Debt-Free Forever (24 page)
Authors: Gail Vaz-Oxlade
It’s a lot harder to spend willy-nilly when you’re on a budget because you’ve accounted for where the money is going, down to the last red cent. If you find a category isn’t working because there’s not enough in it, then you can figure out where to cut from another category to make the budget balance.
Not everyone is prepared to be a grown-up and spend money consciously. Some people like the rush of spending on a whim. If you’re married to one of these people, a budget can be a marriage saver, since it will reduce arguments about
money. The budget serves as your guide, so if you and your partner are having a skirmish over whether to buy something, you can always fall back on “Not until we put it in the budget.”
As I’ve often said, managing money isn’t rocket science. And it isn’t magic. It’s discipline. You must decide that you will live on what you make. You have to be determined to do whatever it takes to get your consumer debt—your credit cards and your lines of credit—paid off in three years or less. And you must be committed to putting some money away for the future.
Wouldn’t it be nice to go to bed at night and not be awoken by the spectre of debt, rattling its chains and threatening your family’s safety and security? Wouldn’t it be great to buy something new and fresh and fun with the full confidence that you can pay the bill when it arrives? And wouldn’t it be lovely to know, that having hit a wall, you have the financial resources to cope?
You can have everything you want. All you need is a plan. And how do we spell plan? B-U-D-G-E-T!
While my main mantra is
Debt-Free Forever,
and you’ve been busting your butt to get there, that doesn’t mean credit is an evil thing that must be avoided at all costs. You can use credit to make things work for you. What you must avoid is turning that potentially useful credit into a yoke of bad debt that stifles your budget and cramps your style. As long as you understand how credit works, and the role it can play in bringing your goals to fruition, you can use credit to
your
advantage.
Credit score!
Credit score!
CREDIT
SCORE!
Everyone is so
obsessed
with having the highest possible credit score. The reason: your credit score not only affects your ability to get credit, it affects the interest rate you will pay if you do. The better your score, the lower your risk to a lender (or the more profitable you are), and the lower the interest rate you’ll have to pay.
Knowing your credit score is important when you’re trying to borrow money and when you’re trying to negotiate a better interest rate on your debt. Not knowing your credit score means you’re ignorant about something that can have a huge impact on your financial life.
Your credit score is a number that is calculated based on a bunch of factors lenders use to decide whether to lend to you. The FICO score is a credit score developed by Fair Isaac & Co., which began its pioneering work with credit scoring in the late 1950s. The point of the score is to consolidate a borrower’s credit history into a single number. While Fair Isaac & Co. and the credit bureaus do not reveal how these scores are computed, there are a number of factors that affect the score you receive.
The “Credit Scoring System” is a numbers game: the more “points” you score, the better you do. People are sometimes surprised at what will negatively affect their scores.
While you may be tempted to lie about your age especially if your boy-toy is looking over your shoulder, don’t. If a creditor catches you in a lie, they aren’t going to trust the rest of the information you provide either, and you won’t get the loan. Of course, vanity isn’t the only reason people lie about their age. If you’re under 21, you might be tempted to lie because
you’re afraid they won’t like your tender age. And you’d be right. Under-21s score zero points. Between the ages of 24 to 64 years, give yourself a point. You’re probably working. Over 65? Zero points … you’re old!
GAIL’S TIPSWhenever you use all the credit you’ve been given on a credit card, the credit scoring agencies shake their heads and say, “Tut-tut” and then adjust your credit score down. And the closer you get to your limit, the more they shake and tut and subtract from your score. When that happens, lenders respond by jacking up your interest rate. Type up the following and stick it to the back of your card: Danger: Your credit limit is $ (half of what your statement says it is) and you have $ (how much) room left!
Creditors think people who are unmarried are a higher risk. If you are married, give yourself one point. Now you’d think that being divorced might work against you (all that spousal and child support), but most creditors don’t give a whit.
No dependents? Score zero. You’re probably still drinking your money away like a teenager since you haven’t yet “settled down.” And with no “ties that bind” you could skip town at a moment’s notice; not good for collections. One to three dependents? Score one point. You’re a solid citizen. More than
three dependents? Score zero. Have you no self-control? And don’t you know you that with all those mouths to feed you could get in debt over your head?
GAIL’S TIPSYou don’t automatically assume your partner’s level of indebtedness when you choose to tie the knot. The only way to be on the hook for your partner’s debt is to actually sign up for it. if you don’t co-sign, co-borrow, or in some way put your John Hancock on the paperwork, nobody can collect the debt from you. However, if you have joint assets, his or her share of the assets could be affected when the bill collectors want their money back. They can force the sale of joint assets to get their piece of the pie. So the trick would be to not own anything jointly. And your pal’s crappy credit history could come into play when it comes time to start fulfilling some of your dreams. A lousy history with money may mean you won’t qualify jointly for a mortgage, or you’ll have to pay through the nose.
Home address? Live in a trailer park or with your parents? Oops. Bad risk. Score zero points. You’re showing no stability and could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big, fat mortgage? Good for you. Score three points. Someone
has already done some checking and you qualified for a mortgage, so you can’t be all bad. Own your home free and clear? Even better. Take four points. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.
Previous residence? Zero to five years (some applications only go to two years), score zero points. You move around too much! Over five years? You’re stable, so score one point.
Years on job? The longer, the better. If you have less than one year at your present employer, you’ll earn no points at all, which explains all the whining from the newly working who can’t get approved for a credit card. One to three years on the job will earn you one point. Four to six years is worth two. Over seven years at the same company and you’re probably bored out of your mind but you’ll score three points.
Most creditors belong to at least one reporting agency and share their information liberally with one another. Of course they’re more likely to believe their own information than somebody else’s. So if you paid off a loan with them, give yourself five points. Good record with other creditors should earn you two or three points.
It’s pretty obvious, but the more you make, the better. Having a savings and/or chequing account with a balance over $500 will earn you a couple of points, providing you didn’t open up the account last week.
Having a landline in your own name earns you a couple of points because creditors have a way to contact you if you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.
I don’t have the best credit score going. Does that surprise you? The main reason is that i’m determined to pay off my credit cards in full every month so i incur no interest. Not very profitable, am i? And that’s why my score is lower. if i made my minimum payment every month, my score would be higher.
I’m not obsessed with my credit score, and neither should you be.
Your credit score is only important if you’re borrowing money.
Once you become debt-free, once you eliminate your dependence on other people’s money to live your life, your credit score has much less impact on your financial life.
Focusing on your credit score is a trick, a distraction from the real issue:
You have to learn to live within your means.
Credit cards and lines of credit only serve you when you have the power. Give the power to the creditor and you’re a puppet, jumping and twitching. So, do you want to be some credit card company’s puppet? Like the feeling of twitching when collectors call? No? Okay then, it’s time to retake control and be in charge.
Being in charge means being out of debt. It means paying off your balance in full every single month. It means having only as much credit available as suits your needs. Do you want
to be some company’s dream customer, paying gobs of interest and twisting in the wind when the company decides to change the rules of the game? Or do you want to be in charge of your money and your life?
All you have to do is accept that living on credit is dumb. Dumb! Dumb! Dumb! The only way to be financially safe is to owe nobody nuthin’.
Living within your means isn’t as hard as some people think. Yes, it does mean you have to make choices. And yes, you may have to wait a while before you can take that vacation. But when you start living within your means, you’ll be in charge.
When a company offers to fix your sloppy credit history, it’s often just a ploy to get your money. And wouldn’t you rather spend that money—anywhere from $250 to $1,000—paying down debt, saving for your kids’ education, or building up an emergency fund, especially when it’s virtually impossible to cover up your past mistakes? While ads for credit repair companies may seem like the cure for a credit life lived less than perfectly, in reality, no credit repair company has the power to change or erase accurate information in your file.
If the reason you’re in trouble with a potential lender is because of wrong information on your credit file, you could pay someone to take care of the problem for you, but it’s often just as easy—and a whole lot less expensive—to take care of that problem yourself.
When you sign a loan application, you give your consent to the lender, be it a bank, credit card company, or retail store, to access your credit bureau information to decide whether you’re a good credit risk. Each time a lender looks at your file, there’s a record of that “look” on your file. And too many “looks” could mean you’re as bad credit risk because either you’re “credit seeking” or you’ve been declined elsewhere. So if you’re shopping around, don’t sign an application unless you’re ready to buy.
If you’ve damaged your credit rating by missing payments, carrying high balances, or overextending yourself financially, start fixing the problem by locking away your credit cards. Don’t cancel them because if your credit rating is low, you could have trouble getting new ones. But don’t use them until you are debt-free. While you must pay at least the minimum to stay on the positive side with your credit history, paying only the minimum isn’t going to get you out of debt. So figure out what it’ll take and do it!
If you are declined for a loan, it doesn’t automatically mean you have a crappy credit history. A lender may decline a loan application because the credit bureau’s records indicate that you have other loans outstanding. Yes, everything you owe
shows up—including all those credit cards you have even if there are no balances outstanding. When credit is refused, you’re usually advised to have a look at your credit bureau report to see what’s amiss.
You should check your credit files at least once a year to ensure the information is correct. Send a written request (there’s no charge for this service) or go online if you’re into instant gratification, but you’ll have to pay a fee.