICO. In 1989 FICO partnered with Equifax to introduce the first credit bureau FICO risk score. The purpose of a FICO credit score is to predict risk – specifically the risk of the consumer going 90 days late on any account within the next 24 months. Today, FICO builds credit scoring software and installs it on the mainframe of each of the 3 major credit bureaus. The credit bureaus will use FICO’s software to calculate their own credit data and then sells the credit reports with credit scores to lenders. FICO receives a royalty from the credit bureaus for the use of the software.

FICO credit scores range from 300 to 850. If a consumer has a low credit score then the data in the consumer’s credit report indicates that there is a high risk involved with loaning money to that consumer. If a consumer has a high credit score then there is a low risk involved with loaning money to that consumer.

As mentioned above, consumers are currently not entitled via federal law to receive free copies of their credit scores annually. (Note: if you apply for a mortgage then mortgage lenders are required by law to show you all 3 of your credit scores that were pulled for the mortgage application.) Still, there are several places online where you can receive free educational credit scores (not the same scores as the ones used by lenders) or a free score from one of the bureaus individually. You can also view your credit scores, often initially for free, as a benefit of signing up for monthly credit monitoring services. Beware, many monitoring services will only all you to see your credit score from one and not all three of the credit bureaus. CLICK HERE to access a great comparison site where you can check out the benefits of several different credit monitoring services before deciding which option is right for you.

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Should I Consolidate My Credit Card Debt?

February 6, 2014

Credit card debt can quickly become an ugly monster. As a reader of the HOPE4USA blog, you already know that outstanding credit card debt can significantly lower your credit scores, even if every single payment is made on time. (Check out The Ideal Credit Card Balance to Optimize Credit Score for more information regarding how credit card balances impact your credit scores.) If your credit card debt has gotten out of control, then it is time to step back, assess the damage, and come up with a plan of action to fix the problem before it gets worse.

Step One: Face the Facts

Now that you are ready to begin tackling your credit card debt problem, the first step is to make a list of all of your current credit card debt. List your credit card debt from the card with the highest balance at the top of the list and the card with the lowest balance at the bottom. Here is an example:

1. Capital One - $5,000
2. Chase - $3,500
3. Citibank - $2,800
4. Discover - $1,200

Step Two: Figure out How Much You Can Afford to Pay

Of course, you must maintain at least the monthly minimum payment on each of your credit cards in order to protect your credit scores. However, if the minimum payment is all that you pay then you can count on being stuck underneath a pile of credit card debt for a long time – potentially as long as decades! If you do not already have a monthly budget set up for yourself, then CLICK HERE for a complimentary copy of the HOPE Basic Budgeting Worksheet. Once you have filled out your budget sheet (and maybe made a plan to cut back on unnecessary spending) you will be able to determine how much “extra” income you can afford to pay on your credit card debt each month.

Step Three: The Snowball

One option for paying off your credit card debt is the “snowball effect.” Here is how it works. Begin by paying the minimum payment on all of the credit cards on your list, with the exception of the card with the lowest balance (#4 – Discover in the example above). For the card with the lowest balance you will want to use all of your additional funds and pay the largest payment possible. Your goal should be to pay off the card with the lowest balance first, then move up the list to the next card with the lowest remaining balance. Rinse and repeat until all of the cards from your list have been paid in full.

Step Three: Determine If a Consolidation Loan Is Right for You

If you find yourself in a situation where it is going to take you a long time to pay off your credit card debt, even if you use the snowball effect method above, then it may be time to consider a debt consolidation loan. There are 2 great benefits to a debt consolidation loan. First, when you consolidate your revolving credit card accounts into an installment loan your credit scores will likely see an almost immediate increase. The reason you will most likely see a credit score increase is because credit scoring models, like FICO and VantageScore, do not treat installment debt the same way they treat revolving debt. A credit card with a balance has a great potential to harm your credit scores. However, an installment loan (like a personal loan or a vehicle loan) does not have the same negative effect. The second benefit that comes along with a consolidation loan is that it has the potential to save you money. Most debt consolidation loans have a much lower interest rate than your credit card accounts.

If you do decide to use a debt consolidation loan as a tool to help get yourself out of credit card debt, keep the following in mind.

1. Do not charge your credit cards back up once they have been paid off.
You have to determine ahead of time that you will not allow it to be an option to charge up new balances on your credit cards. In fact, it would probably be a good idea for you to lock your credit cards up in a safe place and only use them about once a quarter in order to maintain some activity on the accounts.

2. You should still try to pay off your consolidation loan early.
Just because you consolidate your credit card payments into an installment account does not mean that you should not try to pay the loan off early. Paying extra money onto the principle balance of your consolidation loan each month is still a wise financial strategy to follow.

CLICK HERE to compare consolidation loans and personal loans to find an option which may be right for you.

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How to Remove Federal Tax Liens from Your Credit Reports

November 18, 2013

“Michelle, I recently paid a federal tax lien with the IRS. I am having a problem though because the IRS is still reporting the lien on my credit reports. The lien says it has been released, but aren’t they supposed to remove the lien from my credit altogether now that it has been paid? This is really hurting my credit – help!”

I receive questions like the one above on an almost weekly basis from HOPE4USA clients, Realtors, loan officers, and from Facebook followers. Typically, just because a negative item on a credit report has been paid or settled, that does not mean that the item will be removed from the credit report. The Fair Credit Reporting Act (FCRA) allows for negative items to remain on a consumer’s credit report, even if the item has been paid, until the credit reporting statute of limitations has expired. (Check out my article “How Long Will Items Stay on My Credit Report?” to see the specific statutes of limitation for different types of credit report items.) Released tax liens are able to remain on your credit reports for 7 years from the date the lien is released. Unpaid tax liens can remain on your credit reports indefinitely – yikes!

How Liens Show Up on Your Credit Reports

Thankfully, when it comes to federal tax liens there IS a way to have paid liens removed from your credit reports prior to 7 years from the release date. Before I explain how the lien can be removed from your credit, let’s take a quick look at the way tax liens show up on credit reports in the first place. It is important to understand that tax liens (federal or state) are not reported to the credit bureaus. The IRS does not notify the credit bureaus whenever a lien is placed against a consumer. However, liens are public records and the credit bureaus proactively search courthouse records and add them to consumer credit reports.

How to Remove Paid Federal Tax Liens

In February of 2011, the IRS adopted a new policy regarding federal tax liens known as the Fresh Start Program. The new policy states that if a taxpayer will pay their bill in full, the lien will be withdrawn by the IRS once it has been paid. Eligible taxpayers may even be able to have a lien withdrawn if they simply enter into a payment arrangement call a Direct Debit Installment Agreement – wow! Of course, when it comes to a having a lien withdrawn under a payment arrangement there are a lot of rules (i.e. the lien balance must be $25,000 or less, you must have made at least 3 consecutive payments, etc.).

Remember how I mentioned above that the credit bureaus proactively search public records and report liens on consumer credit reports? Well, the credit bureaus only choose to report filed and released liens to on consumer credit reports. If you send the credit bureaus proof that your tax lien has been withdrawn then they will remove the lien from your credit reports.

If you are a current member of HOPE4USA with a paid federal tax lien or a federal tax lien currently involved in a repayment plan, please contact your case manager. You may be eligible to request for the lien to be withdrawn! Unsure if a tax lien is currently lowering your credit scores? CLICK HERE for a list of websites to compare where you can see a copy of your credit scores today.

Michelle Black is an 11+ year credit expert with HOPE, the credit blogger at www.HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.

Credit Reports

Knowing exactly what is on your credit reports and where your credit scores fall currently is the first step for anyone looking to build healthy credit.

Credit Cards

Compare the credit card offers below to determine which cards are right for you.

Credit Repair Tool Kit

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The Cost of Bad Credit

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The Ideal Credit Card Balance to Optimize Credit Scores

October 17, 2013

As a reader of our HOPE4USA Credit Blog you already know that credit cards can potentially be a very powerful tool - when used properly - to help drive your credit scores upwards. A credit card with a $0 or very low balance can potentially help to give your credit scores a substantial boost. If you need some more great credit boosting tips check out this article for some of my favorite suggestions.

Lately I have noticed a lot of confusion regarding whether or not it is best for a consumer to carry a balance on a credit card in order to receive a potential score boost from FICO. For a long time, I have held the opinion that carrying a $0 balance on a credit card is always the best way to go. However, as I have consulted with professionals whom I respect within the mortgage industry I have found that many of them have the opinion that a consumer should carry a $10 balance to achieve the maximum score increase possible. So I set out to research the topic. What I have found is that the truth is actually somewhere in between the 2 opinions.

FICO rewards consumers (with points added to their credit scores) when the consumer has a 0% utilization ratio on a credit card or, in laymen's terms, a $0 balance. However, FICO rewards consumers just a little bit more when they have a 1% utilization ratio. What does a 1% utilization ratio look like? Here are a few examples:

1. On a credit card with a $300 credit limit a balance of $3 = a 1% utilization ratio.
2. On a credit card with a $500 credit limit a balance of $5 = a 1% utilization ratio.
3. On a credit card with a $1,000 credit limit a balance of $10 = a 1% utilization ratio.

This means that if a consumer has a credit limit of only $300 and they are carrying a $10 balance then the consumer is above the 1% utilization ratio and, therefore, is not receiving the full potential score benefit from that card. In fact, the consumer is losing some of the points that he or she would receive if the same card had a $0 balance. However, on a credit card with a $1,000 credit limit then carrying a $10 balance is a good idea in order to receive the maximum points available. Don't look at a zero balance as a bad thing. It is awesome. But, a 1% balance on a credit card is awesome + 1.

Another factor to consider is how difficult it is to actually have a precise 1% balance show up on a consumer's credit report vs. a $0 balance. Let me give you another example. Joe Consumer wants to boost his credit scores as much as possible before applying for an upcoming mortgage loan. Joe has a VISA with a $300 limit. Joe knows that 1% credit card utilization ($3 on his $300 VISA) can help to improve his scores. So Joe goes to his local mall on July 1st and charges $50 on his VISA. Unbeknownst to Joe, VISA reports the $50 balance on July 3rd. On July 5th Joe pays the $50 balance down to $3 which equals a 1% utilization ratio on his VISA card. However, on July 10th when Joe's loan officer pulls his credit report the balance on his VISA is being reported as $50 NOT $3. Joe's limit of $3 will not be reported to the credit bureaus by VISA until August 3rd (assuming that Joe does not use the card for any additional purchases in the meantime). Because Joe's VISA is at a $50 balance, which is a little over a 16% credit utilization ratio, Joe lost potential points that he could have gained with a $0 limit.

Therefore, my recommendation in most cases is still that a $0 balance on a credit card is the best way to go to help boost credit scores. If you have time to play around with your balance for at least 60 days prior to a loan to try to reach the perfect 1% credit card utilization ratio - go for it! Never turn down extra points. However, if you know that you are going to be applying for a large auto loan or mortgage within the next 45 days then your best bet is to keep a $0 balance.

Either way you go - $0 balance or 1% credit utilization ratio - you will be showing the credit bureaus that you are a good credit risk. While you have the right to fully utilize the entire credit limit on your credit card accounts you are choosing to exercise discipline and financial restraint. In other words, you are not maxing out your credit cards each time the shoe store comes out with its hottest new releases. Showing the credit bureaus that you have this discipline and restraint will result in a reward - extra points for your credit scores!

Have credit card debt that you need to consolidate? Click here to compare consolidation options.

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.

Credit Reports

Knowing exactly what is on your credit reports and where your credit scores fall currently is the first step for anyone looking to build healthy credit.

Credit Cards

Compare the credit card offers below to determine which cards are right for you.

Credit Repair Tool Kit

Get your copy for FREE today!