When trying to build or maintain good credit, or rebuild a damaged credit score, you may receive an abundance of advice about what you should or should not do. Like all matters in life where advice is given, when building good credit is likely for you to hear a great deal of misinformation. Here are some myths about items that may impact your credit score and the realities.
- Using A Debit Card Can Improve Your Credit. Some may tell you that you need to charge your debit card as credit at the checkout in order to receive this benefit. The truth is that this will help your credit score insofar as it will not increase your debts if you are drawing on sufficient funds in your bank account. However, since using a debit card does not require giving you an extension of credit, there is no benefit to using one when it comes to building your score. Charging it as a credit will not help either in this case. All it does is hold your funds for disbursement to the merchant for three days, as it would if you were using a normal credit card. The benefit is the convenience of being able to make purchases with a swipe. Alas, if you overdraw your accounts and do not reimburse your bank for its costs and the over-payment, your credit score may be effected – in a very negative way.
- Paying Your Utilities Will Improve Your Credit Score. This is, again, not true in the literal sense. While a financial institution may take prompt payments on your utility bills into consideration when you make a loan application if your credit history is short (they often like to see an absence of missed payments for at least one year on a minimum of two accounts), the credit bureaus themselves will not keep track of your payments. Like the first myth however, if you are repeatedly late with your utility payments or owe a large back-debt, this may then be reported to the credit bureaus and result in a negative impact on your credit score.
- It Is Necessary To Have Some Debt to Have A Good Credit Score. While taking out credit and then repaying your debts in a timely manner will indeed help boost your credit score, having a consistent debt may not help you at all. Having a large debt will certainly hurt you, if you are above 50% of your combined or individual credit card limits. The best bet is to use your credit cards or take out loans for large purchases only and then pay them down as quickly as possible. Having a high credit limit and a low or non-existent debt to limit ratio will help your credit score far more than carrying a constant debt will.
- Once Something Is On Your Credit Report, It Is There Forever. We cannot foresee all circumstances of your potential credit troubles, but do not fret if you have made mistakes in the distant past. Even bankruptcy will only impact your score for a period of 10 years. Don’t let this knowledge help you to rationalize missing a payment or two. If these have happened recently, your score will go down. The larger the late payment, the worse the impact. Furthermore, if inaccurate information is included in your credit report, you can appeal to the credit bureaus Equifax, Experian, and TransUnion to have those mistakes corrected.
The bottom line is: Don’t necessarily believe everything you hear. Do a bit of research or request to see your credit reports from the big three credit bureaus. You are allowed to see your report once per year from each of the bureaus for free and there are a number of reputable websites which will provide credit-monitoring and credit score information at low cost. With these tools in hand, you can help build, maintain, or repair your credit score and move forward to a more secure financial future.
If you have a mountain of credit card debt, you should stay current and always make at least the minimum monthly payment. Credit cards are great for emergencies or large purchases, because they allow you to spread out those larger amounts over a longer period of time.
However, if your debt never seems to go away, it may be because you are only paying the minimum amount due on your cards each month. Your credit card’s interest rate accumulates additional debt every month. Take, for example, a case where you have $2,500 of credit card debt at 10% interest and a $40 minimum monthly payment. The odds are great that any or all of these numbers might be higher.
At $2,500, with 10% interest and no additional purchases on the credit card, if you pay $40 a month, it will take you 88 months (over 7 years) and $3,520 total to pay off that debt.
If you can free up an additional $10 a month, to pay $50 instead of the minimum $40, then it will only take you 65 months (just under 6 and a half years) and $3,250 total to pay the debt. That’s a savings of 13 months and $270 dollars.
The basic concept to understand is that credit card companies add interest charges to your credit balance every month. When you pay the minimum payment, you are often paying very little of the principal (the money you borrowed) and most of your payment is actually going to pay that interest.
If you need help trying to figure out how to free that money, check out our article on 9 Quick and Easy Steps to Start a Budget.
If you’d like to figure out how long it might take you to pay off your debt, or to set payoff goals, try Bankrate.com’s Credit Card Payoff Calculator.
As an increasing number of Americans find themselves burdened by mounting debts and lower incomes, scam artists have set up shop around the country, offering “help” to innocent families seeking to save their families from the hardships of bankruptcy and foreclosure. Many government agencies, like the Office of the Comptroller of the Currency (OCC) and many state attorney generals, are now providing tips to help avoid being scammed out of your money for services that don’t offer any help at all.
Money can be hard to come by in this economy. Getting help from legitimate debt counselors can be a lifesaver to those crushed by mortgage payments and other bills. Here are some tips to find real help and avoid scams that can leave you in even greater debt.
- Beware counselors that make you pay up-front for services. Understanding that those in debt already have trouble paying their bills, government agencies like the U.S. Department of Housing and Urban Development have been giving grants to credit counseling agencies to provide free services to those in debt. While small fees may be charged, these services should not cost money up-front to give you help. If a service offers to help in exchange for an up-front fee or asks you to pass your mortgage payments through their agency, beware that you may be the victim of a scam. Do a background check online, look at the HUD website, or contact your lender to see if the service is legitimate.
- Beware guarantees. Credit counselors are just that, counselors who can try to help you solve your debt problems. Legitimate services can not guarantee results. Extreme guarantees, like promises to eliminate your debt entirely, are likely to be scams.
- Beware leaseback and rent-to-buy schemes. A number of scam services are offering to hold your property and deeds for you while you pay down your debts. For a monthly fee, you transfer your deeds and titles to the service, and once your debt is paid they are supposed to sign it back over to you. The damaging effects are two-fold. Signing your property over to a third-party is unlikely to protect you from your debts and, if you grant ownership to a scammer, they may not give it back.
- Beware “insider knowledge.” Many current scams offer to help you avoid foreclosure by explaining legal “loopholes” that prove you do not have to pay your debts. Of course, this service comes for a fee and the legal advice offered is bogus.
- Beware bankruptcy scams. Some services will offer to help you avoid foreclosure and your debts by guiding you through bankruptcy – for a fee. The claim is that by filing bankruptcy, you will be able to keep your home and avoid the need to pay back your mortgage. This may seem like a good idea in the short-term. However, according to the OCC, even if you file bankruptcy, in order to avoid foreclosure you will eventually need to pay back the lender. Furthermore, bankruptcy will stay on your credit report for 10 years and impact future attempts to get loans. If you are considering bankruptcy, make sure you speak to a legitimate, HUD-approved credit counselor.
You can avoid the majority of these scams by adhering to the age-old rule, “If it sounds too good to be true, it probably is.” You can get out of debt and avoid foreclosure, but be careful in your dealings to make sure you are not taken advantage of. By avoiding up-front fees, reading agreements before you sign them, getting verbal promises in writing, and by first contacting your lender to verify the services you are receiving, you can avoid scams and start paying down your debt.
You may often wonder how your credit score is calculated, or how you can improve it. Wonder no more! Here are a few of the major factors in calculating your credit score.
- Payment History. It’s no secret. Your credit is largely an indicator of how well you will be able to pay your bills. If you miss payments or are late on a frequent basis, this may be reported to the credit bureaus. Depending on the size of your missed payment, or how late you are with your payment, your credit may be more severely effected. Making payments on your debts may not necessarily increase your credit score on its own, but missing them will certainly effect it negatively.
- Length of Credit History. The greater the amount of time you’ve been able to take out and manage debts without missing payments effects your credit score positively. Think about it in terms of a job trade. The longer you can show that you can do the job, the more likely your supervisors will allow you to continue and the less likely you are to run into trouble. Credit works on the same idea – the longer your good track record, the better your score.
- Types of Credit. Having a greater number of different kinds of debt like revolving (i.e. credit cards) and installment (i.e. mortgages) that you have been able to obtain and maintain will improve your credit. Of course, having too many kinds of the same type of credit line, like a wallet full of credit cards, can hurt your credit. Many will accumulate different types of credit lines over the course of their lifetime, such as mortgages, car loans, or credit cards. Just try not to go overboard.
- Amount Owed vs. Credit Limit. Just because you have a platinum card, doesn’t mean that the credit bureaus or creditors will look kindly if you’ve maxed out your $3,000 limit. A general rule of thumb is to set your maximum at half of what your credit limit is. Thus, if you have a $3,000 limit from the issuer, set your own limit at $1,500. A debt to availability ratio that is too high will hurt your credit.
- Frequency of Credit Application. Nobody wants to loan money to the guy that asks everyone else for money. Banks are no different. If you have applied for a credit card or loan recently and been denied, there is probably a flag in your record and you should wait a while if possible for when you are in a better financial position before applying again. If you have applied recently and been approved, it might create a red flag that suggests you need a great deal more money than has been offered. Try to limit your applications to when you really need it.
Foreclosures are again on the rise in the United States, with August 2011 showing a new resurgence. Luckily, the Obama Administration has enacted a number of programs to help families and homeowners prevent foreclosure. In the end, this means you might be able to find the time and savings you need to hold off creditors and pay-off or restructure your debt and avoid foreclosure, or transition to more affordable housing without going through the foreclosure process.
Some government resources which may be able to provide assistance through the federal government’s Department of Housing and Urban Development (HUD) and Federal Housing Administration (FHA):
The Making Home Affordable Program can help homeowners lower their monthly mortgage payments and secure a more stable loan at today’s low interest rates. Additionally, if owning a home is no longer financially sound or desirable, the program can provide home owners with a way out without the need of going through the foreclosure process.
The Home Affordable Modification Program (HAMP) lowers monthly mortgage payments to 31% of your verified pre-tax income to make payments more affordable for homeowners. HAMP modifications often results in a 40 percent drop in monthly mortgage payments. 18% of HAMP homeowners have been able to receive over $1,000 a month in mortgage payment reductions.
The Principal Reduction Alternative (PRA) helps homeowners whose homes are now worth a great deal less than what they owe by encouraging servicers and investors to reduce the amount owed.
Second Lien Modification Program (2MP) is available to homeowners whose first mortgage was permanent modified under HAMP SM and who have a second mortgage on the same property. Those homeowners may be eligible for modification and/or principal reduction on the second loan. This also applies to home equity loans or other secondary loans that make it difficult for homeowners to keep up payment on their mortgages.
The Home Affordable Refinance Program (HARP) helps those homeowners who have been able to keep current on their mortgage but have been unable to refinance their loan because their home has declined in alue. HARP may be able to help you secure a stable refinancing of your current mortgage at a lower monthly payment.
The Treasury/FHA Second Lien Program (FHA2LP) is available to those who have a second mortgage and for whom the servicer of the first mortgage agrees to participate in FHA Short Refinance. If you qualify, you may be able to have your second mortgage reduced or even eliminated. If your servicer agrees, your total amount of mortgage debt cannot exceed 115% of your homes current value.
The Home Affordable Unemployment Program (UP) is available for those who are having a tough time making mortgage payments beause they are unemployed. It can help provide a temporary reduction or suspension of your mortgage payments for at least 12 months while you continue seeking re-employemnt.
The Home Affordable Foreclosure Alternatives (HAFA) allow homeowners to transition to more affordable housing if their mortgage becomes unaffordable, allowing some homeowners to be eligible for a short sale or deed-in-lieu of forclosure.
Finally, their exist redemption periods on foreclosed homes, during which you may be able to reclaim your home. However, you will need to pay the outstanding balance and all costs associated with foreclosure proceedings.
You can visit http://hud.gov to learn more.
Student loans can leave you in a world of debt. Some people occur hundreds of thousands of dollars in student debt by the time they graduate college. Here are a few tips to help you chip away and eliminate student debt.
Step 1:
Call your student loan lenders and ask about their student loan repayment programs. Many lenders offer lower interest rates for students with large amounts of student debt. There are also a number of other reasons they would consider lowering your rates. Each lender has a different program and rules.
Step 2:
Consider getting a student loan debt consolidation plan. This can help reduce student loan debt by giving you one fixed lower interest rate instead of several. Shop around to different lenders for the best deal. Only consolidate if it makes sense and you can get a better interest rate. Many people get tricked into debt consolidation loans which have higher interest rates and hidden fees. Your trying to eliminate student debt, not increase it.
Step 3:
Seek professional debt management. Many organizations and even schools offer free debt counselling. These professionals can help you evaluate all of your options and hopefully bring new debt reducing solutions to the table.
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