Category: Credit Repair

Making a Six-Figure Income Doesn’t Mean You Won’t Have Credit Issues

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During the 1980’s, when I was growing up, knowing someone who made a six-figure salary was like knowing royalty. It was that number that made you think of owning fancy cars, living in a huge house, and going on lavish vacations. Fast forward to the 21st century and making $100,000 plus does not really seem like all that much money anymore. Still, according to recent Census Bureau data, only a little over 20 percent of American households even break into that six-figure number.

But doesn’t making a six-figure salary pretty much guarantee you will have a good credit rating? Not necessarily. Your salary is not factored into your FICO score, but lenders will consider it when approving you for a loan. Loan and/or credit approval is based on your income and your FICO score. But how can someone who makes over $100,000 a year possibly have credit issues? There are some interesting factors which play into why someone who makes a decent income has bad credit. Let’s see what they are and how these factors affect their credit scores.

Feeling the Pressure to Keep up with the Joneses

This is cliché but true. Let’s say you have graduated from college and landed your first real job. Gone are your grungy pals from college only to be replaced with well dressed, sophisticated work colleagues and/or neighbors. They all drive BMW’s and have a garage full of “toys” and you feel the need to join in the fun. These extravagant purchases require applying for auto loans and/or credit cards and opening new lines of credit all at once. This could be lowering your FICO score. Why?

Two categories used by FICO when calculating your credit score is “New Credit” and “Credit Mix.” In fact, 10% of your FICO score is based opening new credit lines and another 10% is based on the mix of credit you use. According to myfico.com, FICO’s official website, “Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.” Not only does FICO look at how many new accounts you open, but also what types of credit you apply for. So, trying to keep up with your neighbors by applying for a lot of credit in a short period of time may negatively affect your credit score. In addition, each time you apply for a loan or credit card, an inquiry shows up on your credit score. Each inquiry can ding your score up to 5 points apiece.

Large Student Loans

When you were in high school, I am sure you thought a lot about what you wanted to be when you grew up. Achieving that goal probably meant going to college, which in turn meant taking out student loans to pay for college. After graduating from college, you landed a good paying job but your six-figure salary doesn’t go very far when paying a large monthly student loan payment. Add that payment to your rent/mortgage payment, car payment, food, and utilities and you have the problem of possibly not being able to make your payments on time.

Why is this important? Making on-time payments makes up the largest portion of your credit score, 35 percent to be exact. To quote FICO, “This is one of the most important factors in a FICO® Score.” So, even though you are making a six-figure salary, paying one or more of your bills late may cause your credit score to decrease.

How to Avoid Credit Issues Making a Six-Figure Salary

Touching on a few reasons why someone making over $100,000 is capable of having credit issues is great – but how can one avoid damaging their credit rating? Get yourself on a monthly budget plan and you will see the following improvements:

  • You will pay your bills on time (35% of FICO is based on payment history)
  • You will lower the amounts owed on your outstanding debts (30% of FICO is based on amounts owed)
  • You will lengthen your current credit history by paying these timely (15% of FICO is based on length of credit history)
  • You will curb the need to apply for new credit (20% of FICO is based on new credit and a mix of credit)

Knowing some of the reasons why a person making a six-figure salary can have credit issues can be helpful to the person who is making half of that salary. Living beyond your means and getting into debt can happen to us all, not just the wealthy. We all need to be mindful of what we spend our money on and making a budget is the best way to keep you and your family on track. Teaching your children about money management will help them avoid credit issues when they become a wage earner. Hopefully, they will look back and realize that no matter how much money they make, they can live within their means, have excellent credit, and be able to save money for their future.

If you find yourself having credit issues despite your salary, you can start your credit repair journey here. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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What Happens To Your Credit When You Withdraw Cash From Your Credit Card

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Credit is an important part of financial health. It can help you buy a car or home, pay for college, and even qualify for a new job. While credit can be used as a tool of success, it can also lead to unwise and damaging choices.

Money trouble can be stressful, especially when you need it fast, and you might be considering a cash advance to cover your needs. Is it the right choice? Read on for all the details.

Can I Withdraw Cash from a Credit Card?

Probably. While it depends on your issuer’s policies, most credit cards provide a cash advance option, allowing you to withdraw liquid funds from your account.

Is a Cash Advance a Regular Charge?

No. Cash advances usually come with their own terms and conditions, and you can expect to pay more in:

  • Fees: Most credit card issuers impose a cash advance fee: either a flat rate or a percentage of the cash amount. For example, the Chase Freedom card charges $10 or 5% of the transaction amount.
  • APR Interest Rates: The same Chase Freedom card charges 23.99% on cash advances (the standard rate for all other charges varies between 15.49%-24.24%). Cash advances also have no grace period, which means that interest immediately begins accruing on the balance.

Will It Hurt My Credit?

A cash advance won’t damage your credit on its own, but the aftermath is another story. For example, suppose you use your Chase Freedom card to withdraw a $1,000 cash advance. Your account is immediately charged a 5% transaction fee of $50. You need the money to cover emergency car repairs, and you cannot repay the balance at the end of the month. In fact, six months pass before you have the funds to tackle your debt. By this point, your balance has ballooned from $1,050 to $1,184, increasing your credit utilization ratio. Unfortunately, you must use emergency savings to repay it, once again putting you at risk for surprise expenses and credit damage. If improving your credit score is a top priority, think carefully before pursuing a cash advance.

Are There Other Ways to Secure Cash?

Relying on credit for cash isn’t a wise choice, and should only be used as a last resort. If you need money fast, there are a few ways to get it without going into debt.

  • Quick Delivery Jobs: Delivery services like Amazon Prime Now and DoorDash are always looking for new employees nationwide, and you can earn as much as $25 per hour making simple deliveries.
  • Clean Out Your Closet: Take advantage of unused electronics, clothing, jewelry, etc. by selling it online for a quick profit.
  • Lessen Your 401(k) Contribution: Saving for retirement is a wise choice, but you might consider temporarily changing your 401(k) contributions if you need liquid funds. Talk to your employer’s HR department about how to make changes to your direct deposit accounts.
  • Use Home Equity: If you’re a long-time homeowner, you may qualify for a home equity loan or line of credit. This strategy allows you to borrow against the value of your home and pay it back over time with a variable rate (i.e., home equity line) or fixed interest rate based on your FICO score (i.e., home equity loan). Talk to a financial planner about which choice is right for your situation and credit score.

If you want your credit situation to improve, learn how you can start repairing your credit here. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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The Dos and Don’ts of Dealing With a Collection Agency

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No one is immune from credit-related woes—I speak from experience. This week I received a call from a collection agency in Chicago. They claimed I owed $863 in unpaid medical bills, and the representative was eager to get his hands on payment. The call itself was a mistake—I paid the bill months ago—and yet, I was being asked to provide my credit card number over the phone to avoid a vague threat of “further action.”

It’s difficult to know how to move forward in a stressful situation that involves credit. Whether you receive a collection call in response to overwhelming debt, a forgotten bill, or by clerical error, it’s important to take it seriously. An account in collection status can severely damage your credit score and remain on your credit reports for up to seven years. Thankfully, the Fair Debt Collection Practices Act (FDCPA) provides federal guidelines for debt collectors to follow—a law that protects consumers from unfair, deceptive, and abusive actions. Exercise your rights by practicing these do’s and don’ts. They will help you navigate the debt collection process.

Do Ask for a Validation Notice

Debt collectors are required to provide a validation notice within five days of making contact with you. The notice must include several important pieces of information:

  • The name of the creditor you owe
  • The remaining balance owed
  • How to respond to pay the debt
  • How to respond if you plan to contest the debt

Debt collectors that cannot provide this information don’t have the power to collect unpaid funds from you. Learn more about debt validation here.

Don’t Provide Payment Over the Phone

Identity theft is a common occurrence in today’s world, and it’s easy to fall victim to a scammer posing as a debt collector. While you may feel pressured to pay the mysterious balance immediately, don’t provide your credit card number or other sensitive information over the phone. Instead, tell the representative that you’d rather communicate by mail. A legitimate collection agency is required to provide written correspondence when asked, and verifying their legitimacy is your first priority.

Do Assert Your Contact Preferences

The FDCPA provides provisions for consumers dealing with collection agencies, including your preference for how they should contact you. While most people believe harassing phone calls are unavoidable, you actually have the right to communicate by mail only, and a debt collector cannot contact you by phone again if you notify them in writing to stop. They also cannot contact you before 8 a.m. and after 9 p.m. local time or harass you at your place of work. If you receive an unwanted call, make it clear that you would rather communicate via mail or email only.

Don’t Be Intimidated by Threats 

Collection agencies aren’t allowed to threaten you in order to recoup debt, but that doesn’t mean some won’t skirt the law with intimidation. Don’t be fooled. Regardless of your financial situation, debt collectors cannot have you arrested, publish your name in the newspaper as an unpaid debtor, use profane language, threaten violence, seize your property without a court judgment, etc. Restate your contact preference and write down any threats you receive before ending the call.

Do Consider Working with a Lawyer 

Every consumer has the right to represent themselves in credit-related matters, but if you’re feeling overwhelmed, it might be beneficial to seek legal advice. In addition to working with the collection agency on your behalf, a trained credit repair lawyer can assess the merits of the debt collector’s claims, draft responses, and help you minimize credit damage in the process. You have rights and you have options. When it comes to financial health, choosing the best course could make a huge difference.

If you have questions about collections, or are worried about your credit, learn how you can start repairing your credit here.  You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Tools for Buying a House? You May Want to Avoid the 30% Rule

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Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

This article originally appeared on Credit.com.

If you’re looking to purchase a home and worried about your credit situation, learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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What’s the Difference Between an Educational Score and a FICO Score?

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Building credit strength is a delicate balance of time, strategy, and information. When it comes to the latter, accuracy is crucial, especially concerning your credit scores. For instance, suppose you plan to buy a new house by the end of the year. Your mortgage broker friend suggests raising your credit score to at least 720 before applying for a loan. She explains that a higher credit score qualifies you for a lower interest rate, which will reduce your monthly payments and the long-term cost of your mortgage. So, which score counts? You’ll find the answers here.

What is an Educational Credit Score?

An educational credit score is based on a private lender or credit bureau’s ranking of your financial information. For example, the PLUS score was designed by Experian and uses your bureau-specific credit report to tally a score from 330 to 830. The purpose of educational credit scores is to provide you with a basic idea of your risk level and creditworthiness.

Are Educational Scores Used By Lenders?

No. Although they are designed to measure credit risk, educational credit scores are not used by lenders. Models like the PLUS score are meant for consumer use only, which means that they are not considered when lenders review your loan application.

What is a FICO Score?

The FICO scoring model is used by more than 90 percent of lenders. Developed by the Fair Isaac Corporation (FICO), your traditional FICO score is graded on a scale of 350 to 850, while industry-specific FICO scores are measured on a scale of 250 to 900. Your score is based on five factors: payment history, debt utilization, credit length, new credit, and types of credit used.

You have several FICO scores, but in general, the average lender will review the three scores based on your TransUnion, Experian, and Equifax credit reports.

Where Can I Check My FICO Scores?

Many websites advertise FICO score purchase options, but when you’re planning a financial move, it’s best to go straight to the source. “MyFICO.com is the only place where consumers can access all three FICO Scores based on Equifax, Experian and TransUnion data,” the FICO team said in a statement. Your scores can be purchased directly from the website.

You may find educational scores that model the FICO scoring method from the following sources:

  • The Credit Bureaus: TransUnion, Experian, and Equifax all sell credit scores to consumers, and some provide regular updates when you sign up for their ongoing credit monitoring services.
  • Your Credit Card: Many credit card members receive access to their educational credit score as a monthly perk.

Which Score Should I Check Before Applying for a Loan or Credit?

When it comes to learning the facts yourself, you should always rely on the credit score used by your intended lender. “Before getting a loan for a major purchase, such as a home, you should check all three of your FICO scores,” the FICO team said. “Most lenders will look at all three FICO scores—one from each major credit bureau—when evaluating your loan application.”

Reviewing your credit scores can be confusing, and it’s a good idea to familiarize yourself with the FICO model and understand how your lender analyzes loan applications. The result could save you a lifetime of excessive debt.
Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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