Pros and Cons of Owning a Credit Card

Credit cards are both good and bad depending on whose hands they're in. If you are careful and good with managing money, then there are many benefits to using one. If you have trouble staying out of debt, then stay away!

The benefits on credit cards add up if you pay off your bill every month. Credit cards such as the one offered by Upromise, benefits college students by contributing a percentage of the purchase to their college fund, which over time adds up. Others, off rewards such as cash back or travel points.

The key is to pay off the bill every month and never over spend. It is proven that it is easier to over spend with a credit card compared to with cash. With cash, we see and feel our hard earned money leaving us. With plastic, one swipe or two or three is like a child's game.

The other good thing about credit cards is that if stolen, you can cancel them right away and not lose a cent. With paper money, you're out of luck.

When traveling, check your credit card's fees for foreign transactions. Sometimes, it's better to exchange paper currency and avoid the 3%+ charge. Even better are traveler's checks.

Now of days, with online banking you can keep track of your purchases better than before. And in certain cases, you can cancel charges. When money exchanges hands, it's gone for good.

Overall, it depends on one's lifestyle whether credit cards are beneficial. Just monitor your purchases to avoid debt, and use them with caution.

As you get older it's important to establish a credit history. You need credit for a lot of different things which include obtaining a loan, renting an apartment, and some job requirements. It can be a difficult process because not everyone is willing to extend credit to people, especially during these economic times. It can be frustrating for people because you can't build a credit history if nobody wants to extend it to you. So, you should understand what lenders want.

If you no credit history, lenders will often look at other areas of your financial history in order to extend you credit. They will look at bank accounts, your employment history, your residential history, and utility bills. Even though you do not have to have a credit score to open up a checking or savings account, when you apply for credit, they'll ask you for your bank's name. Many lenders also ask who your employer is and how long you've worked for them. Many also ask for your salary to see if you would be able to afford the credit line. Your residence plays a part because having a stable home looks good on paper. They will check to see how long you've been there and if you own or rent. Utility bills also carry weight around on your financial history. If you've established a good history with your electric, gas, and telephone company, it can be helpful because it shows you're responsible.

If you're unsure where to start when looking for credit, check to see if your bank offers credit cards. If you have a checking or savings account in excellent standing, the bank will see that you are able to manage your money. If you have a lot of bounced checks or a low balance, the bank may not consider extending credit to you because of your history. Also, banks like established relationships, so depending on how long you've done business there, they may be more eager to extend credit to you since they value your business.

You can also consider getting a department store credit card. Many stores offer you a discount when you sign up for the card, but they often carry high interest rates. Store credit cards seem to be easier to get, which you may want to consider if you're having difficulty establishing a credit history. Check to see if they report to the credit bureaus before you apply because if they don't, you're wasting your time. If you're approved, make sure you use it wisely. Because of the high interest rates, don't carry a balance on the card. Store cards typically have low credit limits so buy something small and pay it off in full.

If you're unsuccessful at getting credit at your bank or at a department store, consider a secured card. Secured cards require you to pay the money up front and that is your credit line. You may not like having to put up your own money for a line of credit, but most report to the credit bureaus and report your history. Banks who offer secured cards will often change them over to regular credit cards after an established payment history.

Establishing a credit history takes some time and there's no fast way to do it. Your score will improve as your account history and payment history ages. So take the right steps down and maintain a healthy credit history so you don't have any problems in the future.

FHA Loan Feature Allows Buyers to Buy a Home with a Zero Credit Score

Can you buy a home with no credit score? Learn how to overcome a zero traditional credit score to take advantage of historically low rates and home prices to become a first time homeowner with a government insured FHA mortgage loan.

According to the Housing and Urban Development press release HUDNo.10-153, "Home affordability in the U.S. remains near the most attractive levels in 10 years." When home prices reflect a buyer's real estate market, it may be a good time to buy your first home. So why are more first time home buyers not joining the leagues of home owners? There are millions of Americans who, for a variety of reasons, have no or very little traditionally reported credit. These "credit underserved" people, as they are defined, often believe that their lack of credit limits home buying options. However, for many "credit underserved", it is possible to use alternate credit to obtain a FHA loan with no credit score.

Instead of traditional credit report scoring, FHA lenders who underwrite and lend to borrowers who have no credit scores will want to see an "alternate credit" history. Alternate credit is a history of payments made to creditors, companies, or even landlords that do not report payment histories on a traditional credit report. Typically, the lenders will request 3-5 of these alternate credit references. These references that you supply to the lender should reflect that you have made payments on time for at least the most recent 12 months. They can be pay histories from the company, cancelled checks for payments that you have made or simply a letter on the company's letterhead stating that you have met your obligations for the last 12 months.

Identifying these sources can sometimes be challenging for first time homebuyers. Examine your checkbook or monthly bank statements for reoccurring bills. These can be payments to utility companies, cell phone, internet companies, landlords or rental companies, car insurance, rent-to-own and "buy here pay here" auto dealers to name a few.

By presenting verifiable alternate credit to your lender you will overcome not having any credit score. Alternate credit references build a payment history for the underwriter to review as he or she considers your likelihood of repayment. While the other standard FHA loan requirements such as income verification, debt to income calculations, 3.5% of the purchase price for down payment on the home and an appraisal must also be considered as the mortgage application is reviewed, using alternate credit sources helps many overcome the credit requirements of an FHA mortgage loan.

Sources:
HUD Press Release No. 10-153

Credit scoring and the credit-underserved population

On-Time Payments Count Big in Your Credit Score

Conventional wisdom says you should always pay more than your minimum monthly payments on your credit card bills to save money, and as someone who's written about personal finance for over five years, I know how true that really is. Paying more means paying down the interest, which reduces your balance more quickly.

Unfortunately, many people can't afford to send extra money to their credit card companies every month. If you're one of them, it's critically important to make at least the minimum monthly payment due on those cards. Obviously, you'll rack up late fees if you skip payments, but there's an even bigger reason to be diligent about making those minimum payments and sending them in on time: your credit score.

A Critically Important Number

Your credit score is a three digit number that summarizes your credit worthiness. The credit bureaus all have their own formulas to calculate it, but they use the same factors. Can you guess the most important factor is out of your entire financial background? In my experience, I've found that many people have no idea, but if you said "payment history," you're right on target.

Too many consumers think that missing a payment here and there won't hurt them. Little do they know that FICO, the biggest player in the credit score industry, uses your payment history as the basis for 35 percent of your score. That's literally more than one-third of the total number.

Short and Long Term Effects

Every month that you don't make a minimum payment on one or more of your credit cards, it's noted in your credit reports. Your credit score is based on those reports, so it starts sinking. Pretty soon it's low enough to cause rejections when you apply for new credit. You'll pay higher interest to the lenders that do accept you, and you'll also pay more for insurance policies.

Those missed payments can haunt you for a long time, too. They stay on your credit reports for seven years, although their impact lessens over time. In addition to late fees, your credit card company will boost your interest rate and eventually close your account if you continue to have trouble paying.

Do What it Takes

You might have to tighten up your budget to make those credit card payments every month. I advise people to make simple changes. Pack your lunch, quit buying those lattes, and see what's on TV instead of renting a movie. It's rough to live on a bare bones budget, but it's even worse to be in a position where you can't get any new credit. Make the short term sacrifice now and reap the long term benefits of financial health.

When you are enrolled in a debt settlement program , you need to brace yourself for the negative effects on your credit score. To understand that, let us discuss two things.

First is what credit score is all about. This is a figure that people use to determine your financial capabilities and behavior. There are three major credit bureaus that consolidates every consumer's credit report. This report is used to calculate your score. That score is calculated by using a special formula that looks at 5 different aspects of your financial life.

The first is your payment history which is 35% of the whole score. The second comprises 30% and it is the total amount of debts that you have. The third is your credit history and it is 15% of the score. The last two each hold 10% of the credit score and they are new credit accounts and the types of credit being used.

To know how your credit score is affected, let us proceed to discuss what debt settlement is. This type of debt relief aims to reduce your outstanding balance by negotiating with creditors. To get them to agree to this reduction, the debtor must prove that they are in a financial crisis. One of the things that will prove this is by deliberately defaulting on your monthly payments. If you do not do this, the creditor will not believe that you have a problem with your finances.

That act will cause some serious damage to your credit score because any late payments will be reflected on your payment history. As mentioned earlier, this constitutes to 35 percent of the overall credit score. This will also cause your debts to increase because of the late penalty charges and other fees. That will affect the total debt amount that is 30% of your credit score.

With all these, you can estimate that entering into a debt settlement program will cause you to lose up to 160 points. That actually depends on your current score. While the exact details are not sure, a person with a score of 670 may lose up to 65 points only. But someone with a score of more than 750 may lose up to 160 points. This is based on the FICO formula that is most used in the industry.

The good thing about this is it is only temporary. As soon as you finish your debt settlement program (which is between 2-4 years), you can start rebuilding your credit score. There is a mark on your report that will indicate that your debts were "settled" and that is something negative - but not as damaging as a bankruptcy taint.

When you get out of debt through debt relief , your work is usually not yet done. Most of the programs available affect your credit score one way or the other. If you want to keep your score in good shape even as you are still getting out of debt, there are two ways for you to accomplish that: the snowball and avalanche method.

But before we do that, you have to understand that both of these options require that you have a steady income. Not only that, you should have a big enough disposable income to pay for the minimum payment requirements of all your debts. You also need a little more than the minimum to make this work.

Both snowball and avalanche methods requires you to rank your debt payments based on priority. After that, you need to pay the minimum requirement of all debts and any extra that you have will be put into your priority debt account. Since you are paying for more than the minimum of this priority debt, it will be paid off faster. When you close off this debt, you can put all the freed funds and put it in the next debt on your priority list. Keep on doing this until your debts are completely paid off.

The difference in the two options is the type of debt that you will prioritize. In the snowball method, you will focus your extra payment fund on the debt with the least amount of balance. In the avalanche method, you will concentrate on the debt with the highest interest rate - regardless of the outstanding balance.

Of the two, the snowball method is the one that can motivate debtors the most. Since the priority is the one with the low balance, you get to completely pay it off faster. The avalanche method is best for those who are logically inclined to want to minimize their interest payments. If you have self control and you do not need the motivation from closing a debt, then this is a good option for you.

These debt payment methods will not damage your credit score because you are not defaulting on payments, not opening a new account and you are not taking out a loan to pay for your debts. You are using your resources and managing your expenses so you have big enough fund to pay for more than the minimum of your debts.

If you're ready to purchase a home or refinance, you'll want to assess your current credit standing before securing home financing. To do this, you will need to obtain your FICO credit scores which are a key factor in determining your eligibility when applying for a mortgage.

Your FICO scores are based on a scoring system developed by Fair, Isaac & Company, and are provided to lenders by the three national credit bureaus, Equifax, Experian and Transunion. Here are a few suggestions you can implement to enhance your credit score:

1. First, order your credit reports from all three bureaus. Since each bureau is independent, information that appears on one credit file may not appear on the others. You can request reports from each of the 3 credit bureaus once a year online for free at annualcreditreport.com.

Myfico.com provides more immediate access to your Transunion and Equifax credit profiles. Myfico.com also offers a monthly monitoring service for nominal charge which is a great investment especially if you're in the process of securing financing.

2. Once you receive your reports, review each item to make sure everything is correct including your name, addresses, birth date, social security number, payment history and balances. Also check for duplicate information.

3. Dispute inaccurate and outdated information. Negative information such as defaulted student loans, collections and charge offs should be removed within seven years from the date of last activity (DLA). To dispute by phone, call the 800 numbers provided on each credit report. You can also do this online. The websites are listed on each report. If you disagree with the outcome of your dispute, contact the creditors directly to resolve the issue.

4. Pay down charge accounts in good standing, but leave the account open. This improves your debt to
balance ratio. Three to five open, active accounts are generally sufficient.

5. Refrain from opening additional credit accounts, especially if you are planning to purchase a home or
refinance soon.

Once you clear up your credit, continue to make timely payments to your creditors. Keep your credit balances to at least 50% of their limit (of course the lower the better). Maintaining a good credit score will ensure you qualify for the best available loan programs at the best rates.

Home Financing and Credit Enhancement Coach, Gina Jackson is a financing industry consultant who knows what lenders look when approving people for financing. The Founder of youdeservegoodcredit.com, Gina has worked with hundreds of people to help them increase their credit scores and obtain home financing.

Be Informed About Your Loan Options

In the dynamics of world's economy, the major part of economic and commercial activities is controlled or regulated by the banking industry. In a growing capitalist environment that prevails in most of the countries of the world, this industry has seen a dramatic boom in last few decades. Banks and other financial institutions rely on their business of loans and credits that they provide to individuals or corporate entities. This principal function of providing them at the cost of a wide range of interest rates has brought the term 'credit industry' - a multi-billion dollar industry in the U.S. alone.

The reason why this industry experiences a continuous rise is simple - we all need a loan or credit. Even if we do not need it that bad, attractive terms attached to it tempt us to opt for bank credits for a new car, a new home or even for a new home entertainment system. Loans are useful only when you can afford it and only when banks approve it. Availing it is not as easy as the newspaper ads or TV commercials. There are many terms, conditions and hidden strings attached to different credit programs. The first and foremost of them is your credit worthiness. Your lending bank or financial institution needs a guarantee or security of their investment. This means they need to be sure if you are actually capable of paying back the loan you are about to take. In most of the countries this assurance of security is provided by the legal obligations and bindings a borrower commit to his/her lender with the help of contracts, bonds etc. They are usually accompanied by a client assessment in some form.

The assessment of the client's credit worthiness differs from country to country but in the U.S. and few other developed countries, a unique system of Credit Score (also referred to as Credit Report in general) is used to judge one's worthiness. The system is in fact a pre-approval of the eligibility for a loan based on a financial history and status of the applicant.

Credit score is essentially a numerical expression based on different statistical inputs about a client. There are bureaus or reference agencies who calculate and reveal your credit score. Lenders use these scores to assess their risks of investment. Credit scores in fact approve or disapprove a loan to the client, decide on particular package, determine the interest rates and total credit limits. It is therefore very important to have and maintain a good credit report to secure good score. A bad credit score may not approve a higher limit and/or lower interest rates. Chances are, if you avail a loan with higher interest rates, you may not perform well in repayment which will in turn tarnish your credit report resulting in a worse score in future.

To avoid such disasters of rejection or approval of loan with strict conditions, you need to know your credit score first and then try to improve it. There are lenders who would do the credit scoring at no cost. Look for these lenders or other resources from web to find your score. Identify the areas (like payment of previous loan installments, reducing the number of loans etc) that can be improved to raise your score. Remember credit score is becoming a popular risk evaluation tool not only for banks but many other providers of products and services too.

Maintain an Excellent Credit Rating

What is your current credit score? If you applied for a mortgage or personal loan would you be approved? When was the last time you reviewed your credit report? There are advertisements all over the internet that recommend you pull your free credit report. You are prompted to visit www.freecreditreport.com and view your information and score with three of the major credit reporting companies: Transunion, Experian, and Equifax. This report is free once per year and you will need to design a username and password to access your account. Once you gain access, you are to review your past and current credit transactions, what companies have made inquiries into your account, and ensure that your contact and address history are correct. Yet, what are simple steps to improve your credit score over time?

1. Do not open and close credit cards. Sometimes, persons may receive a tempting deal in the mail with a great credit rate and decide to open the new one and close an older one. Yet, remember that each action you take affects your credit score and may decrease your level of trustworthiness with creditors. Remember, the more credit checks that occur with your account, the lower your score will be. So, try to resist temptation and remain consistent with your current credit cards.

2. Watch your balance. Your credit score may be low due to your balances being close to the limit. For example, if your limit for a credit card is $25,000 and your balance is $23,000, this may be affecting your score as creditors may perceive you as overextending your financial abilities. Therefore, seek to decrease your balance to approximately one-third of your limit amount.

3. Pay early. As recommended by many, if you have available funds that you can contribute to the balance each month, it may be very beneficial to do so. One approach is to add 10% to the current payment you are making. For example, if your monthly payment is $200 then add an additional $20 to that payment. Also, if you are financially able, seek to make your monthly payment prior to the due date. For example, if the payment is due on May 15th then make your payment on May 1st. This may be very helpful in the long run regarding accumulating interest.

So, to improve your credit score over time use these three easy steps. Limit opening new credit cards as each request for your credit report can affect your score. Watch your balance and determine if it is too close to the limit. Finally, based on your funds, seek to make payments early. Hopefully, you will see an improvement and reach a score that is very satisfactory.

Credit scores are easy to bring down but are much harder to bring up. Improving a credit score can be done. Tips in this article should be able to help one improve their credit scores without having to pay for some questionable program, filing bankruptcy, paying a lawyer or an accountant. These tips are not an overnight solution and will take time to improve a credit score, which is important as it can affect you getting credit to buy a home, a car, credit cards and the rate you pay. Your credit score can affect you getting a job as well.

Tip One: Check Your Credit Reports For Errors

Periodically check your credit reports for errors. Check all three major credit reports which include TransUnion, Equifax, and Experian. Dayana Yochim of the Motley Fool wrote "surveys over the years have found that a high percentage of credit reports -- perhaps 80% or more -- contain inaccuracies." When I purchased my home, I had my credit pull and found some simple mistakes. An account was inaccurately described as delinquent. I was able to dispute the item and improve my credit score.

Tip Two: Pay Your Bills on Time

Making late payments can cost you additional late fees. It could affect your interest rate. Most importantly it has a negative effect on your credit score. If you have had late payments it could be one of the factors why your credit score is not as high as it could be. If a payment is over 30 days late it could be reported to the credit bureaus. It could stay on your credit report for seven years. LaToya Irby writes "payment history makes up 35% of your credit score." By making your payments on time and establishing a history of paying on time your credit score will improve. Especially the older the late payment is on your credit report. After seven years the late payment incident will fall off your credit report.

Tip Three: Keep Your Balances Under 50% of Your Credit Line

Michael Byrne a Mortgage Broker in New Jersey states in his blog "credit balances make up 30% of your credit score." He states "it is a good idea to keep your balances under 50% of your available credit on any given card." The reason for keeping it at 50% or less is because it is worked into a ratio. In simple terms the closer a person is to a maxing out a credit line, the higher credit risk that person appears to be. Lowering your debt could improve your credit score.

Tip Four: Don't Close That Account

Some people advised closing accounts when they are paid off. However, you may want to keep them open. Keeping an account open with a low balance and some activity will help with your credit balance ratio. By closing the account a person would lose the unused available credit on their total available credit. An example would be if I closed a $1000 line of credit. I have $800 dollars in credit balances on another $1000 line of credit. I would have had a better ratio of $800 balance on $2000 of credit to use than $800 on $1000.

Sources:

Fool.com for Motley Fool Article

The Effects of Late Credit Card Payments by LaToya Irby

Michael Byrne Blog