Credit and Debt

I was going to blog more on other types of retirement vehicles that you may run across, but I have heard from a couple of my girlfriends this week about debt and credit issues.

Let's start with credit since it is the thing most people start out thinking they need to build and then proceed to fall into debt.  Sounds romantic, doesn't it?  "Fall into debt."  Yeah, not so much.  Do you need credit?  Yes, you do.  I know there are some old timers out there who insist that they never needed credit and paid for everything in cash. I even know of a financial guru who swears that you should pay for everything, to include your car and house, in cash.  That is all well and good, but most mere mortals can't do that.  And if you want that car or house you need good credit to get a good interest rate and the loan.

Now to be fair to those that do save and pay cash for their vehicles, good on you.  You have learned to delay gratification and have amazing discipline to save that kind of cash.  And good on you if you only buy used vehicles.  You are correct, you will save lots of money that way.  (See, I already anticipate some of the naysayers...I've been doing this awhile hehehe)

So, first things first.  You need to check your credit report.  The best website to use, IMHO, is Annual Credit Report.  This is NOT the one with the cute and funny jingle on tv.  Once you are at this site and put in some data, check the box to only get 1 report at a time.  There is a method to my madness.  You are only entitled to 1 free credit report per year.  If you pull Experian (name of credit reporting agency) in January, for example, then you can pull the TransUnion report in May and the Equifax report in September.  Then the following January you can do it all over again.  Most of the information is the same across reports.  Pulling your reports in this fashion allows you to monitor your own reports without having to pay for costly "credit monitoring".

You will not get your credit score with your report unless you pay for it.  The only thing that is free is the actual report.  There is a Frequently Asked Questions tab on the home page.  Peruse it before proceeding.

So now you have your credit report in your hot little hands, or more precisely on your computer screen.  What the heck does it all mean?  Well, scroll through the tabs and down through the report to see all the creditors that say you have or had accounts with them.  Make a note of any discrepancies.  These will be items you will want to dispute. You want your credit report to be as accurate as possible.

Now there are many, many people giving their opinions about closing accounts and how that will affect your credit score.  I went to  this link Bankrate and found a question and answer section between Bankrate and a FICO product support person.  Bottom line, if you close an account that is in good standing, that account will fall off your credit report after 10 years.  Not a good thing.  If you leave it open, the account will stay on your report indefinitely.  As long as it was in good standing this is a good thing.  Check out the question and answers on the link.

So now we have credit.  There is different kinds of credit debt.  There are revolving loans and credit cards.  There are installment loans (car loans, personal loans).  There are bank credit cards and store credit cards.  Most people get into trouble because they have used too much of their available credit. There is usually too much month left at the end of the money.  If you find yourself in this position it is time to get a handle on this problem.

This is where your spending plan comes into play.  You need to know where your money is being spent every month...down to the penny. Seriously.  I know it is work, but if you want to get out of debt you will do this.  Once you know where your money is being spent then you need to make some changes to start paying down debt.  This website PowerPay is my absolute favorite website for helping figure out when you will get out of debt.  You have to sign in to use the site but it is free.  You input all your debt data to include balances, minimum pays, and interest rates.  It will calculate an "end date" to your debt if you do nothing else but what you are doing assuming you are paying on the debt..

Most people will not like that result, so I will encourage you to number your debt by priority. This is a very personal issue.  I know, I know, talking heads, your mother, your brother's uncle, your cube mate, and your babysitter will all tell you the best way to pay down your debt....highest balance first, highest interest rate first, etc,etc.  I do things differently.  First I ask if there is a personal attachment to which piece of debt gets paid off first.  Most people don't care, but some have a preference.  If there isn't a preference, I tell the person to pay off the smallest debt first.  I don't care about interest rate at this point.  I care about the psychology behind this.  When you pay off a bill there is a sense of accomplishment..."Woo-hoo!  I did it!!"  If you continue to slog away at the highest balance it can seem like f-o-r-e-v-e-r to get there.  People will quit.  It's like dieting.  If the scale doesn't move downward after a week or two, most people will get discouraged and want to throw in the towel.  It's the same thing with getting out of debt.

Okay, so now you have paid off that first credit card.  Put the monthly dollars used to pay off that credit card onto the next debt on your list and so on.  Paying off your debt in this fashion will not require you to adjust your spending plan if you are only using the money you currently have allocated.  If you don't have money allocated to outstanding debt then drastic adjustments need to be made.

PowerPay will also allow you to show how a lump sum payment onto debt will affect your payoff time.  It is tax refund season and alot of you will be putting your new-found cash onto outstanding debt.

As always, email me or leave me comments if you have any questions.  I'm here for you girlfriend.  Good luck!