As I’ve talked about before, your credit score is important for more than securing lines of credit. Over at Consumerist, they run down four additional situations where your credit may come into play.
Remember, you can check your credit report one time a year for free at Annual Credit Report.
A few weeks back I wrote about how credit card interest is calculated and charged. I was especially interested in this as I was paying off my Bank of America card (with the 29% APR).
I paid my balance in full (approx. $6,500) via the B of A website on January 22nd, and after speaking with a customer service representative, I determined that I would be charged interest on my previous balance from the closing date of my prior statement (ending January 15th), through the pay-off date, which I assumed was the 22nd.
As of yesterday, the payment had still not been debited from my bank account. I also had no record of said payment because B of A never sent me a confirmation email, nor was it noted on the website.
I called up customer service again and was told that unless I manually select a payment date, it defaults to the due date, in this case February 9th. So, instead of paying a roughly $50 finance charge, I’ll be paying around $200.
Just a word of warning for those of you who are planning on paying off a balance or pay your balances monthly. Keep an eye on issues like this and grace periods.
Additionally, this is what the payment page looks like today:
As today is the 4th, I see that the payment defaults to the 5th. I can only assume it defaulted to the 23rd when I made my payment on the 22nd.
I will definitely be calling them on this.
The business of credit can be complicated. It’s taken me a long time to sort out how credit reporting works and, for the most part, I’ve been able to use the rules and guidelines to my advantage. Following are some common misconceptions, and how you might raise (or lower) your credit score.
MISCONCEPTIONS
Closing Credit Accounts Will Improve Your Credit
It seems logical. You pay off a card, and close it so you will no longer be tempted to use it. And, having less open credit cards could only make lenders look at you as more responsible, right?
Wrong. Lenders don’t care how much credit you have available, they care how much you’re using. Your debt-to-credit ratio is one of the common measures used by the credit reporting agencies, and closing accounts will increase this ratio – this is not a good thing.
For example, say you have 10 open cards with a total credit line of $50K, $10K of which you’ve utilized. Your DTC ratio in this case is 1:5. If you were to close 2 of those accounts, reducing your total credit line to $30, your DTC ratio would then be 1:3, meaning you’re using one-third (33%) of your available credit, instead of one-fifth (20%).
If you feel you must close some accounts, focus on those with lower credit limits, such as store cards. However, I would not recommend it in this current credit climate because lenders are closing unused accounts left and right. In fact, some experts have recommended that people start using their cards once or twice a month (and paying them off monthly, obviously) to ensure those lines of credit remain open.
All Credit Reporting Agencies Are The Same
Again, seems logical. However, the three credit reporting agencies (Experian, Equifax and Transunion) are private/public (read: non-government) companies and competitors. They use different models for calculating credit scores. If you would like to check your credit through all three reporting agencies, you may do so for free once a year through Annual Credit Report Dot Com.
Credit Scores Aren’t That Big Of A Deal
Sorry, but they are. Everyone should take their credit scores seriously, as they are not only used by lenders, but landlords, insurers and, increasingly, potential employers. Some people swear off credit cards, but the plain fact is that they’re useful for establishing credit and should be used, responsibly. Not establishing your credit is a big mistake.
Making Minimum Payments Is Better Than Nothing
Sure, better than nothing, but not by much. You might maintain somewhat decent credit, but you’ll spin your wheels. Paying even 10% above your minimum can do wonders in decreasing you debt owed, which will decrease your debt-to-credit ratio. Whenever possible, pay above the minimum due.
Paying A Bit Late Is Not That Big Of A Deal
You must pay at least 30 days late for a delinquency to show up on your credit report (the are noted as 30/60/90/120+ days late). However, paying late has other ramifications. You will be charged a fee by your lender and your interest rates will shoot up, meaning you will pay more in finance charges, increasing your DTC ratio.
HOW YOU CAN LOWER YOUR SCORE
“Shopping” For Credit Excessively
Missing Payments
Ignoring Medical Or Utility Bills
Overusing Your Available Credit & Maxing Out Your Credit Cards
Failing To Report Changes In Address To Lenders
HOW YOU CAN RAISE YOU SCORE
Establish Yourself As An On-Time Payer
Keep High Credit Limit Cards Open
Use Cards Often If You Can Pay Balances Every Month
When I paid off (well, transferred) the balance from my Bank of America account the other day, my elation did not last long.
You see, I’ve been burned before. A month after paying the balance on a card, I’ve received a statement with additional charges, usually accrued interest.
We all know the credit card companies are evil (and I don’t just say this because I am in debt – that’s all me – but they ARE). However, it’s hard to find the confidence to call them up and argue a charge when you don’t even know how it’s been calculated.
So, I decided to finally find out.
Lesson No. 1 – You Have To Read Your Terms
I didn’t want to hear this either. I’ve always just browsed through lender terms, checking on fees and when a teaser rate will expire. I’ve never paid much attention to how finance charges are calculated, because I’ve never paid off balances monthly.
Reading through my B of A terms, this is what I found out:
Of course, none of this made sense to me, even after researching on-line for 30 minutes. So, I decided to call B of A and ask.
After explaining that I paid of my balance on the 22nd of January and my next payment is not due until February 2nd, I asked if I would be seeing another finance charge.
“Yes, you will get another statement with a finance charge.”
“Would you mind just quickly explaining why that is?”
“Because from the end of your last billing cycle, which was January 15th, through the time you paid off the balance on January 22nd, you will have accumulated interest charges.”
This made sense. B of A uses the average daily balance method, so for 8 days I will have accrued some interest.
She did offer a tip; if you’re going to pay of your balance, give your creditor a call and they can calculate what you will owe in total.
According to The Motley Fool, most credit card issuers use the Average Daily Balance Method, so this is something to keep in mind.
Lesson No. 2 – Watch For Double-Cycle Billing
This method will fuck you if you carry a balance. The Average Daily Balance Method is used, but your previous balance will also be considered (and be subject to charges).
Lesson No. 3 – Remember, Creditors Can Raise Your Interest Rate Without Notice
I learned this the hard way. One slightly late payment and my interest rate shot up nearly 20 points. Following are other reasons your rate may increase:
The last point being the most important in this climate. I’ve known many, many people who have seen their rates shoot up without notice. And these are people with excellent credit who pay their balance in full every month.
Want to do some additional research? Try the following sites:
I received an email early last week from Amazon stating “we have deposited $170 to your checking account.” I thought, “great, money from selling my books, that will go straight to one of my cards.” So, in my eager-beaver way, I logged onto Bank of America and made an online payment.
Bad idea.
The $170 didn’t arrive to my account until yesterday and by then I had overdrawn my account and was charged $33. Now I have $6.50 in my account and last night I used my card to buy $10 worth of gas. I scurried over to my ING account and transferred $50 (from our travel fund) into my account in the hope that it will clear before my gas debit does. If not, I can expect another $33 charge. AND, Lending Club is going to withdraw a small amount (under $1) from my bank account in the coming days to verify my account for a possible loan. This would result in ANOTHER overdraft fee.
It’s kind of like watching a train wreck, isn’t it?
Dude, fuck this. I am spinning my wheels trying to pay down debt while being charged in the hundreds of dollars (each month) in interest. I’ve been caught (along with many others) in the perfect storm. There’s no new credit available, and all of my credit card limits have been bumped down to just north of my balances.
I have good credit, in the mid-700s, and in the past I’ve simply moved balances to lower rate cards (and, as you can see, that worked out so well for me). Now there’s nothing. Nada. I managed to get ONE new low interest card but my limit was put at just $1500. I’ve been weighing my options, which are rather depressing, because I cannot stand to look at another $100+ finance charge. My options are as follows, in order of priority:
Call The Credit Card Companies And Ask For A Lower Rate
I won’t lie, this scares me a little. I am incredibly passive and I hate negotiating. Also, I feel as though creditors now have the upper hand. I’m never late on payments (except for one time), I always pay over the minimum, if only slightly. So, I can’t use the excuse that I am unable to pay. I can threaten to take my business elsewhere but they must be aware that credit is tight, and if they look at my credit report they will see a number of inquiries as I’ve tried, in desperation, to open a few cards recently. Should I lie and say that I’ve lost my job or was demoted with lower pay? I’m not entirely sure how to approach this and would love some advice.
Try To Get A Personal Loan
If I am unable to negotiate any lower rates from my creditors, this would be my next step. However, I am not confident that this is a possibility, as the loan industry has also been impacted by the credit crisis. I’ve already submitted a loan request to the Lending Club to see if I get a bite.
Seek Help From A Debt Consolidation Organization
I’ve already kick-started this as well. It should be my last option (well, before bankruptcy, which I refuse to consider).
All I know is that I need to do something, and fast, or I will be swallowed by this debt.
Image: Veer
First thing’s first, do you know your credit score? If not, the government allows you to view your credit report for no charge once a year. Do NOT be fooled by other websites that claim to offer “free” reports, like Free Credit Report Dot Com (you’ll recognize them by the annoying commercials).
You can view your free report at Annual Credit Report Dot Com.
In 2009 a new score formula will take effect, potentially impacting consumer scores negatively. However, the new formula is expected to more accurately predict defaults.
“Fair Isaac says the new score will do a better job of predicting defaults than the classic FICO, which is used in more than 75% of mortgage lending decisions and by 90% of the largest U.S. lenders.”
Source: MSN Money
The biggest change that could potentially lower your score is the formula’s sensitivity to available credit. Because creditors are both closing old, unused accounts and slashing credit limits, this could lower your score in a big way. The other changes are as follows:
MSN Money recommends the following to ensure your credit score remains as high as possible:
The gist? It’s looking like the changes won’t impact most people. Others, such as myself, will likely see a drop in their scores.
I’ve made some changes to my budget and debt. As follows:
The past few weeks have been tough – budget-wise. I’ve overspent, especially on groceries. I definitely need to get back on track.
Well, it’s about time.
Cash-strapped consumers got some welcome news on Thursday when regulators voted to rein in controversial credit card practices. But they’ll have to wait another year and a half to get relief – the new rules won’t take effect until July 1, 2010.
Source: CNN
The Federal Reserve Board has approved new regulations aimed at limiting how credit card issuers can manipulate billing cycles, penalize customers for late payments or raise interest rates indiscriminately.
The new regulations do not take effect until mid-2010 (when I hope to have nearly paid off my credit cards…..damn) but it’s a welcome decision.
