Managing Credit Responsibly

I have very good credit now, my current FICO score is 821. This has allowed me to finance used cars below 3.9% APR or obtain credit cards if needed. I only have 3 cards currently, a Discover, Master Card and Visa.

I use the Discover card for day-to-day purchases, so I had my balance reduced to $1,500 several years ago. The other 2 are for emergencies and each have one recurring payment to keep them open. In total, I have $9,900 in available credit if needed.

When I graduated college I had about $2,500 in credit card debt at a very high interest rate. 18 months later, my balances had ballooned to over $9,000 between 3 cards. Plus I took a loan of $15,750 for a 2 year old Nissan Maxima at 10.5% APR (this was 2002, so while high, not unusual for the time.)

I worked full time, but could never seem to pay down the debts. That is when I decided to take a second job to pay down my debts. This was before Dave Ramsey made the idea popular. I got the idea from seeing how much the people that cleaned our offices made and how quick it was. I bought a bunch of equipment from a retiring individual, most of which was never used. Then I sent out 100 letters.

One company bit. I bid $4,500 per month and was awarded a one year contract. It was more than I could do by myself, so I called my best friend (now brother-in-law) down to help and split the profit with me. We ended up having that account for 3 years before a large public company bought them out and took the service in-house.

With the second job, I was completely debt free within 18 months.  However, I bought a house in 2004 and a waterfront lot in 2005, both with debt financing. The house was purchased with a FHA loan at 6%. One of my biggest mistakes has been never refinancing while rates are so low. 

I sold the lot in 2009, netting a profit of over 30%. Of course, I could have made much more if I had sold in 2007!

Currently I do not have any credit card debt and would like to keep it that way. Building a cash reserve can be difficult. It also may be a better idea to save in tax deferred investment accounts and fund emergencies with debt, as long as you can do so responsibly.

KNOW YOUR FICO SCORE

FICO scores range from 300-850. Several services provide the score for a fee. I am able to see mine for free through both Discover and Ally.

Lenders use this score to determine credit risk and the rate of interest they will charge you. The higher the score, the less risk you are perceived to be. Anything above 800 is considered exceptional and above 740 is very good. 670-739 is the median in the US and below 669 is considered high risk. Below 660 and you may not get mortgage premium insurance for a FHA loan.

Scores are calculated based on:

  • 35%: payment history: Timely payments and lack of derogatory information. Bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, and late payments can cause your FICO score to drop.
  • 30%: debt burden: There are several metrics including the debt to limit ratio, number of accounts with balances, amount owed across different types of accounts, and the amount paid down on installment loans.
  • 15%: length of credit history: As a credit history ages it can have a positive impact on its FICO score. There are two metrics in this category: the average age of the accounts on your report and the age of the oldest account.
  • 10%: types of credit used: Its best to have a good mix of different types of debts (installment, revolving, mortgage and consumer finance.)
  • 10%: recent searches for credit: credit inquiries, which occur when you apply for a credit card or loan can hurt your score, especially if doing often.

CHECK YOUR CREDIT REPORT

https://www.annualcreditreport.com/index.action

You can check your credit reports with Experian, Equifax and TransUnion from the website above for free each year. I recommend choosing one of the above every six months.

Your payment history, balances, recent credit inquiries and any derogatory information will be included in your report. Check your addresses, jobs, and credit accounts to make sure you recognize everything. You can dispute anything you do not recognize directly from this site.

PAY YOUR BALANCES OFF IN FULL EVERY MONTH

This is easier said than done. Credit cards are great if you can pay them off. You are getting an interest free loan plus whatever reward included with purchasing. However, I would try to use cash or a debit card if you carry a balance. Depending on your FICO score, you are paying anywhere from 12%-25% interest on the balance each month.

MINIMIZE OR ELIMINATE FEES

Unless you make thousands of dollars in purchases each month and are offered great rewards, you should not have an annual fee. If you are re-establishing your credit after a bankruptcy or collections, you may also have an annual fee. For the most part, credit card companies are very competitive and you should find one with good rewards and no annual fees.

REGULARLY RENEGOTIATE YOUR ANNUAL PERCENTAGE RATE

Every year, I call Discover to see what the best rate they can offer me. If the rates are higher than Citi or PNC, I will use them instead. I switched to PNC for 2 years when Discover raised my rates. Sometimes they give me a limited time rate (9.9% for purchases during the next 12 months) or a lower permanent rate option. Even if you pay in full every month, you should never skip this in case you cannot pay in full one month.

RESEARCH ONLINE FOR THE BEST CARDS

There are numerous credit card comparisons online. One of the best is NerdWallet’s. I would stay away from the credit cards solicitations in your mailbox and any store offers. Most stores charge extremely high interest rates, plus they want more of your business. Saving 10% off a $100 purchase is not worth it.

I personally have used the store offer twice in the past 2 years. 1st was for an Amazon purchase of a mattress, a $400 purchase. The discount was worth it, although not the best mattress. The second was at a Belk’s department store. I had an interview and needed a suit. I found a $600 Banana Republic suit on sale for $400. On top of that, Belk’s gave 20% off if using a Belk’s card and another 20% if a new account. I got the card, suit and job!

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