The funny thing about bad credit is that it’s a slippery slope: the more trouble you get into, the more expensive everything gets, and the harder it is to manage it all. One of the ways the credit industry balances itself out is by charging higher fees and interest rates to people with lower credit scores.

So what do you do when you’re on the bottom looking up? When we hit bottom I knew that we had to do something to re-establish our credit rating. We were driving a car that was falling apart, renting our home, and had no real assets to speak of. So how did we come back from the abyss?

First, I sat down and took a long hard look at my finances. Then, I choked and accepted one simple truth: It was going to be expensive to raise my credit score back up. That’s where the finances vs. credit battle began.

The only way to raise your credit score is by getting and using credit properly. The only companies that were willing to lend me money all wanted to charge upwards of $250 worth of fees just to give me the privilege of paying better than 19% interest. So, I plucked up my courage and launched a multi-part attack on my bad credit score.

1) I invested a small amount of money into an Orchard Bank secured credit card. I started with $200. They paid a pitiful rate of interest (.02% If I remember correctly) on my savings account. But they did report monthly to all three credit bureaus. The other main benefit to getting that card was that I could simply make an extra deposit into savings any time I wanted, and it would raise my credit score. The icing on the cake was a very reasonable 9% interest rate.
When you have bad credit, an interest rate that low is unheard of.

2) I went ahead and applied for a high fee-unsecured credit card. I chose the Rewards 660 Visa largely because they report to the credit bureaus and they automatically raise your credit limit $75 each time you make three on time payments in a row and don’t go over the limit. The problem is, they had $250 worth of initial fees, and then an annual fee well over $100. As well as a 19% interest rate. I no longer carry a revolving balance on either of my cards though, so I was not really as worried about that.

3) I started monitoring my credit scores, and my credit reports. This cost an average of $30 a month.

4) I challenged incorrect items on my credit report. That was free and it did raise my score.

5) I sent $100 a month extra to my secured credit card to raise my limit. I did it for 5 months in a row.

6) I paid off my credit cards every month, on time, without fail.

So, all in all I figure raising my credit score from the mid 500’s into the high 600’s cost me around $1200 when I counted all the card fees and the credit monitoring service.

At first glance, that appears to be a terrible financial decision, I know. But the truth is, raising my score more than 100 points was worth every penny. And, as long as I keep managing my credit well, that improved credit score will continue to save me thousands of dollars on our home (by being able to periodically refinance), on our next car if we have to finance it, and on every better credit offer that comes along.

In other words, it was a temporary financial sacrifice for my greater financial good. And the most valuable thing I took away from the whole experiences was that I really and truly learned the ins and outs of my credit score and reports. I learned to manage my money. However much that lesson cost me, the rest of my life will be better because of it.

What do you think? If you were in my position would you be willing to pay all of these fees just to raise your credit score? Would you forgo repairing your credit altogether? Would you have explored other options and tried different methods of raising your score? Leave me a comment below, I’d love to have your opinions!

The average cost of monitoring all three credit reports and scores is $30 a month. ($360 a year). Now, with a hefty yearly cost like that, I have to wonder, are these companies really providing a service that valuable? Do I really need to know my credit score every month?

The answer to that is going to depend on your goals and your credit history. This is an excellent example of how past mistakes on your credit report can come back to bite you in the wallet. Now, I think most of us are automatically going to agree that this is a pretty poor way to spend $360 a year. However, there are certain circumstances where you absolutely should be paying for this service. In other words, under certain conditions, credit does win over finances.

Let’s take a quick look at when it would actually benefit you to pay for a credit monitoring service.

1) If you suspect your identity has been stolen, and you do not want to freeze your credit report - In this case, monitoring your credit reports for 3 to 6 months would be a wise idea because it will allow you to quickly see if anyone else is opening accounts in your name.

If my identity was stolen, I would freeze my report for 3 - 6 months. Then, after I un-froze it, I would place a fraud alert and purchase a monitoring service for an additional 3 - 6 months just to be on the safe side. In this case, you could probably skip purchasing your credit scores, and just view your reports. This would save some money.

2) If you are trying to repair your credit after a default, judgement, or bankruptcy - Purchasing a credit monitoring service is especially important after bankruptcy because you will need to be sure that companies whose debt was covered under the bankruptcy do not continue reporting negatively after your bankruptcy is discharged.

3) To make sure your “credit repair” credit cards are reporting properly to all three credit bureaus each month. Let’s face it, repairing your credit is an expensive proposition. Secured credit cards require money up front. Unsecured credit cards for people with bad credit often have high yearly fees, application fees, monthly fees, and even more fees when they raise your limit. Not to mention high interest rates if you dare to leave a revolving balance.

So, if you are going to all the trouble of paying for these types of things to repair your credit, then it makes sense to go the final mile and monitor your reports and scores. That is the only way to know whether or not your score is actually going up, and by how much.

One other thing - depending on how low your score was, it could take some time to raise it. Monitoring helps you track your progress, and pick your next course of action. Finally hit above 700? You can qualify for better deals, maybe even to refinance your high interest cards and loans. Above 720? Even more likely.

By paying to monitor your score regularly, you will prevent needless inquiries on your report. (Whoops, sorry, your score is 680 at Experian, not 700…Denied…) Monitoring will save time, and give you the confidence you need to go apply for better deals as you qualify for them.

For a breakdown of the different credit score categories, you can click here (It’s in the middle of the article.)

What do you think? Is using a credit monitoring service important for people with excellent credit too, or just those trying to repair their credit?

Have a question for us? Leave a comment below!

I would like to introduce our newest staff writer, Jenna Banks. We hired Jenna because she has actually been through all of the following things:

• Worked as a collections representative for a major credit card company.
• Had collection officers call her at home and at work
• Had a Judgement
• Had a wage garnishment
• Had out of control medical bills
• She’s been a victim of Identity Theft
• And at the end, she went through Bankruptcy.

Now, we realize that none of these things are positive! But what Jenna did next was very positive. She decided that she was finally going to learn to manage her finances and her medical bills and never, ever make the same mistakes that led to her bankruptcy again.

There is not much that can happen to you financially that Jenna has not experienced, and repaired in her own life. She has learned how to protect her self from identity theft, challenged items on her credit report, stopped her wage garnishment, and even crawled back from bankruptcy.

Jenna took her credit score from a dismal 540 to a slightly-less-dismal 670 in just over a year. She is well on track to being able to get loans at a decent interest rate within a year or two - despite the bankruptcy.

She is not an expert in good credit and rewards credit cards, but she can tell you which secured and unsecured credit cards are best for people who are repairing their credit, help you find out if bankruptcy is the right option for you, give you tips for negotiating with your creditors, and tell you the best way to manage your credit card accounts if you start to fall behind.

Everyone, please give a warm welcome to Jenna Banks! (And feel free to pick her brain if you have questions.)

Today we have more opportunities than ever before to manage our finances and, if need be, consolidate our debt in order to pay it down. If you are feeling stretched by too many payments, or having trouble managing your various accounts, then debt consolidation can definitely be a smart financial move. The only question is, how will it affect your credit score?

Balance Transfers:

Who wouldn’t want to transfer the balances on several cards with various interest rates to one card with a low, or even 0% interest rate? Before you do this, just keep in mind the golden rule of balance transferring: Keep your accounts open. Closing your old accounts after you transfer the balance off of them can hurt your credit score.

Just like in part 1 of our series, closing those old accounts hurts you in two ways:

1) By lowering the overall amount credit you have available. (30% of your credit score)
2) By lowering the average age of your accounts. (15% of your credit score)

If you need to close those old accounts because they have high maintenance or yearly fees, then make sure you aren’t going to apply for a home or auto loan in the next six months to a year. Keep making on time payments to your new card, and your score will go back up.

Also, remember the second rule of balance transferring: Keep your old accounts open, but do not charge them back up. Unless you’d like to double up on your debt!

Debt Consolidation Companies:

Consolidating your debt through a debt management company does not necessarily hurt your credit score – but it can. It all depends on the company.

What happens when you make an agreement with a debt consolidation company:

Once you decide on a company and agree to a debt management plan, the company you have chosen will begin to negotiate with your creditors on your behalf. You will write a monthly check to your debt consolidation company, and they will disburse it to your creditors.
There will be a notation made on your credit report that you are repaying the loan through a debt management company. At this time, that notation does not hurt your credit score.

Here’s the problem:

Many credit card companies will not negotiate things like settlements or reduced interest rates until you are past due on their account. Unscrupulous debt management companies will allow your accounts to go past due for several months so that they can negotiate new terms with your creditors. This will hurt your credit score. The solution? Choose your debt consolidation company wisely. You can read more about how to do that here:

Have a question for us? Leave a comment below!

Question: Let’s say you have a credit card that you’ve had since your college days. It has a relatively high interest rate, and a whopper of an annual fee. Your credit has improved since then, and you are now eligible for far better offers. What do you do?

Financial Answer: The smart financial decision is to close the old, unused account, and then open up a new credit account with a better interest rate, and some decent rewards. This way you benefit from your improved credit rating instead of paying a high interest rate and yearly fees on a card you no longer want.

Zing! Yup - You guessed it, you just lowered your credit score…

Why closing that old account will lower your credit score:

Your credit score is based on several factors, and closing an old account affects two of them:

1. How long your accounts have been open - Closing that old, unwanted account is going to lower the average age of all your open credit accounts, and that will lower your score.

   Credit Score Rundown: The length of time your accounts have been open is 15% of your total score.

2. The total amount of money you have borrowed, vs. the amount of money you are capable of borrowing -

   When lenders consider your creditworthiness, they want to know how much you currently owe on everything - credit cards, mortgage, car payment, everything. Then they compare it to your total lines of credit. Basically, they want to see that you are not actually using more than 20% - 30% of all your available credit lines.

   If you close that old, paid off account, then you will appear to be using more of your total available credit than you were before you closed the account - especially if you are carrying revolving balances on any of your other credit accounts. This will lower your credit score.

   Credit Score Rundown: Available credit vs. used credit is 30% of your credit score.

So what do you do? You choose your own adventure!

Choose your Credit Score First:

If you are actively trying to raise your credit score, then leave the account open, make a small charge on the card every few months, and pay it off to avoid the high interest rate. Unfortunately, you will have to chalk the yearly fee up to the cost of raising your credit score.

Quick Tip: Call your credit card company. See if they can waive the annual fee, or reduce the interest rate. If your credit history with them is good, they may be more willing to help you than you think!

Choose Your Finances First:

If your goal is to streamline your accounts, and get rid of additional expenses like the high interest or yearly fees, then go ahead and close the account.

Quick Tip: If you are planning to apply for a new credit account any time soon then make sure you have the new card in hand before you close the old account - that way your credit score will be highest when you apply for your new card, and you can get the best deal possible.

Check back with us Monday for part two of our Finances vs. Credit series!

What’s your 2¢? Leave a Comment Below!

One of our readers, Jack, sent us this question:

Just a quick question. One of my family members had their purse stolen. Everything they owned was in the purse, from credit cards, checks, social security cards, and so on. Now would Freezing their credit report benefit her? Or would freezing them hinder the progress of getting everything straightend out? The theives did not open any new accounts.

Thanks,

Jack

Thanks for your question Jack! The short answer is yes, she absolutely needs to freeze her credit report as quickly as possible. Any time your purse or wallet is stolen there are ten basic steps that you need to take in order to protect your accounts and your credit rating.

Ten Steps to Combat Identity Theft:

1. File a police report - Call your local police station (not 911). They will help you file a report. Make sure that you keep a copy of the report, and keep the report number handy. You may need it as proof to follow some of the steps below.
2. Call your bank and report your debit card missing / stolen - It is important that you do this as quickly as possible because if you do not you could end up being liable for any charges the thief makes on your card.

Here’s how federal law works: if you report your card stolen before the thief manages to charge on your card, then you are not liable for the charges. If you report it afterwards, the amount of your liability depends on how long you wait - so don’t wait. Do this the instant you have filed your police report, if not sooner. Ask for a new card, with a different account number.

3. Your Checking and Savings Accounts - Close them and stop payment on any checks you have out if possible. Open up new ones, with new account numbers. Your bank should be able to help you.
4. Freeze your credit reports - One of the first things would-be identity thieves do is to try to open up new accounts in your name. If you freeze your credit report it will not matter how many applications for credit someone puts in, they will probably not be able to open new accounts since your credit score will be hidden.

   Freezing your credit reports is a far more effective policy than simply placing a fraud alert since some lending banks could ignore the fraud alert and open new accounts despite the warning. As long as you have a police report there should be no charge to freeze your report at any of the three credit bureaus.

5. Make a list of everything that you know was in your wallet / purse - At the very least you are going to need this list so that you know what you need to replace. You will also need it for step number 6.
6. Start calling your credit card companies - Report the loss of each individual card. Cancel the card, and ask for a new card, with a new account number. By law you are not liable for more than $50 per account if your card is used without your permission, so take a deep breath and relax.
7. Your Driver’s License - You will need to go to your local DMV and report your license as missing, and get a replacement.
8. Your social security card - you will have to go up to your local social security office to get a new social security card. However, you will never be issued a new social security number unless there is proof that someone is using it fraudulently - you will just get a replacement card.
9. Change your locks - If the thief got your keys as well, then you need to change the locks on your house, and if possible, your car. They have your keys. They have your address. Why take a chance?
10. Temporarily purchase a credit monitoring service - especially if you do not freeze your credit report. This will be the first indicator that someone is opening accounts in your name, and right now, I think that it only costs around $30 a month to monitor your reports and scores from all three credit bureaus. Personally, I prefer TransUnion’s credit monitoring service over Experian’s. I have never used Equifax’s, so you may have to check that out yourself. You could also look into companies like Lifelock.

Once you have finally gotten this resolved, don’t forget to get a free copy of your credit report each year. Once someone has your information, it is possible that they always have it, so at the very least check once a year to make sure no new accounts have been opened without your knowledge.

Have a question for us? Leave a comment below!

What is a FICO® score?

A FICO® score is a credit score that was developed by Fair Isaac and Company. Lenders use this number in part to decide whether or not to give you a loan. Most lenders offer different interest rates to you depending on how high or low your score is.

Your FICO® score:

All FICO® scores range from 300-850. The higher your score is, the more likely you are to get a loan. The lower your score is, the less likely you are to get a loan.

If you have a low FICO® score and you do manage to get approved for credit then your interest rate will be much higher than someone who had a good FICO® score and borrowed money. So, basically, having a high FICO® score can save you hundreds, if not thousands of dollars over the life of your mortgage, auto loan, or credit card.

What is considered a good (or bad) FICO® score?

• Scores between 720 and 850 are considered a good credit risk. They normally qualify for the best interest rates on a loan , and can receive instant credit approval nearly anywhere. This is the ideal range for your credit score to be in.
• Scores between 600 and 720 are considered a moderate credit risk. People who’s scores fall into this category will not normally have trouble getting a loan, but they will pay more in interest than people who have score above 720.
• Scores between 500 and 600 are considered poor credit. If you fall into this category, you will have difficulty getting a loan. If you do manage to get a loan you can expect to pay double digit interest until you manage to raise your score and refinance.
• Scores below 500 are considered a terrible credit risk. If you fall into this range you will most likely not be able to get a loan of any type, although you may qualify for a secured credit card.

How is my FICO® Score Computed?

Your FICO® Score is computed using all of the following things:

(Photo from www.MyFICO.com)
For more information on exactly how your FICO® score is calculated you can visit MyFICO.com

How can I check my FICO® score?

You can check your FICO® score by paying to see it at any of the three credit bureaus, or you can check your FICO® score for all three bureaus at once by going here.

If you are planning to apply for a credit card, or especially a mortgage or auto loan then it is vital that you know your score before applying. Every time you request a loan it can lower your FICO® score, so you need to know where you are starting from before you apply for credit.

How can I raise my FICO® score?

There are several simple ways to raise your FICO® score:

Pay all of your bills on time, every time. This includes your utility bills, mortgage and auto payments, and all of your revolving lines of credit like credit cards.

Check your credit report at least once a year – You can find out how to get your free credit reports here. You can find out how to challenge bad information on your credit report here.

Do not charge more than 30% of the available balance on any of your credit cards. Banks like to see a nice record of on-time payments, and several credit cards that are not maxed-out. If you are carrying high balances on your credit cards, then make paying them down under 30% a priority.

Do use your credit cards – Many people who make mistakes with their credit believe that the best way to fix things is to never use credit again. If you are afraid that you cannot handle your credit cards correctly then the best policy is probably this one: Run only your utility bills on your credit cards each month, and then pay the balance in full by the due date. This ensures that your utility bills get paid on time automatically, and as long as you keep the habit of paying off your credit card balance each month your score will continue to go up. Leave the credit cards locked in a safe or drawer at home.

Keep your accounts open as long as possible – Even if you are no longer charging on the card. The best policy is to keep those unused accounts open, blow the dust off your card every few months to make a small purchase, then pay it off. How long each of your accounts have been active is a major factor in your credit score.

Remember that it will take time – Following the above steps consistently over a long period of time will repair your FICO® score and allow you to qualify for better loans and interest rates. Repairing your FICO® score does not happen overnight though, so if you do these things for a few months and do not see a large increase in your score, do not give up. They are all habits that you will want to maintain throughout your life to be sure that you keep your finances and lines of credit under control.

Have a question for us? Leave a comment below!

Eye Catching Credit Card Posts

Below are a couple of posts that caught my eye and some carnivals that I was involved in during the week.

Sneaky Credit Card Tricks - Over the limit fees by Fire Finance looks at one way credit card issuers can stick you with a fee. My suggestion is to stay way under your credit limit (it helps your credit score too!).

According to No Credit Needed, some gas stations are not accepting credit cards. Well, they should do so at their peril. I’ll switch stations if it were me.

Carnivals I was involved in

Carnival of 20 Something Finance

3rd Anniversary of the Carnival of Personal Finance - It’s the3rd anniversary and still going strong.

Carnival of Money Hacks #17 - Music of the 80s Edition

Carnival of Debt Managment

Anything Goes and General News

A credit report “Freeze” prevents lenders from pulling your credit score, so it could actually prevent would-be identity thieves from opening new accounts in your name. But, is it really worth the trouble?

The credit bureaus aren’t exactly lining up to help you freeze your credit reports, since most of their money is made by selling your credit score and information to prospective lenders.

If you decide that you do want to freeze your credit report as a preventative measure you have to send a request in writing and provide up to seven documents (Driver’s license, Social Security Number, Utility Bills, etc.) as proof of your identity. You have to send all of that information to each of the three main credit bureaus individually. On top of that, you have to pay a fee to freeze and unfreeze your report. Then, when you get ready to apply for a loan, un-freezing your credit report takes several days.

(As a side note it is free for victims of identity theft to freeze their credit reports, but they must provide a police report documenting the theft.)

So, inquiring minds want to know. What do you think of freezing your credit report? Is the potential security worth the hassle, or do you want to be free to apply for credit and pounce on a better offer the minute you see it?

Here are a few facts to consider:

• It is estimated that there are as many as 750,000 cases of identity theft each year.
• It is frighteningly easy to steal someone else’s identity.
• You have to go through about 30,000 miles of red tape if your identity is stolen, including freezing your credit report anyway.
• Freezing your credit report only prevents new lenders from pulling your credit score. It does not prevent thieves from using your current credit card numbers, or bank account information, or your social security number any way they like.

So what do you think? Is the additional protection worth it, or is freezing your credit report something you will deal with only if you have to?

One of our readers, Frank Mills, sent us this question:

I have heard that you can apply for a business credit card and get a fresh start by using only the tax id number but it seems that all of the cards that we have checked want your social security number. Is there such a card to apply with only the tax id number?

Thanks for your question Frank.

Here is the answer:
If your business is a sole proprietorship, then you will almost always be asked for your social security number, as well as your Tax ID number before you will be able to get credit.

There are some online rumors and “advice” that cite companies like Staples and a few other companies (see the list below) that will allow you to open up an account without your social security number.

So, from here you really have to take a quick look at your motivation and goals:

1) If your personal credit is bad, and you are only starting the business with the hopes of a quick fresh start in the credit department, then you would be better off not starting a business.

Instead consider getting a secured credit card and making the payments on time.From there you can start applying for retail credit cards, and then after another 6 months to a year of on time payments you can move up to an unsecured Visa or MasterCard. This will raise your credit score legitimately and does not really take that much effort – just the initial deposit for a secured credit card, and regular payments. (Check out this link for our reviews of the best secured credit cards to rebuild your credit.)

2) If you really want to start a business and you have bad personal credit, then you will want to take the following steps:

• Staples
• Office Depot
• UPS
• FedEx
• Chevron Oil
• TMobile
• Nextel
• Dell Computers
• Office Max
• Cingular
• Or bite the bullet and apply for a secured business credit card to start building up your credit rating.

From there you should be well on your way to establishing excellent business credit.

Have a question for us? Leave a comment below!