7 Ways To Improve Your Credit Score

Nobody knows the exact methods by which your credit score is calculated, but you should definitely understand the importance of having a good score, and some methods which will help you improve your credit score.

Here are 7 Ways To Improve Your Credit Score

Pay on time.  Every time .

The biggest knock on a credit score is late or missed payments.  While you can’t erase the sins of the past, you can make sure that moving forward you prove your credit worthiness by paying every bill on time.

Reduce the number of open debts.

It’s been thought that, all things equal, the number of debts you have can adversely affect your limit. For example, if you have $4,000 in credit card debt, you might have a lower score if you have this spread across eight cards versus consolidating the debt down to one or two cards.

Keep open available credit.

One thing that likely factors into your credit score is how much of your available credit you have in use.  Again, using the $4,000 credit card balance, mb-201402creditcard400you might find yourself with a lower score if your overall limit is $5,000 versus if it’s $10,000.  Not to say that you should open up new cards to increase your limit, but instead of closing cards and lowering your overall limit, you can just stop using them.

Understand different types of credit.

A $4,000 auto loan may have a different impact on your credit score than $4,000 in credit card debt.  A mix of different types of debts is likely more favorable than just having one type of debt.  Again, not advising that you run out and open more types of credit, but understanding the potential impact, especially before potentially taking on a new loan, is very important.

Keep aged credit.

Two people with identical credit situations can find themselves with vastly different credit scores simply depending on the age of their credit.  If your oldest credit card was taken out just a year ago, you will likely have a lower score someone else whose oldest card was issued ten years ago, all other things equal.  Before you start closing cards, again, take this into consideration.

Know that stability counts.

Many people open and close credit cards to take advantage of different reward programs.  A few years ago, it was common to have reward cards available that would give you 5% or more back on your purchases, but the catch was that this was just a teaser, and the rewards would decline after a few months.  People would simply move on once the premium rewards disappeared in order to continue to maximize their overall rewards.  This can add up to big bucks in rewards but this will have a negative impact on your score.  If you already have a top score, this will likely be negligible. For someone with an average score, this could actually do more harm than good.  Weigh not just the reward benefits, but also the long term potential costs.

Keep working hard.

If you have a 600 credit score, it’s not going to jump up to 800 overnight.  But, it can be done as long as you work hard and understand that time is on your side.  While there are many offers out there that claim to improve your credit score overnight, the best and most stable method is to make solid choices as noted above and do so over time.  That will outlast any gimmick!

Readers, what have you done that’s improved your credit score? Have you found any methods to work against you?  I’d love to hear your thoughts in the comments below.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Set Your Debt Free Date And Stick To It!

When I started catching up on e-mails that piled up over the holidays last month, one of the first ones I opened was from Jackie at The Debt Myth, a fantastic personal blog that tackles debt in real and sensible ways.  She had a great idea to get as many bloggers as possible to write a blog post centered around the theme “Debt Is Not Forever”.

The Debt Is Not Forever Idea

The idea behind her theme is so simple that the words really speak for themselves.  It’s basically to acknowledge that debt is something that is temporary, even though many people have made it a permanent part of their lives.

Think about it.  We have car loans, mortgages, credit card bills, home improvement loans, student loans, and the list can go on and on and on.  Looking at the list as well as the figures that many people have attached to them, it can seem like debt is constant.

Although it may seem like that, it really isn’t.

How To Think of Debt As Temporary

mb-201402creditcard400For the last couple of years, I’ve had Jackie’s principle of ‘Debt Is Not Forever’ in my head, but in a more abstract way.  Reading her e-mail which asked me to write this post, gave me the a-ha moment, and put some framework around my approach.  So, what is my approach, you ask?  It’s pretty simple.

  1. Gather a list of all of your debts
  2. Find the debt that is set to be paid off last
  3. Set that date as your debt free date.
  4. Manage your debts within that time frame.
  5. Stick to it!

Sounds pretty simple, right?  It is!  A little too simple?  No, not if you plan and work.

Applying Our Plan To Get Debt Free

So, let me put our plan in action.

Gather a list of our debts
Right now, we only have two debts.

  • Student Loan
  • Mortgage

List created.  See, this is easy.

Find the debt that is set to be paid off last
The mortgage is the debt that is scheduled to be around the longest out of all of our debts, in October 2026.  The student loan will be paid off in 2018 with normal payments.

Second item, done.

Set that date as your debt free date

I just said that October 2026 is the date that the last payment on our current debt is scheduled, so I guess October 2026 it is.

Third item, done!  We’re flying right now.

Manage your debts within that time frame

OK, here’s where it probably gets a bit tricky.  Here it is just January 2015, and we have to figure out our debt situation for the next eleven and a half years?   I knew this would get tough.

Or is it?

Not really.  Actually, planning your debt is pretty basic if you give yourself only two options.

  • Take on no new debt during that time – This is the ideal situation, and if you can pull this off, you’ll be assured to hit your mark on or before the current date of your final payment.  That’s simple, cool, and will work 100% of the time.  Unforunately, it isn’t always practical, which leads to the second option….
  • Manage any new debt within your schedule – Let’s face it, you may have to take on debt between now and the time your last debt is scheduled to be paid off.  Ideally, you wouldn’t have to take out a loan for a car, but you might.  In a perfect world, all home improvements and such can be paid for up front, but maybe that can’t happen.  The winning strategy here is to make your debt payment date a priority.  If you willingly take on any new debt, make sure it’s done so in a fashion where all new debts will be paid off within the date you just set above.  Period.  So, if you have to get a car loan (or multiple car loans within the time), fine, or you want to take out a home equity loan to pay for some upgrades, no problem, just so long as you can commit to having that new debt paid off before your debt is scheduled to end.  If you’re unable to commit to that, then the solution is simple: Don’t take on the new debt!

Stick To It!

Again, this part will get tricky, and you may have to go back a few times, especially depending on how long it is before your debt is scheduled to be gone.  But, if you establish that date, write it down, remind yourself of it, get a calendar popup on a regular basis.

Start Thinking Of Debt As Temporary Today!

Whatever it takes, ingrain that date in your head.  Whether your debt free date is a month from now or thirty years from now, it really doesn’t matter.  Just so long as you establish it and stick to it, you’ll get there.  And, once you do, you’ll realize that debt is not forever!

Readers, please share your strategy on ending debt, or your story of how you did it if you’ve already hit this goal.  In addition, please visit Jackie’s page on this important topic over at The Debt Myth.  

Many thanks to Jackie for organizing this topic and including Money Beagle.  I’m proud to share!

 

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Starting An Emergency Fund Gives You The Most Bang For Your Buck

I was reading a well written post from Money Ning about emergency funds.  He was recommending an emergency fund over using the money to pay down debt.  I totally agreed with him, but as I read the article, I thought of it in a different perspective, and that my readers might agree or consider as food for thought.

The Biggest Value In Emergency Funds

The example that Ning used was if you had $1,000, would it make sense to start an mb-201312billscoinsemergency fund or to throw it at paying down debt?

Where it fell into place for me was when I started thinking about it in terms of where you would get the most bang for your buck.

Consider the following examples:

Credit Cards, Student Loan Debt, and an Auto Loan

The two most standard types of debt where I would think the person questioning ’emergency fund’ vs. ‘debt’ would be student loan debt and credit card debt, and throw in a car payment as well.  Say you have someone with $40,000 in debt, and they’ve decided to tackle that debt and try to become debt free.

First, celebrate that.  If you’ve made that pledge, then good for you!

Second, let’s look at what would happen if you had $1,000 and used it to attack your debt.

In the example above, your $1,000 would pay off 2.5% of your outstanding balance.

This is nothing to sneeze at and probably represents a bigger chunk than would normally be paid with minimum payments.  There’s nothing wrong with that, but is it really enough bang for your buck.

Which leads us to the second option

Should I Start an Emergency Fund

If you have that $1,000 and stick it in the bank, you are obviously set to pay against an unexpected expense, at least for the first grand.

This is great.  Let’s think of a couple of examples of how this would play out:

  • You get in a car accident. Repairs are $6,000, but your insurance picks up everything after your deductible, which is $1,000.
  • You get sick or injured and have out of pocket health care costs of $1,500.
  • You get laid off from work for two months.  Your severance and unemployment can cover all of your expenses except for your $400 per month car payment, meaning you’d be short $800.

In each of those cases, using your $1,000 emergency fund would be completely appropriate.  These are all emergencies and precisely the types of situations where you’d use an emergency fund.

But, what kind of bang for the buck are you getting?

  • In your car accident, your emergency fund covers your entire deductible, so your emergency fund gives you 100% bang for the buck.
  • If you get sick or injured and have your bill, your emergency fund covers two-thirds, giving you a 67% bang for your buck.
  • In the event of your layoff, your shortfall works out to being fully funded, again giving you 100% bang for the buck, with the added bonus of having $200 left over that you don’t have to replenish once you get back to work.

In each of those cases, your bang for the buck far exceeds the 2.5% bang for the buck that you’d be getting by paying off debt.

The Math Works Almost All The Time

Obviously each person has different debt numbers and each emergency will offer different numbers, but the fact of the matter is that unless the cost of your emergency comes in at a greater cost than your outstanding debt, you’ll get greater bang for the buck by starting an emergency fund every single time.

Important Considerations For An Emergency Fund

Don’t take this too far.  Some people might ask why stop at $1,000 and build an even bigger emergency fund.  I think $1,000 is appropriate as it’s going to likely cover over half the costs of most short term emergencies.  Yes, there are situations where that might not be the case, but the goal of an emergency fund is not to protect you against every worst case scenario, but it’s designed to put you in front of a majority of situations which could provide short term financial catastrophe.

As you get lower in debt, you might bulk up your emergency fund in small increments, or you might also do so if emergencies might provide bigger risk, for example if you start a family.

In either case, the details in how you approach setting up and maintaining your emergency fund will vary, but the one constant I would recommend is that you should put a small emergency fund in place before paying extra on debt no matter what.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

6 Things Your Debt Is Costing You

I am not a fan of debt.  Most financial bloggers will agree with me.

Have you ever thought of the things that your debt can be costing you?  Here are six things that I came up with in just two minutes time!

  1. mb-201312billscoins – This is the obvious one.  When you have debt, you have to pay it off.  This is money that comes right out of your income stream, and because it’s for an item you already paid for, you are paying present money for past purchases.  There is absolutely no joy in that.
  2. Opportunity – When you pay money for your debt payments, that takes money away that you could use for other things, including making money!  Your $500 debt payment is gone, but a $500 investment in the stock market is an opportunity for future gains.  But that’s lost when you have the debt payment that comes first.
  3. Freedom – Every debt payment you make requires a certain level of income.  For some people, debt takes any income gap and then some.  These are people in extreme debt.  But, even those not in extreme debt end up with a correlation between debt and income that sees you relying on your income so that you can pay off your debt.  You’re still able to make the payments, which is great, but you’re in essence stuck doing whatever you’re doing to make income for as long as you have debt.  Remember the people in extreme debt I talked about earlier this paragraph?  The ideal thing is to be on the other extreme, where you have no debt.  When you’re there, you have freedom without having to worry about the next debt payment.
  4. Happiness – Debt causes anxiety.  Anxiety causes stress.  Stress reduces happiness.  Therefore debt costs you some level of your happiness.
  5. Sleep – Have you ever woken up and started thinking about your debt?  If you have, then chances are, rolling over and going back to sleep isn’t in the cards.  There are few things worse than being kept at night…because of debt!
  6. Your Net Worth – Financial freedom is obtained by increasing your net worth.  When you make debt payments, you’re taking an asset to pay off a liability.  This means that your debt payment realistically results in zero net worth growth.  In fact, once your next statement comes in the mail, your interest is a new liability, which actually reduces your net worth!

As you can see, debt is kind of the worst.  If you’re in debt, then getting out of debt will help you gain back some of the costs above, and I’m sure there are others.  If you get out of debt, then stay out of debt so you don’t have these costs come up and get you again.

Readers, what other costs are associated with debt?

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.