Credit Card Basics

Credit cards can be useful tools or they can be your financial downfall. Credit cards are a quick, easy way to establish credit history, but can easily get out of hand and become the very thing that destroys your credit.

The basic problem with credit cards goes back to how easy they are to use. Too many people over use their credit cards and quickly find themselves maxed out and with a moderate to large sized loan to pay back. Credit cards that are maxed out are usually difficult and expensive to pay back. The outstanding balance is on a line of credit, so there is no set amount of time in which the balance must be paid off. This means that when the balance is paid down, credit becomes available and typically gets used again by the cardholder, thereby maxing it out again. Also, the minimum monthly payments on a maxed out credit card have very little impact on the princple balance.

What is the moral of the story?

Simply put, don't max out your credit cards. Don't treat your $5,000 credit limit as if you have an extra $5,000 to spend. Rather, regard it as a safety net to be used in emergencies. In a perfect world, that is the way to handle your credit cards. In a perfect world. Most people, however, end up maxing out their credit cards at some point and end up making only the minimum monthly payment. Again, the credit cards make spending money very easy and most credit cards have a healthy interest rate as well as various fees that make it difficult to get paid off.

If you are one of these people, the best thing you can do is to put all of your disposable income that you can into gettng that card--or cards--paid off as quickly as possible. Having a balance on a credit card that is more than half of the total limit has a negative effect on your credit score. When you pay your balance down below the 50% mark and when you pay it off entirely, you will see an increase in your credit score.

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Learn Financial Responsibility Young

Credit cards, credit history, auto loans, mortgages, insurance, savings, retirement........these are just a few of the things that people should have a basic understanding of from an early age. In fact, a personal finance course should be a mandatory part of high school curriculum, to be taken in the senior year. Many high schools offer a personal finance or consumer economics course as an elective, but it should be a standard part of the basic curriculum.

Why?

There is a long list of valid reasons why high school seniors should have to take a practical finance course, but what it boils down to is this: credit history, credit cards, auto loans and mortgages can have a huge impact, positive or negative, on a person's life. The fact is, many young adults learn about credit history, credit cards and auto loans the hard way. They have not received any structured training in these matters and are not aware of the serious consequences of bad credit and of the pitfalls of credit cards and loans.

If there was a federal mandate to include a personal finance course as a mandatory part of the high school curriculum, the instances of bankruptcy, foreclosures and bad debt charge-offs would decrease significantly over the next 5 to 8 years. Young adults would be introduced to the concept of financial responsibility before they get into the "real world".


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Credit Repair Basics

If you are in a situation in which you need to repair your credit, the first thing you you need to do is to find out what exactly is on your credit report. Actually, you need to find out what is on all three credit reports. There are three primary credit reporting agencies that almost all lenders use: Transunion, Experian and Equifax. Your credit score and accounts will be different from report to report. Almost all mortgage lenders will pull all three reports and use your middle FICO score for loan qualification and pricing purposes.

The main point is that you could have credit issues on one report that might not show up on another, so it is very important to monitor all three reports. There are a number of places that you can go online to get your credit reports and scores, and ongoing monitoring services, but they will charge you anywhere from $20 to $50 for the scores and reports and a monthly subscription fee for the monitoring.

Everyone is entitled to view all three of their reports at http://www.annualcreditreport.com/. There is no charge, but if you want to see your scores, you will need to pay a little bit. It is still a very good idea to go ahead and look at the free reports even if you are not willing to pay for the scores. You should review the reports and look for the items that are negatively affecting your credit. If you have charge offs or late payments, the only remedy for that is time. The negative items---with the exception of bankruptcies---will fall off your report after 7 years. However, you need to review the reports to make sure that there are no negative items that are over 7 years old that are still reporting. This has been known to happen, but you can dispute the items on the basis that they are past the 7 year mark and get them removed.

Again, the first step toward repairing your credit is to know what exactly is on your reports that is affecting your score. The next step is to get your finances under control to the point that you are able to meet your monthly obligations. Easier said than done for most people, but spending less than you make is the basis of financial health and the building block of good credit. You have to be able to meet the monthly obligations on time to re-establish good payment history.

A quick way to boost your scores is to pay down or to pay off credit cards and charge cards. Your score will drop when your balance exceeds 50% of your total credit limit. Paying your balances down under 50 % will give you a quick score increase. The best way to do this is to focus on one credit or charge card and pay as much extra over the minimum monthly payment as you can until it is paid down or off. Once it is paid off, roll the monthly amount you were paying on that card into the monthly amount you are paying on another card. Obviously, this does not reduce your monthly obligations, but it dramatically reduces the amount of time it takes to pay off your debt and will save you large amounts of money in interest charges.

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Welcome To Personal Finance

Welcome to Personal Finance, where Nickels and Dimes Make Sense. Corny titles aside, the purpose of this blog is to serve as a practical, real-world guide to personal finance. Upcoming post topics will include the basics of credit, a guide to every type of insurance, a guide to buying and selling houses, a guide to small business fundamentals and advice on budgeting.