Month: August 2018

Everything You Need to Know About Credit Scores

What is credit and why do you need it?

America became the largest economy in the world because of a concept called credit. Christopher Columbus was able to discover the new world (Bahamas) because of credit from the Spanish government and private Italian investors. The concept of credit can be explained when one person receives money, goods and/or services from another person without having to pay for them immediately and/or instead payment is due at a later agreed upon date.

American consumers need credit to make large purchases for houses, cars and emergencies. Since 70% of Americans live paycheck to paycheck, credit is essential to our daily lives. In 2007, total American consumer debts were about $2.5 trillion, where credit card debt accounted for 36 percent of the total. On average, consumers carry about $10,000 in credit card debt. Entrepreneurs also rely on credit to start businesses that provide us with goods and services, which allows our economy to grow and increase our overall standard of living.

The person who loans the money, goods and/or services is called the creditor or lender and the person who receives those items is the debtor or borrower. Credit is more than just a plastic card you use to buy things-it is your financial reputation in the business world. Good credit means that your history of payments, employment and salary make you attractive (less risky) for a loan, and creditors-those who lend money or services-will be more willing to work with you.

Having good credit means you pay less interest (the cost of borrowing money) and lower monthly payments, and you have less difficulty borrowing money for your purchases. Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it could result in you having trouble getting a car loan, car insurance, a credit card, a place to live, business startup capital and sometimes, a job!

What is a credit score?

One of the most important numbers in your personal and financial life is a three-digit number ranging from 300-850 called F.I.C.O. or simply, your credit score. F.I.C.O. actually stands for Fair Issac Corporation and was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac. These two created the confidential formula and sold it to the three major credit-reporting agencies (CRAs) Experian, Equifax and TransUnion, who use the information in your credit report, along with FICO formula to compute your score. Generally, people with scores below 620 are considered poor risks, and those with scores above 680 are considered acceptable risks. According to F.I.C.O., the typical score in America is a FICO of 723.

Credit Reporting Agencies (CRAs)

The three major CRAs mentioned above have established relationships with businesses, banks, credit-card companies, utilities, mortgage companies, and other institutions that lend you money or provide you with goods and services on credit. They then collect information about you from those businesses regarding the transactions you make that involve credit. Most businesses report credit information about you monthly or quarterly to the CRAs, who finally produce your personal credit report and compute your credit score.

For example, let’s say you apply for a credit card and provide the card company with all of your personal information, such as your name and address, your previous address (if you haven’t lived at your current residence for more than two years), your employer, other credit cards you have, etc. The credit card company then contacts a CRA and reviews your credit report.

If the company approves your application for a credit card, then the information you’ve supplied is forwarded to the CRA. That credit card company also reports your payment history to the CRA, so that becomes part of your report. The CRAs will also access information about you from public records information such as bankruptcies, tax liens, lawsuits, foreclosures, judgments, and wage attachments. Most large creditors like Bank of America report to all three major CRAs, however smaller creditors may only report to one. This is why it’s important to review your report from all three CRAs because they may not have all the same information about you.

What determines your FICO score?

35 percent of your score is based on your payment history, which makes sense since one of the primary reasons a lender wants to see the score is to find out if you pay your bills on time. Your score is also affected by how many of your bills have not been paid on time, how many were sent out for collection, bankruptcies, and repossessions. The more recent your delinquencies have occurred, the lower your overall score.

Helpful tips: Pay all of your bills on time, if you’ve missed payments get current immediately because the longer you pay your bills on time the better your score. Understand that paying off a collection will not remove it from your credit report; it will stay on your report for seven years or more. You can also challenge incorrect items on your report and the CRAs have 30 days to respond or they must remove the item from your report.30 percent of your score is based on the amount of debt you have accumulated compared to the amount of available credit for you or what is simply called your debt ratio. Also included is how much you owe on car and home loans, how many credit cards you have that have reached their limit and the number of accounts you have with outstanding balances.

Helpful tips: The more credit cards you have at their limits, the lower your score will be. You should keep your debt ratio (total debt / available credit) at 35% or less of your credit limits ($1,000 card should have no more than $350 balance). A good way to do this is to spread the debt over three to five cards. For example, Tonya has $5,000 in total debt and two credit cards. The first card has a limit of $5,000 and the second card has a limit of $10,000. To maximize her credit in this situation she should leave $1650 on the first card (33% debt ratio) and transfer $3350 to the second card (33.5% debt ratio).

15 percent of your score is based on how long you’ve had credit. The longer you’ve had good credit, the higher your overall score. Why? Because there will be more information about your payment history and this gives creditors a better prediction of your future actions. Also included is how long you’ve had open accounts and the time since financial activity on those accounts.

Helpful tips: Try not to close any accounts especially older accounts that show you’ve had good payment history. If your interest rates are low, take your time paying off those student loans and build some good payment history. If you have not had credit very long don’t open a lot of new accounts in a hurry. New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit history.

10 percent of your score is based on the number of inquiries on your report. If you’ve applied for numerous credit cards or loans, you will have many inquiries on your credit report. Generally, these are bad for your score because they mean you may be in some kind of financial trouble or your accumulating large amounts of debt. The more recent these inquiries are, the lower your overall credit score. If the inquiries are older than a year they won’t be counted in your FICO score.

Helpful tips: Whenever you’re shopping for the best mortgage and auto loans, make sure you apply for these loans within a 30 day time period. By doing this your score will not be affected by “multiple inquiries” and will count only as a single inquiry on your credit report. Also, when you personally request your credit report it will not affect your score as long you order it directly from a CRA.

Auto Insurance Tips For Teens and First Time Drivers

Congratulations! You’ve started driving, now get ready to open your wallet:S. Auto insurance is required by law and everybody must pay to get it regardless of age or skill level. When I first started driving, the process of getting insured was fairly straight-forward since I just went to my parent’s insurance agent and got tacked on to their policy. This may be the best case scenario for many new drivers as well, but it is not always the best route to take. Here are some tips to make sure that you are getting the best deal possible and your likely limited funds are not being unnecessarily wasted.

Latching on to your Parents Policy

This is the route that the vast majority of first time drivers choose to take, and for good reason. Most of the time it is cheaper, and your parents likely have some sort of rapport built up with their agent. The reason that this method is often times cheaper, is due to the beauty of the “multi-line discount”. What this means is that many insurance companies will offer a discount to policy holders who have multiple lines of coverage through their company. In my case, my parents had home-owners, auto, and life insurance through the same agent, and as such I was able to see a significant discount in my premiums.

Sidenote: an insurance premium refers to the monthly payment that is due to keep your insurance policy in effect. A deductible refers to a one time payment made (often $100, $250, $500, or $1000 depending on your plan) if you have an accident and must file an insurance claim. In theory the insurer will cover any additional expenses above and beyond the deductible you pay to them.

Why so Expensive?

Even with the discounts from your parents policies however insurance will NOT be cheap. Much of this stems from the fact that statistically teens and early 20-somethings have the about the highest rate of automotive accidents. This number subsides for many years and starts to rise again past the age 60 or so. Insurance premiums follow this curve, and are highest when you are first starting to drive, and again when you are getting too old to be driving. Your rates will drop significantly when you reach age 25 for most insurers, and stay relatively low until you’re old and gray. I was 16 when I purchased my first vehicle (nothing special, just a 1989 F-150 pickup truck), and with all the discounts (including good student discount), I was still paying on order of $100 a month for liability only coverage… Things got even more crazy several years later when I purchased a sportier two door Mitsubishi Eclipse which cost me over $250 a month for full coverage. (This was more than my monthly car payment for the vehicle. As I write this now, I am 26 years old, and pay around $75 a month for full coverage on my current vehicle.

Insurance Price Factors

The main factors that will affect your initial premium rate are: age, multiple policy discounts, Good student discounts, type of car you drive, and family driver history (if you are using your parents insurer). Type of Car: As a general rule, the sportier the car, the more expensive your insurance will be. Duh. It’s no secret that when given a fast car and the right circumstances, most teens will drive fast. I certainly did, and I have the traffic tickets to prove it. There is an interesting proviso to this however, because some fast cars can be cheaper than others. This applies mainly to sport sedans, and luxury sedans which are viewed by insurance companies to be safer, and statistically involved in less accidents. It’s hard to offer exact guidance here, because every company is different, but if you’re car shopping for your first ride as well, it will never hurt to call up your (or your parents agent) to find out which cars on your favorites list are going to be the cheapest to insure. Good Student Discount: This is a fairly popular discount offered by most companies, because according to their statistics, students with GPA’s above a 3.0 are generally involved in less traffic incidents, and are thus given better rates. Yeah, good grades to pay off sometimes… who would have thought.

Non-Parent Policies If your parents policy has a laundry list of accidents attached to it, it might be a good idea to seek insurance on your own. A great way to do this is online, by filling out free quotes from various popular insurance agencies (many of whose links can be found throughout this site). One nifty little trick to consider as well, is to purchase the cheapest term life insurance policy along with your auto insurance. In my case when I moved out and detached from my parents policy, I added the lowest life insurance policy to my auto insurance, and with the discount I received from having multiple lines of coverage through the same company it was actually cheaper for both policies than just automotive by itself. Weird, I know.

Wrap Up Summing up this article, if your parents are in good standing with their insurance company, your best bet is probably to use their agent. If not, or if you are already living on your own, get multiple quotes from different insurance companies, and be sure to ask about multi-line discounts if you purchase cheap life insurance from them as well. Even if it doesn’t save you any money, often times you can pick up valuable coverage such as renters insurance for next to nothing with your multi line discount.

Searching For Auto Insurance Online? Here’s How It Works

How The companies Rate You

When shopping for auto insurance, most companies are likely to give you low cost car insurance if they know that your car is not at great risk of being burglarized, vandalized, or of you being at high risk for automobile accidents or traffic violations. To benefit with insurance policies make sure you drive carefully as insurance companies increase the premium on drivers prone to accidents or traffic violations. Your automobile is a major investment and should be protected with excellent insurance coverage.

Some insurance companies will allow you to pay the premium monthly, every six months, or in some cases yearly. There are also additional discounts for those who make one yearly payment. You will however, need to consider your age. Auto insurance companies are big on age, since statistically they believe that if you are 25 or younger you are a higher risk. The insurer evaluates the risk of insuring the customer. Some insurance companies will not grant insurance to people with serious health issues, or extreme lifestyles. It is important to have certain information ready when shopping for car insurance. Having your vehicle identification number for all vehicles, and the drivers license number for all drivers will make your shopping easier.

Your Research

Nowadays getting online car insurance rates is not something beyond the realm of possibilities. The essential secret to online auto insurance is research, as rates can be widely varied between the make of vehicles and models. Older vehicles with a lot of miles sometimes do not warrant physical damage coverage. Physical damage coverage rates can be adjusted up or down based on the deductible you choose. Avoid signing up with general insurance companies and seek out insurance companies that deal with these special vehicles. The rates are better and the policies are made to fit your needs.

Deductible And Pricing

If economically feasible increase your deductible. An increased deductible lowers rates, just make sure the deductible is an amount that you will be able to pay should an accident occur. You may be able to save money on the premium of your policy if you carry a higher deductible. The deductible is the amount of out of pocket expenses you pay before your coverage begins. Having a $1000 or even a $1500 deductible can lower premiums 15 to 20 percent. If you decide to go this route, consider putting the money saved the first year into an account to pay the deductible should you have any accident. If economically feasible increasing your deductible is a good way to go.

Another way to get a lower quote is to change the coverage plan by reducing coverage. There are some interesting facts about the pricing of auto insurance quotes. If you would like an auto insurance quote, and your current insurance carrier has dropped you, the amount of your quote will be dramatically increased. If you want to insure an underage driver, your quote will also be increased. Make sure to take these things into consideration when asking for a auto insurance quote and deciding on your insurance.

Collision Coverage

Collision coverage will pay you for damages down to your own vehicle in the event an accident is deemed to be your fault. If your vehicle is totaled out in an accident the insurance company will pay you the actual cash value of your vehicle. This could be less in some cases than what your vehicle is worth. What about liability insurance you ask? Basically, liability auto insurance doesn’t cover your own vehicle at all if you cause an accident. If your vehicle is damaged or destroyed, you won’t receive any assistance from your insurance company to repair or replace your car. Liability only guarantees that the other parties vehicle will be covered by your insurance company.

In conclusion, searching for auto insurance isn’t that difficult. There are things that you must take into consideration when looking. You should understand how the company rates you, make sure you do your research, look at deductible and pricing, and lastly, check on your collision coverage. If you do these simple things your search for auto insurance will be a breeze and you will ensure that you get the best rate possible.