5 Reasons to Keep Good Credit

Some people wonder if they REALLY need to keep good credit. Many financial experts will tell you that credit doesn’t matter if you plan to be out of debt because you won’t be borrowing money going forward so what does your credit matter?

While I agree that once debt free you may not need to borrow money right away, I disagree with the notion that you shouldn’t try to at least keep reasonable credit for emergencies when you absolutely might need to borrow money. Even more, many times good credit is needed for more than just “borrowing” money. Here are a 5 reasons why you need to keep good credit, even if you are debt free.

1. Buying a House – Someday, especially if you are young, you will want to buy a place of your own and that will require some high standards when it comes to credit and your credit score. Most lenders require a minimum credit score of 680 to qualify for a fixed rate mortgage rate. You always want to shoot for a fixed rate as it limits your monthly payment to a fixed amount, so there are no surprises down the road.

2. Financing a Car – Similar to buying a house, you will need a good credit score to finance the purchase of your next vehicle. Most banks and even car dealers will offer you a better rate if your credit score is higher. And obviously, we all want the lowest rate when borrowing money. My suggestion for financing any type of highly depreciating asset like a car is to borrow only up to 60%-70% on the car’s loan value. This provides you with an equity safety net which will help you get a jump start on paying the loan off before the value of the car can drop too much.

3. Getting a Job – Like it or not, many employers have begun to run credit checks on their candidates. In fact, 47% of employers admitted to running your credit when you apply for a job. After all, if you’re being hired to work for someone, they want to know how responsible you are with your own money. This is a good indicator to your employer about habits including: can you manage your responsibilities, are you timely and are you an integrity laden person.

4. Starting a Business – Every year, thousands of Americans decide to start their own businesses. Getting a business up and running isn’t always easy however and usually takes some significant funding to get going and stay afloat. Depending on the type of business you want to start, you may need to have your local community bank help you make your dreams a reality and succeed. Even if you plan to borrow money in your business’ name, most banks require a credit check and evaluation of the partners of the business. Because after all, you are the one who will be making the decisions.

5. Emergencies! – Dave Ramsey always says that many times in life, “Murphy shows up at your door and wants to stay awhile.” He is referring to the concept of Murphy’s Law. The infamous statement that, “If something can go wrong, it will go wrong.”

We all find ourselves in this situation at some point in our lives when things just seem to happen for the worst. Your car breaks down two weeks from payday, your furnace goes out in the middle of winter, or most horrible, you lose your job. Now what? Our philosophy for all our readers is that we encourage living debt free as much as possible, but sometimes you just have to borrow some money to make things work.

Debt and Your Credit: Five Common Myths About Credit

Myth #1: Different formulas are used for calculating your credit score by the three major credit reporting bureaus.

Not so, each has a different name: Equifax calls it “Beacon”, Trans Union calls it “Empirica”, and Experian calls it “Fair Isaac Risk Model” (FICO), but they all use the same formula. The reason the scores are different depends on the information they have in your file. One Bureau may have information that goes back farther, or a lender reported your payment history or other information to only one of the three bureaus.

Myth #2: To immediately fix your credit score just pay off your debts.

Unfortunately this is a very big misconception. Your score is determined by your past payment history, not the current amount of debts. So if you have a history of late or missed payments, paying off your debts will not improve your score. There is no overnight fix to repair your score, it takes time. It’s important not only to pay down your debts, but also to pay your bills consistently and on time.

Myth #3: Your credit score will improve if you close your accounts

This is a big misconception. What does affect your score is opening new accounts rather than closing older ones. As a matter of fact closing accounts could actually hurt your score. On the other hand, having too many open accounts also has a negative impact on your score; but once opened the damage has been done.

Myth #4: Shopping around for a loan will hurt your credit score.

This is not necessarily true. However, bear in mind each time a lender makes an inquiry into your credit your score could drop up to five points. Most people think that by going to different lenders their credit score will drop because each lender requests a credit report. While this is true, here’s the good news. There is a 45 day window where multiple inquiries from lenders are treated as a single inquiry. So if you plan to shop around for a loan make sure you do it within those 45 days.

OR… Play it safe. What would be better is to get your own copy from all three credit bureaus then ask the lender which credit bureau they use. Now you have a copy to give them and you will know which one scores the highest and therefore which lenders to go to. If the lender uses the bureau with the lowest score, move on. Lenders recognize a report/score for up to six months and will not pull a new one if you are within those six months.

Myth #5: There are companies out there that can fix my credit score as long as I pay a fee.

There are many companies out there who claim to be able to do this. However, this involves working with your credit report, which your credit score is a direct result of. If you have a history of not handling your debts well there is really nothing that can be done quickly. The only effect on your credit score is to show that you can manage your debts, which takes time. The same amount of time that companies need to fix a credit score. You can do this yourself without a fee.

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This article is copyright 2013 pluspointwealth.com and Gabriella Roth. You may reprint this article. You may not change the content and must include the resource box.

How to Choose the Best Credit Cards?

With credit card use comes great responsibility and guidelines are easily found. Don’t overuse them, don’t spend money you can’t afford to pay back, don’t open too many credit accounts, etc. Still, the usefulness of credit cards endures. Credit cards are so useful, in fact, that many companies have noticed the high demand, making the marketplace very competitive for consumer choices. Before you impulsively sign up for a card, take a moment to make sure your plastic suits your needs. And before you write off entirely, consider the benefits.

Credit cards are great tools while traveling because many automatically convert your money into different currencies. They can also serve as identity cards, especially when they include your photo. They are better than walking around with a lot of cash, which can be stolen, or even traveler’s checks, because stolen cards can be reported sooner and prevented from use.

So what type of card is right for you? The easy answer comes if you have trouble paying off your account balance in full each month or if you’re seeking to consolidate debt. In either case, you’ll want to find a card with a low interest rate. If you pay your balance in full each month or if you’re interested in these cards for the rewards programs, the decision starts to get more complicated.

Fees or no fees?

A no-fee card with rewards is perfect for people who pay their balance in full but don’t use credit cards heavily. For heavy credit card users, a credit card that comes with an annual fee might end up paying for itself in rewards. To fully take advantage of cards with fees, however, you need to do an assessment of how often you actually use credit cards. Otherwise, a no-fee card is your best option.

Navigating the rewards system

To figure out which rewards systems are best suited to your own needs, consider their offers in terms of the dollar amounts you would pay for those rewards. Cash back is easily calculated as cash, as are gift cards to certain department stores, but airline miles and point systems might be more of a challenge. Figure out what you’d pay for those extra airline miles or points and calculate those as monetary value so you can easily compare rewards systems with very different rewards.

One aspect of rewards systems that might make it easy to choose one card over another is when rewards systems maximize benefits for certain types of purchases, like gas or groceries. If you decide to use one of those credit cards, keep it clearly marked in your wallet so you use it as often as possible for the type of purchase that card rewards.

Which companies want you?

It’s important to know from the very beginning what companies will likely deny your application if you have bad credit. Free credit reports are available annually and can be accessed online from different free credit report websites. If you have a bad credit rating, choose a card company that will work with you. To apply for many cards in a short period of time is a bad idea because the more often companies run your credit check, the more likely your credit score will be negatively affected. People who apply for many credit accounts are considered higher risk than people who don’t.

Do your homework

Learn all you can about what cards are most appealing to your particular needs and open an account with the top choice. If you open many accounts to figure out which one you like best with the intention of closing the others, your credit can be negatively affected because many accounts open at once can indicate a high risk.

The Best Way To Check Your Credit Score

There are so many offers for free credit scores. You see them everywhere: on TV, in magazines and just about every website you look at. Of course, each ad will try to convince you that they have the best way to check your credit score. But which one can you trust? Will it really be free? Is there a catch? These are the obvious questions. But the most important question is not so obvious. It’s a question many people don’t even think about asking. The question is: Which credit score are they offering?

Your credit score is based on the information in your credit report. Each item in your report is given a numerical value, and that value is either added to your score if it’s a positive item, or subtracted if it’s a negative item. The companies that sell credit scores (or offer them for “free”) can use different formulas to determine your score. Each of the formulas may assign a different value for the same item on your report, so obviously they will come up with different scores. To make matters worse, some of the formulas that are used are based on different scales. That means a score of 740 from one formula might be considered a good score, but 740 might only be a fair score from another.

One of the scores is much more meaningful than the others. Approximately 90% of all lenders look at FICO scores when they are evaluating applications for credit cards, loans and mortgages. When you look at your FICO score, you see what lender will most likely see. A FICO score is determined by a formula that is only used by FICO (formerly the Fair Isaac Corporation). Companies that do not have access to the FICO formula have created their own formulas as a way to compete with FICO. These other formulas can only give you an estimation of your FICO score.

These other scoring methods can be quite accurate. There’s a chance that you might even get your exact score, but you won’t know for sure. If your score is off by just one number, it could make a difference in the interest you pay or it could even mean the difference between getting approved and being denied. For example; let’s say you got a 740 from one of these estimated scores. You go to a lender for a loan or a mortgage and they say that 740 and above will be approved, so you go ahead and apply. They check your FICO score and it is 739 so you are denied. If you had known it was only 739, you might have been able to do something about it. Even waiting a month or two could have raised your score by one point.

How can you tell which credit score you will get when you respond to one of the offers? The offer will state which scoring method they use either at the bottom of the offer page or buried in the fine print of their “terms and conditions”. CreditScore.com and FreeCreditScore.com say the score they give is “Calculated on the PLUS Score model… and is not the score used by lenders”. FreeScoresOnline.com states that “any credit scores provided to you… are not FICO scores”. I could go on and on with these disclaimers, but you get the idea. They are not giving you your FICO score. They are not offering the same score that lenders look at, so why waste your time and possibly some money getting the wrong score?

The best way to check your credit score is to get it directly from the source for FICO scores. Go to myfico.com. They offer a 10-day free trial of their Score Watch service. With this trial, you will get your FICO score along with your Equifax credit report. Just be sure to cancel within the ten days or you will be committed to a 3-month service for $14.95 per month. Another choice they have is a one-time charge of $19.95 which gets you instant access to your FICO score, TransUnion credit report and Equifax credit report.

I am not trying to sell FICO services. I am not employed by them and I receive no compensation for recommending their services. I don’t like their apparent monopoly on credit scores any more than you do. But until something better comes along, FICO is the best way to check your credit score.