Welcome to Financial Spiderplant!

I’ve referred several times to the fact that credit is something that is extremely powerful. Whether or not you choose to use credit to your advantage or to your disadvantage is your choice. In order to understand some of the power you can achieve if you use credit, here are some examples:

Credit Card Interest - People with good credit ratings can pay as low as 7% on a credit card compared to those with bad credit who often receive offers for cards that charge 29% interest. This difference alone is a reason to desire a good credit rating.
Credit Card Offers - Good credit tags you as a source for credit card offers. Most of these offers are bogus but it sure helps to have a few 0% balance transfer offers sitting around that allow you to keep your card payment in a savings account (or somewhere else) while you’re paying NO interest.
Leverage - Good credit allows an individual to be approved for high credit offers. This credit can be applied towards large purchases which individuals with less than stellar credit cannot make. This applies mainly in the purchase of large assets such as homes.

Again, credit is a powerful tool that you can learn to use in your favor. To understand this beast, we can look a little more at what your credit score is composed of. Most of the information I will be providing can be found in the Bankrate article “Credit Scores Made Simple.”

Your credit score is composed of the following elements which are weighted towards calculating your score. I will also provide a few tips for using the way your score is calculated to your advantage.

Payment History on Accounts: 35% of score - If you pay late, it looks bad; if you pay only the minimum, it looks bad; if you are in excess of meeting your financial obligations, it looks great! Solution: never pay late and always pay more than the minimum required. Even if you only pay $1.00 more than the minimum, your score is impacted in a positive fashion.
Amounts Owed: 30% of score - Not much of a way to impact this. The amounts you owe can be represented in your Debt To Income Ratio (DTI) which shows what percentage of your income is going towards debt payments. You should aim to keep this level around 20%. In order to use this aspect to your advantage, you need to either pay down your debts or make more money.
Length of Credit History: 15% - Fifteen percent of your score is based on how long you’ve held your various accounts. The easiest way to maximize on this is to keep your accounts open forever once you open them. Enough said.
New Credit: 10% - Don’t take out bad credit (payday loans etc) lines if possible, your score will go down when you open a new account but if it is a high risk account, your score will be even more negatively impacted. If you aren’t opening new accounts, this aspect will continue to improve your score
Types of Credit Used: 10% - Do you have good credit (mortgage) or bad credit (payday loans)? Keep good credit and your are golden. Maintain bad credit and your score won’t improve.

Do a little more research; check out a few articles out there floating around. Improving your credit score isn’t that difficult and once you’ve got that item down, you’ll be ready to starting using your good credit to establish great things!

Good luck to everyone!

Question:
Hi David,
Can you forward me that information you were telling me about that will monitor my FICO score for free?
Thanks,
R.W.

I’ve been talking with R.W. for a while and she’s currently ~$5/mth to track her FICO score. I have no problem with people making this choice, keeping tabs on your credit score is something that most people should so they are aware when they are at a level to receive the best offers from banks and other financial institutions. I had pointed out the fact that the $60/yr she was paying for her FICO score monitoring was not needed when there are services out there that will track your FICO free of charge.

R.W.,

The service I was talking about is the FICO monitoring service that Providian provides me with. Every month, I receive my FICO score as well as a break up of the number of accounts I have open, the number of recent inquiries, the total number of delinquent accounts, and my total revolving debt level. This report helps for several reasons. First, I don’t open credit accounts unless my FICO is above 720, when your score is 720+, you will receive most of the best rates out there. Second, since I can see the number of inquiries, I know whether or not someone is trying to open an account in my name; this is something that most of the agencies that provide credit reports for a monthly fee try to push on you. If someone steals your identity, you’ll know. Well, Providian also includes this free of charge.

The catch is that you have to show activity on your card at least once every two months in order to continue to receive this service. I simply put my cell phone bill on the card and set up an automatic payment schedule that pays down the bill every month, problem solved.

The most important thing to remember is that you should only open this account for the benefits it provides.
Benefits Costs
-free credit report - can have high APR
-credit limit (which increases your overall score) - Providian has high late fees
-potential for balance transfers -credit cards balances are rarely a positive thing

If you create your entry criteria for opening this card as:
1) Open the card
2) Only make a couple of charges which you pay off in full each month

And will refuse to:
1) Carry a balance on the card
2) Use any of the offerings they provide that will not help your long term interest

You will come out with a free credit monitoring service.

Monitoring your credit score is something that you should do on at least an annual basis. Checking on your score on a more regular basis can make you aware of how your actions (Paying down debt, new accounts, etc) effects your score. If you know how to influence your score to provide you with the best deals out there, you’ll really come out on top! The only downside to this is all the credit card offers you’ll receive once they view you as a ‘prime candidate.’

Good luck!

P.S. Providian often sends me checks that I can write out that offer a lifetime balance of ~2%, I’m actually thinking of using one of these checks for down payment on a rental property in the future once my credit limit gets high enough. Credit is a damn powerful thing once you start using it to your advantage.