• Posts Tagged ‘credit_score’

    3 Financial Management Tactics You Can Start Using Today

    by  • June 28, 2016 • Tagged: , , ,  • Comments

    Financial management is about more than just balancing your checkbook and making sure you don’t spend more than you make. Let’s take a look at some of the financial management tactics you can start using today that can help you achieve your long-range goals.

    Before we do, let’s make an important distinction between tactics and strategy. A strategy represents a goal or big picture plan of action; tactics are actions you are going to take to achieve the goal described by a strategy. For instance, one strategy might be to own your own home. The tactics you might use to achieve the strategy could entail cutting expenses, making more money, saving up, exploring financing options, borrowing from family or friends, liquidating assets, etc. In turn, some of these tactics become strategies that entail tactics of their own (such as those you would use to make more money).

    You will need to take this type of tactical approach if you want to move from simplistic to a level of complexity in order to achieve the strategies described below. Here are three financial management strategies to consider.

    1. Reducing Your Debt-to-Income Ratio

    Your debt-to-income ratio is the total amount of money that goes out each month for mortgage, auto loan, student loans, credit cards, personal loans, business loans (for sole proprietors), etc., compared to the income you earn during the same month. As a formula, it’s expressed like this: Total Monthly Debt Payments / Gross Monthly Income. Here’s an example of how to calculate your debt-to-income ratio:

    $10,000 Monthly personal income from all sources
    $3,200 Mortgage
    $500 Car payment
    $200 Student loan payment
    $200 Business loan payment

    Debt-to-Income Ratio: 41 percent ($4,100 / $10,000)

    It’s important for you to know your debt-to-income ratio, since this ratio is often a key contributor to your credit score and impacts decisions lenders make about whether to extend credit to you personally. If you’re a business owner, your personal debt-to-income ratio can also affect your company’s credit rating and ability to obtain working capital. Bankrate.com’s debt-to-income ratio calculator can help you calculate your own score.

    The 36 percent rule suggests that your debt-to-income ratio should never surpass 36 percent. A high debt-to-income ratio (43 percent or above) might even automatically disqualify you from financing while a lower ratio makes you more attractive to financial institutions. Plus, the more you can reduce your debt-to-income ratio, the more you become less susceptible to financial problems. For instance, if your debt-to-income ratio is low, you have more ability to take a cut in pay or weather temporary job loss.

    2. Improving Your Credit Score

    Most credit score rating systems have a scale that ranges from 300 to 850, broken down into five results:

    • 750+ – Excellent Credit

    • 700-759 – Good Credit

    • 650-699 – Fair Credit

    • 600-649 – Poor Credit

    • Below 600 – Bad Credit

    Your credit score impacts your ability to obtain personal financing such as a home loan (mortgage), credit card, retail store financing, auto loan, etc. In addition, your credit score can also impact your cost of financing; for instance, a low credit score might mean financing companies offer you money at a higher rate of interest than they would offer if you had a high credit score.

    Reducing your debt-to-income ratio is one obvious tactic you can execute in order to improve your credit score. However, simply making your payments on time (or early) and making payments on debt in excess of minimum monthly payments required can also help you improve your credit score, especially over time.

    Given the number of financial data breaches where hackers have obtained personal identification information from retail and financial institutions during recent years, it’s important to check your credit score periodically. Monitoring your credit can help ensure that no one has “stolen” your identity and used it to rack up debt which can not only hurt your credit score, but even result in creditors pursuing you for repayment.

    There are several credit score monitoring services that offer the ability to check your credit scores; however, many offer “free” credit score results only after you agree to another fee or subscription. Your bank or another financial institution may also provide both credit reporting and monitoring services at no cost.

    3. Planning for Retirement

    Just because you have enough money now doesn’t mean you will always have enough money to live the lifestyle you want. Planning for retirement – those years when you are not likely to have any income except for social security – is important for everyone. You can use tools like CNN’s retirement planning estimator to see how much money you should put away into savings or investments at the age you are now, in order to retire by a specific age and maintain your lifestyle (live in the same type of home, spend the same amount on discretionary items, etc.)

    Make sure your financial management strategy goes beyond the basics. The more you understand how to optimize your financial position and avail yourself of tools that can help you find out where you are right now, the better you will be able to plan a strategy that gets you to where you want to be in the long run.

    Things to Note when Considering the Effects of loans on your Credit Score

    by  • February 23, 2016 • Tagged: , ,  • Comments

    It is well known that installment loans are typically a great way for people with bad credit to still acquire a loan; however, it is good to understand how these loans may affect your credit so that you can get back on track towards having good credit once again. Below are three major things to note when it comes to considering your credit future while paying off an installment loan:

    Low risk equals low score impact

    Firstly, the debt from installment loans are typically stable relative to other types of loans over time; however, the early effects on your credit score of paying the fixed rates are also more modest. The stability of the installment loan comes both with good and bad news. In fact, it is the stability of the loan itself that actually explains why the debt payoff does not significantly improve your credit because it simply never lowers the score in the first place. The logic is that when a creditor is not worried about being paid back, there is less reason to incentivize you through a score deduction. It is not un-heard of to have a score between 650 and 750 or higher despite holding a six figure installment loan. On average the recipients of installment loans actually do hold a six figure amount of this debt, and there is no indication that this is a particularly more risky.

    Prioritize making regular payments

    Installment loans are unique because the total amount you receive has far less of impact on your credit score than the overall payment history does. Your history is considered in a more holistic way which can be an advantage to many with lesser but steady income streams. This means that making those regular payments in a timely way will ensure that when your history is reviewed you end up better off than you were before.

    Have Patience

    One should not shy away from installment loans due to the worry that they will not improve your score; in fact, it is actually very likely to improve. There is no disputing the fact that by lowering your balance by paying off your installment loan, that your credit will improve overall. As long as you pay careful attention to the advice above and use a steady income to ensure timely payments, your score will begin to better, however, in a relatively slow way compared with many other loans. It is therefore important to understand the importance of patience when improving your credit through an installment loan as they often are set to mature after a few or perhaps even a dozen years.

    In general, installment loans are a very safe alternative to other options for those seeking to acquire money and improve their credit while doing so. It is important to understand that with these loans it is far more important to focus attention on the management of regular payments and a steady stream of income rather than paying off a dauntingly high balance. This is because with installment loans, a steep balance should simply not daunt you, including those with poor credit scores. Educate yourself further on the specific type of installment loan before receiving one so that you can cover the necessary steps to slowly and steadily improve your credit score.

    Paying Off Credit Card Debt and Improving Your Credit Score

    by  • April 10, 2013 • Tagged: ,  • Comments

    There is no doubt that having credit card debt is stressful – especially when you know that it just keeps on growing day after day. Paying down credit card debt can be just as stressful as trying to ignore it, however, paying off your debt is recommended – ignoring it is not!

    There are a number of options open to you if you have decided it’s finally time to get rid of that debt. We’re going to look at balance transfer credit cards, to see if that is the right route for you.

    Balance Transfer Credit Cards

    Transferring the balance from your current store or credit cards onto a balance transfer card can give you a great opportunity to pay down debt, without having to worry about interest. Transferred balances will attract low or no interest for a given period of time, giving you a chance to pay off more of your actual debt, while taking a break from interest.

    To do this properly, it’s important to choose the right balance transfer offer. Offers vary according to the card provider, so you could get a card with 0% on balance transfers for six months, or another card with 3% on balance transfers for 12 months.

    To choose the right offer, you will need to work out how long you need to pay off your debt. If you’re certain you can pay it off quickly, go for a card with the lowest possible interest over a shorter period of time.

    If you think you will need longer to pay off your debt, you may need to choose a longer offer. Bear in mind that longer offers can sometimes charge higher interest – but, you will still be paying a lot less interest than a standard credit card.

    Try using a balance transfer calculator or a credit card calculator to work out what you can afford, and what is the best option for you. Also be aware of the card’s reversion rates, what happens when the offer ends, and be sure to read the terms and conditions of the card.

    After You’ve Paid Off Your Debt

    Congratulations, you’ve paid off your debt! Now it’s time to think about whether the balance transfer card is still the best card for you. You may find that the card has reverted to a much higher interest rate, in which case, you need to decide if it’s still affordable.

    If you pay off your balance at the end of the month, you shouldn’t need to worry too much about the card’s interest rate. However, if you have trouble paying it off each month, then you may want to switch to a low interest credit card. This will help you keep a lid on the amount of interest you’re paying on your debt.

    While you may not always be able to pay off your balance each month, it is certainly something to aim for. Never just pay the minimum repayment, or it’s likely you’ll end up in trouble with your credit card again sooner rather than later.

    Again, it’s a good idea to use a credit card calculator and a comparison site, to find the best credit card for you, and to ensure you get what you need from your card.

    Improving your Credit Score

    Treating your credit cards with respect can help to improve your credit score. This means, always pay your bills on time, try to pay off the balance in full each month, don’t apply for more than one credit card at once, and keep a good relationship with your credit card provider.

    Credit Card Conundrum

    by  • June 17, 2010 • Tagged: ,  • Comments


    photo: Andres Rueda

    Over the past few months I’ve chosen to close a few credit card accounts. I think that in each case, the card carriers were going to start charging an annual fee unless we started using the card. The most recent example was my Citibank card, as they wanted us to spend at least $2400 per year to have them waive a $60 fee.

    The problem with all of the recent cancellations are that 1) the cards were among the oldest that I had and 2) they had pretty high credit limits. Cancelling those cards has reduced the average age of my credit history and has decreased my overall credit limit. I do still have a relatively high overall credit limit around $35,000 and my oldest card was opened in 2000, with others opened from 2005 to 2007. But still, it sucks that I had to cancel those cards.

    Of the remaining credit cards that I have, I use two of them regularly. Both are rewards cards, but one of them has a $45 yearly fee. Oh, and Her also has that card as well. So yes, we’re paying the $45 annual fee twice.

    So naturally, I’m contemplating closing that card as well so that we don’t have to pay the annual fee more times than we need to. The problem is that card is also the second oldest card that I have and has the second highest credit limit; closing the card would effectively halve my overall credit limit. I don’t want to take another ding on my credit score. I’ve had this card for almost 5 years, so we’ve paid $180 in fees so far – soon to be $225. We have definitely received much more in rewards (5-star hotels in Europe are a very nice perk), and so far have accumulated enough points to go on more awesome vacations.

    Do you think it’s worth it for me to still have this card? What alternatives could you think of instead?


    FICO as a Mathematical and Sociological Challenge

    by  • March 17, 2006 • Tagged: ,  • Comments

    Mathematically speaking, a FICO score is nothing more than the result of an equation that considers multiple variables. The exact equation is a closely guarded industry secret. After all, the credit bureau couldn’t sell you your FICO score if you could calculate it yourself. But I’ve been pondering this equation for about a week now and I just can’t come up with a good reason why nobody has cracked the equation.

    First, consider it as a mathematical challenge. I assume the equation could probably be determined by using linear regression. This is a math trick that allows you to isolate a single variable among many and solve for its value. It is used most commonly to determine real estate values. For example, imagine that you and your neighbor have identical houses on identical properties. The only difference is that your house has a fire place and your neighbor’s house does not. Now imagine you both sell your respective houses on the same day. He sells his for $100,000 and you sell yours for $105,000. It’s pretty easy to determine that, all else being equal, your fireplace was worth $5,000. It gets more complicated in the real world; because of course no two houses are completely identical. Even in a development with rows of identical houses, one might have a nicer view of the lake while the other may be closer to a busy street. So real estate agents use linear regression to isolate the base home price and the value of each add-on (like a fireplace or nice view) or detractor (such as noise). Then they can predict a fair price for your home.

    It makes sense to me that the FICO formula would work the same way. You would get a base number to start with, and then each good thing (on-time payments, low debt-to-credit ratio, etc) would add points and each bad thing (missed payments, late payments, etc) would detract from your score. This is the perfect situation for linear regression.

    While linear regression is time consuming, it isn’t hard. And it isn’t as though we don’t have some basic FICO equation information already. Here’s what we do know, because the FICO company has made this information public:

    1. The solution (your FICO score) can range from 250 to 900.
    2. There are not more than 33 variables and we know how much each one deducts from your score.
    3. If your credit report is accurate, you have all the same raw data they use to calculate your FICO score.

    So why hasn’t anyone cracked the formula? With all the brilliant mathematicians on the planet today, can’t one of them whip out a FICO equation? Imagine the fame and fortune that would follow such a revelation! That person could sell “FICO” scores at a discount and undercut the big guys, or he could work to improve the formula and sell a better score.

    The final aspect of this mystery is human nature. The FICO score equation is a secret only so long as nobody spills the beans. With all the employees who have worked at the Fair Isaac Corporation, surely one or two of them have seen the equation. Are their employees really that loyal and trustworthy?

    How does such a simple secret stay a secret for so long?