The Challenge Of Losing Your Income

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The effects of closing a credit card

Americans owe over $900 billion in credit card debt[i], and credit card interest rates are on the rise – now over 15 percent.[ii]

So if you’re on a mission to reduce or eliminate your credit card debt (go you!), you may be thinking you should close out your credit cards. However, you need to know that doing that may have several effects, some of which may not be what you’d expect.

There are times when canceling a card may be the best answer:

  1. A card charges an annual fee
    If you’re being charged an annual fee for the privilege of having a certain credit card, it may be better to cancel the card, particularly if you don’t use it often or have other options available.

  2. You can’t control your spending
    If “retail therapy” is impacting your financial future by creating an ever-growing mountain of debt, it may be best to eliminate the temptation of buying on credit.

Then there are times when closing a credit card may not make much difference, or could even hurt your score:

  1. Lingering effects: The good and the bad
    Many of us have heard that credit card information stays on your report for 7 years. That’s true for negative information, including events as large as a foreclosure. Positive events, however, stay on your report for 10 years. In either case, canceling your credit card now will reduce the credit you have available, but the history – good or bad – will remain on your credit report for up to a decade.

  2. The benefits of old credit
    Did you know that one aspect factored in to your credit score is the age of your accounts? Canceling a much older account in favor of a newer account can actually leave a dent in your score, and we know that canceling the card won’t erase any negative history less than 7 years old. So it may be best to keep the older credit account open as long as there are no costs to the card. Another point to consider is that the effects of canceling an older account may be magnified when you’re younger and haven’t yet established a long enough credit history.

Credit utilization affects your credit score
Lenders and credit bureaus not only look at your repayment history, they also look at your credit utilization, which refers to how much of your available credit you’re using. Lower usage can help your credit score while high utilization can work against you.

For example, if you have $20,000 in credit available and $10,000 in credit card balances, your credit utilization is 50 percent. If you close a credit card that has a credit limit of $5,000, your available credit drops to $15,000 but your credit utilization jumps to 67 percent if the credit card balances remain unchanged. Going on a credit card canceling rampage may actually have negative effects because your credit utilization can skyrocket.

If unnecessary spending is out of control or if there is a cost to having a particular credit card, it may be best to cancel the card. In other cases, however, it’s often better to use credit cards occasionally, and make sure to pay them off as quickly as possible.

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[i] https://www.nerdwallet.com/blog/average-credit-card-debt-household/
[ii] https://fred.stlouisfed.org/series/TERMCBCCINTNS

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How to Build Credit When You’re Young

Your credit score can affect a lot more than just your interest rates or credit limits.

Your credit history can have an impact on your eligibility for rental leases, raise (or lower) your auto insurance rates, or even affect your eligibility for certain jobs (although in many cases the authorized credit reports available to third parties don’t contain your credit score if you aren’t requesting credit). Because credit history affects so many aspects of financial life, it’s important to begin building a solid credit history as early as possible.

So, where do you start?

  1. Apply for a store credit card.
    Store credit cards are a common starting point for teens and young adults, as it often can be easier to get approved for a store card than for a major credit card. As a caveat though, store card interest rates are often higher than for a standard credit card. Credit limits are also typically low – but that might not be a bad thing when you’re just getting started building your credit. A lower limit helps ensure you’ll be able to keep up with payments. Because you’re trying to build a positive history and because interest rates are often higher with a store card, it’s important to pay on time – or ideally, to pay the entire balance when you receive the statement.

  2. Become an authorized user on a parent’s credit card.
    Another common way to begin building credit is to become an authorized user on a parent’s credit card. Ultimately, the credit card account isn’t yours, so your parents would be responsible for paying the balance. (Because of this, your credit score won’t benefit as much as if you are approved for a credit card in your own name.) Another thing to keep in mind is that some credit card providers don’t report authorized users’ activity to credit bureaus.* Additionally, even if you’re only an authorized user, any missed or late payments on the card can affect your credit history negatively.

Are secured cards useful to build credit?
A secured credit card is another way to begin building credit. To secure the card, you make an initial deposit. The amount of that deposit is your credit line. If you miss a payment, the bank uses your collateral – the deposit – to pay the balance. Don’t let that make you too comfortable though. Your goal is to build a positive credit history, so if you miss payments – even though you have a prepaid deposit to fall back on – you’re still going to get a ding on your credit history. Instead, it’s best to use a small amount of your available credit each month and to pay in full when you get the statement. This will help you look like a credit superstar due to your consistently timely payments and low credit utilization.

As you build your credit history, you’ll be able to apply for credit in larger amounts, and you may even start receiving pre-approved offers. But beware. Having credit available is useful for certain emergencies and for demonstrating responsible use of credit – but you don’t need to apply for every offer you receive.

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Source: “Does Being an Authorized User Help You Build Credit?” Discover*, 2018, https://discvr.co/2lAzSgt.

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When is it ok to use a credit card?

Some could say “never!” but there might be situations in which using a credit card may be the option you want to go with.

Many families use credit with good intentions – and then life happens – surprise expenses or a change in income leave them struggling to get ahead of growing debt. To be fair, there may be times to use credit and times to avoid using credit.

Purchasing big-ticket items
A big-screen TV or a laptop purchased with a credit card may have additional warranty protection through your credit card company. Features and promotions vary by card, however, so be sure to know the details before you buy. If your credit card offers reward points or airline miles, big-ticket items may be a faster way to earn points than making small purchases over time. Just be sure to have a plan to pay off the balance.

Travel and car rental
For many families, these two items go hand in hand. Credit cards sometimes offer additional insurance protection for your luggage or for the trip itself. Your credit card company may offer some additional protection for car rentals. You might score some extra airline miles or reward points in this category as well because the numbers can add up quickly.

Online shopping
Credit card and debit card numbers are being stolen all the time. Online merchants can have a breach and not even be aware that your credit card info is out in the wild. The advantage of using a credit card as opposed to a debit card is time. You’ll have more time to dispute charges that aren’t yours. If your debit card gets into the wrong hands, someone might be quickly spending your mortgage money, food and gas money, or college tuition for your kids. Credit cards may be a better choice to use online because the effects of fraud don’t have an immediate impact on your bank balance.

Legitimate emergencies
Life happens and sometimes we don’t have enough readily available cash to pay for emergencies. Life’s emergencies can range from broken appliances to broken cars to broken bones and in these cases, you may not have any other viable options for payment.

Using credit isn’t necessarily a bad thing. In fact, if you plan carefully, you may reap several types of benefits from using credit cards and still avoid paying interest. You’ll have to pay off the balance right away to avoid finance charges, though. So, always think twice before you charge once.

Some credit cards offer consumer benefits, like extended warranties, extra insurance, or even rewards. There are some situations in which using a credit card may come in handy.

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The starter kit for building good credit

Having a good credit score is one of the most important tools you can have in your financial toolbox.

Your credit report may affect anything from how much you pay for a cell phone plan, to whether you would qualify for the mortgage you might want.

Getting and maintaining a good credit score can be advantageous. But how do you achieve a good credit report? What if you’re starting from scratch? The dilemma is like the chicken and the egg question. How can you build a positive credit report if no one will extend you credit?

Read on for some useful tips to help you get started.

Use a cosigner to take out a loan
One way to help build good credit is by taking out a loan with a cosigner. A cosigner would be responsible for the repayment of the loan if the borrower defaults. Many banks may be willing to give loans to people with no credit if someone with good credit acts as a cosigner on the loan to help ensure the money will be paid back.

Build credit as an authorized user
If you don’t want or need to take out a loan with a cosigner, you may want to consider building credit as an authorized user of someone else’s credit card – like a parent, close friend, or relative you trust. The credit card holder would add you as an authorized user of the card. Over time if the credit account remains in good standing, you would begin building credit.

Apply for a store credit card to build your credit
Another way to start building your credit record is to secure a store credit card. Store credit cards may be easier to qualify for than major credit cards because they usually have lower credit limits and higher interest rates. A store credit card may help you build good credit if you make the payments on time every month. Also be sure to pay the card balance off each month to avoid paying interest.

Keep student loans in good standing
If there is an upside to student loan debt, it’s that having a student loan can help build credit and may be easy to qualify for. Just keep in mind, as with any loan, to make payments on time.

Good credit takes time
Building a good credit report takes time, but we all must start somewhere. Your credit score can affect many aspects of your financial health, so it’s worth it to build and maintain a good credit report. Start small and don’t bite off more than you can chew. Most importantly, as you begin building credit, protect it by avoiding credit card debt and making your payments on time.

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How to live without credit cards

Our parents, uncles, aunts, and maybe even our grandparents tried to warn us about credit cards.

In some cases, the warnings might have been heeded but in other cases, we may have learned the cost of credit the hard way.

Using credit isn’t necessarily a bad thing, but it may be a costly thing – and sometimes even a risky thing. The interest from credit card balances can be like a ball and chain that might never seem to go away. And your financial strategy for the future may seem like a distant horizon that’s always out of reach.

It is possible to live without credit cards if you choose to do so, but it can take discipline if you’ve developed the credit habit.

It’s budgeting time
Here’s some tough love. If you don’t have one already, you should hunker down and create a budget. In the beginning it doesn’t have to be complicated. First just try to determine how much you’re spending on food, utilities, transportation, and other essentials. Next, consider what you’re spending on the non-essentials – be honest with yourself!

In making a budget, you should become acutely aware of your spending habits and you’ll give yourself a chance to think about what your priorities really are. Is it really more important to spend $5-6 per day on coffee at the corner shop, or would you rather put that money towards some new clothes?

Try to set up a budget that has as strict allowances as you can handle for non-essential purchases until you can get your existing balances under control. Always keep in mind that an item you bought with credit “because it was on sale” might not end up being such a great deal if you have to pay interest on it for months (or even years).

Hide the plastic
Part of the reason we use credit cards is because they are right there in our wallets or automatically stored on our favorite shopping websites, making them easy to use. (That’s the point, right?) Fortunately, this is also easy to help fix. Put your credit cards away in a safe place at home and save them for a real emergency. Don’t save them on websites you use.

Don’t worry about actually canceling them or cutting them up. Unless there’s an annual fee for owning the card, canceling the card might not help you financially or help boost your credit score.[i]

Pay down your credit card debt
When you’re working on your budget, decide how much extra money you can afford to pay toward your credit card balances. If you just pay the minimum payment, even small balances may not get paid off for years. Try to prioritize extra payments to help the balances go down and eventually get paid off.

Save for things you want to purchase
Make some room in your budget for some of the purchases you used to make with a credit card. If an item you’re eyeing costs $100, ask yourself if you can save $50 per month and purchase it in two months rather than immediately. Also, consider using the 30-day rule. If you see something you want – or even something you think you’ll need – wait 30 days. If the 30 days go by and you still need or want it, make sure it makes sense within your budget.

Save one card for occasional use
Having a solid credit history is important, so once your credit balances are under control, you may want to use one card in a disciplined way within your budget. In this case, you would just use the card for routine expenses that you are able to pay off in full at the end of the month.

Living without credit cards completely, or at least for the most part, is possible. Sticking to a budget, paying down debt, and having a solid savings strategy for the future will help make your discipline worth it!

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[i] https://www.myfico.com/credit-education/improve-your-credit-score

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Are you credit worthy?

Credit scores are determined by credit reports, which are built over time by those who utilize credit.

However, there is a sizeable portion of the United States population, numbering in the tens of millions of individuals[i], who either have no credit history, credit history that’s too limited to provide a score, or credit history that’s too old to provide a score. These people may be rejected by lenders simply because they can’t prove their creditworthiness.

A large segment of these citizens are either just becoming adults and have yet to build a score, have little access to today’s modern financial system, or are from older generations who no longer need loans and thus their history has become “stale” or too old for scoring purposes. New immigrants who have no credit history in the United States also face this issue. The invisibles tend to cluster in dense urban centers or in small, rural towns, and, according to the latest Consumer Financial Protection Bureau’s report, lack of internet access seems to have a stronger correlation to credit invisibility than access to a physical bank branch.[ii]

The detriment of credit invisibility
It might seem better to always cover your bills with cash and simply save up for whatever items you wish to purchase. And this is generally a sound practice. However, if doing this leads to credit invisibility, it may have a detrimental effect on your financial life.

Most people – even if they have enough money on hand to cover normal bills and the occasional emergency – might someday want to purchase a home, start a business, or need a new car. It’s not usual that someone could pay for these high-dollar items with cash. Entering a loan agreement for any of these situations may be something you choose to do if the benefits seem to outweigh the costs, and if you have a solid strategy in place to repay the loan. If you can’t prove your creditworthiness, it might be more difficult to secure a loan for these things.

How to avoid being credit invisible
If you are credit invisible because you have little to no assets and lenders refuse to open accounts for you, one possibility is obtaining a secured credit card.[iii] The cardholder deposits cash and the deposit amount is usually the credit limit. The issuer has zero liability against your non-repayment, because they already have the money. Using a secured card and paying the balance back on time helps you build a credit history if you have none.

Once you’ve started to build a history, you may be able to apply for a “real” credit card. At that point, you’ll want to be cautious with your spending (according to a budget, of course) and always make sure to pay your bill on time, especially in full whenever possible so you can avoid interest. Then you should be on your way to establishing a solid credit history, which may help you with other milestones in life, like buying a home, replacing an old car, or even starting a new business venture with a friend.

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[i] https://www.americanbanker.com/opinion/senate-should-take-up-bill-to-help-lenders-see-credit-invisibles
[ii] https://www.consumerfinance.gov/about-us/blog/new-research-report-geography-credit-invisibility/
[iii] https://www.experian.com/blogs/ask-experian/what-is-a-secured-credit-card/

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The state of financial literacy

We learn a lot of things in school.

Some of which are useful later in life, some of which are hurriedly memorized and then promptly forgotten, and some of which barely get a passing glance. In decades past, financial literacy wasn’t an emphasis in school curriculum – unless you include the odd math problem that involved interest rate calculations. For all our years of education, as a nation we were woefully unprepared for one of the largest challenges in adult life: financial survival.

Recently, however, schools have begun to introduce various topics regarding financial literacy to the K-12 curriculum. Some states have fared better than others in this effort, with graded results ranging from A to F, as measured in an analysis done by the Washington Post.[i] Read on for the breakdown.

How we’re doing so far
In its annual Survey of the States, the Council for Economic Education reported that not one state had added personal finance to their K-12 standard curriculum since 2016, and that only 22 states require high school students to take a course in economics. Only 17 of the 50 states require students to take a course in personal finance.[ii]

We can’t count on schools (at least not right now)
While it’s easy to pick on schools and state governments for not including financial literacy education in the past and for only making small strides in curriculums today, that’s not solving the problem that current generations don’t understand how money works. As with many things, the responsibility – at least in the short-term – is falling to parents to help educate younger people on financial matters.

Other financial literacy resources
Given the general lack of financial education provided in schools, unsurprisingly, most teens look to their parents to learn money management skills.[iii] Fortunately, there are some great online resources that can help begin the conversation and help educate both parents and children on topics such as budgeting, how (or if) to use credit cards, differences in types of bank accounts, how to save, managing credit scores, etc.

Pepperdine University offers a “Financial Literacy Guide for Kids, Teens and Students”[iv], which covers many of the basics but also provides a useful set of links to resources where kids and parents alike can learn more through interactive games, quizzes, and demonstrations.

Included highlights are mobile apps which can be useful for budgeting, saving, and so forth, and even listings of websites that can help kids find scholarships or grants.

So if you feel like you haven’t learned quite as much about money and finances that you wish you had in school, contact me so that we can explore how money works together, and I can help put a strategy in place for you and your family!

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[i] https://www.washingtonpost.com/news/answer-sheet/wp/2017/12/19/grading-u-s-states-on-teaching-financial-literacy-some-earn-as-while-others-flunk/?noredirect=on&utm_term=.3faad208d1d9
[ii] https://www.councilforeconed.org/wp-content/uploads/2018/02/2018-SOS-Layout-18.pdf
[iii] https://www.juniorachievement.org/documents/20009/20652/2015+Teens+and+Personal+Finance+Survey
[iv] https://mbaonline.pepperdine.edu/financial-literacy-guide-for-kids-teens-and-students/

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Why have a good credit score?

A rare few may have little need for credit, and might not even concern themselves with whether their credit scores were high, low, or somewhere in between.

For most people, however, at some point in life we’ll need access to credit, which is why we should keep an eye on our credit scores and make adjustments to our financial behavior to help keep our credit scores as high as possible.

Interest rates are generally lower with better credit scores
As of December 2018, the average credit card interest rate can be anywhere from 15.37% to 20.90%, but can rocket up to 29.99% in some cases if a payment is missed and you fall prey to a late payment penalty. On the other side of the scale, high credit scores can earn interest rates that are lower than average, which may reduce the cost of credit if you need it.[i]

It’s easy to pick on credit cards because of their typically high interest rates, but a good credit score may save you money on long-term loans like your mortgage, or on loans that occur repeatedly, such as auto loans. Auto leasing rates can also be considerably less expensive if you have good credit.[ii]

A higher interest rate on one or two balances may not seem like a big deal. However, your credit score is probably affecting the rates on all or most of your credit-based transactions, which may cost you money every month (or may save you money every month).

Insurance rates can be lower
It’s become commonplace for insurers to weigh credit as a risk factor when determining premiums for auto or home insurance. Somewhere in their loss statistics, insurers found a correlation between credit and risk of a loss, and as a result, depending on your state, consumers with a good credit score can generally expect lower insurance rates if all other factors are equal.[iii] In most households, insurance is a sizable monthly expense, so keeping your rates as low as possible can be beneficial to your budget.

Avoid security deposits and get easier approval
Your credit score comes into play with expenses such as utilities.[iv] Utility providers routinely require security deposits before beginning service for many consumers. With a good credit score, it may be possible to bypass security deposit requirements or to earn a reduced security deposit amount, keeping more cash freed up to use as you see fit.

The same concept also applies to cell phone service providers. With a good credit score, you’ll probably have more choices from providers, and be able to get later model phones sooner. Without a good credit score, however, you may be forced to choose from no contract providers, which often have service limitations or a smaller offering of mobile devices.

Taking steps to protect your credit score and to improve it, if it needs a little help, may save you money in the long run and open up new opportunities.

Have you checked your credit score lately? It’s free![v]

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[i] https://www.valuepenguin.com/average-credit-card-interest-rates
[ii] https://www.preventloanscams.org/good-credit-scores/
[iii] https://www.nerdwallet.com/blog/insurance/car-insurance-rate-increases-poor-credit/
[iv] https://www.creditcards.com/credit-card-news/cellphone-credit-check-1270.php
[v] https://www.annualcreditreport.com/index.action

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To close it or not to close it? That is the question.

Your credit score helps determine the interest rate you’ll pay for loans, how much credit you’re eligible to receive, and it can even affect other monthly expenses, such as auto or homeowners insurance.

Keeping your credit in tip top shape may actually help save you money in some cases. With that in mind, how do you know if it’s a good idea to open a new credit card or to close some credit card accounts? Let’s find out!

Opening Credit Card Accounts
Opening a new credit card isn’t necessarily detrimental to your credit score in the long term, although there may be some potential negatives in the short term. As you might expect, opening a new credit card account will place a new inquiry on your credit report, which could cause a drop in your credit score. Any negative effect due to the inquiry is often temporary, but the long-term effect depends on how you use the account after that (not making minimum payments, carrying a high balance, etc.).

Opening a new credit card account can affect your credit rating in two other ways. The average age of your credit accounts can be lowered since you’ve added a credit account that’s brand new (i.e., the older the account, the better it is for your score). On the plus side, opening a new credit card account can reduce your credit utilization. For example, if you had $5000 in available credit with $2500 in credit card balances, your credit utilization is 50%. Adding another card with $2500 in available credit with the same balance total of $2500 drops your credit utilization to 33%. A lower credit utilization can help your score.

Closing Credit Card Accounts
Closing a credit card account can also affect your credit score, largely due to some of the same considerations for opening new credit card accounts. Generally speaking, closing a credit card account likely won’t help boost your credit score, and doing so could possibly lower your credit score for the same reasons above (lowering the average age of your accounts, increasing your credit utilization, etc.).

First, the positive reasons to close the account: This might be obvious, but closing a credit card account will prevent you from using it. If discipline has been a challenge, instead of closing the account, you might consider simply cutting up the card or placing it in a lockbox.

Second, the negative reasons to close the account: Closing a credit card account when you have outstanding balances on other credit card accounts will raise your credit utilization. A higher credit utilization can cause your credit rating to fall. You’ll also want to consider the average age of all of your accounts, which can play a big role in your credit score. A longer history is better. Closing a credit account that was established long ago can impact your credit score negatively by lowering your average account age.

Fair Isaac, the company responsible for assigning FICO scores, recommends not closing credit card accounts if your goal is to raise or preserve your credit score.[i]

Would opening or closing a bank account have any effect on my score?\ Closing a bank account has no effect on your credit rating and normally doesn’t appear on your credit report at all. When you open a bank account, however, your bank may perform a credit inquiry, particularly if you apply for overdraft protection. A hard inquiry (such as an overdraft protection application) can cause a temporary drop in your credit score. Soft inquiries – which are also common for banks – will appear on your credit report but do not affect your credit rating. Banks may also check your report from ChexSystems[ii], a company that reports on consumer bank accounts, including overdraft history and any unresolved balances on closed accounts.[iii]

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[i] https://www.myfico.com/credit-education/faq/cards/impact-of-closing-credit-card-account
[ii] https://www.chexsystems.com/web/chexsystems/consumerdebit/page/home/
[iii] https://www.mybanktracker.com/news/account-denied-chexsystems-report

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