MONEY credit cards

The Spending Mistake that Millennials Are Making

millennial holding credit card
To swipe or not to swipe? For millennials, it's not much of a question. Dimitri Vervitsiotis—Getty Images

Millennials prefer to pay with plastic over cash, a new CreditCards.com study finds—but all that swiping may be unravelling their budgets.

Millennials don’t shop like their parents—and increasingly, they don’t pay like their parents either. Studies have already shown that many of them have chucked the checkbook (if they’ve ever had one); and they’re more likely to forego cash as well, a poll released today by CreditCards.com found.

Asked how they typically pay for purchases under $5, 77% of people over 50 surveyed preferred cash to debit or credit, while just 48% of people between 18 and 29 use paper money. The fact that millennials are using cards to pay for even such small expenses suggests they’re probably using plastic for most purchases.

And when they’re swiping, this group also uses debit (37%) vs. credit (14%) by a larger margin than any other cardholder group.

What millennials may not realize is that choosing plastic—even if it’s debit—over paper could be costing them.

Research has suggested that we’re inclined to spend more when we swipe. A 2008 study published in the Journal of Experimental Psychology found that physically handing over bills triggers an emotional pain that actually helps to deter spending, while swiping doesn’t create the same aversion. As a result, the study found, cash discourages spending whereas plastic encourages it.

In addition, a 2012 study from The Journal of Consumer Research found that shoppers who pay with plastic focus more on the benefits of the purchase than the price, while those who pay with cash focus on price first. In other words, we’re more likely to make the decision to purchase an item when we know we’ll be charging it.

Further fueling our natural tendencies to spend more with plastic—a.k.a. “the credit card premium”—is the fact that many shops and bars mandate that you spend a minimum amount to use your card. So if you were planning to use the card anyway, you might pad your purchase to get to the minimum required.

All this spending on plastic also can cause you to rack up debt or overdraft fees, if you’re not swiping mindfully. And many members of Gen Y are not, it would seem.

For example, millennials are more likely than any other age group to overdraw their checking accounts, the Consumer Financial Protection Bureau found. About 11% of millennials overdraft more than 10 times a year, and these overdrafts were typically for small purchases under $24 and were paid back within three days. With the median overdraft fee equaling $34, borrowing $24 for three days is like taking out a loan with a 17,000% annual percentage rate, the study found.

Of course, we can avoid paying the credit card premium by just using cash. But if you won’t remember to go to the ATM, at least take a second to close your eyes the next time you’re about to buy something using plastic: Think about the price of the item and how it will impact your bank account. You might even give yourself a 24-hour cooling off period to think over any nonessential purchases.

Avoid overdrawing or getting in over your head in debt by reviewing your bank and/or credit card account online once per day, or by using an app like Mint.com, which lets you track all your accounts in one place. Also, consider setting alerts at your bank or credit card website to let you know when you’re approaching a certain balance—this can keep your spending in check.

Related:

Money 101: How Do I Figure Out My Financial Priorities?

Money 101: How Do I Create a Budget I Can Stick To?

MONEY Ask the Expert

Why You Might Want More Than One College Savings Account

Robert A. Di Ieso

Q: I have college savings for my children in both education savings accounts (ESAs) and 529s. Is there a difference in the way those accounts are calculated for potential financial aid? Would there be any benefit to consolidating into one type of account? — Mike Spofford, Green Bay, Wisc.

A: The good news: There is no difference in how Coverdell ESAs and 529 savings plans factor into your child’s student aid, says Mark Kantrowitz, publisher of Edvisors.com, a website that helps people plan and pay for college.

Both of these education accounts are considered qualified tuition plans. So as long as they are owned by a student or a parent, the plans are reported as an asset on financial aid forms and have a minimal impact on your aid eligibility (federal aid will be reduced by no more than 5.64% of the value of the account). What’s more, your account distributions are not considered income, Kantrowitz adds.

Education savings accounts and 529s share other appealing features: Your savings grows tax-deferred and withdrawals are tax free as long as the money goes toward qualified education expenses. If you spend it on anything else, you will be hit by income taxes on the earnings as well as a 10% penalty.

One of the biggest differences is how much you can put in. ESA contributions max out at $2,000 per child per year, while 529s have no contribution limits. However, if you put more than $14,000 a year into your child’s 529—or $28,000 as a couple—the excess counts against your lifetime gift tax exclusion and must be reported to the IRS. You can get around that by using five-year tax averaging, which treats the gift as if it were made over the next five years.

Coverdell ESAs give you more investment options—from certificates of deposit to individual stocks and bonds to mutual funds and ETFs; you’re usually limited to a small number of mutual funds in a 529 plan. But you don’t need that much investing flexibility, Kantrowitz notes, since you want to keep risks and fees to a minimum over the short time you have to save for college.

Another key difference is that ESA funds can be spent on K-12 expenses; 529s must wait until college. ESAs also come with age restrictions. You can contribute only while the beneficiary is under 18, and to avoid penalties and taxes you must spend the funds by the beneficiary’s 30th birthday (with a 30-day grace period).

You can get around this age limit by changing the beneficiary to an under-18 close relative of the beneficiary. Or you can roll it over into a 529 plan with no tax penalty. (You cannot roll your 529 into a Coverdell ESA, however.) In fact, later-in-life education is one of the only reasons to consolidate plans. Otherwise, says Kantrowitz, there is no compelling reason to combine your two savings accounts into one.

MONEY College

12 Things We Wish We’d Known When We Were 18

Girl moving off to college
Eric Raptosh Photography—Corbis

Suze Orman and other experts share their financial advice for the Class of 2018. Follow these tips to keep your college experience from becoming a major money mistake.

Prepping for freshman year at college typically includes activities like shopping for dorm essentials, reviewing orientation packets, and Googling your new roommate.

Most students don’t spend a lot of time thinking about how they’ll manage their money in this new phase of their lives.

And yet, what you do in those first few years of parental emancipation can affect you for years—or decades—to come. Students graduated last year with an average $35,200 in college-related debt, including federal, state and private loans, as well as debt owed to family and accumulated via credit cards, according to a Fidelity study. Half of those students said they were surprised by just how much debt they’d accumulated.

To make sure the class of 2018 gets off on the right foot, MONEY gathered sage advice from top financial experts about the lessons they wish they, their kids, or their friends had known before starting school.

1. Limit your loans. “Do not take out more in student loans than what you are projected to earn in your first year after college. If you only expect to make $40,000, you better not take out more than $40,000. The chances of you being able to pay it back is close to nil. If you need to take a private loan, you’re going to a college you can’t afford. Remember, going to an expensive school doesn’t guarantee success. The school never makes you, you make the school.” —Suze Orman, host of The Suze Orman Show and author of The Money Book for the Young, Fabulous & Broke

2. Finish in four. “Many kids are finishing school in five or six years. But every extra year is potentially an extra $30,000 to 40,000 in expenses. Map out your coursework and figure out exactly what you’ll need to do each semester. Be vigilant about sticking to your plan. Try to catch up on any credits by taking classes at a community college over the summer.” —Farnoosh Torabi, author of You’re So Money

3. Study money 101. “Sign up for an economics or personal finance course. This way, when you graduate, you’ll be better equipped to manage money for the rest of your life.” —Brittney Castro, CEO of Financially Wise Women

4. Leave the car at home. “Everyone feels like they need a car, but with the combination of sharing services like Uber, Lyft, Zipcar and public transport, that isn’t always the case. If you’re living in a major metropolitan center or on campus, consider leaving your car behind. It’s much cheaper to use one of these car services than it is to pay for insurance, gas, parking, car maintenance and car payments.” —Daniel Solin, author of The Smartest Money Book You’ll Ever Read

5. Lead rather than follow. “Especially in college, you’re going to be surrounded by people doing dumb things financially. You’ll see people financing their lifestyle with student loans or their parents’ money. Don’t feel bad if you can’t afford the same things as others. I knew a student who was financing his whole college experience with debt and he was always asking people to go shopping with him. If I’d tried to keep pace, I’d have ended up in the same debt-ridden place as him.”—Zac Bissonnette, author of Debt-Free U

6. Find free fun. “You can still do fun things at school, without spending a lot of money. You’re paying an activity fee in your tuition, so you ought to make sure you’re taking full advantage of whatever the school offers for free—be it concerts, trips, lectures. The school I went to provided grants to help students travel abroad and offered free plays and trips through different clubs.” —Farnoosh Torabi

7. Be purposeful with plastic. “The idea that you need to build credit in college is wildly overrated. It’s not a bad idea to build credit, but having built up a bad credit history will hurt you more than having no credit history. You don’t need to feel pressure to get a credit card. You can get by just fine with cash and a debit card; no one is expecting you to have a ton of borrowing history when you’re getting your first apartment anyway.” —Zac Bissonnette

8. Put your budget on autopilot. “Keep track of the money you’re getting in from loans and your parents, as well as your expenses. Use an app like Mint.com, which lets you link your debit and credit cards to your online account to track your spending and easily help you keep on budget.” —Daniel Solin

9. Enlist Mom and Dad. “Check in with your parents once a month and review your spending with them. Talking about this will help you to avoid what I call ‘budget creep,’ where all of a sudden you’re spending $30 a day on food and entertainment. All those little extras add up and you could be spending over a hundred a week… on what?”—Neale Godfrey, chairwoman of Children’s Financial Inc.

10. Protect your stuff. “College students may not think they have a lot of valuable possessions. But think about the value of electronic devices alone, not to mention textbooks, clothes, even that ratty futon. The good news is that renters insurance is typically inexpensive and can protect you from fires, theft and other incidents. The even better news is that students’ stuff may be covered by their parents’ homeowners insurance. Check the policy prior to hitting the books.”—Kara McGuire, author of The Teen Money Manual

11. Establish rules with roomies. “If you’re renting an apartment with friends, be sure everyone and their parents sign the lease. Try to have everyone’s name on the utilities bills as well. Kids will take advantage of other kids, and you don’t want to be the one who is stuck being responsible for everything. If you can’t attach everyone’s names to all the bills, have them prepay. Also, make sure everyone chips in for general expenses like cleaning supplies and toilet paper, so you don’t end up paying for all of that as well.” —Neale Godfrey

12. Share with discretion. “Social networks are a public record. Your future employers will look you up on your social sites and judge you based on what they see. So something that you thought was cute in college could keep you from getting the job. Know that every move you make on those sites could have a direct consequence on your ability to land a job.” —Suze Orman

 

MONEY Kids & Money

The Most and Least Expensive Cities to Raise a Child

Where you choose to raise your child can have a huge impact on your parenting costs. Here are the cities that will run up your spending the most—and the least.

Having a child today will set you back close to a quarter million dollars by the time your offspring reaches 18, an annual study released Monday by the U.S. Department of Agriculture found. A middle-income family can expect to shell out on average $245,340 (or $304,480, when adjusted for projected inflation), with the biggest chunk of the budget going to housing, followed by child care costs.

Of course, your bottom line could be very different depending on where you live. According to data from personal finance website NerdWallet, child-rearing costs can vary by more than $340,000, based on local housing market prices and the cost of daycare (which exceeds the cost of college in 31 states).

Families living in cities in more rural areas can expect to pay the least to raise a child to adulthood, but those living in the urban Northwest and on the West Coast should expect to pay far above the average.

Here are the cities where you’ll pay the most and the least to rear your child.

Most Expensive Cities to Raise A Child

Rank City Cost of raising a child
1 New York (Manhattan), NY $540,514
2 Honolulu, HI $429,635
3 San Francisco, CA $402,112
4 New York (Brooklyn), NY $400,951
5 Hilo, HI $369,559
6 San Jose, CA $363,807
7 Orange County, CA $353,081
8 Washington, DC $342,552
9 Oakland, CA $337,477
10 Fairbanks, AK $334,562

Least Expensive Cities to Raise a Child

Rank City Cost of raising a child
1 Norman, OK $199,298
2 Harlingen, TX $199,694
3 Ashland, OH $206,793
4 Salina, KS $207,525
5 Pueblo, CO $208,155
6 Memphis, TN $208,322
7 Temple, TX $208,593
8 Richmond, IN $209,522
9 Jackson, MS $211,309
10 Hattiesburg, MS $211,451

 

Related: Why the $245,000 Cost of Raising a Child Shouldn’t Stop You From Having One

MONEY

What It Costs to Raise a Child

Baby drinking milk bottle filled with cash
Mike Kemp—Getty Images

Parents will spend nearly a quarter of a million dollars to raise a child born today to age 18. The good news: The cost isn't going up as much as in years past.

A middle-income family can expect to pay $245,340 to raise one child up to age 18, according to an annual study released today by the U.S. Department of Agriculture. When adjusted for anticipated annual inflation of 2.4% though, the total in 2032 dollars will look more like $304,480.

The cost to raise a child, excluding pregnancy and college expenses, increased by only 1.8% over last year’s estimates, representing the smallest price jump since the financial crisis.

Middle-income parents shelled out between $12,800 and $14,970 last year on their child, depending on the child’s age. But wealthier families spent more than twice what middle-income parents do, reaching $407,820 to rear a child for 18 years.

Housing remains the largest expense of any parent’s budget at 30%, unchanged from 2012, followed by child care/education (18%), and then food (16%). More affluent families spent a larger percentage of their funds on childcare costs, while those in middle or lower income households tend to spend more on food.

The amount spent also varied by region, driven largely by the cost of housing. Those living in the urban south could expect to spend $230,610 on their child, but those living in rural areas could expect to spend far less—$193,590. Families living in the urban northwest can expect to pay the most at $282,480.

Related:
Why the Cost of Raising a Child Shouldn’t Stop You From Having a Baby

MONEY Kids & Money

Why the $245,000 Cost of Raising a Child Shouldn’t Stop You From Having One

Baby drinking milk bottle filled with cash
Mike Kemp—Getty Images

A new USDA report will send shivers down the spine of any person of child-bearing age. But these five steps can help you make room in your budget for baby—and prevent financial freak out.

Even if you’ve got baby fever, new data out today from the U.S. Department of Agriculture could have you reaching for the prophylactics.

For a middle income family (before tax $61,530 to $106,540), a child adds an average $14,970 in annual expenses to the bottom line. And to raise that kiddo born in 2013 to age 18 will cost on average $245,340 in total—up 1.8% from last year.

Yikes.

But before you go telling your honey you have a headache, keep in mind that four million babies are born in the U.S. each year, and most of their parents adjust just fine to the new costs. And if you wait until you feel completely financially ready, you may never realize that bundle of joy.

“Having a child is an exciting but scary step, and money can be a big part of that worry,” says financial planner Matt Becker, father of two and founder of the blog Mom and Dad Money. “I wouldn’t dive in without considering the financial consequences, but I also wouldn’t let them scare you off.”

You’ll just need to make room for in your budget for baby. These five steps can help you feel secure enough to add to your family.

1. Assess your current expenses. First step, get a handle on how you are currently allocating your income. Mint.com can help you track your spending.

2. Estimate future income. Then consider how your income might change after the baby, says San Diego financial planner Andrew Russell, who’s also a dad of two. For example, will you or your partner stay home part time or full time? Will you take any unpaid parental leave?

3. Estimate future expenses. Once you know what your post-baby income will look like, get a rough estimate of the new expenses you will be footing, both one-time (like maternity clothes, hospital costs, car seat, crib) and ongoing (childcare, food and diapers). Becker recommends using Babycenter’s child cost calculator.

You’ll also want to factor in the cost of basic protections like life and disability insurance, which can help ensure your child will still be provided for if a parent dies prematurely or is seriously injured. “These will add to your monthly budget, but are well worth the cost for the financial security they provide,” says Becker.

4. Cut costs. You may find through this exercise that your future expenses with baby exceed your income. If so, look for any fat in your budget to cut out—particularly recurring expenses that require a one-time effort to change like switching to a cheaper cell phone plan, cutting cable, or moving to an area with less expensive rents. Keep in mind that while some of your costs will go up, your entertainment costs—like bar tabs and restaurant bills—will likely go down in the first few years.

And what if, like a lot of Millennials, you have some $20,000 in student loan debts standing in your way? See if you qualify for any loan forgiveness programs. If not, dial back to the minimums. “Obviously this is a big life goal with a certain time frame, and if there is not that much room to cut back on spending, then you need to minimize the amount you pay back on loans,” says Russell. “If the debt is too large for you to take a good chunk out of it in the next few years, you’re going to have to move forward with it.”

While the lower payment will add to your interest over time, the federal tax deduction on student loan interest—if you qualify—will offset some of the cost. Plus, every time you and/or your partner receive pay raises and bonuses, you can funnel that additional income toward the debt.

5. Practice your new budget. Once you’ve figured out your post-baby budget, start living on it—even before you get pregnant, Becker advises. And put the money you would be spending into a savings account.

Besides helping you see if you can handle the budget, “this helps you build up a savings cushion that will relieve a lot of the financial anxiety that can come with a growing family,” says Becker. You will need to plump that cushion before the baby’s arrival anyway: With the general rule being to have cash reserves equaling six months of living expenses, you’ll need to make sure your emergency fund now reflects all the new costs you’ll be covering.

In the end, you might be surprised at how easy it is to adjust your spending. especially when the prize is so sweet.

Related:

MONEY Ask the Expert

How to Tell if You Can Afford to Have a Baby

Pregnancy test with dollar sign
Sarina Finkelstein (photo illustration)—William Andrew/Getty Images

Q: “I’m a 38-year-old female, who has been focused on paying down student loans, currently at about $58,000 (my initial amount was $98,000). Minimum monthly payments are about $650, but I pay about $1,000 a month. I’ve paid down my loans by living very modestly, and at the expense of saving for retirement or planning a family. But now I’m afraid that if I don’t start having children now, I won’t be able to. Can I afford to start a family?” ‑ S.C., Brooklyn, N.Y.

A: “Having a child is an exciting but scary step, and money can be a big part of that worry,” says financial planner Matt Becker, father of two and founder of the blog Mom and Dad Money. “I wouldn’t dive in without considering the financial consequences, but I also wouldn’t let them scare you off.”

Considering the average cost for a middle-income couple to raise a child for 18 years comes in at just under a quarter of a million dollars, excluding college costs, according to the U.S. Department of Agriculture, you may never feel like having a baby is in the budget. But keep in mind that four million babies are born in the U.S. each year, and most of their parents adjust just fine to the new costs.

Even with your student loan debt, starting a family should be do-able for you, says Becker. You’ll just need to make room for in your budget for baby.

First step, get a handle on how you are currently allocating your income. (Mint.com can help you track your spending.) Then consider how your income might change after the baby, says San Diego financial planner Andrew Russell, who’s also a dad of two. For example, will you or your partner stay home part time or full time? Will you take any unpaid parental leave?

Once you know what your post-baby income will look like, get a rough estimate of the new expenses you will be footing, both one-time (like maternity clothes, hospital costs, car seat, crib) and ongoing (childcare, food and diapers). Becker recommends using Babycenter’s child cost calculator.

You’ll also want to factor in the cost of basic protections like life and disability insurance, which can help ensure your child will still be provided for if a parent dies prematurely or is seriously injured. “These will add to your monthly budget, but are well worth the cost for the financial security they provide,” says Becker.

With your big student loan payments, you may find through this exercise that your future expenses with baby exceed your income. So what next? See if you qualify for any loan forgiveness programs. Also, look for any fat in your budget to cut out—particularly recurring expenses that require a one-time effort to change like switching to a cheaper cell phone plan, cutting cable, or moving to an area with less expensive rents.

“Obviously this is a big life goal with a certain time frame, and if there is not that much room to cut back on spending, then you need to minimize the amount you pay back on loans,” says Russell, who adds that it’s okay for you to dial back to the minimum payment. “The debt is too large for you to take a good chunk out of it in the next few years, so you’re going to have to move forward with it.”

While the lower payment will add to your interest over time, the federal tax deduction on student loan interest—if you qualify—will offset some of the cost. Plus, every time you and/or your partner receive pay raises and bonuses, you can funnel that additional income toward the debt.

Once you’ve figured out your post-baby budget, start living on it—even before you get pregnant, Becker advises. And put the money you would be spending into a savings account. Besides helping you see if you can handle the budget, “this helps you build up a savings cushion that will relieve a lot of the financial anxiety that can come with a growing family,” says Becker. You will need to plump that cushion before the baby’s arrival anyway: With the general rule being to have cash reserves equaling six months of living expenses, you’ll need to make sure your emergency fund now reflects all the new costs you’ll be covering.

Related:

MONEY health

These Mental Health Charities Have the Most Impact

140813_FF_CHARITIES
BEVERLY HILLS, CA - JULY 29: Robin Williams arrives at the Television Critic Association's Summer Press Tour - CBS/CW/Showtime Party at 9900 Wilshire Blvd on July 29, 2013 in Beverly Hills, California. (Photo by Steve Granitz/WireImage) Steve Granitz—WireImage

One way to pay tribute to Robin Williams is to contribute to these top-rated charities that help people who struggle with depression and suicidal thoughts.

The suicide of comedian Robin Williams shows just how hard a battle with depression can be, and just how high a toll it can take. And while we may be tempted to share our favorite scenes from his movies, standup specials, or TV shows as way to pay tribute, perhaps another way would be to reach out and help those also struggling with mental illness.

With the help of Charity Navigator, MONEY identified mental illness and suicide prevention charities where your dollars will be put to good use. These organizations received high ratings for their extremely high levels of accountability and transparency for donors, how well they have sustained their programs, and the high percentage of their revenue spent on programs and services rather than administrative or fundraising costs.

So if you would like to donate to help those struggling with mental illness, consider one of the following groups.

American Foundation for Suicide Prevention
This national charity works to understand and prevent suicide by supporting research looking at the causes of suicide, helping those who have suicidal thoughts or those who have lost someone to suicide, and working with federal and state government on policies to prevent suicide and care for those at risk.

Brain & Behavior Research Foundation
This foundation awards scientific grants to those working to make discoveries in understanding the causes and improving the treatments of mental disorders, such as depression, schizophrenia, anxiety, autism, and bipolar, attention-deficit hyperactivity, post-traumatic stress, and obsessive-compulsive disorders. They’ve awarded close to $310 million to more than 3,700 scientists in the past 25 years.

Treatment Advocacy Center
This charity works to improve the treatment of severe metal illness by promoting policies and practices for the delivery of psychiatric care and supporting the development of treatments for and research into the causes of psychiatric illnesses, such as schizophrenia and bipolar disorder.

Trevor Project
This national organization, founded by the creators of the Academy-award winning short film Trevor, provides crisis intervention and suicide prevention services to lesbian, gay, bisexual, and transgender teens and young adults.

 

 

 

MONEY Credit

These Are the 5 Best Ways to Improve Your Credit Score

140618_money_gen_12
iStock

Changes in the way credit scores are calculated may help raise your FICO score, but these strategies can really send it soaring.

The changes Fair Isaac announced Thursday to how it calculates its widely-used FICO credit scores could help boost scores for the millions of Americans with medical debt collections as well as those with a settled debt collection lingering on their report, but there is a lot we can also do to help raise those scores even further.

“While these changes, if adopted by lenders, can be helpful to consumers, it’s not a cure to all their credit problems,” warns John Ulzheimer, president of consumer education at CreditSesame.com and a former Fair Isaac manager.

If your rating is south of 700, these good behaviors will be well worth it when the price you’ll pay to borrow drops.

1) Check Your Credit Reports

Fixing errors in your credit report can give you the most immediate score boost. Request a copy of all three of your credit reports from each credit agency for free from annualcreditreport.com. “You need to be very proactive and check your reports and make sure anything that is incorrect is cleared,” says Keith Gumbinger, vice president of HSH.com, a website that tracks the mortgage and consumer loan industry.

If you spot a mistake like a paid-off debt appearing as unpaid, contact the lender or creditor that reported the inaccurate information and ask them to update your account. Each credit bureau also has a form on their website for submitting disputes. For a more serious issue, file a dispute with the creditors and the credit bureau, as well as the Consumer Finance Protection Bureau (CFPB).

2) Pay Your Bills on Time

The biggest influence on your credit score is your payment history. Whether you’ve made your loan payments and done so on time will rise or lower your score more than any other single factor. “There is nothing magic to improving your score, you’ve just got to diligent about paying on time,” says Gumbinger.

The best thing you can do is set up automatic payments for the minimum amounts on your debts to make sure you’re never overdue. If automatic bill pay isn’t an option or you’d prefer to push the bill out yourself, you can also set up bill alerts through your card’s website or reminders on your phone. By consistently meeting your payment deadlines, you will see your score start to increase after about six months.

3) Keep Balances Low

Just because your credit limit tops out at, say, $10,000, you should not spend anywhere near that. The amount of credit you use as a percentage of the amount available is called your “utilization ratio,” and it’s the second largest element determining your credit score. “Lenders like to see a significant difference between your balance and the card’s maximum balance,” says Jack M. Guttentag, a finance professor at the University of Pennsylvania’s Wharton School and founder of The Mortgage Professor website.

Look at your most recent statement to find your credit max and then limit yourself to charging up to only 30% of that amount. If you can limit yourself to the single digits that’s even better, as consumers with the best credit scores use just 7% of their revolving credit lines, according to FICO. Make sure you’re doing this with every card, as creditors will also compare the total amount you owe with the sum of your credit limits on all cards.

4) Settle With Debt Collectors

While it’s always in your best interest to resolve outstanding debts as soon as possible, the new FICO credit model makes this even more worthwhile. Under the new FICO credit-score model any record of you failing to pay a bill will not be factored into their calculations if the bill has been paid or settled with a collection agency. Before this any bill reported to collection, even if settled, would still have dinged your score.

As before, any unpaid bills will still be noted on your credit report for lenders to see. So if you have any lingering debts you’ve put off dealing with, reach out to the agency and work out a payment plan to keep this blemish from dragging your score down. For more strategies for dealing with collection agencies, see 9 Ways to Outsmart Debt Collectors.

5) Build Up Credit History

To prove to lenders that you are not risky and build up your credit score, you will need to build credit history. “You can’t improve your score if you never have debts,” says Guttentag. To create a good credit history, you’ll need to have open lines of credit that you use and pay off responsibly each month. While you may want to open a new line of credit occasionally, be careful not to open too many new accounts at once as this is seen as risky behavior. Watch out for retail credit card signups as well as these will take a bigger bite out of your score then signing up for a traditional credit card will.

 

MONEY Ask the Expert

How to Find a Mortgage When Your Credit is Bad

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: “What’s the fastest or easiest way to rebuild my credit? I want to buy a house, and I can’t get approved.” —Tracy, Fargo, N.D.

A: “The bad news is you really do need a good score to get a home loan today,” says Keith Gumbinger, vice president of HSH.com, a website that tracks the mortgage and consumer loan industry.

If your credit score is below 700, you’ll be hard pressed to find a lender willing to give you a conventional home loan, and if you do, the interest rate and fees are likely to be far too high. So you may want to take the time to rebuild your credit before you shop for a home.

“Before you decide you should you jump in, maybe you want to step back and look at the circumstances that lead to your current credit score,” says Gumbinger. “Look at your bills. You don’t want to put yourself in a position where you could lose the home. It’s expensive to maintain a mortgage.”

To boost your credit score, first get a free copy of each of your three credit reports from annualcreditreport.com. Scan them for mistakes that could be dragging down your score and fix them. After that, repairing your credit comes down to having credit and making your payments on time.

“You can’t improve your score if you don’t have debts, so you will need a credit card or new credit line where your payment history can be recorded,”says Jack M. Guttentag, a finance professor at the University of Pennsylvania’s Wharton School and founder of The Mortgage Professor website.

You also need to avoid maxing out the cards you have. “If you have a credit card that allows you to draw up to $10,000, having a $9,500 balance will hurt you,” says Guttentag. “Having a $2,000 balance will help you.” For more on improving your credit score, check out our Money 101 guide.

Your other option if you want buy now is to get a loan through a government program designed to help less creditworthy borrowers.

The Federal Housing Administration backs loans that have more relaxed qualification standards (including down payments as low as 3.5%), and the Department of Veterans Affairs has a program that helps members of the military borrow. If you happen to live in certain rural areas, you might qualify for a U.S. Department of Agriculture lending program designed to entice people to settle in less-developed parts of the country.

For a full FHA loan, the agency says you typically must have a minimum credit score of 580. With a 10% down payment, the FHA will insure loans for borrowers with scores between 500 and 579 (below 500, you you typically won’t qualify). The VA and USDA do not set minimum credit standards.

However, these minimums can be misleading. The private lenders who actually make these loans typically have higher standards. Most FHA, VA, and USDA-approved lenders look for credit scores between 620 and 660, and your best chance for getting approved will be to have a score at the high end or above this range, says Gumbinger. If you’re close, being able to show a healthy bank balance or a monthly rent bill that’s higher than your future mortgage payment may help.

Wells Fargo, the country’s biggest mortgage lender, said earlier this year that it would accept credit scores of 600, down from 640, for FHA and VA loans. Bank of America said that it may also accept certain cases with credit scores in the low-600 range, depending on that borrower’s ability to repay the loan.

Keep in mind that these loans carry additional fees. FHA loans require an upfront mortgage insurance premium of 1.75% of the loan value, as well as an annual premium based on your loan-to-value ratio, loan size, and length of the loan. USDA loans carry an upfront premium of 2% and an annual fee. VA loans have a funding fee that varies based on factors such as the type of loan and the size of the down payment.

Even if you qualify for one of these loans, Gumbinger cautions about getting in over your head. These programs are best if your credit problems are due to a job loss or medical bill. “If this was a one-time event and you’re getting past it, then no problem,” he says. “But if you have perpetual problems that are affecting your credit score, maybe you’re not well-aligned for home ownership.”

 

 

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