Credit Problems? No Credit? Perhaps You Have Bad Credit. Let Me Help!
Ever Bought Something, Then Immediately Regretted it?
Credit Problems. At one time or another, I think all of us have had our share of credit issues. Like most Americans we’ve found ourselves in car loans we regret. Credit cards we have no idea what was purchased, or a closet full of clothes we don’t wear. When we find ourselves in this situation there are a couple of options available. One, get a cheaper vehicle or two, refinance the one you have. If it’s credit card debt, there is only one way out. One payment at a time.
In my opinion this happens in the same way people think processed foods are healthy. We simply are not taught the truth. And let me tell you, there is a lot to learn about finances. Remember all those math classes everyone is laughing about, saying when will I use this? The answer is now. Understanding math is the basis of understanding credit, and making it work for you.
Keeping Track of Bills Doesn’t Have to Be Hard
Keeping track of your bills does not need to be complicated. I make it that way personally, because that’s me. However, one simple way to get on track is by tracking your bills and the due date. I stopped needing bills in the mail years ago by using this simple tracker. There are programs you can buy, but really that isn’t necessary. Don’t go into debt trying to get out of debt. Try inputting your information into this excel spreadsheet and go from there.
Budget Spreadsheet ~ Get organized today!!
Personally, I pay the bills first, then look at what is left over. That becomes what we have to play around with until next pay day. I’m not going to lie, when I put our family on a budget 10 or more years ago it was hard. I was the person in the grocery store with a calculator. Not because we didn’t have the money, because we didn’t want to needlessly throw junk in the shopping cart.
As far as it goes with car debt you have options, but either way, ultimately you will extend the time frame to pay off a vehicle. More times than not, what I’ve seen is young adults having no credit, are taken advantage of. Like they say, no credit is bad credit. I know this sounds ridiculous, but not having credit doesn’t prove to anyone you are a safe risk for a loan.
Start Building Credit Today
Fortunately, there are a few ways you can begin establishing credit. One is having a cell phone or credit card. A credit card company will likely charge high interest because no credit/bad credit means you have to prove yourself to them. HOWEVER, the good thing about using a credit card to establish credit is the fact that you do not need to max it out. In fact, you should keep 20-30% of your credit available.
For example, if you receive a credit card for one thousand dollars, do not charge more than $700 on it. This shows the credit bureau several things. One, you can handle credit. Two, you are not likely to get in over your head. The beauty here though is that you do not need to charge even $700. Charge $100-200 and pay the monthly payments of $20. May be less. Who knows? By paying payments each month and on time you establish credibility with the credit bureau. These two things combined will raise your credit score.
Avoid Building Credit With Auto Loans
I know what you are thinking. Aren’t we talking about cars? Yes. A car is a locked in amount. Take for example a car loan for 20 thousand and a term of five years. Without credit this loan will likely run anywhere from 15-28% interests. If you have bad credit you will likely be in the upper 20% range. With a little patience you can save yourself hundreds on interest.
However, if you already own a vehicle with a high interest rate, consider refinancing. In order for this to be cost effective you would need to lower your interest rate by several points. Say, 5% or more. Keep in mind a refinance has several options in and of itself. If you refinance for 5 years with a lower interest rate, you will pay longer but likely save yourself a lot in interest. One good thing about a refinance is that it lowers your monthly payments. That frees up income, ultimately helping your credit score. If your bills match your income, you are in trouble.
Start Small. Build Credit Gradually
My recommendation rather than starting with a large loan, start small. Use a credit card with a low revolving balance. There is no credit for making high payments. Just carry a low balance and make the payments on time. DO NOT, I repeat do NOT pay off the balance each month. This will not help your credit. That is a blog in and of itself. You probably don’t like this, but I’ll come back to it.
Even though the credit card may have the same 28% interest rate, you are only paying the interest rate on a couple hundred dollars. Not 28% on 20 thousand for the next five years. Establishing credit can certainly can be hard. One thing to keep in mind is this, if your name is not on the contract, it’s not on your credit. If you pay rent diligently each month, but are not on the lease it doesn’t count.
An Unfair System
I am aware how unfair the system is built. We effectively have to pay money (interest) in order to establish good credit. Then if we do really well, we get lower interest rates (saves money). If you are young and have no credit, start small. Perhaps you REALLY need a car, do your best to get pre-approved. If you don’t you are stuck with a high interest rate, you will pay WAY too much for the car. I’ll say it again. Get the GAP insurance. These payments will not keep up with the decreasing value of the vehicle. If it were to be totaled by an insurance company, you would likely find yourself upside down on your loan. Meaning, you will have to pay off the remaining balance yourself.
Another way to establish credit is simply by being on a lease. Could be an apartment, house or condo. Doesn’t matter. As long as it is reported to the credit bureau via a contract, it will improve your score. Keep in mind though, it will also ruin your credit if the rent isn’t paid on time. The beauty here is that you can establish credit without paying interest charges. Like all things, it is a double edge sword. Without credit, some places will not rent to you. So it’s back to a cell phone or credit card.
How is a FICO Score Determined?
The truth of the matter is that there is no one way to establish credit. Credit however, is measured in a couple standard ways. Here are a few:
1. Payments made on time
2. Do not max out your line of credit (leave 20-30% available)
3. Secure credit is better than unsecured credit (Car secured/Credit card Unsecured)
4. Depending on the company, when a payment is reported late varies
Paying on Time and Still Have Bad Credit?
You Are Over-Extended
I do also want to point out that if you pay on time, all the time, and have a poor credit score you are over extended. Remember, banks will loan money to you. They do not care if it ruins your credit. The bank makes money by collecting interests. I would be remiss if I didn’t mention the system is built this way on purpose. Once you are over extended your credit rating goes down. That tells the banks to charge higher interest. This makes them money and cost us more money. It is up to us to control our own credit and live within our means.
Invest Everything You Can Into Paying Down Credit
Should you find yourself in the above situation start today paying down your dept. Depending on how strapped you may or may not be, this can be very difficult. Check out Forbes website for 11 ways to start fixing your credit today. Every single one of these will immediately start to improve your credit. Keep in mind though, you will not see immediate changes. The reason being, a full billing cycle must past before a company reports your payment on time. The system takes time.
Tomorrow I will post a new blog about ways to reduce your debt, thereby cleaning up your credit. For now, ensure you do NOT close any credit cards. This will have a negative effect on your score.
Fool.com Has a lot of good advice on lowering credit card rates.
Credit Card Forum An excellent forum to better understand credit scores, and how it affects your everyday life.