Beating Broke

Personal Finance from the Broke Perspective

Beating Broke Guide to Your Credit Score

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Almost a year ago, I released the Beating Broke Guide to your Credit Score.  Since then, a lot has happened and it seems to me that your credit score could become more important than ever as we recover from this economic disaster.  Previously, I had it set up such that you had to sign up for the newsletter to receive a copy.  I’m changing that now.  The graphic in the right sidebar now links directly to the guide in it’s pdf form.

It’s one hundred percent FREE, so please grab a copy and take a look.  I think you might learn something.

You can download it at https://www.beatingbroke.com/BBGCS/BBGCS.pdf

The guide is now available for the Kindle as well!  Please note that the kindle version is not free as the pdf version is.  The pdf version will remain free for downloading.

Being Debt Responsible

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What does being “debt responsible” mean, and how do you do it?

Being debt responsible means taking responsibility for your debt and it’s payoff without making excuses or trying to find easy ways out through debt write-off, negotiation with creditors, or bankruptcy.  In a nutshell, if you signed on the dotted line, you must pay it off.

Why must you be debt responsible?  The most commonly referenced reason that you must be debt responsible is that, by signing the note, you were guaranteeing that the debt would be paid.  You also accepted the conditions of repayment.  Some of those conditions, such as interest rate, are somewhat negotiable even after you sign the note, but not the amount of the actual debt.  The most important reason for being debt responsible (to me at least), is the moral requirement.  Morally, whether you look at it religiously or secularly, you have a responsibility to repay the debt.   Again, it goes back to your acceptance of the debt and it’s conditions.  Morally, you have a responsibility to uphold your part of the bargain.

Luckily, for most of us, it’s extremely easy to be debt responsible.  We just have to pay our bills each month.  But what happens when an emergency strikes and you can no longer pay your bills?  That depends.  Can you really not pay your bills, or can you not pay your bills because you have to go out to Red Lobster next Thursday?  If you really, truly cannot pay your bills, you have what is one of the only exceptions to any of the above rules.  You are free to negotiate as much as possible to reduce your payments, delay your payments, and even reduce or eliminate your interest payments.  Only in the most extreme cases should you try and reduce the debt or eliminate the debt.

Being debt responsible isn’t always fun.  (Who am I trying to kid?  It’s never fun.)  But, it’s the right thing to do, not just morally, but for your personal finance as well.

Unused Credit Cards are Being Closed

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According to J.D. and several other places I’ve seen, Credit Card Companies are Being a lot more pro-active about closing unused Credit Card Accounts.  Why would they do that?  And why does it matter to you?

First, they do it because every open account costs them something.  It may not be much, but they still have to process the data and maybe even send out a statement.  Many have moved to not sending out statements on accounts that haven’t been used, but some still do.  Most importantly, any open account is an open credit line.  It’s a potential liability for the credit card company.  If you go from having no balance to maxing out a 5000 card, you’ve just added $5000 in liability to the company’s bottom line.  Not to mention that doing so is a likely red flag for impending financial trouble and that makes the liability a risky liability.  Any way you look at it, that isn’t good for the company.

Of course, if you continue to not use the card, it really doesn’t cost them much.  It’s just the potential that they are not willing to risk.  It’s a sign of increasing risk aversion on the part of the credit card companies.

So, why does all this matter to you?  Part of your credit score is based on your credit history.  The longer you have had an open account, the better it looks on your credit report.  It’s a sign of good credit management.  Another part of your credit score is the ratio of available credit to credit used.  So, if you have a $5000 credit line, and have only used $2500 of it, it looks better than if you had a $2500 credit line and had used $2000 of it.  If you have a credit card that you aren’t using, it’s adding to that unused portion of your available credit.  That’s good for your credit score.  But if the credit card gets closed, you don’t have that unused credit available anymore and your ration goes down.  And so does your credit score.

In both cases, the dip in your credit score is likely to be fairly small.  And it is likely not a huge problem.  But it is something you should be aware of if you had been planning on applying for any type of loan and have had a dormant credit card closed recently.  Also, if you are holding a card that you haven’t used recently and doesn’t have a balance, and want to keep it from closing, you can make a purchase with it once every couple of months to keep it active.  Just make sure to pay it off right away.