Happy Birthday, Little House!

It’s hard to believe that my one-year anniversary of beginning this blog is already here. When I started this blog, my goals were listed in my 3-step plan:

1. Pay down my debt
2. Improve my credit score
3. Save for a down payment for a house

I really didn’t have a “blog” goal, per say. By starting this blog, I felt it would keep me more focused on my 3-steps if people were watching. If I had a blog goal forming in the back of my mind,  that goal was to give it a year and try and build a small readership. Thankfully, I’ve done just that with the help of a blogging network, the Yakezie (Yakezie.com coming August 16th!). I’ve also become a staff writer for WiseBread.com, a terrific opportunity for me to expand my readership! As for my initial 3-step progress:

1. Pay down my debt – Status: On going. My credit cards are paid in full and I’m getting closer to paying off my crummy line of credit. I’m not too concerned about my student loan or auto loan, but those two are next on my list to conquer.
2. Improve my credit score - Status: On target! I’ve managed to increase it to above 700. (I haven’t checked it in a couple of months, but last I checked is was at 728.)
3. Save for a down payment for a house – Status: Missed the mark. I’ve actually put off this step off in order to fulfill step 1. I also need to reassess this goal since I need to get serious about saving for retirement. Perhaps this step needs to be a retirement goal, or I need to add a 4th step. Though a 4-step plan just doesn’t have the same ring to it!

Over the next year I’ll continue working on my goals, and possibly add a 4th one: Save for retirement. I can’t really formulate a plan as to where this blog will lead, but since I still enjoy blogging I’m not going anywhere anytime soon.

Now a quick recap of some of my initial posts for a trip down memory lane:

• An Easy Plan- Details step-1; Looking back, I’m definitely on target with this goal as well.
• I like Pie Charts – I also like pie; apple, pumpkin, cherry. Must have whipped cream topping…..
• Living Vicariously Through Others – I was being a bit snarky, especially considering I don’t own a house yet.

Have you made progress on your goals? Do you reevaluate your goals throughout the year?

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.

…I signed up for CreditKarma.com so I can now obsess check my score’s progress. One of the elements of my 3-step plan towards purchasing my own little house is improving my credit score so I can qualify for the best and lowest APR mortgage loan. Now that I’m privy to amortization charts, I can quickly compare a mortgage loan at 5.5% versus one at 7% and see that the amount of interest paid on the 7% loan is nearly twice the amount that someone would pay on a 5.5% APR loan. Excellent credit has its benefits!

What I like about CreditKarma.com

I really like how quickly I can check my credit score with CreditKarma.com. Of course, the score I’m seeing is my Transunion score and the last time I pulled all three credit reports my Experian score was actually higher. My Transunion score was smack dab in the middle, sandwiched between the much lower Equifax score and the slightly higher Experian score. I can only hope that my other two scores are steadily rising as well. A few other features that I find beneficial are:

• The report card: CreditKarma.com analyzes the credit score based on a few factors, such as length of history, late payments, type of credit, payment history, and new credit. I scored a ‘B’ overall. My length of history is lacking and my types of credit is also poorly misrepresented.
• Score Simulator: Hypothesizing what can happen to a credit score, good or bad, only makes me more diligent to make sure I make all my payments in a timely manner and keep my credit usage low. The simulator shows how quickly a score can plummet versus how slowly it rises.

Where CreditKarma.com needs to improve

Some of the things I really like about Credit Karma are the same things that need a little tweaking. For instance, the Score Simulator is terrific for seeing how quickly a score can drop. However, it lacks the ability to hypothesize what happens when all of your current debt is paid off. I can slide the “pay off debt” scale into the negative (like pay off my student loans), yet my score remains the same. Here are a few other things that need a little more work:

• The report card: I was able to see where I was right on target with my credit. Yet, the one area where I scored an ‘F’ was in the types of credit I currently have. This credit score factor is very elusive. When I used the simulator and found out what would happen to my score if I took on a mortgage, my credit dropped significantly.  The simulator may not have factored in that I’m missing an installment type loan that could raise my score. The report card and simulator aren’t working in conjunction with each other.
• Additional Savings Options: Credit Karma provides the credit scores for free, so they need to make money somewhere. Here is where they make a little money – offer credit cards and insurance from affiliates at lower rates. I found this feature annoying and slightly deceptive. If I signed up for another credit card at a lower rate, Credit Karma is estimating I could save around $238 over three years. However, signing up for another card could potentially lower my score based on their simulator. This feature still needs a little work and more explanation.

Overall I like the ability to view my score whenever I feel like it and for FREE. Though it may only be tracking my Transunion score, it does give me an indication of if I’m moving in the right direction or have fallen off the path toward excellent credit, my ultimate goal.

Debt Repayment Graph - Very helpful tool!

Over the past two weeks, I’ve been writing about what I would have liked to have known about personal finance before I turned 18. These three personal finance topics sure would have been useful when I was just starting out as a young adult! My goal for this series was to enlighten one or two people on what you need to know about savings and debt.  Today’s final post is focusing on topic number 3, How finance charges work. Here is a recap on my Big Three: (click one or two to read the full post for each)

1. It’s never too early to start investing – making compound interest work for you,
2. Don’t be a slave to debt – using credit wisely, and…
3. How finance charges work – using amortization tables for clarity.

How finance charges work: Using amortization tables and calculators for clarity

When I signed up for my first credit card years ago, there weren’t any online calculators I could use to see how my minimum credit card payment was being applied toward my balance. (The internet was in its infancy! I’m dating myself ) I didn’ t know that the majority of my calculated minimum payment was only paying off the interest, not the principal. If someone had shown me the length of time it would take to pay off a measly $1,500 by only paying the minimum payment, it would have been an eye-opener! Let’s take a look at two pay off scenarios, shall we? We’ll assume that the total balance due on a credit card is $1,500 at 19% interest rate. Here are two very different scenarios:

• Paying only the minimum of $32 a month: 86 months until paid off – that’s over 7 years! The interest paid is almost the same amount as the principal.  (I’m calculating the minimum monthly based on the 19% APR divided by 12 months plus a couple of bucks towards principal.)
• Paying an additional $100 a month for a total of $132 per month: 13 months until paid off . Wow! What a difference, and the interest paid is only $167.

Today, there are lots of great websites that offer calculators and charts (creditkarma.com, bankrate.com, etc.) that do this for you. For my examples above, I used a debt repayment calculator from CreditKarma.com. It allows you to see how long it will take to pay off debts at varying interest rates and monthly payments. These calculators may also inspire you to shop around for the best rates. Lower rates equal less cash out of your pocket in the long run. Learn how to use these calculators!

Another item I also use is an amortization chart which shows how much of your payment is applied to the finance charges and how much is applied to the actual principal, or amount you borrowed. You can watch your principal to interest ratio move from paying more toward interest to paying more toward principal as the years go by. What a handy tool! It will also show you the total amount of interest you will pay on your debt. It’s a great motivator to help you pay off that debt quickly!

Finally, using budgeting software to set up a budget and see where most of your money is going is a  must-have tool for organizing your finances. I personally use Quickbooks, similar to Quicken, but there are some great personal finance software programs online as well, like Mint.com.

Summary

The saying that hind sight is 20/20 couldn’t be more accurate. In my early 20’s, I didn’t know what questions to ask and I was ill-prepared for personal finance. Now that I’m in my late 30’s, I realize that what I’ve learned can be helpful to young adults just starting out. Hopefully this can be used as a starting point for those who are fumbling through the murky waters of personal finance.

How do you think the internet has helped you with your own personal finance? For those of you in your 30’s, like me, do you think this knowledge would have been beneficial in your late teens and early 20’s?

Cut up those credit cards?

One of my goals for this year, that I have partly accomplished, is raising my credit score. I need to get my score above 740, at minimum, so that when I apply for a mortgage loan, I’ll be able to get the best rate. I still need to raise my score about 40 points (this is an average as all 3 credit bureaus are reporting slightly different scores). One thing I’ve learned about improving my credit score, is keeping my debt to credit ratio low. Since I’ve paid off all of my credit cards, I’m looking pretty good here. However, another factor that affects a credit score is how much total credit banks are willing to loan you. Since I’ve been on a mission to improve my poor credit history, I haven’t had much credit extended to me these past few years leaving me with very low credit limits.

So, here is my dilemma: I have two credit cards with low credit limits that are charging me monthly fees and/or annual fees (totaling approx. $155 for the year) . I don’t use these cards at all anymore. However, there is a catch with these two cards: they were originally a way to pay off old collection debt. These cards were offered to me about 6 years ago to pay off two other credit cards that had gone into collections. Once I paid the old debt off in full, they extended a limited amount of credit to me. I’m now thinking of canceling these two credit cards now that they are paid in full, but then my overall total available credit limit will be reduced by almost $1,000. How will this affect my credit score? Will it ding my score by a few points? Since I’m hoping to apply for a mortgage loan with in the next year or so, I’m trying very hard to keep the activity on my credit report to a minimum.

After doing some research, canceling my two credit cards would probably affect my credit score a little bit. By how much, I don’t know exactly. I have two options; A.) I cancel these cards and save $155 annually, with the potential of losing a few points off my credit score, or B.) I keep these cards until I am able to purchase a home.  That could be up to 18 – 24 months meaning I would have to spend up to $310 on fees, but I’d be saving my credit score.

For now, I think I will keep the cards. If purchasing a house becomes ever more elusive and my time frame extends to more than 24 months, I might just go ahead and cancel these two cards. I do know that when I obtain that mortgage loan, these two cards are getting the ax!

What do you think? Would canceling these cards now be beneficial? Am I making the right choice by keeping these cards a little longer?