At a recent presentation I had a couple of days ago, one of the questions that was asked was how to establish a credit history from scratch. This question sort of caught me off guard as I wasn’t expecting it. The reason is because I’m so used to hearing people talk about their bad credit history, debt which they now regret taking and short cuts they can take to get out of their bad situation.
For people out there that are interested in establishing a credit history, I will walk you through some of the steps I took when was also in that situation. A word of caution, unless you are about to take on “good debt” i.e., debt that is used to purchase an asset that will be beneficial to you and which you can pay off without any financial wishful thinking or gizmos (like hoping to get a windfall or inheritance or winning the lottery), you do not need to be so concerned about establishing a credit history.
One of the best ways to establish a credit history is to get a secured credit card from a bank. The secured credit card is like a conventional credit card; the major difference is that the secured credit card is secured by a deposit made by you into the bank unlike a conventional credit card which is unsecured. As an illustration, if you have $100 in savings, you can approach a bank to grant you a secured credit card with a limit of $100. You deposit the $100 into a savings account in the bank and the bank grants you the card. You can’t have a balance on the card greater than $100 and in the instance where you are experiencing financial difficulties; the bank simply uses your deposit ($100) to extinguish the debt. However, you do not want to practice habits that will leave you with credit card debt so do not carry any balance on the card at the end of the month. Use the card to pay for everyday items provided that you have enough cash which you can use immediately to pay off the amount on the credit card. For instance, if your weekly grocery shopping costs you $20, you can pay for the groceries with the card and as soon as you get home, pay off the balance immediately. Please, do not use your secured credit card to pay for items you do not have enough cash to pay off at the end of the month. The purpose of having the secured credit card is to establish good credit history and not to engage in frivolous spending otherwise the purpose is defeated.
If your utility bills are in your name, you could view a free copy of your credit report through annualcreditreport.com to find out if your utility company reports your payment history. If your utility company reports your payment history in your your credit report, this can also be used to build your credit history. As alway, make sure you pay your bills in time as a late payment not only results in you being charged with late fees but it also adds a dent to your credit history.
As always, if you have a different experience or know of other ways to build up your credit history from scratch, your comments are more than welcomed.
Tuesday, September 15, 2009
Friday, August 21, 2009
New Credit Card Law Kicks In
Yesterday, August 20 2009, a section of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 came into effect. The law has two main changes:
More Advance Notice of Rate Hikes:
The February 22, 2010 law will deal with:
The best way to avoid getting burned is to make sure you use your credit card judiciously (if you have to) and pay off your balances each month. That way you don't get charged with fees and saddled with debt.
More Advance Notice of Rate Hikes:
- Card holders will receive a 45-day notice before key contract changes take effect. The contract changes include interest rates, fees, or finance charges increases.
- The provision does not apply to credit card limit changes, closure or interest rate caps. This means that, if the credit card cuts a customer's credit limit, the consumer could still be charged a penalty.
- Credit card companies must send statements to consumers 21 days before a payment is due. The previous laws require only a 14-day notice.
- You now have enough time to pay your credit card bills before they are due.
- Your credit score could be negatively affected if your credit limit is reduced. According to Fair Issac- the creator of the FICO score, credit utilization accounts for 30% of your credit score. Credit utilization is the ratio of current revolving debt to the total available revolving credit. Therefore, the closing of existing revolving accounts will affect this ratio and therefore have a negative impact on FICO scores.
The February 22, 2010 law will deal with:
- Retroactive rate increases
- Fee restrictions
- Restriction of cards to students
- Ending of double cycling billing
- Fairer payment allocation
- Gift card protection
- Retroactive rate increases
The best way to avoid getting burned is to make sure you use your credit card judiciously (if you have to) and pay off your balances each month. That way you don't get charged with fees and saddled with debt.
Sunday, August 9, 2009
A goal without a plan is useless
I volunteer as a career coach in an organization within my community. The role involves following up with people, providing encouragement and acting as a resource to help them accomplish their financial goals. My observation has been that a majority of folks, after setting up their financial goal, do not set up plans or action sets needed to accomplish that goal. It's like they get so fired up and excited at the initial stage of setting up the goal but fail to follow through with action steps and plans. A goal without a plan is just a waste of your time and resources.
In order to make sure that you achieve your goals, the following steps are helpful:
Your comments about this article are appreciated.
In order to make sure that you achieve your goals, the following steps are helpful:
- Set the goal. Make sure the goal is specific and easily measurable so that it's easy to know when the goal as been accomplished. For instance, it's better to set up a goal to "create an emergency fund of $1,000" rather than a goal that states "create an emergency fund with enough money".
- Set up a realistic time period for accomplishing the goal.
- Break the goal into mini goals and create action plans and steps needed to accomplish these goals.
- Set up a period either weekly, bi-weekly, monthly,quarterly, etc during which your goals, action plans and steps are reviewed and also your progress to date is evaluated. Make adequate changes where required. It's possible that as you progress, things change and you know become aware of situations and factors which you did not think of earlier.
Your comments about this article are appreciated.
Friday, July 10, 2009
Get out of Debt
It happens to the best of us. We make multiple 'minor' financial goofs and before we know it, what started as a small manageable problem, snow balls into a catastrophe- the little drop of credit become an overwhelming flood of revolving balances. You're saddled with credit card debt!
Credit cards are so pervasive in our society. According to Experian, consumers have an average of 5.4 cards and a Federal Reserve bulletin issued in 2006 states that 74.9% of US families surveyed in 2004 had credit cards and 58% of those families carried a balance. Credit cards can be a great financial tool if used properly, unfortunately, credit card [issuers] having been getting a lot of bad press lately- some blame justifiably should be placed on the banks that issue these cards but the reality is that most people lack the discipline needed to use credit wisely and as a result end up battling significant debt.
There are a few steps to follow to ensure you get out of debt, unfortunately, none of them is a 'get out of jail' card but if applied will take you closer to reliving the ever elusive debt free lifestyle.
The first step towards getting out of debt is mental. A professional boxer friend of mine once told me that the fights he wins are those he has mentally won even before getting into the ring. If his mind is not well conditioned even after weeks of physical training and he can not visualize success, rarely does he end up winning. You've got to develop the self discipline to do all within your power to dig yourself out of the hole you're in. You can have all the gimmicks in the world, get advice from the top financial advisers but if you lack the self discipline and motivation, your victory over debt, if you're able to achieve it, will only be short lived before you find yourself in trouble again. So cut up your old plastics, put yourself in the Do-Not-Mail/Call lists so you don't get anymore solicitations, tell someone that can (and will) hold you accountable that you've decided to stop living off your credit cards as this will help curb the urge on days you feel like going on a spending binge-do whatever it takes to get your mind conditioned for the battle that lays ahead.
Next, stop making purchases on your credit card. Decide that you will only spend cash (or use your Debit/ATM card) for all purchases going forward. I know that some of you will complain that you hardly have enough money to pay your bills and that using a credit card is the only way you can make ends meet. This is not entirely true for most people. A lot of us have fallen under the illusion that we do not have enough money to get by because we are unable to separate our wants from our needs. For instance, why do we really need a car? The answer is that it is a mode of transportation to get us from point A to point B. That said, the train, public bus, a Jaguar XK, all would get us from point A to point B. The need is a mode of transportation that will get you to your point of destination, the want is a luxury and convenient mode of transportation that will make you the envy of your peers and make you "feel" important. Do not confuse the two. Pursuit of wants are mostly what make us strive to live like the Joneses and it leads to being broke.
Learn to live within your means. One of the major reasons people get trapped under the burden of debt is the failure to live within one's means. It's often said that there are 3 ways to increase means: 1) Increase your inflow (income) while holding your outflow (expenses) constant 2) Decrease your outflow while holding your inflow constant or 3) Do both, increase your inflow and decrease your outflow.
Inflow can be increased by improving your skills and job performance in order to increase your value (and commensurate salary) in the job market, having a small business that generates additional income and selling items you no longer need or use. You can reduce your expenses by paying close attention to all the items you spend your money on. Ask yourself, "Is this purchase necessary? Do I need this item or do I want it? Is there a cheaper alternative that will accomplish the same goal that this item will?"
Other ways to reduce your expenses are to avoid behaviors that will negatively affect your health (health care costs are one of the leading causes of personal bankruptcy), shop for store brands while grocery shopping. Not only do they cost less than the premium brands but they are also as good. Another exercise is to write down every expense you make in a week. At the end of the week, go through your list and you'll be very surprised at some of the purchases made out of habit without thinking- you'll probably find out that you're paying for services you really do not use, for instance paying for premium cable channels when most of the channels you watch are also packaged in basic cable.
Lastly, try to get as much information on personal finance as you can. Read blogs (like this one) and books on creating and adhering to a budget, savings, investing and the like. Knowledge is power.
Credit cards are so pervasive in our society. According to Experian, consumers have an average of 5.4 cards and a Federal Reserve bulletin issued in 2006 states that 74.9% of US families surveyed in 2004 had credit cards and 58% of those families carried a balance. Credit cards can be a great financial tool if used properly, unfortunately, credit card [issuers] having been getting a lot of bad press lately- some blame justifiably should be placed on the banks that issue these cards but the reality is that most people lack the discipline needed to use credit wisely and as a result end up battling significant debt.
There are a few steps to follow to ensure you get out of debt, unfortunately, none of them is a 'get out of jail' card but if applied will take you closer to reliving the ever elusive debt free lifestyle.
The first step towards getting out of debt is mental. A professional boxer friend of mine once told me that the fights he wins are those he has mentally won even before getting into the ring. If his mind is not well conditioned even after weeks of physical training and he can not visualize success, rarely does he end up winning. You've got to develop the self discipline to do all within your power to dig yourself out of the hole you're in. You can have all the gimmicks in the world, get advice from the top financial advisers but if you lack the self discipline and motivation, your victory over debt, if you're able to achieve it, will only be short lived before you find yourself in trouble again. So cut up your old plastics, put yourself in the Do-Not-Mail/Call lists so you don't get anymore solicitations, tell someone that can (and will) hold you accountable that you've decided to stop living off your credit cards as this will help curb the urge on days you feel like going on a spending binge-do whatever it takes to get your mind conditioned for the battle that lays ahead.
Next, stop making purchases on your credit card. Decide that you will only spend cash (or use your Debit/ATM card) for all purchases going forward. I know that some of you will complain that you hardly have enough money to pay your bills and that using a credit card is the only way you can make ends meet. This is not entirely true for most people. A lot of us have fallen under the illusion that we do not have enough money to get by because we are unable to separate our wants from our needs. For instance, why do we really need a car? The answer is that it is a mode of transportation to get us from point A to point B. That said, the train, public bus, a Jaguar XK, all would get us from point A to point B. The need is a mode of transportation that will get you to your point of destination, the want is a luxury and convenient mode of transportation that will make you the envy of your peers and make you "feel" important. Do not confuse the two. Pursuit of wants are mostly what make us strive to live like the Joneses and it leads to being broke.
Learn to live within your means. One of the major reasons people get trapped under the burden of debt is the failure to live within one's means. It's often said that there are 3 ways to increase means: 1) Increase your inflow (income) while holding your outflow (expenses) constant 2) Decrease your outflow while holding your inflow constant or 3) Do both, increase your inflow and decrease your outflow.
Inflow can be increased by improving your skills and job performance in order to increase your value (and commensurate salary) in the job market, having a small business that generates additional income and selling items you no longer need or use. You can reduce your expenses by paying close attention to all the items you spend your money on. Ask yourself, "Is this purchase necessary? Do I need this item or do I want it? Is there a cheaper alternative that will accomplish the same goal that this item will?"
Other ways to reduce your expenses are to avoid behaviors that will negatively affect your health (health care costs are one of the leading causes of personal bankruptcy), shop for store brands while grocery shopping. Not only do they cost less than the premium brands but they are also as good. Another exercise is to write down every expense you make in a week. At the end of the week, go through your list and you'll be very surprised at some of the purchases made out of habit without thinking- you'll probably find out that you're paying for services you really do not use, for instance paying for premium cable channels when most of the channels you watch are also packaged in basic cable.
Lastly, try to get as much information on personal finance as you can. Read blogs (like this one) and books on creating and adhering to a budget, savings, investing and the like. Knowledge is power.
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