I’ve always been the type of person who learns through experiences. I learned how to pay bills by actually paying bills, I learned how to code for websites by sitting down and doing it, I’ve learned how to teach through substitute teaching. Experiences to me are the best way to learn. Now, everyone learns differently, of course. But I wonder how true financial experiences alter people’s habits.

For example, for those people short selling their houses, are they learning that they shouldn’t have bought a house they really couldn’t afford? Or, are they day-dreaming of purchasing another house in the near future? What about a person who’s maxed out their credit card? Have they learned they need to limit their expenses and pay down their debt? Or what about a person who has recently been hired after a year of unemployment, are they saving more of their income for a “rainy day”?

My wonderings aren’t random; they’re based on personal experiences or discussions I’ve had recently.

Take for instance this scenario:

A family is short-selling their house. They’ve loaded their kids up on holiday gifts and have made sure to buy them everything on their list. They don’t have any solid future plans in terms of housing arrangements, but are sure they can purchase another house in a year or so.

Of course, I’m not in this situation, so I can only predict how I would react. Yet, I can guess that I’d make a plan that looks similar to this:  I’d pare down the holidays and explain to the kids money is tight this year so don’t expect everything on your list – this is a teachable moment as well.  I think I’d be sitting down with the bills and figuring out where I can save money and how I can make more money to begin adding to an emergency fund. Next , I would be pulling credit reports and figuring out how damaging a short sale will be to my credit score.

Given this scenario, I’d take it as a “life lesson” and learn from my mistakes. Don’t spend more than you earn!

Because we live in a society where we don’t talk about money to our friends and family, we think everyone’s in the same boat and that’s not always the case. Talking it out with others and coming up with resolutions to problems is a first great step. Though many of us might have to learn “the hard way” or through personal experiences, it doesn’t mean these experiences will have to repeat themselves. However, if the lesson wasn’t learned the first time around, there’s always the possibility of a repeat occurrence. And that just isn’t smart.

Have you had to learn financial lessons the “hard way”? What have you done differently to make sure the same mistakes don’t get repeated?

This is a guest post written by Money Supermarket, a UK based comparison site.

As I’m sure most of you will know borrowing money has become extremely difficult in recent years. However, there will probably be a time when you will need to be approved for credit, and when that time comes you need to be prepared.

Building your personal credit rating is simple; you need to show to possible lenders that you are trustworthy and reliable, because at the end of the day they just want to ensure that they’ll get their money back. If they have even the smallest of suspicions that you aren’t reliable then this could see your application rejected.

When you apply for credit when trying to purchase something, the lender you want to borrow from will perform a credit check on you to see how reliable they think you are. The better your personal score then the more chance you have of being approved. So, first things first you need to know what your personal credit score is.

Firstly, I would advise reading an earlier post on Little House in the Valley entitled “Obtaining Your Three Credit Scores” because there is some great advice there. Finding out your credit score will give you a great indication of how the lenders think you are doing financially.

When you receive your reports, analyse them thoroughly and make sure you know what all of the little details mean. If you’re unsure about any of the aspects of your report or if you think some of the data may be inaccurate, then contact the credit reference agency and get it queried.

Once you have your credit score it’s time to think about what you can do improve it. One thing to remember is that lenders don’t like things out of the ordinary, so one thing you should focus on is consistency. Always meet your payments on time and try to be as organised as possible.

Another thing you can do to improve your rating, is to monitor the total credit available to you, because the more credit you have in your name the worse your credit score will be – and this will look really bad to possible lenders.

Try to identify ways that you can cut down the amount of credit available to you, do you have credit cards open that you don’t use? Have you got an amount left outstanding on a loan that could you pay off? The less credit you have against your name the less of a risk the lenders will see you as.

To make sure your credit score always remains in a healthy state, you should never take on more than you can handle financially. If you do, this just elevates the risk of you getting into debt which will again have a negative effect on your score.

It’s important to keep on top of your personal credit score to watch the situation closely, if anything changes then ask why?

Building your credit rating has so many benefits, there will probably be a time when you will need funds for a specific reason and being refused is truly a horrible experience.

A while ago, a mutual friend of ours admitted that he had ruined his credit and wanted to begin rebuilding it through obtaining a secure credit card. I advised him on opening up a secure credit card because  most banks keep the amount of the credit line, for instance $500, in a savings account as collateral for extending credit to a person who is a less than credit worthy. A secure credit card is similar to a  prepaid Visa gift card, but it’s reported to the credit bureaus as an actual credit card which helps build a positive payment history, providing on-time payments are made.

To my astonishment, he was declined a secure credit card through a large financial institution. His credit was so poor, the bank wouldn’t extend him the line of credit even with depositing the total amount of the credit line into a bank account. He was flummoxed and wasn’t sure what to do next. Knowing that his credit was so poor, I did a little investigating and realized that his next best hope would be to approach his own bank, a credit union, to see if they could help him out. It turns out that they were able extend a credit card to him, and it wasn’t even a secure one at that.

Would this help anyone who’s credit is in shambles? It depends, but a few tips to follow if you’ve had this happen to you:

• Approach your own bank about a secured credit card. They might be able to work something out with you if you’ve been a customer for a while and have a good banking history.
• Open a bank account at a credit union, and then apply for a credit card – credit unions are sometimes more accommodating.
• Forgo the credit card altogether and fix your finances!

My third point is important; if your credit is really terrible, it might be better to work on the negative existing accounts than to open yet another one, even if it is a secure credit card account. In his case, it might have been better to not open another account just for the plain fact that he’s having difficulty managing his money and his credit. As you can imagine what happened next….he maxed out his card and is now back to his old habit of making minimum payments and not seeing the balances drop. Unfortunately, some people need to experience great pain before changing their ways, even after a friendly lecture on personal finance!

Do you know of someone who was turned down on a secure credit card offer? What would you recommend to a friend struggling to get their finances in order?

Deep in Debt? Don't buy into checks in the mail that offer relief.

Once a month I help out one of our clients with her personal finance issues, such as checking her credit card balances and calculating her residual income from her deceased ex-husband’s films. Unfortunately, she has always had others take care of her bills and finances and is purposefully clueless about finance charges and credit card debt. Hence, whenever credit card offers come in the mail, she has me look over them. The majority of the offers I shred immediately; there’s no reason to own more than 20 credit cards!

However, the other day while going through her offers, I came across a suspicious looking check from the National Debt Relief Stimulus Plan. “Hmmmm,” I thought. The return address was directly from Washington D.C., but knowing her finances fairly well, it seemed too good to be true; pay one-third of the debt she owed by cashing their $28,000 check. It just smelled fishy, so I did some quick and dirty research online and found that most people were wondering the same thing. It turns out that it is not a program from the government as the title would have one believe. Instead, it is a debt consolidation company using the terms “relief and stimulus” in their name for some persuasive and deceptive marketing.

Luckily for this woman, I caught the scam and shredded it right away. But what about a more desperate person who thinks this is their answer to becoming debt-free? What would happen then?

According to my research, if someone actually cashed one of these checks unknowingly, they’d be signing up for a debt consolidation program. The debt consolidation company would begin negotiating with their client’s financial institutions for a settlement amount. Obviously, someone who is already delinquent with their payments may not care as much about how a debt settlement would affect their credit score. However, a person who has been able to keep up with their debt payments, but is becoming frustrated by not seeing a reduction in their total amount due would then be subjected to a negative account or accounts on their credit report.

Is this helpful for a person deep in debt? Personally, I think it depends on the individual. If they are making a decent and conscious effort to change their spending ways and begin living debt-free, then it could be beneficial; getting their debt down to zero in a shorter period of time and paying less for it. On the other hand, many people enrolled in these programs never complete them. They end up missing a payment, then all of their accounts plus their consolidation account go into collections. This behavior is usually the reason they ended up so far behind to begin with. I know someone who recently entered one of these programs because they were “desperate” and they are already missing payments only a few months into the program.

Is this National Debt Relief Stimulus Plan company deceptively marketing to desperate people? In my opinion, yes. Personally, I think this is wrong. If I were the CEO of this company, I would feel ashamed to be posing as a government program. Instead they need to offer a free finance seminar on how people can negotiate with their creditors themselves, then explain how their services really work.

Have you encountered these checks or know someone who did? Does this seem like a legitimate way to market a debt consolidation company? Is it ethical?

Lose that annual fee!

On a mission to clean up and improve my credit score, I had taken on a couple of cards a few years ago with annual fees. Neither card had a very high credit limit, but at the time it was all any credit card company was willing to lend me. So, I signed on the dotted line and decided to swallow their fees with the hopes of building a solid payment history. Flash forward to today and I’ve finally accomplished that goal: my credit score is over 700 and I’m now receiving credit card offers from more legitimate credit card companies with lower APR’s and NO annual fee.

It took me a while to decide whether I should accept any of these new offers, though. My reasoning was that taking on a NEW card, and potentially canceling an OLD card could ding my credit score. Since raising my credit score was part of my 3-step plan toward becoming a homeowner, it seemed counter-productive to take this action. On the other hand, because I’ve put off purchasing a house for a couple of years, I decided that I really didn’t want to continue paying annual fees on cards with such low credit limits.

A NOTE ABOUT CLOSING CREDIT CARDS: It’s important that when YOU close a card of your own, you follow up with a letter to all three credit bureaus explaining to them that you were the one that closed the account, not that the account was closed by the creditor.

I’m excited to say that the other day, I accepted an offer from American Express for a card with a 10.49% APR, no annual fee, and a credit limit that is much higher than a couple of my combined cards. I canceled one of my annual fee cards, the one with the lowest credit limit, and am waiting to see how this activity will affect my credit score. I made sure to mail in my letter to all three bureaus explaining that I closed the account. If not much harm has been done, my goal is to cancel my second card with an annual fee, leaving me a total of 3 credit cards (one which I share with my husband) with only one annual fee card. I’m not really willing to relinquish the last annual fee card because I feel I need the payment history which dates back about 5 years.

Since I don’t use my cards unless I can pay them off in full each month, I should be able to quickly reestablish any points I do lose on this transaction. Just a quick refresher on how credit scores are calculated:

1. 35% is based on payment history: Most reports show a two-year period of payment history on installment, revolving, and store credit. Even one payment that is over 30 days late can negatively affect your score.
2. 30% is based on how much debt you owe: This is also affected by how much credit you are utilizing.  They like to see a debt to credit utilization of 30% or less.  Another note on credit utilization is that you should never be utilizing more than 30% of your credit on any one card or loan.
3. 15% is based on your length of credit history: The longer you’ve been responsible with credit, the better your score gets. Unfortunately with this one, all you can do is wait and make sure that your oldest, positive credit account is on your reports.
4. 10% is based on the types of loans you have: There are three types of loans available to you, installment, revolving, and store credit. The credit bureaus like to see that you have access to at least two of these types. Installment loans can be a car loan, mortgage, or student loan. A revolving line of credit is usually a typical credit card like a Visa or MasterCard. A store line of credit can be a gas card or a department store credit card.
5. 10% is based on new credit: Credit bureaus may view you as a risk if you’ve opened too many accounts in too short a time period. This is based on how recently you’ve opened a new line of credit of any kind, and how many you’ve opened.

My latest action could potentially negatively affect my credit score because the card I canceled was one of my oldest, see point #3, and I opened a new credit card, see point #5. Only time will tell, and in the meantime, I’m saving $69.00 a year.