To all my young friends: Build and maintain good credit.

WTF is a credit score, and why the Heck do I need one?

 I was about 22 when I asked myself this question. Then I found out that it's actually not a very well understood topic, nobody seems to know what it's really good for, and what it can do for you. I learned a lot since then, so here is the deal....

You have to build credit to have a good score. If you simply avoid signing contracts or getting credit card, you won't have much on your credit report at all. That's not too bad as long as you are young, but when you get into your twenties and beyond, and your credit score barely has anything on it at all, it looks suspicious, like maybe someone else handled your money for you (and you have no idea how to handle it yourself), or maybe you are trying a fake identity or something shady like that. A bare credit report is not horrible, but it does not inspire anyone to trust you with a loan. The better way is to start as young as you can, and start small, and slowly build it up. By the time you are in your mid twenties, and possibly looking to buy something very expensive (Brand new car? House? Yacht?), you will need a solid credit report, and a high credit score. Trust me on this one!

As you know, Big Brother is always watching. Another fact of life. That means that someone is tracking how you use your money, what you buy, if you make your payments on time, and if you spend every penny the second you make it without any control over yourself. 3 'Someones', actually. Their names are Experian, EquiFax, and TransUnion. These are the 3 major Credit Reporting Agencies that each give you a Credit Score, and compile a Credit Report on you. I'm sure there are more of them out there, but these are the three you should mainly concern yourself about.

A Credit Score is a numeric grading system based on how you use your money, and it says a lot about how responsible you are with paying your debts, your bills, etc.(you thought grades would end with school? Think again!) Your score (grade) changes over time, as you learn to handle your money more efficiently. You will have a Credit Score for your whole life, and banks and other creditors will look at it when they are making decisions about lending you money. Some employers might check it, too. You Credit Score usually covers your previous 7 years, but some events such as filing bankruptcy may stay on your credit report for up to 12 years.

Your Credit Score plays a huge role regarding what sort of interest rates you can get on loans. A high score can get you a much lower interest rate, which means you won't pay nearly as much over time. You don't have to be rich to get a good score, you only have to be consistently reliable and responsible in how you deal with your money. That's right, people who know how to work the money the right way don't pay as much for cars, student loans, home loans, etc.

The highest credit score you can get (last time I checked in 2013) is 900. Anything over 700 is considered pretty good. 600 is about average. When I started studying all this stuff, I had a score of around 200. Ten years after I started actually doing the stuff I'm teaching you about, my score is 890 or higher in all 3 reports (Experian, Equifax, TransUnion). This is the only proof I can offer that this stuff works, but in my opinion, it's pretty good proof. Sorry, I'm not posting my report online, it contains WAYYYYY too much personal data! =)

A Credit Report is a list of all your credit-related activities that were reported, both good and bad, for the previous 7 years. It lists every 'official' debt that you have, whether you pay it on time every month, which months you missed and were late on, previous addresses, your full name, any aliases that you might use officially, and a lot of other personal data.

You can order your Credit Score and Credit Report from each of the 3 credit agencies, usually for just a few dollars. Do it once per year. Watch how it changes over time, year after year. Keep your old credit reports for 7 to 10 years, you may need them someday. Get yourself a file box to keep this stuff in, you don't want to lose it or misplace it!

Here are the links to order your reports directly from the credit companies:





What sorts of things impact a credit score?
Well, pretty much anything financial that is not a cash deal. If you buy a used computer from your friend for twenty bucks in cash, nobody is recording that.

If you buy a car from a dealer for $2,000.00, and you set up monthly payments on it, that will get reported. The dealership reports it to the credit unions. You don't get a say in the matter. Same goes for school loans, personal loans, or any other type of loan that is done through a bank, dealership, or other lending institution. Every time you make a payment on time per your agreement, your score goes up just a little bit. Every time you make a late payment, it goes down a lot. That's right, you get a small reward for doing a good job, and a huge penalty every single time you mess up. Late payments stick out like bold type on a credit report, and every creditor that looks at it for the next 7 years will be looking for your mistakes first. Sad, but still a fact.

Any time you sign any sort of contract saying that you will pay money, either as a one-time payment or as a monthly payment, it can be reported to the credit agency if you fail to make a payment, or pay late. This is why it is SO important to actually read all the agreements that you sign. Rent, car payments, household utilities, student loans, any sort of loan, credit cards, and a ton of other options that I can't think of right now, they can ALL report to the credit agencies. Don't ever give them any reason to report anything bad!

Credit Card Basics, and how that works with your credit report:

If you sign up for a credit card, that is called Revolving Credit. It works a little differently. With Revolving Credit, every time you buy something with the card (say, a pack of gum), it's like taking out a tiny loan from the bank. Yes, they will charge you compound interest on it, too. When you pay some amount back, it's like paying off that tiny loan that you took out to buy a pack of gum. The interest is usually computed monthly, which means that if you pay off the entire balance of your credit card every month, you don't end up paying any interest on it. Well, at least some cards work like that. There are probably some out there that charge interest daily. Avoid those! Read the entire card agreement before you sign up for any sort of charge card, and make sure you understand it.

The trick with credit cards is that they will try to lure you in with 'Point rewards'. They offer this nifty deal where every dollar you spend with the card gets you points of some sort, which you can eventually trade in for stuff or travel. This will make you want to use the card a lot, to get the 'free stuff'. This is where the self control part comes in.... Credit cards are not necessarily bad, if you use them wisely.

1) NEVER charge more on your card than what you know you can pay off every month.

2) ALWAYS pay off the entire balance on your card, and MAKE SURE you pay it before the due date. This way you never actually pay interest on it, but you still get the points.

3) Don't sign up for cards that you don't intend to use regularly. If you have a card in your name, and you don't use it, it will put a bad mark on your credit score. Go figure.

4) Do not sign up for a card that has an annual fee. Your bank can probably offer you one with no annual fees, plus, if it's linked to your bank, it's easy to make online payments from your main account every month. You can even do it from a Smartphone. There's an App for that! You should make sure that your agreement allows you to raise the credit limit, however. Also, make sure that it has a feature called 'Daily Limit', so you can set how much the card can be used in one day. That way if it gets stolen, the thief can't max it out all at once. Pick a limit that accommodates your daily needs, but not more. You can call your bank and have them approve an exception if you know you will be making a large charge to the card. That's how I got my first computer. Make sure your card has protection against theft: That's where the bank pays you back if the card is stolen or used without your permission. Since you will have it for a long time, make sure it can be used internationally, in case you go on vacation. After all, someday you will be able to afford that trip to Paris!

5) Every time you complete a year of making payments on time with your card, pay it off and call your bank. Ask them if they will raise the credit limit by $500 or $1000. If you have just completed a year of perfect payments, and have no balance on the card at the time that you call, most banks will happily raise the limit for you. You see, when people over-spend on their cards, and end up carrying balances from month to month, that's when the banks make money in the form of interest. So it makes sense that they want you to have a high spending limit, in the hopes that you will run up a bill that you cannot pay off in a month, because that's when they gouge you. On the flip side...

6) NEVER use more than 1/3 the total amount of your spending limit on any card. It looks bad on a credit report, and raises a red flag with the bank too(OK, a small red flag, but they probably won't grant you a limit raise at the end of the year if you do it too often!). When people start living off a credit card and running up big monthly credit card bills, it usually means they are either unemployed, or have suddenly stopped caring about their finances for some reason. Nobody wants to lend you money if you are jobless, or might not bother to pay it back. It's the appearance that matters here. The bank does not know if you lose your job, unless it becomes reflected in your finances. As long as you still look good on paper, nobody will be the wiser. This is also where that Savings Account comes into play (from my previous essay), as it can be used to pay off a credit card and provide the appearance (at least on paper) that everything is fine. They don't have to know that you are surviving off of Ramen and carrots from the neighbor's garden! As you grow older, and keep asking them to raise your limit every year, you will eventually end up with one of those nifty Platinum Cards, with a really high spending limit. The higher the spending limit is, the more you can spend before you reach the 1/3 mark, but by then you will be making enough money (hopefully) to pay it off every month anyway. It's a slow process, and you have to start small, but if you keep at it, that's how you go from Broke to Well Off, at least in regards to credit cards.

7)Avoid getting more than one credit card, it looks bad on a credit report. It looks like you are desperate to spend money that you have not even earned yet. More credit cards DOES NOT make you look more responsible. It makes you look like you have some sort of compulsion to sign every offer you get in the mail. Which brings me to...

***WARNING*** You WILL get a billion credit card offers in the mail as soon as you show any improvement on your credit ratings. DO NOT accept any of them. Tear them in half or burn them so nobody can accept the card in your name, without you knowing about it...which will destroy your credit BTW. The only credit card companies that send out mailers all charge yearly fees, have high interest rates, and are basically bad deals. If you want a credit card, go to your bank, shop around a bit, there are better deals out there!

So.. I'm confused now...How do I actually get GOOD credit? 

You earn it. Over many years, little by little. There is no quick way to get good credit, but the basics are pretty simple, really:

1. Keep your word: If you agree to make payments, do everything you can to make them on time, every time, like your life depends on it. This should be common sense, I hope. 
2. Pay attention to your money. Know how much you have, how much you expect to make every year, month, week. Know what you spend it on. Know it well enough that you can immediately tell if any goes missing. (keep your mind on your money and your money on your mind)
3. Build your credit: Take out loans that you know you can pay on time. Get a credit card and learn to buy a few small things with it every month, and practice paying it off on time like it's your new religion. 
4. Track your credit report and credit score every year. Study it. Treasure it. Snuggle with it, if that's what it takes. Know it by heart. 
5. If you see any mistakes on your credit report, contact the credit agency immediately and start a dispute. If you have the misfortune of having your identity stolen, you could end up with a lot of false reports on your credit report. It takes a long time to get that stuff fixed, but it helps if you get right on it promptly. Your future mansion with the rooftop pool depends on you now, and how closely you keep an eye on this report!

Basically, that's it. That's the basics of how to establish credit, make it good credit, and build on it from there. Even if you have bad credit already, you can still follow all these steps, and in about 7 years your credit will be a whole lot better. If you want to take it further, there are a ton of books on the topic, just check out your library. 

Good luck!

To all my young friends: Learn to save & spend wisely: Why the rich stay rich, and the poor stay poor.

So.... Everyone is basically broke for a few years when they move out one their own. The question is how do you get from being a broke teen to a well-off adult? What does it take to get a house, a car, afford regular vacations, etc? With the rising price of food, how can anyone be expected to buy organic stuff and still afford that ATV, boat, trip to Paris?

This is not a tutorial on becoming a 1%-er. But it might help you learn the very basics on how to get into the middle class and stay there!

For the purpose of this essay, let's assume that when I say Lower Class, I don't mean that these people have less value as humans. I'm talking strictly monetary value here. I mean people who work 40 to 60 hours a week at a low-paying job (fast food, WalMart, gas station, etc), and barely make enough to pay rent and buy cheap food. These folk usually have large debts, and usually can only afford to pay the very minimum amount due per month. This is where I started when I was 18, working at Burger King part time for $4.50 an hour.

The Middle Class are those who work 40 to 60 hours a week and can afford a mortgage, a decent car for each adult (over 18), good food, some savings, and maybe a little left over for a yearly vacation or so. This is where I am now, and it took me 10 years to get myself here (I did not figure all this out right as I turned 18, of course). They might even have a 401K account to save for retirement. They also have some debt, but it's under control, and they can pay it off little by little.

The Upper Middle Class works 40 or less hours per week, and makes good money, enough to buy a house, a nice new cars, eat the very best food, go out for a nice dinner 2 to 4 times per month, gets yearly vacations and has some left over for play, and no huge debts to stress over. These guys have retirement all planned out. This is where I intend to be in 10 years or less.

The Upper Class are those who make more money than they can spend, and I'm not qualified to discuss that fortunate situation. I have not figured out how to make that final jump yet, but I have some ideas....That's another topic, for another time.

How? How is this magic done? This is what I asked myself when I was 22. I spent a few years asking everyone I knew how to better my own position, and when I was 27 I committed to following a few bits of advice. I wish I would have done this when I was 18, I'd be much better off now if I had! It's never too late to start, though. Actually, it was not hard to do at all. It's mostly a matter of paying attention, and following a very few common sense rules, which I will explain.

1) Know your limits.

Know how much you will earn in a month. This is called your Net Income. 

Know how much you need for bills, food, rent, gas, insurance, car payment, school supplies, etc. All the bills that cost the same amount every month, add them all up. These are your Fixed Expenses.
Subtract your Fixed Expenses from your Net Income, so you can see how much money you might have left over. I shall call this your Working Income. The Working Income should be about 1/3 of your Net Income. In other words, all your rent/bills should be less than 2/3 of the total of what you make. If your Working Income is less than 1/3 of your Net Income, it can still be done, but it will take longer. Or you can get a better job or a second job. Pick up some Babysitting gigs or something. Get a roommate. Trade your car in for a bike.

Now, for the next 2 month, track every penny that you spend on food. This amount will change per month, and the price of food will go up over time, but if you track it attentively for 2 whole months (or more), you will get a pretty good idea of how much food will cost you. Find the average, subtract that from your Working Income. Whatever you have left over is what you have to work with, to get started. It probably won't be very much, at least at first. I think my total came to about $20 per month when I started all this.

2) Know your debts.
Debt is not the same thing as bills.

Bills are charged monthly, like rent, but they stop when you stop using the service (like if you move out), and the amount of some bills can change every month (like in winter when you use the heater, that will cost extra in most cases).

Debt is something that you have agreed to pay off, like a student loan or a car loan. Sadly, student loans don't go away as soon as you graduate, you still have to pay them off, even if you can't get a good job in your field of choice. Car loans don't go away if the car breaks or stops running.

There is a tricky thing that the banks do with loans: They charge interest. Basically, that means that they charge you for the privilege of borrowing money from them. Also, it will be compound interest, which makes it nearly impossible to calculate, and ends up charging you a lot more in the end. For example, a simple 10% interest might be like if you borrowed $100, and agreed to pay them back $110 by a certain date. Compound interest often looks like a good deal, but it's really not. They might offer you a $100 loan with a 10% compound interest, compounded monthly. You might be tempted to think that this will also come out to paying $110 back at the end. Wrong. Even if you make every payment on time, you will end up paying them back a lot more than what you borrowed, and the longer it takes you to pay it off, the more they get to charge you. If you miss a payment, or have to skip a month, they get to charge you even more. Compound interest is basically a way to screw you, and make you think you are getting a good deal. Sadly, pretty much any sort of loan will come with compound interest. It's a fact of life. Having a good credit score will help you get lower interest rates, but I will discuss credit scores in another essay.

Example:
A $100,000 loan at 10% simple interest rate paid over 10 years, means you will pay them a total of $110,000. You have lost $10,000 on this loan. 

A $100,000 loan at 10% compound interest rate paid over 10 years means you will pay them $270,704.17. You have lost $170,704.17 on this loan, which more than twice what you borrowed in the first place! 

Here is an online compound interest calculator, in case you wish to play with some numbers and see what you are really agreeing to when you take out a loan:  http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Why is it important to know your debts?

You need to know your debts, and how much interest you are paying on each one. Always. Otherwise you will get taken for a ride, and you will end up paying back much more than you thought you were agreeing to. The average 4 year degree costs around $100,00.00 these days, or close. Even if you agree to pay that ridiculous amount, if you agree to compound interest, and make every payment on time, you will actually be paying back almost 3 times what you borrowed. You need to be aware of this!

Trick #1: Unless your contract states otherwise, you can pay debts off early, or pay a little extra on every payment, and you end up spending less in the end. That's the flip side of Compound Interest. Take as much of your extra money as you can spare, even if it means skipping the Starbucks in the morning, and pay it towards your smallest loan every month. Eventually, you will pay the smaller loan off, which frees up more money each month. Then you take all the money that you would have put towards the small loan, and pay it all towards the next smallest loan, and so forth. Kill all the loans in order of size, smallest to largest. The faster you get rid of loans, the less interest you will pay. Interest is basically wasted money.

3) Spend Wisely.
Spending wisely does not mean always buying the cheapest item.

Why do rich people always have lovely, high quality stuff? Well, it's because they buy lovely, high quality stuff, and then keep it forever, because it's high quality.

Of course, you probably won't be able to afford a $10,000.00 couch with a lifetime warranty. I can't afford that, either. But given a choice of a $100 couch with a 1 year warranty, or a $150 couch with a 3 year warranty, get the $150 option. It will last longer, and that means you won't have to spend another $100 every year to live with a crappy cheap couch. Get the better one, and take good care of it, and you won't have to spend money on another couch for several years. Plus, it's probably a nicer model.

Trick #2: There is this ridiculous psychology surrounding the lower class. It's a thing that companies do to get more money out of you, while making you think you are getting a good deal. They make a horrible cheap product, and sell it for only slightly less than a better model. People who think of themselves as poor usually go for the cheapest option, which inevitably breaks the second the warranty runs out, forcing them to pay for another cheap product. In the end, buying a $100 couch every year costs you $300 over 3 years, but if you had bought the $150 couch, it would last you at least 3 years, so you would only have spent $150 on couches over 3 years. Paying a little more for a better product ALWAYS pays off. Pay attention to what you spend your money on, and focus on getting better quality stuff. It sucks at first, but once you get your living basics sorted out, you will save more money faster in the future this way.

4) Savings: It's not just a dream anymore.
I remember dreaming about having some savings, enough to get me by in case I lost my job. It's so hard to save effectively when you live paycheck to paycheck!

1. Get a big empty jar. Wrap paper or cloth around it so you can't see what's inside. Glue the lid on, and cut a slit in the lid to make a cheap piggy-bank.
2. Every week, drop $5 in the jar. NEVER take anything out of it. Forget all about the money in the jar. It no longer exists. Mark your calendar when you do this, so you can be sure never to skip a week.
3. After one whole year of doing this, take all the money out of the jar, go straight to the bank, open a savings account and put ALL the money in it. (a savings account often requires an initial deposit of about $200, hence the piggy bank)
4. Go online and set up an automatic payment from your main account, so that it drops $20 per month into your savings account automatically. You may put extra into the savings account, but you may not take anything out of it. If you can manage it, put more in every month!
5. Forget about your savings account. You are only allowed to access it in case of extreme emergencies, like if you lose your job and your friends are not willing to feed you anymore. Seriously, I couch surfed at my best friend's house for 2 months and ate nothing but my Employee Meal at Taco Bell before I broke into my savings. True story.

At this point I try to drop $150 per month into my savings. I've been at this level for a few years now, and sometimes I drop in a little extra.The result was that when my husband lost his job, and spent 10 months unemployed, we could still pay the bills and eat, and we did not lose our house or have to sell the cars. It's THAT IMPORTANT! Doing this will save your buns someday, I guarantee it.


In closing: if you want to get out of the Lower Class, you will need to know your limits, know your debts, spend wisely and establish some savings. It won't happen overnight. This is something that you start doing NOW, and work at it every day, and someday you will discover that you have nice things, your debts are under control, you  know exactly when you can afford to splurge on something, and you even have something in savings for emergencies. Over the years, you will get better paying jobs, too. That helps a lot. This process takes patience and dedication. You may stumble along the way, and if you do, just remember to get back on track as soon as you can. Don't dwell on it, just make it part of your daily habits.


OK, enough for now. =)

Next Topic:

Build and maintain good credit.

To all my young friends: Learn how to make money.

I want to offer you some advice based on my own experience in life. May you benefit from my mistakes, and avoid them for yourselves!

I've been studying the differences between the 'Haves' and the 'Have Nots' for a few years now, and how each group thinks about money. The differences are pretty amazing. What the rich teach their kids about money is very different than what the middle class and lower class teach their kids, and what you might learn in school. I started this research about 10 years ago, and I also put some of the practices to work. The result was that in 10 years I managed to drag myself out of the lower class, and firmly into the middle class, and still climbing. This is not rocket science. It's just a few things that can be done differently, and they can change your life. I want to share the basics with you in a series of short essays that, hopefully, will be easy to read & follow. Here goes....

Learn how to make money.

Money cannot buy happiness, but it sure makes it easier to explore the places where you might find it. Therefor, address your money needs first, because if you have money, then you will be able to afford to take the time to do what you really want.

Studying art may sound great, but rarely makes you rich. Learn a practical skill that pulls in a big paycheck first, like computer programming, Brain surgeon, chiropractor.... It will eat 8 or more years of your life to learn it, and it will be hard, but you know what? An 8 year (master's) degree in any field is hard, and will take dedication and sacrifice... But then you will be able to take vacations, explore the world, take afternoons off to do art, dance, music, whatever your heart loves, and still live in a nice house, with a car that is not a junker, afford good food and the occasional dinner out. Plus you can fund your hobbies, too.

It sucks to think about sacrificing 8 years of youth to learn something that is not your passion. I get that. But the flip side is that if you learn what you love, and later discover that there is no money in it, you will end up working any crap job you can get, and you will work 40+ hours a week at something you hate until you are 65 (providing the retirement age does not go up by then, and providing that retirement still exists...).

So many people will tell you to 'do what you love', and yes, that sounds wonderful, but that is the poor person's view. Poor folks expect to work until they are 65, and so they try to do something they will at least enjoy. Rich folk stay rich because they teach their kids to address the money first, then enjoy the benefits for the rest of their lives. If you can't think of anything else, take a business degree, which will give you that all-important certification, which in turn will get you a bigger paycheck in any job you take. Plus, a Business Degree will teach you how to run your own business. You will probably think of doing that at some point anyway, because it's better to be the boss than the employee in any field. It's true. If you have a college degree in ANYTHING, you make more money, even if your job has nothing to do with your degree. The diploma basically just proves that you are able to see a thing through, and that counts for more than years of experience.

In the 'real world', you can get a 2 year degree, or get 8 years of experience, and it is considered equal. Or you can get the 8 year degree, get your Master's, and that is equal to about 30 years of experience! When you look at it that way, 8 years is not so bad. 8 years, and you not only get a career that will make you good money for the rest of your life, but it will also get you that Golden Ticket(diploma), and that my friends, That can open so many doors, to all sorts of jobs and adventures.

Money won't buy you happiness, but when you have the money part figured out, then you get extra time. Time in which you can do whatever you want, be whatever you want, get a second degree in whatever you love. You may think that you don't want to 'waste' your youth in school, you just want to go play and take time off. That's fun for a while, but the fun wears off about the time you discover that working 40 hours a week at Burger King won't cover rent, or a car, or groceries, and you can forget about going out with your friends, because you'll be broke. The truth is that even in school, you will probably be broke for a while, and rack up a huge student debt... But you will make friends who are in the same situation, so you won't feel left out. And then, if you do it right, you will make a lot more money than most people, and have more time to spare, and the possibility of retiring early. If you take good care of yourself, you won't start feeling 'old' until your forties or so, maybe even later,  which still gives you plenty of time to go 'be young' and play. With all your money. And all your spare time.

I really wish someone would have told me all this when I was 18. I would have gone into computer programming then, and would probably be making $200+ per hour now. Or more. Maybe some of you will read this and remember it, and maybe you will do the smart thing, and be better off for it.

Next Topic:

Learn to save & spend wisely: Why the rich stay rich, and the poor stay poor.