Beating Broke

Personal Finance from the Broke Perspective

Compare Those Credit Card Offers

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Like many mailboxes around the country, mine seems to overflow on occasion with credit card offers.  I’m not sure what it is, if their marketing departments all work on the same cyclical calendar, or if there are certain market indicators that trigger a flood of offers, but whatever it is, they all seem to come all at once.  Normally, they all find their way to the shredder, to then find their way to the trash can.

One of the things that we still do, because we haven’t paid off all of our credit card debt, is to occasionally transfer the balances to take advantage of those same credit card offers.  One of those offers recently expired, and so I had been keeping my eye out for a new offer to make the move.  That offer came in the form of those little convenience checks that the credit card companies are so fond of sharing.  In this particular case, from a card that we’d already paid off, but had left open.  It had two checks in it.  One that offered 0% interest for about 13 months, and the other that offered 1.99% for about 18 months.

Which Credit Card Offer Will Reign Supreme?

Credit Card Offers

There was plenty of balance on the paid off card to take care of the entire balance of the other card.  It was just a matter of writing the check to transfer the balance, and mail it.  But, which one?  Most people, including myself, if making the decision in a quick manner would likely choose the 0% offer and mail it off.  However, it bears a little more analysis than that.  Especially if, like in our case, you don’t think you’ll have the balance paid off at the end of the 13 months.  When the transfer special expires, the rate bumps back up to the normal 12.24%.

I put a little thought into it, and thought that there might be some advantage to using the 1.99% rate with the longer term.  But, I had to be sure.  I’m no math wiz, especially when it comes to interest rates, so I went looking for a calculator that might help me figure out for sure if there was an advantage to one rate or the other.  I found two that gave me the numbers I was looking for.

Credit Card Offer Calculators

The first was a calculator from my friend Todd Tresidder over at FinancialMentor.  It’s a simple Credit Card Comparison calculator.  I think it’s meant to compare different credit cards, but I just punched in the numbers for the different offers on the same card and hit the button.  What did it tell me?

In both this calculation, and the second one, I used a few assumptions.  These aren’t really true assumptions, but I had to use some baseline to determine the difference.  I assumed that it would take us longer than 18 months to pay off the entire balance.  I used an approximate payment.  I also assumed (since the calculators didn’t allow for different payments) that we’d pay the same payment for the entire life of the credit card.  Here’s what I found.

In Todd’s calculator, the difference between the two offers was about 5 payments to payoff, and about $300 in savings.  Which one won?  The 1.99% offer. My initial thoughts were confirmed.  An interesting note; I played with the payment amount, and the more we pay as a payment, the less difference there is.  In fact, there’s a tipping point, where the 0% offer is better.  As I suspected, the more you pay, the sooner you’ll pay off the balance, and the more advantage you get from using the 0% rate.  But, remember that I made the assumption that we wouldn’t be paying it off in less than 18 months, so that isn’t an issue in our case.

The second calculator that I used is this credit card balance transfer calculator.  This calculator seemed to be set up a little more for this specific calculation.  It adds in calculations for the balance transfer fee which is something that you certainly need to take into account if you are thinking of transferring a balance.  With all the numbers punched in, and the calculator spinning up, my initial thought was once again confirmed.  In fact, this calculator seemed to show even more advantage to going with the 1.99% rate.  Here, I got an answer of about $405 in costs.  Again, massaging the payment gave the same results in that the more you pay, the more advantage there might be in taking the 0% rate.

We Have A Credit Card Offer Winner!

So, all that calculated, we filled out the check for the 1.99% transfer and sent it off.  But, it brought an interesting revelation to me.  You’ve got to compare the offers.  A difference of a few months, or a few interest rate points can make a much larger difference than you think.  Compare them thoroughly, and try and make accurate assumptions about your payoff behavior so that calculators like the ones I used can give you accurate information.

Have you ever found that an offer that, at first glance didn’t seem the best, really was?

 

How to Build, and Use, Rockstar Credit

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Unless you’ve taken the vow of debt celibacy, you’re gonna need credit.  There’s plenty of reasons to have credit, and plenty of reasons to not need the debt instruments that determine your credit score.  Unfortunately, if you’re going to need credit, you’re going to have to make use of a few debt instruments in order to not only get a credit score, but get a rockstar credit score.

Building Rockstar Credit

Building a credit score isn’t particularly difficult.  Any Joe (or Jane) off of the street can get a credit score.  You’ve simply got to have some form of debt that reports your history with that debt to the credit bureaus.  Simple right?  Let’s move on to using your credit score then…  Or not.  Listen, getting a credit score is the easy part.  Getting a rockstar credit score is another thing altogether.  If you want to build a good credit score, you’ve got to know how to use the debt instruments in a way that demonstrates your credit worthiness.  If you want a rockstar credit score, you’ve got to have rockstar credit worthiness.

Know what goes into a credit score.

img credit: kspsycho83, on Flickr

Knowing what goes into a credit score will make it that much easier to build that rockstar reputation with the credit bureaus.  The factors that the bureaus take into effect vary a bit from one to another, but they have the same basic bones.  35 percent of your credit score is all about payment history.  There’s lots of factors in that payment history, but if you keep one thing in mind, you’ll never have a problem with this 35% of your score.  Pay on time.  If you pay on time, you will never run into any of the other things, like bankruptcy, length of delinquency, and amount of delinquency.  Frankly, it’s the easiest part of your credit score, because you can pretty much nail it down with a good bill pay system.

Another 30 percent of your score is determined by the amounts owed.  That is, the category of things that falls under amounts owed.  This includes the total amount you owe, but also includes things like the number of accounts with a balance, the amount of available credit, and even the type of debt you owe.  What this category boils down to, is a score on utilization.  If you’ve got nothing but credit cards (unsecured debt), and you’ve got nearly all of them maxed out, the chances of you defaulting in the future are higher, and so, you’re score goes down.  If, on the other hand, you’ve got a mortgage (secured debt), a car loan (more secured debt), and a few credit cards with low balances on them, your chances of defaulting are lower and your score will go up.  Of all the factors that go into your credit score, the amounts owed factor is the most complex and hardest to balance.  If you’ve got the patience, some experimentation with available credit, types of credit, and distribution of credit can yield some interesting changes to your score.

The remaining 35 percent of your score is split (15%-10%-10% respectively) between length of credit history, new credit, and types of credit used.  The first, length of credit history, takes into account how long you’ve had your credit accounts open, and how often you use the accounts.  New credit takes into account how much of the credit you have is new to you.  In short, how many new accounts you’ve opened, and how many times your credit report has been pulled by a potential new creditor. Finally, the types of credits used category takes the type of accounts you have and scores your usage based on that.   Unlike in the amounts owed category, the types of credits used category doesn’t take the balances on the accounts into consideration, but merely weighs the ratio of one type of account against another.  With all three of these categories, the emphasis is on smart credit usage.

The bureaus want to give the best credit scores to the rockstar credit users.  A rockstar credit user is someone who pays their bills on time and is never late, has “good” balances on their credit accounts with a higher ratio of secured debt versus unsecured debt, has a long history of being a rockstar credit user, isn’t actively trying to open a whole bunch of new accounts (and hasn’t recently added a whole bunch of new debt), and isn’t overusing any one type of credit.  A simple rule, to fill all of those requirements, is to just be a smart person with your personal finances.  Don’t take on more debt than you can afford, and make the payments on time.

Tools for Rockstar Credit

Along your journey to building rockstar credit, there are some tools that you will want to use.  The first, and most important, is your free credit reports.  You can get one per year from each of the three major credit bureaus.  A smart way to use them is to get one from one of the bureaus in one quarter, one from the next the next quarter, and then once more in the third quarter of the year.  While the free credit reports don’t include your FICO score (credit score), they do show you all the information that the major credit bureaus are using to determine your score.  Look over them carefully, and make sure that any inaccuracies are fixed, and reflected the next time you pull the free report.

The second tool (really tools) is to have a full complement of programs and apps to help you along the way.  A good bill-pay system is beneficial to keeping your payments on time, while programs like Mint and Adaptu can help you keep track of where your money is going, and keep it all under control.

If you want more detail on what makes up your credit score, I encourage you to check out The Beating Broke guide to Your Credit Score. (it’s FREE)

Using Rockstar Credit

Ok.  So you’ve got a rockstar credit score.  Now what?  Well, we didn’t spend all that time building a solid credit history to not use it, right? Right.

Depending on where you are in your personal finance journey, you will find that there are certain benefits to having a rockstar credit score.  The main key, when using your credit, is to remember that your usage will reflect on your credit score, and use it accordingly.

Negotiating a better interest rate.

If you’ve managed to improve your credit score by quite a bit, one of the first things you should try and do to take advantage is to negotiate a better interest rate.  In most cases, this will be done with your credit cards, but it sometimes doesn’t hurt to call other creditors as well.  Call them, explain that your credit score has gone up significantly, and you’d like your interest rate lowered.  One of the advantages of having a great credit score is that you have some leverage in that you are more likely to be able to secure a balance transfer to another card at a lower rate.  If the creditor won’t lower your interest rate, consider trying to find a new card with a good rate and a good balance transfer rate.

Use your credit to leverage debt.

This usage is likely to get a few comments.  It’s frowned upon a bit, and can be dangerous if not done properly.  Further, it can be dangerous in that you can over-leverage and end up losing everything if it falls apart.  Which makes it all that more interesting, and something to learn about, in the same way that learning about pyramid schemes helps avoid them. 🙂

Leveraging your debt comes in many shapes and methods.  The easiest way is something you’ve probably heard about before.  Using low balance transfer rates and low introductory rates, you can use the credit to earn income on the money.  Several years ago, this was very popular as people were getting transfer and intro rates of less than 2%, while online savings accounts were earning more than 5%.  It didn’t take a rocket scientist to figure out that a person could earn 3% on the credit card company’s money with little to no work besides making sure that the payments were made and the debt was paid off at the end of the rate period.

A similar method, that is a bit more popular today, is to use the transfer/intro rates and lend the money out on something like the peer-to-peer lending site Lending Club.  With return rates of 13% possible, it could be a lucrative proposition.  It would require extremely good investing, and a good amount of luck in avoiding delinquencies and write-offs however.

Another way that you will see used more often is to use the debt as a means for investment into assets.  If you can get a card with a large enough limit and a low enough transfer/intro rate, you can then use the money as a down payment on an investment property (think rental property).  I shouldn’t have to tell you this, but there are a lot of people around the nation (and the world) who got burned in the last 5 years by using this method.  To be honest, I wouldn’t use it, but it is a method that is available to you.

I’d like to reiterate that leveraging your debt can be dangerous.  A market downturn, or sudden loss of income can not only ruin your leverage attempt, but can also quickly send you into a spiral that could lead to bankruptcy.

Keeping Rockstar Credit

Keeping rockstar credit can be super easy.  If you’ve got rockstar credit, you’ve already mastered the steps to building a good credit score.  Keeping a good credit score calls for more of the same.  Yep.  Just keep on doing what you’ve been doing while building your credit, and you’ll keep it.

How to Recover From Bad Credit

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If you’re one of the millions of people that has been negatively impacted by the global financial crisis, then you may find that your credit rating has suffered. Realize though that no amount of good advice can be a replacement for responsibility. Living within your means and giving a proper amount of deference to your financial situation will always be better than trying to pick up the pieces after a meltdown. Still, a lot of responsible people have been suffering lately due to no fault of their own, and if you find yourself in this group you will be able to reestablish your credit and recover. In this article we explore what options you have available to recover from bad credit.

  1. Apply for a Secured Credit Card
    These types of credit cards require that you keep some collateral, typically $100-$500 in an account. The nice thing is that after about a year of doing this you can upgrade to a regular credit card. Make sure to check for any hidden fees and that the issuing lender reports to all 3 of the major credit agencies before you apply.
  2. Make Sure All of Your Debts are Paid Off
    If you have recently been denied credit then you are entitled to a free copy of your credit report from one of the three major credit reporting agencies (Experian, Equifax, and TransUnion). These agencies also offer a one-time deal, so if you can, take advantage of that as well. Make sure to pay off any outstanding debts and to challenge anything on there that you did not legitimately incur. It is also possible to write the lenders asking for forgiveness, and have them remove bad marks against you, but it’s not quite standard procedure for them to do so.
  3. Watch Out for Phony Credit Reduction Scams
    There are some legitimate non-profit credit counseling services available that can act as a middle man in dealing with creditors and help you to reduce your debt. There are also a ton of scams out there that will do nothing but put you deeper into debt. Make sure to thoroughly research these types of services before using them.
  4. Get a Small Loan to Help Build Your Credit Further
    Once you are able to reestablish a line of credit, and are paying it off on a monthly basis, don’t expect lenders to just automatically open their coffers to you. Factors they will take into account typically include your monthly income to debt ratio, how much debt you have tied up in high interest accounts, how much savings you have, your credit history for the last 7 years, and other issues related to stability like the number of residences you’ve had.

Make sure to explain the circumstances that lead to your financial troubles, and don’t forget to mention things like you were 1 of several thousand workers to be laid off at your job, or that the company has gone out of business. The better you are able to show the lender that you are financially responsible, the better luck you will have at getting a loan.  Once you’re on the road to recovering from bad credit, learn how to build and use good credit.