Start over in 2015 with these smart habits to improve your credit scores.
Improving your credit and debt situation in 2015 may not require drastic changes. In fact, simply developing a few good habits can go a long way toward putting you in a better place by this time next year. Here are five of them.
1. Ensure On-Time Payments
We all know paying our bills on time is important to maintaining good credit scores and avoiding late fees. But let’s face it: Sometimes we slip up despite our good intentions. It has happened to me: I once forgot to hit the “submit” button when making a credit card payment online, and another time I got a notice that I had missed a car payment I could have sworn I had paid online.
To make this a habit: Set up automatic payments so the money comes straight out of your checking or savings account on the due date. If you aren’t comfortable with that option, then at least set up alerts to notify you by text message or email when a payment is due.
2. Pay Back Debt With a Plan
If you’re carrying credit card debt, there’s a good chance that paying it off is one of the goals you are considering in 2015. If so, the most important thing you can do right now is to create a plan for becoming debt-free. Whether you decide to pay off the card with the smallest balance first or tackle the one with the highest interest rate first isn’t nearly as important as committing to a specific plan so you can track and measure your progress.
To make it a habit: Start with a credit card payoff calculator like this one to find out how much you’ll have to pay each month to pay off your debt within your targeted time frame. Commit to paying that much each month — without taking on new debt — until you are debt-free.
3. Use Credit Cards the Right Way
I’ve heard plenty of consumers call credit cards “evil” over the years, but if you use them the right way, you can save money and shop safely. That means only using them to make purchases you would have made if you paid in cash. It means spending what you can afford to repay before interest kicks in. And if you can’t do that (the car breaks down, you have an unexpected visit to the ER, etc.), you have a plan to pay off the balance in three years or less. It also means tracking your spending as it happens and reviewing your statements as they arrive for suspicious charges.
To make it a habit: Choose one card for everyday purchases. It should be a card with a grace period and no balance so that you avoid interest. (A rewards card is a good option for this purpose.) Keep track of your spending so you don’t spend more than you can afford to pay back when the bill comes due. Then, if you don’t already have one, compare low-rate credit card offers so you can get one to use as a backup when emergency purchases arise that you have to pay off over time.
4. Watch Your Balances
Even if you pay your balances in full each month, your credit score may suffer if the balances listed on your credit reports are high in comparison to your credit limits. Let’s say you pulled out one of your retail cards over the holidays because you earned an extra discount for those purchases. And let’s say your credit limit on that card is $500. If you charged $400, that’s 80% of your available credit. When that card issuer sent you the bill, it likely also reported your balance of $400 to the credit reporting agencies. The fact that you are going to pay it off won’t likely be reported until your next billing cycle closes — and the balance at that point in time is shared with the credit agencies. In the meantime your credit scores have most likely been negatively affected by that 80% debt usage ratio, which is considered very high.
To make it a habit: Keep track of your balances and try to keep your balance below 20% to 25% of the credit line (10% is even better). If you need to make larger purchases, consider making a payment online at least a few days before your billing cycle closes. If your issuer reports balances as of the “statement closing date” (many do), your reported balance will be lower and you won’t have to worry about your credit score dropping.You can track how your debt affects your credit by getting your credit scores for free on Credit.com.
5. Lower Your Rates
Interest rates have remained low through most of 2014, but many analysts expect them to start creeping up in 2015, so the more you can do now to lock in low rates, the better. If your credit scores have improved since you first financed your car, for example, you may be able to refinance your auto loan. Similarly, you may want to see whether you can get a lower rate on your mortgage. If your home used to be underwater, for example, but now you have equity, this may be a good time to refinance. Even credit card interest rates may be negotiated. But if you’re not successful when asking your issuer to cut you a break, you may be able to use a balance transfer or a consolidation loan to lock in a better deal.
To make it a habit: Mark your calendar for when you plan to review all your interest rates and shop for lower ones. Make it a yearly event. As Marc Eisenson, co-author of my book Reduce Debt, Reduce Stress likes to say, “Not asking is an automatic ‘no’.”
More from Credit.com
- The Credit Card Payoff Calculator
- How to Improve Your Credit Without Taking on Debt
- What’s a Bad Credit Score?
This article originally appeared on Credit.com.
You owe it to yourself to do these
Along with the New Year’s Resolutions about losing weight and learning a new language, plenty of Americans will be contemplating how to improve their credit in 2015.
Whether you’re trying to get a better credit score so you can qualify for a mortgage or a low rate on a car loan, are just starting to build your credit history or repairing it after a financial setback, experts say there are a handful of things you should be doing right now.
Consider a balance transfer. “January is the start of balance transfer season, [when] credit card issuers try to lure new customers with 0% APR promotional offers,” says Charles Tran, founder of the site CreditDonkey.com. While balance transfers can help people pay down a high debt load, you really need to read the fine print, Tran says. “Pay attention to the balance transfer fee and how long the promotional period is for,” he advises. Another thing you want to check is whether or not the promotional rate applies to new purchases or only to the balance you transferred onto the card. “Watch out, as a balance on the card will typically mean there is no grace period for purchases,” Tran warns.
Avoid applying for more. Applying for a credit card or loan dings your credit score just a bit, so if you’re planning a big purchase (say, a home or a car) where every point on your credit score counts, hold off on opening any other accounts for a while, says Odysseas Papadimitriou, founder and CEO of the sites CardHub.com and WalletHub.com. “Stop applying for other forms of credit at least six months in advance,” he advises.
Pay down any variable-rate debts. “It’s important to cut down your overall debt level as interest rates are predicted to rise,” Tran advises. Most credit cards these days are variable-rate cards with APRs linked to the prime rate, and right now the prime rate is unusually low. It literally has nowhere to go but up, which means more Americans will find themselves paying more to service their debts. For people who are already strapped, this could hurt their credit if they can’t make those higher monthly payments.
Check your credit reports. This is also especially important if you plan to buy a car or house this year, says Matt Schulz, senior industry analyst at the site CreditCards.com. “Check for errors such as accounts that you don’t recognize and late payments that you didn’t actually pay late,” he says. “Cleaning up any mistakes on your report can make a big difference to your credit score.”
Build a cash cushion. You might think your paycheck is already stretched thin, but experts say it’s important to sock away money in a savings account that you can access if you have an unexpected expense or interruption in your income stream. Without an emergency fund to tap, even a small shock to your finances could knock you into an expensive and long-lasting spiral of debt. “Do not get into additional debt without first having an emergency fund,” Papadimitriou warns.
Bad scores can be a sign of poor health
Never mind the blood pressure test: A new study finds that you can tell how healthy someone’s heart is just by looking at their credit score.
The study, published in Proceedings of the National Academy of Sciences, finds a correlation between high credit, cognitive ability and self-control. Researchers studied health and financial data from more than 1,000 people who had been monitored since birth for nearly 40 years. They discovered that your credit does a lot more than tell a bank whether or not it should give you a loan.
Employers, insurers and even landlords regularly pull the applicants’ credit already, treating it as a proxy for a vague sort of approximation of your diligence, honesty and character. Consumer groups have raised questions about the use of credit as a way to assess things like people’s ethics, arguing that the two aren’t necessarily related.
“Credit reports were not designed as an employment screening tool,” says nonprofit group Demos. “Employment credit checks are an illegitimate barrier to employment, often for the very job applicants who need work the most.” In a survey of job-seekers, Demos found that one in seven people with blemished credit said that they’d been denied a job as a result.
But scientists insist the link is real and they have the proof to back it up. “What it comes down to is that people who don’t take care of their money don’t take care of their health,” study leader Terrie Moffitt says in a statement.
At least some of the factors that influence both health and credit have deep psychological roots. Moffitt’s team found about 20% of the correlation between credit scores and cardiovascular health can be attributed to attitudes and behaviors that are either innate or ingrained very early — the attributes in question were all observed before the participants were 10 years old.
On one hand, it makes sense that someone who exercises poor impulse control when it comes to their diet or fitness regimen might be similarly lackadaisical about their finances, but this doesn’t mean that hard-wired personality traits doom you to poor health and poor credit. Social scientists say they hope the knowledge can lay the groundwork for people to make positive changes in their lives.
“It provides hope that early life intervention can impede the development of life-long patterns of illness and financial struggle,” says Lamar Pierce, an associate professor of organization and strategy at Washington University in St. Louis, who was not involved in the study.
Money contributing editor Farnoosh Torabi clears up some widely held misunderstandings about spouses' responsibility for debt.
Can't seem to get on the same page with your partner when it comes to money? Help has arrived.
In order to achieve common goals, getting on the same financial page with your romantic partner is critical—but it’s also challenging.
As our own MONEY survey recently revealed, a majority of married couples (70%) argue about money. Financial spats are, in fact, more frequent than disagreements over chores, sex and what’s for dinner.
The Internet can offer some strategic intervention. From budgeting to paying off debt, saving to credit awareness, these five online financial tools can help everyone—and, in particular, couples—get a better handle on their money.
The best part: They’re free.
1. For help reaching a goal: SmartyPig
SmartyPig is an FDIC-insured online savings account that—besides paying a top-of-the-heap 1% interest rate—is designed to help consumers systematically save up for specific purchases using categorized accounts like “college savings,” “summer vacation” or “new car.” Couples can link their existing bank accounts to one shared SmartyPig account and open up as many goal-oriented funds as they desire. You see exactly where you stand in terms of reaching your goals, which can motivate you to keep saving.
Additionally, SmartyPig has a social sharing tool that lets customers invite friends and family to contribute to their savings missions. Don’t want people to bring gifts to your child’s next birthday? In lieu of toys, you can suggest a ‘contribution’ to his SmartyPig music-lessons fund and provide the link to where they can transfer money.
2. For help boosting your credit scores: Credit.com
If you and your partner need to improve one—or both—of your credit scores and seek clarity on how, Credit.com can help. The Web site offers a free credit report card that assigns letter grades to each of the main factors that make up your score: payment history, debt usage, credit age, account mix and credit inquiries.
A side-by-side comparison of each person’s credit report card can—even if the scores are roughly the same—actually reveal that one spouse scored, say, a D for account inquiries, while the other has a C- under debt usage. From there you can tell what, specifically, each person needs to improve upon. “It may lead to some friendly competition,” says Gerri Detweiler, Director of Consumer Education at Credit.com.
3. For help tracking your expenses: Level Money
Called the “Mint for Millennials,” Level Money is a cash-flow-management mobile app that automatically updates your credit, debt and banking transactions and gives a simple, real-time overview of your finances. It includes a “money meter” that shows how much you have left to spend for the remainder of the day, week and month.
A spokesperson tells me that couples with completely combined finances can share a Level Money account and see all bank and credit card accounts in one place. They can get insight into when either partner spends money and how that affects cash flow. The company says it’s continuing to build out tools for couples.
4. For help eliminating debt: ReadyForZero
If you and your partner need some nudging to get out of credit card debt once and for all, ReadyForZero may be of service. Launched three years ago, it’s an online financial tool that aims to help people pay off debt faster and protect their credit. The free membership gets you a personalized debt-reduction plan with suggested payments. The site tracks your progress so you can see how well—or how poorly—you’re doing and regularly posts “success stories” on its site to motivate users. You also get access to the ReadyForZero mobile app which sends you push notifications suggesting an extra payment towards your balance if you just placed a larger than normal deposit in savings or checking.
For couples, the tool can help one or both partners to stop living in denial and to come to terms with their financial obligations. Says CEO Rod Ebrahimi, “it demystifies the debt.”
5. For help syncing up generally: Cozi
When I asked attendees at the annual Financial Bloggers Conference last month about what sites, apps and online tools they like to use to keep their finances in check in their relationships, a few pointed to the website and app Cozi. It’s not a financial tool per se, but Cozi helps households stay organized, informed and in sync with master calendars and household to-do’s like food and meal planning, shopping and appointments.
Want to schedule a meeting to talk about holiday gifting and how much to spend? Put in in Cozi. Want to plan meals for the week so you’ll know exactly what to buy at the market and not be tempted to order in? Tap Cozi to make a list.
Ashley Barnett who runs the blog MoneyTalksCoaching.com says she and her husband have been using Cozi for years. “My favorite part is that the calendar syncs across all devices, so when I enter an event into the calendar, my husband will also have it on his,” she says. Cozi’s actually gone so far as helping the couple minimize childcare costs. “Before Cozi, if I accidentally booked a meeting on a night my husband was working late, I had to either pay a sitter or reschedule the client, which is unprofessional and hurts my business,” says Barnett. “Now when I pull up my calendar I see his work schedule as well. No more surprise sitters needed!”
[Editor’s Note: Cozi was recently acquired by Time Inc., the company that owns MONEY and TIME.]
Farnoosh Torabi is a contributing editor at Money Magazine and the author of the new book When She Makes More: 10 Rules for Breadwinning Women. She blogs at www.farnoosh.tv
FICO is decreasing the impact of medical debt on credit scores, which should make it easier for consumers to get loans.
Unpaid medical bills will carry less weight on FICO scores -- and late bills that get paid off won't count at all.
A change in the way credit scores are calculated means consumers may soon have an easier time getting a loan and could begin paying lower interest rates on their credit cards.
Fair Isaac, the company behind the widely used FICO credit scores, announced Thursday that it will no longer reduce a consumer’s score for late bill payments if those bills have been paid off.
It will also reduce the impact of unpaid medical bills on FICO scores. Under the new model, which will become available this fall, consumers with a median credit score would generally see their score rise by 25 points if their only major late payment is an unpaid medical debt.
“The new ruling looks great,” says Credit.com’s Gerri Detweiler. “These are changes consumers and consumer advocates have been hoping for for a long time. The one big warning is that these changes won’t happen over night.”
The changes comes after May report from the Consumer Financial Protection Bureau found that consumer credit scores are “overly penalized” for medical debt, which it said often does not accurately reflect their credit worthiness.
“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” said CFPB director Richard Cordray in a statement at the time. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”
A new report shows credit is more available for homebuyers- even for the self-employed, a group that has previously had trouble securing loans.
Being approved for a mortgage has gotten a little easier for consumers with good credit, according to a recent report from the Federal Reserve. The bad news is that standards are still tighter than pre-recession levels, and banks won’t be further loosening them for a while.
The July report, which surveys senior loan officers about their banks’ lending practices, shows almost one-fourth—23.9%—of all banks eased their credit standards in the last three months for borrowers with solid credit and incomes. According to the Wall Street Journal, this is the largest such action by lenders since the financial crisis.
Keith Gumbinger, vice president at mortgage research firm HSH, says that while loans can still be difficult for some consumers to get, banks are approving borrowers with slightly lower credit scores. Previously, Gumbinger says, banks required a FICO score of about 640 to approve a loan backed by the Federal Housing Administration, called an FHA loan. Now applicants with scores as low as 600 are getting the green light.
In July Wells Fargo lowered the minimum credit score needed for a jumbo loan to 700, down from 720, according to Reuters. Jumbo mortgages are generally necessary for consumers who need to borrow more than $417,000. Most banks have stricter requirements for jumbos than they do for smaller loans.
What’s behind the easing? In short, banks are becoming less paranoid. Technically, the government will underwrite FHA loans given to those with credit scores as low as 580. However, banks are reluctant to lend to borrowers with such low scores because a certain number of defaults will cause the feds to pull their backing. As a result, many lenders require FICO scores above those minimums, or other additional requirements—collectively known as “overlays”—to make sure that doesn’t happen.
What’s more, in recent months housing prices have been going up. “If you’re a lender and you make a loan to someone when home prices are rising, and [the loan] fails, well then congratulations,” Gumbinger jokes.
One group benefitting from the changes is the self-employed, who tend to have fluctuating incomes. Since the housing crash, this group has found it extremely difficult to get credit because their unconventional or inconsistent income streams failed to meet the Qualified Mortgage standard that protects banks in case a loan goes south. As a result, lenders willing to give out non-QM loans had been demanding down payments as high as 35%, even from borrowers with a relatively high FICO score. Gumbinger says lenders are now more willing to look for other positive qualities, like a large number of assets or equities, or a higher credit score, instead of asking for huge sums of money up front.
The loosening is good for prospective homebuyers who previously may have just missed most banks’ credit cut-off. What’s not good is there’s not much room to go from here in terms of lowering credit standards further. Banks theoretically have wide latitude to change requirements, and as housing prices go up they may loosen them further, but the primary determinant of who can get a loan are the credit limits set by government mortgage backers who securitize most of the mortgage industry.
Those limits are set by politicians, not bankers, and asking the voting public to allow less dependable mortgages is not exactly an easy sell, especially since bad loans helped cause the financial crisis.
“You’re the head of the [Federal Housing Finance Agency], you lost billions and recovered billions, do you go stand before the American people and say in order to save the housing market we need riskier loans?” asks Gumbinger. “You may not want to put the American taxpayer at risk.”
Related: MONEY 101’s How to Get the Best Rate on a Mortgage
Related: MONEY 101’s How to Improve your Credit Score
Survey finds that financial responsibility is one of the most important qualities people look for in a spouse.
This article was originally published on AllYou.com and was written by Jennifer Liu.
You’ve met the parents, survived a combined family holiday, traded embarrassing childhood memories, and are ready to start a life together. But before you hop over to complete your wedding registry, you might want to check out your future life-partner’s credit score.
That’s right—according to an Experian Consumer Services survey, half of married adults say that credit scores were important to them when choosing a spouse. In fact, financial responsibility ranked number two as the most important attribute in a spouse, second only to personal compatibility. Even physical attractiveness and career ambition came after a person’s ability to balance a checkbook.
The survey also measured what kind of shared goals spouses found to be important to maintain a compatible relationship. Having similar financial goals ranked number three in the survey, even above compatibility in sex and intimacy or religion and spirituality. The full list includes:
1. Family goals
2. Life goals
4. Sex and intimacy
5. Career goals
6. Religion sand spirituality
“Survey findings show that once someone identifies a compatible partner, his or her next thought is about how that person manages personal finances, and credit plays a key role in that scenario,” says Ken Chaplin, senior vice president at Experian Consumer Services. “This holds true for both genders, and the study further shows that working toward compatible financial goals matters to the vast majority of married adults.”
For those of you who might shy away from financial talk, consider this: The survey indicates that 73% of women and 60% of men state that having a partner who openly communicates about personal finances and credit makes him/her more attractive. Talking about credit is especially important when the couple is securing a home loan, applying for interest rates and securing a loan to buy a car. Just a few of many examples proving that in relationships, marriage especially, communication is key. Don’t believe it? Couples married for more than 20 years who participated in the survey reported that credit plays an instrumental role in marriage.
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