Sunday, November 27, 2011

Black Friday - Was it for you too?

Well, we are now into the holiday shopping season.  Black Friday was just two days ago and now Cyber Monday is tomorrow.  Do you know why that day is called Black Friday?  Supposedly, the retailers have been operating at a "loss" (i.e. in the Red) all year and this one day is supposed to give them some profits (i.e. put them back in the Black).  Hard for me to believe so many companies are able to survive the rest of the year operating at a loss especially when they are selling things on Black Friday at such "huge" discounts.  By the way, if you believe them, please contact me so I can sell you my ocean front property in Arizona (LOL!).

All the marketing hype over the last few days got me thinking about how so many folks will be out fighting each other for these deals, using their credit cards to pay for all this stuff and will most likely have to make several payments to pay off this new debt at 14-20% interest!  Is that crazy or what? 

It reminded me of a recent survey conducted by the National Center for Credit Counseling that had some very surprising information about how people manage their personal finances.  One of the findings was that 63% of adults have no idea what their Credit Score is.  That was amazing to me.  How could someone walk around and not know their credit score?  I have that number in my head.  Then I realized something;  so many people don't know simply because "they don't know what they don't know!"  So let me explain to you in a little more detail what a Credit Score is and why it is important.

Simply put your Credit Score, also called your FICO score, is a financial report card about you.  The values of the score range from 300 (worst) to 850 (best) and provide and indication of how well you handle the credit you have been given through bank loans (such as for homes and automobiles), lines of credit (such as a credit card) and other credit extended to you by service providers (such as the power company, water company, etc.).  The score is calculated by applying values to several factors that describe your individual, unique credit situation:
  • 35% - Payment History - Have you made your payments on time?
  • 30% - Amount Owed - How much do you owe or the total of all your loans?
  • 15% - Length of History - How long have you maintained credit accounts?
  • 10% - New Credit - How many new credit accounts have you opened recently?
  • 10% - Credit Types - How many different types of credit to you use?
You can see much more about the items that make up each of these categories on the FICO Website as well as learn a lot more about what the score means.  By the way, it is called a FICO score because it was developed by the Fair Isaac Corporation.

There are three credit reporting agencies that "track" your credit:  Transunion, Equifax and Experian.  Each company uses the FICO system for measurement and each one will provide you with a slightly different number.  For example, Transunion may give you a 650, Equifax a 646 and Experian a 648.  The scores may not be exactly identical but they should be within 10 points of each other.  If they are not, there may be an error in your credit report OR you may have been a victim of fraud.  You need to obtain your credit report regularly to insure it is an accurate reflection of your financial management capability and so that you are certain no one has stolen your identity.

So how do you get a copy of your credit report?  How do you make sure you get one from EACH of the three agencies?  Well, there was a federal law passed on December 4, 2003 called the  Fair and Accurate Credit Transactions Act (FACTA) as an amendment to the Fair Credit Reporting Act (FCRA).  The FCRA was originally passed in 1970 to regulate the three reporting agencies and activities related to credit reporting.  The FACTA added a clause that requires that EACH one of the agencies provide you a FREE copy of your report every 12 months.  You can read some more details about obtaining your free report at the Federal Trade Commissions website.  You will also find a link there to the ONLY website that provides you with the FREE report from all three agencies.

You may have seen the ads on TV for but don't confuse that with the REAL free credit reports you are guaranteed by the FACTA. will ask you for a credit card number to "sign up" for their "free" service which means, you guessed it, it isn't really free.  So be sure to follow the links I've provided to get your free reports.

This is really EASY to do.  In fact, as I was typing this blog entry, I realized it had been just over a year since I pulled my reports so I went to the free website and pulled and saved all mine in PDF format in less than 15 minutes.  If you don't have software to save your files in PDF format, here's some free software to do it.  If you don't want to do that you should at least print them out and save them somewhere safe.

The report from each agency will be formatted a little different but each one will list your name, most recent address, 2 previous addresses and all the credit accounts you have had within the last 10 or so years.  Each account will have details such as the name of the lender (for example, Wells Fargo Bank), the amount of credit granted (i.e. the amount of money you borrowed), the status of the account (i.e. open or closed) and highest balance and your payment history for the account.  You should get these reports every year and look them over to make sure the information is accurate, meaning, all the accounts you see are in fact yours either now or at one time and that the amounts and payment histories are correct.  If not, there are details at the bottom of the  Federal Trade Commissions website
that explain what you have to do to contact the particular reporting agency and get the information corrected.

Why is the score so important?  Well creditors review you scores to see how well you have managed the credit you have been given in the past.  For example, when you decide to buy a new car and need a loan, they look up your credit score.  If you have a poor rating, you will have a more difficult time obtaining new loans, credit cards, etc. AND the interest rate you are charged on your loans and credit cards will be higher.   Why?  A low score means you haven't managed your credit well therefore you will be charged higher interest so the lender gets their money back sooner from you.  The higher the interest, the more money the lender gets for the life of the loan.  For ANY loan, in the beginning, the  payment (made up of interest and principle) that you make is made up of more interest than the principle.  As you pay down the loan, the interest portion of the payment gets smaller and the principle portion gets bigger.  Again, the higher your interest rate, the greater the amount of money the lender is getting from you in each payment as interest until you get "closer" to paying off your loan.

Now if you find yourself in trouble with a bad credit score it's not the end of the world.  You can fix it with patience and dedication.  First, you've got to make your payments on time and keep from going further into debt.  You can get started by developing a budget as I discussed in a previous post.  You should also probably get some Free Credit Counseling.  The National Foundation for Credit Counseling is a non profit organization that helps people straighten out their credit.   You can learn more about what the NFCC has to offer here.  You could also use Google to find FREE credit counseling.  You may want to go to your local bank and ask if they have any recommendations.  There is help out there for you so don't lose hope - you have the control to fix it and you can.

One last thing.  I talked about your Credit Score and obtaining your Free Credit Report but you need to understand that those are NOT the same thing.  The Credit Report you can get for free once a year by law, however, there is nothing that says they have to give you your Credit Score for free.  In spite of this, I have never paid to get my score and it's a simple little secret.  The next time you apply for a loan or ANYTIME someone says asks you "May I pull your credit report?" just wait.   When they have done that and they say "Ok, based upon your report, we can offer you XX% interest rate on your loan" simply ask "Would you mind telling me what my three credit scores were?"  I have NEVER had anyone not tell me what the numbers were and so I've never paid to find out.  That's just one of the "little secrets" I've learned to save myself some money while I manage my finances.

I hope you see now that understanding your Credit Score and reviewing your Credit Report ANNUALLY are two important items you must have in your overall financial management plan.  Don't be intimidated.  You can do it.  Anyone can.  It just takes patience, discipline and some awareness of where to look for information and what to do with it.

So now you "know" and YOU too can stay "in the Black."

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