Nickeled and Dimed

I’ve had a rough start to my day.  First, I woke up to find that the power outage in the middle of the night had lost todays article I spent all night writing.  Wonderful.  Then, on my way to work, I was rear ended while sitting at a stop sign.  Luckily there seems to be very little damage to my car, however the incident turned ugly when the woman who hit me became furious that I wanted her insurance information.  She claims the scratches she put on my car can be fixed with a black magic marker and didn’t understand why her apology wasn’t good enough for her.  Uh, not how I wanted to start the day.

So for today I am just going to briefly highlight Smart Money’s article on using your credit cards or risk losing them.

While I am completely against carrying credit card debt, credit cards themselves are extremely useful.  Not only can you receive rewards like cash back and frequent flier miles by using them (and paying them off), they can help improve your FICO score.

Due to the credit crisis, many credit card issuers are now going through and closing inactive accounts with little or no warning.  Why is this bad?  A large chunk of your FICO score is determined by how much debt you carry vs. how much credit you are allowed.  By closing an account, the credit card companies are essentially eliminating the latter part of that equation which could cause a major hit to your credit score.

What should you do to prevent this?  While nothing can guarantee you won’t have accounts closed (even loyal customers are seeing their credit limits reduced or closed), by simply using them for little things like gas and groceries on a regular basis (and then paying off the entire balance, of course) you can significantly reduce the chances your accounts will be closed.

Protect your FICO score by regularly using your credit cards responsibly. 

Please continue sending any personal finance related questions, suggestions and story tips to centsabilitytowealth@gmail.com.

CTW reader Tim Crooks forwarded me an email from an attorney with tips for protecting your identity and on what to do if your wallet, credit card, social security card or anything else containing your “identity” is stolen.  Since protecting your identity is a pretty crucial part of your finances, I thought it would be a good thing to share here.

Here are the seven steps to protecting your identity:

1. Do not sign the back of your credit cards . Instead, put ‘PHOTO ID REQUIRED.’

2. When you are writing checks to pay on your credit card accounts, DO NOT put the complete account number on the ‘For’ line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check processing channels won’t have access to it.

3. Put your work phone # on your checks instead of your home phone. If you have a PO Box use that instead of your home address. If you do not have a PO Box, use your work address. Never have your SS# printed on your checks. (DUH!) You can add it if it is necessary. But if you have it printed, anyone can get it.

4. Place the contents of your wallet on a photocopy machine . Do both sides of each license, credit card, etc. You will know what you had in your wallet and all of the account numbers and phone numbers to call and cancel. Keep the photocopy in a safe place.
I also carry a photocopy of my passport when I travel either here or abroad. We’ve all heard horror stories about fraud that’s committed on us in stealing a Name, address, Social Security number, credit cards.

5. we have been told we should cancel our credit cards immediately. But the key is having the toll free numbers and your card numbers handy so you know whom to call. Keep those where you can find them.

6. File a police report immediately in the jurisdiction where your credit cards, etc., was stolen. This proves to credit providers you were diligent, and this is a first step toward an investigation (if there ever is one).

But here’s what is perhaps most important of all: (I never even thought to do this.)
7. Call the 3 national credit reporting organizations immediately to place a fraud alert on your name and also call the Social Security fraud line number. I had never heard of doing that until advised by a bank that called to tell me an application for credit was made over the internet in my name.
The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit.

Identity theft is one of the fastest growing crimes in America right now.  Having yours stolen could do major damage to both your finances and your FICO score.  By following the steps above you can help prevent your identity from being stolen and limit the damage done if it is stolen.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com

Ask any random guy what their favorite sports teams record is, and they will likely be able to tell you off the top of their head.  Ask the same guy what his FICO score is, and you are likely to be met with a blank stare.

There are few numbers in your life that are more important than your credit score.  Maintain a high one and countless financial doors will be open for you.  Allow your credit score to drop, however, and those doors will be slammed in your face.  There is not a single financial move you can make that will not somehow be linked to your credit score.

What is a credit score?

Your credit score (also known as FICO score) is basically a permanent record of your credit use.  It is based on your spending habits, your bill-payment history, and your overall debt load.  By looking at this information, the Fair Isaac Corporation (FICO) gives you a rating between 300 and 850.  This three digit number can effect everything from interest rates on loans (or if you can even get a loan) to whether or not you can get a cell phone or apartment without a co-signer.

Your score will generally fall into one of six categories:

• 760-850- Highest
• 700-759
• 660-699
• 620-659
• 580-619
• 500-579- Lowest

Which category you fall into is usually more important than your actual score.  For example, there is really no difference between a score of 761 and a score of 850, both fall in the highest category.  The interest rate you pay on loans will also depend on which range you fall into.  The higher the range, the lower the interest rate you will pay.

With the current “credit crisis”, having a high score is more important than ever.  If your score doesn’t fall into the 700 range or higher, you could be in real jeopardy of even being approved for a loan.

What effects your credit score?

What effects your credit score can be broken down into five broad categories, each with a different degree of importance.

1. Record of paying your bills on time: Accounts for 35 percent of your FICO score- Looks at your payment history with each payment that is at least 30 days late having a negative effect on your score.
2. Total credit used vs. total credit available: Accounts for 30 percent of your FICO score- Looks at how much of your available credit you are using.  The higher the percentage the lower your score.  Maxed out credit cards are seen as irresponsible uses of credit.
3. Length of credit history: Accounts for 15 percent of your FICO score- The older your credit accounts the better for your score.
4. New accounts and recent applications for credit: Accounts for 10 percent of your FICO score- Each time you apply for a line of credit it puts a minor ding on your credit score.
5. Types of credit in use: Accounts for 10 percent of your FICO score- Credit companies like to see a mix of installment loans and credit cards.

How can you improve your credit score?

Now that we know what effects your credit score, what steps can you do to improve each of these categories?  Here are a few tips for achieving and keeping a high FICO score.

• PAY ALL BILLS ON TIME.  PERIOD.  Nothing will hurt your score more than being 30 or more days late on a payment.  If you have already been late on payments in the past, make sure it never happens again.  Just a few months of paying all your bills on time will start to make up for any late payments in the past.  If you are having trouble remembering to pay them, make all payments automated.
• Make an effort to pay off the balances on your credit cards.  This should be something you are doing without the incentive of improving your credit score, but if you aren’t, it’s time to start.  Lowering the amount of debt used while keeping the total debt available you can significantly raise your FICO score.
• Don’t cancel your credit cards after you pay them off.  On top of keeping your cards so that the available credit stays in play, it’s important to protect your accounts with the most history.  If you really feel the need to cancel one of your credit cards, make sure it is your most recent account.
• Don’t apply for too much credit in a short period of time.  You are penalized a few points each time a credit agency checks your report.  Limit the number of inquiries over short periods of time.  

  Monitoring your credit

Now that we know what effects our credit and how we can improve it, it’s important to check and monitor your FICO scores.

There are three different credit reporting bureaus; Equifax, TransUnion and Experian.  Unfortunately, all three agencies can and usually will have different numbers, so it is important to check all three.  Why do you need to check all three?  Because errors are not uncommon.  You need to scan each report and make sure all information is accurate.

What to do if you find an error?  If you find an error in your credit report at any of the three credit bureaus, you need to write them a letter disputing the item.  From there the credit bureau will forward the complaint to the company you are claiming the error came from, and they will have 30 days to respond.  If they do not respond within 30 days, you win the dispute.

Where do you check your credit reports?  By law, you are entitled to one free credit report per year.  You can redeem this free report at www.annualcreditreport.com.  On top of that, you can also get a free 30 day trial at www.myfico.com and view one of your credit reports for free.  After that, you will typically pay around 16 dollars for each credit report and score.  You should be checking all three reports at least twice a year.  It will be well worth the price you pay to check them.

What to do if you have no credit history?  If you are in the rare position of not having a credit score due to never using any form of credit, you need to create one.  The easiest way to do this is by opening up a credit card with a small line of credit, charging a small expense every month and paying it off each month.  This will slowly build up your credit score so you are in good shape when it’s time to secure a large loan for a car or house.

Summing up

Although just a simple number, your credit score can have an enormous effect on nearly every aspect of your life.  And in our current economy, this has never been more true.

Check your FICO scores.  If all three aren’t at least 700, you have work to do.  Put the strategies discussed here to use and you will make sure you never have to worry about securing a loan or getting a good rate again.  Over the course of a lifetime, a great credit score could save you tens of thousands of dollars or more.

You can contact Centsability to Wealth with any questions, suggestions and story tips by emailing centsabilitytowealth@gmail.com.