FrontLine's "The Secret History of The Credit Card"

I found this news story put together by FrontLine and The New York Times.

It talks about some of the hostory of credit cards, but also many of the dirty little secrets of the credit industry.  If you are looking for some background, this is a good place to start.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/

How Will Divorce Affect My Credit?

When I got divorced, I never really thought about my credit scores. To that point, I had a perfect payment record, a mortgage, two car payments, a home improvement loan, and a couple of credit cards. Add in 3 kids and a dog, and it was kind of the all-American family. My credit scores were in the high 700’s the last time I had checked them for a mortgage re-finance, so all was in order. I was living the dream.

Then, like a ton of bricks, the bottom fell out. Those 4 little words, ‘I want a divorce’, changed it all. When that happened to me, I stopped really considering the financial aspects of my life, and started thinking about the interpersonal and relationship areas. I went to classes, learned basic communications, and basically got things in order. But still, I just didn’t pay much attention to my credit.

Over time, that oversight caught up with me. When I first moved into my own place while separated, I went out and bought a TV and stereo on credit. Then I decided a couch would be a good thing, and a few pots and pans. Did I pay with cash? Of course not, I used credit.

That first few months, during the initial separation, were fine. My ex and I agreed on money, and I had enough to live. Then she actually filed for divorce. When that happened, the judge, in his infinite wisdom, gave us some ‘temporary orders’ which gave me $1,137.00 per month to live on. That was roughly a sixth of my take home at the time (Remember the dot-com days? Ah, the pay rates! The Perks! The worthless stock!) I did some math. I paid $450.00 for my car each month, plus insurance. $140.00 for the stereo and TV. $60.00 for the household items. $60.00 for the couch. Add in a 60 mile commute each way from the only place I could find that was cheap enough to live, and my bills ran up to about $1970.00 per month if I didn’t eat. This, by the way, is NOT a good weight loss plan. So, I had an $800.00 deficit in cash flow. That is a fancy term which means I lived on credit. It grew over the next year to about $12,000.00 in credit debt.

Then, the divorce happened. No more temporary orders! I GOT HALF OF MY TAKE HOME!!!
Talk about living well. I could afford Ramen noodles, and twice a week I would splurge and buy some soft drinks. I was living well! OK, actually it wasn’t that bad. I managed my money well, still hadn’t missed a payment, and was paying down my debt.

Then, wonder of wonders, I lost my job. The company closed in 2003, and the market was horrible. I went under.

Now, I can’t blame that on the divorce, but my credit got trashed trying to recover from the living expenses I charged. I ended up not being able to pay the cards or department store charges, and got 5 negatives on my credit report. More damage was done, but the divorce, and the subsequent payment problems, left me in real credit problems.

I still haven’t told you how this can affect your credit yet. Let’s take a look at that now.

The credit cards I used while on temporary orders were joint with my ex. So when I stopped making payments, it affected HER credit. The car was in both names as well, so that was a hit to her. And she decided paying for her car should be my responsibility without letting me know that, so the payments slipped there as well. That hit both of us with late payments on our credit reports.

Eventually I filed bankruptcy, and was able to clear my bad items off of her report by claiming them as part of the divorce. My credit, however, was trashed. This was clearly my fault, but it did happen.

I can give you another example. A friend of mine, Sherry, got divorced 8 years ago. Her ex had just gotten a workman’s comp settlement, and they had enough money to pay off all their expenses as they parted ways. It should have been an easy thing to take care of, but her ex was dishonest. Instead of mailing all the payments, he cleaned out their account and disappeared. Since Sherry had made out all the checks, she assumed the debt was gone. After a couple of months, her phone started ringing, and she discovered that she was over $50,000.00 in debt. Her ex was nowhere to be found, and had even stopped making child support payments. If she had handled the payments herself, and gotten certified funds to cover payments, he could not have caused this damage to her credit and lifestyle. She ended up having to take care of all the debt by getting on payment schedules, and she is still paying part of it off.

As you well know if you are reading this, emotions run high during a divorce. There is a lot of blame, many ill feelings, and you probably don’t care much about finances outside of basic survival. However, the impact of a bad decision regarding credit is at least 7 years of a negative item on your credit report, and the possibility of collections, court appearances, and even bankruptcy.

Let’s take a look at some of the things you can do to protect your credit when a divorce happens:

1) Get your own credit cards. If each of you wants to keep cards from the current vendors, do so, but make sure they are in one name only. Joint cards need to be cancelled, and new cards issued. Most credit card companies will allow you to get a new card with the same balance as the old, but in only one name, unless the credit line requires both of your incomes.

2) Put it in writing. Make sure that the debts you have are all accounted for, and that each of you acknowledges in writing what his or her responsibilities are. If one of you defaults, this can be used by the other to protect their credit report and standing to some extent.

3) Get your own bank account. You have every right to do this. You don’t have to share an account. I got an account at the same bank at which I had a joint account with my ex, and I used the old joint account to transfer alimony and child support to her. She doesn’t need to see how I spend my money, and I don’t need to see her spending habits.

4) Build a budget. Things have changed, and you probably don’t have as much disposable income as you once did. Don’t make the mistake of continuing to spend the way you used to. Remember, you are responsible for your own actions, and if you overextend, you will still owe the money. Programs like Quicken or Microsoft Money are great for helping with this, but a piece of paper and pencil will work just fine.

5) Get educated. If you have been relying on the financial knowledge of your spouse, you need to figure things out for yourself.

6) Protect yourself. If you are making payments for your debt, make sure the payment can be tracked. If you don’t trust your ex to make payments, you take responsibility for making the payment yourself, and get the money from your ex to make the payment. Remember, a joint account is the responsibility of both of you to pay, so make sure it gets paid on time.

Nothing about divorce is pleasant, but with a little planning and forethought you can protect your financial standing. Of course, if while married you have ended up with bad credit, a divorce can be a great way to re-start. No matter where you stand, make sure you look after your own best interests. After your divorce is final, you won’t have that particular partner, but you will still have your credit scores and standing, and working toward protecting it now can do you a world of good later.

One final note: When I was going through my divorce, far and away the best thing I did was to go through the Rebuilding Seminars. To get more information, or for other resources, you should go to http://www.divorceseminarcenter.com/ and look for yourself. Many of my best friends were made in these seminars, and the opportunity to be with people who are going through the same thing is priceless.

5 Rules of Great Credit Scores

We all want nice things. New cars, a big house, a 52 inch flat screen TV (oh yeah!), new skis, that Harley your have had your eye on. These are all things that are wonderful to have, and which we seldom want to wait for. However, we usually don’t have the cash available to just run out and buy these things, so where do we turn? That’s right, we get credit.

For some purchases, credit makes a lot of sense. I personally don’t ever expect to be able to buy a car with cash, much less a house. For those things, credit will act as an extension of my earning ability. In other words, it stretches my cash position out over many years, so I can afford things that I would not otherwise be able to buy. But the difference in what you will have to pay over time is really amazing.

If you have a poor credit score, you will have higher interest rates. This may not seem like a big deal, but let’s take a look at what that means for just one purchase. Let’s say you want to buy a house. Your credit scores aren’t that great. You can qualify for the house, but you will get an 8% interest rate. Your will finance $200,000.00 on your house. You payment ends up being $1,467.53 per month for 30 years.

Now, let’s say your neighbor across the street has good credit and gets the same model house. They get a 6% interest rate on their house. Not much of a difference, right? Just a measly 2% interest. So what is the big deal?

Well, the big deal is that your neighbor will pay much less than you will. Their payment for the same $200,000.00 house would be $1,199.10. That’s right; they will pay $268.43 a month less than you will. Ouch!

Ok, you say, no big deal. That is a lot of money, but in the long run does it really matter? Well, the long run is where it gets you. You see, if you make those payments for a year at the higher rate, you will pay an extra $3,221.14 compared to your neighbor. That’s a lot. Over 7 years, which is about how long the average person stays in a home, you will pay an extra $22,547.96. That’s right, you pay more than $22,000.00 for having a 2% higher rate!

The question, then, is what can you do about it? The first thing you should know is it is never too late to start. You need to monitor and manage your credit to make sure that your scores go up, or at least that they don’t go down. To accomplish that, just follow a few easy rules:

Rule Number 1: Make Your Payments ON TIME!

OK, this sounds easy, but this is the one that gets most people. A single late payment, noted as a 30 day late on your credit report, can drop your scores as much as 60 points. That is enough to seriously impact your interest rates, or even your ability to get credit. If you can make your payments on time, and keep doing so for a number of months, you will begin to see your scores move up.

Rule Number 2: Don’t Go Over Your Limit!

This is a bad thing. If you go over your limit, your creditor will note that on your credit report. Going over your limit shows that you are not responsible with your credit. Creditors want to see you use credit responsibly, and going over your limit shows them that you don’t know how much you are spending. While this won’t hurt your scores as much as a late or missed payment, it still hurts.

Rule Number 3: Only Get Credit When You Need It!

There are three reasons for this, but one of the most important reasons not to go out and get a bunch of credit is that every time someone checks your credit you, they will do a hard pull. Each hard pull will get about a 5 point deduction. After about 6 months, you will get those points back, but if you have, say, 5 new checks against your credit report, you will take a 30 point hit for a while, which can affect your rate. There are other things to consider here, but too many pulls is generally considered a bad thing to a potential creditor.

Rule Number 4: Keep Your Account Balances Low!

Your scores can go WAY down with high balances on your cards. For instance, I had a 44 point reduction in scores by going to a 90% overall utilization across all my cards (it was, um, a test! Right, a test! To see what would happen. Really…). The rule of thumb is to keep your balances below 30 percent of your limit. So, if you have a $1000.00 limit, you need to keep your balances below $300.00 ($1,000.00 X 30% = $300.00). Again, it is all about ‘responsible use’. Creditors want to see that you don’t have to have credit, and instead use it for convenience or for those big purchases.

Rule Number 5: Check Your Credit Report!

Your really need to know when something changes on your credit reports. If you haven’t checked recently, you should probably go do it. You can get it for free right here: https://www.annualcreditreport.com. If someone has stolen your identity, or a collections firm has decided to come after you for something that isn’t yours, the only way you may find out about it is to pull your credit report. You can get on free yearly, or pay for one more frequently than that. You can get your reports and scores from http://www.myfico.com/.

The most import thing you can do to build and keep good scores is to make a plan and following it NOW! Good credit scores are vital in today’s economy, and it is up to you to make them the best they can be.

Does My Credit Score Affect My Insurance Rates?

You’ve been driving for years. You haven’t had an accident, or a ticket, or even been caught driving drunk. And now, suddenly, your rates go up.

Why? How can they do that?

Great question, but you won’t like the answer. The insurance industry adopted a policy of using insurance scores, which are derived from your credit reports, to determine how likely you are to file a claim. Apparently, a person with a good credit history is less likely to file a claim than is a person with a poor credit history. Insurance companies make their money by collecting your premiums, and never having to pay for anything. If they have to pay you, they make less money, so they look for ways to make sure that they don’t have to pay money out, or at least for ways to offset those payouts.

Because of this, you may be considered a ‘high-risk’ policy holder if your scores go down. You aren’t necessarily high-risk to yourself, or to other people. You are just a risk to the insurance company.

What, then, is the magic formula used to assess your insurability? That is really, really secret. They don’t want you to know what the magic formula is. You see, if you saw the formula, you might actually know their secret, so they aren’t going to tell you. I know, it makes no sense to me either.

You can, however, see your scores. You can get them from True Credit (http://www.truecredit.com/), which is a TransUnion service, from MyFICO.com (http://www.myfico.com/) or at ChoiceTrust (http://www.choicetrust.com/) who is a leader in insurance scoring. These scores aren’t free, as they aren’t regulated in the same way as credit scores, but they are available at a fairly low cost.

How can improve your scores? Well, pay your bills on time, don’t file bankruptcy, and generally follow the Rules Of Great Credit Scores. Remember, though, that other services will have information about you, such as medical services used, accidents you have had, and even your insurers own database. So while the scores you can buy can be used as a guide, remember that your insurance company may also decide to produce their own scores, and while they may rely on those scores, you will never see them.

How To Build Your Credit

If you are looking at establishing a credit history, you have an interesting challenge ahead of you. There is this dilemma, you see, that creditors want you to have credit before they wilol give you any. Why do they want this, you ask? Well, it is pretty simple, really. Creditors want to know that you can use credit responsibly.

If you are a young adult, and are going to college, credit is pretty easy to get. You will be getting applications in your books, in handouts as you walk past other students, and in the mail. All you have to do is sign, and you get a card. The credit card companies know that, as an average student, if you get in trouble mom or dad will bail you out. So you are a pretty safe bet.
After college, however, or if you choose not to go, you suddenly have to prove yourself. They want to know how much you make. How much you spend. Your waist size. The name of your neighbors cat. Where you were on June 16th, 1963 (I know, you probably weren’t born yet). They want to know how worthy you are of having one of their cards.

Here’s the deal: They want to know you understand the responsible use of credit. They WANT you to use their card, because then they earn interest. They DON’T want you to pay your card off all the time, because then they make less money. (They still make money on every transaction by charging a store to let you use your card.) So, economically, they are looking for 3 things:

1) You will have the ability to keep making payments.
2) You are unlikely to stop paying them.
3) You understand that credit is a tool, and not a way of life.

The majority of people who default on a credit card have several cards, and they are all maxed out. They originally got those cards as a way to extend their purchasing power instead of as a mechanism to keep from carrying cash. So, having too many cards, or having them maxed out, can make you look less desirable to a credit card company.

There seem to be a few key utilization limits that the credit card companies look for. Utilization is pretty easy to calculate. As an example, if you have a $1000.00 credit limit, and you have charged $600.00, you have a 60% utilization rate (600 / 1000 = .6, or 60%).
Utilization percentage break points are at around 60%, 40%, 30% and 10%. Your ‘best’ appearance to a creditor is under the 10% level, but under 30% is also a really good mark. Higher than 60% utilization is a key indicator that you aren’t managing you debt well.
Another thing they look for is if your debt is all in one card, with the rest at low balances. Creditors prefer to have your debt spread out across multiple cards rather than a single large amount. If you have taken advantage of a consolidation offer, prepare to have a lower credit score for a while.

Another thing to consider is how many cards you should get. Credit companies call having too many cards debt pyramiding, which is a condition in which you have so much credit if you maxed all the cards out you couldn’t pay them all off.

Let’s sum this up:

1) Keep low utilization amounts on all of your cards, preferably below 10% per card.
2) Spread debt across several cards, rather than running up a large amount on a single card.
3) Don’t get too many credit cards, as you will look like a bigger risk.

Regardless of your current situation, you have to have credit to build credit. So, consider taking out charge cards from retailers, or a secured card from a bank if you are having trouble getting credit.

Store cards, such as JC Penney, Macy’s and Target, are typically very expensive in terms of the interest rates. However, Target in particular has a reputation for giving people a chance to build credit. Their standard procedure seems to be to give a new customer a $200.00 limit, and then up the credit limit to $500.00 after 90 days.

Can’t get a store card? Go secured. For a secured card, you will give your bank a certain amount of money, say $500.00. They deposit that money into an account, and give you a credit card that is secured by that account. You can’t spend more than the $500.00, and the payments will come out automatically.

As your credit improves, a mix of credit can be helpful. You may want to look at a car loan, or a mortgage, to give you a nice rounded credit portfolio. Creditors like to see this instead of just a bunch of credit cards. Again, it is a responsible use of credit thing.

Remember, though, that taking on too much debt is dangerous to your financial health. No matter how tempting that cool new widget is, make sure you can afford the payments, especially if something like the loss of a job happens to you.