TheMarchMyth

Credit. When it comes to understanding personal finance, this component looms large. For some it is a dirty word, to be avoided at all costs. For others, it is an intoxicating license, an opportunity to reach for a lifestyle well beyond their means.

In truth, credit can be extremely helpful or harmful depending on how it’s used. In many ways, credit is more of a tool than anything else – simply a means of achieving some desired outcome. In the hands of an uneducated, unskilled, and inexperienced person, a fire, a table saw, or a gun can cause havoc and harm. But in the hands of a responsible and educated individual, they can be immensely useful. So it is with credit.

A bad use of credit would be buying a huge flatscreen television with a credit card; you’ll receive little return on the interest you’ll pay on that balance. A good use of credit would be taking out loans to get an education, or for a car to get you to and from a job; these things put you in debt in the short-term, but will improve your financial prospects in the long-term.

When you need to use credit in a positive way, your ability to do so will be based on the credit history and score you have been establishing for years, starting when you first headed out on your own.

What Is Credit?

As the dictionary defines it, credit is: “The ability to obtain goods or services before payment, based on the trust that payment will be made in the future.” Student loans, car loans, home mortgages, and credit cards are all types of consumer credit instruments — you’re getting money now to pay for something you otherwise couldn’t afford, based on the lender trusting that you’ll pay them back later.

Sometimes credit is completely free, but it usually comes at a price. Most banks and institutions will charge interest on the money they lend you (aka, the principle) in exchange for giving you the funds, along with the opportunity to pay it back slowly over an extended period of time.

Different types of credit have different interest rates. Student loans often have lower interest rates than other types because many of them are guaranteed by the U.S. government. Even if you can’t pay them back, the lender will still get their money from the government. Credit cards, on the other hand, often have the highest interest rates among the various types of credit because: 1) there’s a higher risk that the credit card lender won’t get repaid and 2) it’s more expensive to manage credit card debt (at least that’s what the credit card companies say).

Even among the same kinds of loans, you’ll find different interest rates. That’s because people have varying degrees of “creditworthiness”. You’ll often hear banks refer to people as having “good credit,” bad credit,” or “no credit.” People with good credit have a reputation for being a responsible borrower. They pay their bills on time and manage the credit available to them responsibly. People with good credit not only have access to more money, they also get lower interest rates on their loans.

People with bad credit have a reputation for not paying their bills on time or even not paying them at all. Banks and other businesses are less willing to extend credit to these individuals. Even if they’re able to get a loan, a person with bad credit will be charged a higher interest rate.

Folks with no credit simply don’t have a history of using credit, so they’re kind of a wild card. They might be good with credit, or they might not. When banks loan money to people in this situation, they’ll usually start off charging a higher interest rate, but they’ll be willing to bring it down as the debtor demonstrates they can repay the balance owed on a consistent basis.

How Do Banks Know If You’re Creditworthy?

So how do banks or credit card companies know whether you have good credit, bad credit, or no credit? When you apply for a loan, the person reviewing the application probably doesn’t know you from Adam. How can they possibly discern whether or not they can trust you to pay them back?

Put on your tin foil hat folks, because the answer is that there are three big credit agencies keeping track of how you use credit — from how much you borrow to how often you are late on payments.

You’ve probably seen the commercials on TV about how to get your hands on a free credit report. That’s the record those Big Brother-like agencies have on you. These commercials will also typically mention something called a credit score. That’s the number that banks use to indicate whether you’re a trustworthy borrower or not.

Many young people just getting their feet wet in the world of credit often confuse credit reports with credit scores, and vice versa. It’s an easy mistake to make, but one that can be corrected with a quick primer on the difference between the two.

What’s a Credit Report?

Credit reports explain what you do with your credit. They state when and where you applied for credit, whom you borrowed money from, and whom you still owe. Your credit report also tells if you’ve paid off a debt and if you make monthly payments on time.

Federal law mandates that all three major credit reporting agencies must each give you a free credit report each year. So, when those TV commercials talk about getting a free credit report, the above information is what they’re offering.

But, getting your free credit report from a heavily-advertised site like FreeCreditReport.com or FreeCreditScore.com isn’t a good idea. In return for getting a free credit report and score, you have to enroll in their monthly credit-monitoring service for $15 a month. If you cancel within seven days, the report and score are indeed free, but if not, your subscription to their service will begin. The pain is that you have to call to cancel — you can’t do it online — and you might forget (that’s what they’re counting on).

Instead, get your free credit report with no strings attached from AnnualCreditReport.com. This site offers you a truly free report from each of the three credit agencies. You can get them all at once, but I would recommend staggering them throughout the year so you can keep more regular tabs on your credit score.

Why You Need to Request Your Credit Report Every Year

There are a couple of reasons why you should request a free credit report each year. First, it allows you to check for and correct mistakes that have crept into your report. You don’t want those mistakes to affect whether you get a higher or lower interest rate, or whether a bank will approve a loan for you at all. When you spot a mistake, you can start taking actions to clean it up.

The second big reason you want to request a credit report every year is to protect yourself from identity theft. With the right information, a con-artist can apply for a wallet full of credit cards in your name without you knowing it. Then you start getting calls out of the blue from collection agencies asking you to pay up on purchases you never made. A yearly credit report lets you check to see if anybody is fraudulently using your name to apply for credit cards or loans without your knowledge and take action if needed.

What’s a Credit Score?

Your credit score is determined by the information in your credit report. Credit scores are used by companies and banks to evaluate the potential risk posed by lending money to individual consumers. Your credit score determines if you qualify for a loan, what your loan’s interest rate will be, and what your credit limit is. It’s basically your trustworthiness score for lenders.

The company that came up with the idea of a credit score was the Fair Isaac Corporation. That’s why you’ve probably heard credit scores referred to as a FICO score. Because each of the three credit agencies collect slightly different information about you, you’ll have three different credit scores, although it’s possible for all of them to be the same.

Credit scores range from 500 to 850. If you have a FICO score of 500, you’re going to have a hard time getting a loan. Even if you manage to get one, the interest rate on it will be high. With any score above 720, you’ll receive the best rates available. Whenever you apply for a credit card or car loan, banks and credit card companies will check your credit score to determine whether to lend you money or extend the credit card to you in the first place. If they do decide to extend you credit, they’ll then use your credit score to determine the interest rate they’ll charge you for borrowing money.

Unlike credit reports, which are free, credit scores cost money to view. They cost about $15 to access, and you’re given the offer to purchase your credit score after you get a credit report. Bankrate, however, offers a free FICO score estimator. The estimator asks you 10 questions about your loans and credit card balances and then spits out an estimate of your credit score. While not 100% accurate, you’ll at least have an idea of where your score is at and make adjustments in order to improve it.

How Your Credit Score is Determined

Because your credit score can possibly make or break some important financial and lifestyle decisions, it’s important to understand how the credit agencies determine your score so you can take actions to ensure it’s the best it can be.

When coming up with your FICO score, credit reporting companies look at several factors, including:

Payment record. 35% of your score depends on your ability to pay your bills on time. Payments that are more than 90 days late will hurt more than a payment that’s just 30 days late. Also, recent late payments hurt more than older ones. A single late payment won’t kill your score, so don’t panic that you’ll never be creditworthy because you missed a payment. Just pay the bill and try not to let it happen again.

Amount borrowed relative to available credit. This factor accounts for 30% of your score. The credit companies want to know if you’re borrowing to the max. If you have $10,000 of available credit, and you consistently run a balance of $9,999, that’s a red flag that you’re not very prudent about your debt. However, if you usually have a balance of $200 of outstanding debt, that’s a sign you’re more responsible with credit. To improve your score, try to keep your debt to about 10% or less of your available credit.

Length of credit history. This is 15% of your score. The longer you have successfully borrowed money and paid it back, the less risk you are to a lender. If you pay off a credit card, it’s good to keep it open, even if you never use it. When you close it, you lose that credit history, which could in turn affect your score.

“Hard” Credit Pulls. This is 10% of your credit score. A pull is a type of inquiry into your credit. Hard credit inquiries are made by lenders for the purpose of extending you credit. These will lower your score because having multiple hard inquiries is a signal that you’re looking for loans and are possibly a poor credit risk. So, when the cashier asks if you want to sign-up for a store credit card to get a 10% discount, tell them “no thanks” in order to avoid the hard credit pull.

If you’re shopping around for a car loan or mortgage, lenders will have to pull your credit score every time you ask for a quote. Don’t worry about those types of pulls hurting your score. Similar inquiries made within a two-week period won’t ding your score.

Types of debt. This is the final 10% of your score. It’s best to have a mix of car, home, student loans, and little to no credit card debt. If you’re up to your eyeballs in credit card debt, you’ll be seen as bigger risk.

Other factors. In addition to your FICO score, lenders will also to take into account other factors when determining whether to loan you money. Things like your income, job history, and assets you own can factor into whether you can secure a loan.

How Can I Build and Improve My Credit History and Score?

Because your payment record and length of credit history make up about 50% of your credit score, it’s important you begin building a solid credit history as soon as you can. A good credit history along with a high credit score will serve you well later in life.

The fastest and surest way to build up your credit history is to simply open up credit accounts and pay back the money when it’s due. Opening a credit card account is an easy way for young people to begin establishing their credit history.  A low interest, low minimum balance credit card can give a young person just starting out in life the opportunity to pay a credit balance on a regular basis in order to establish a solid positive payment record. Also, the earlier a young person obtains a credit card, the longer his credit history will be when he applies for that mortgage later in life.

There is a danger, though. Credit cards can be a big time hazard for a young man just starting out on their own, as they allow you to spend money you don’t have. And because a young man’s schedule can be hectic and his life disorganized, he may forget to pay the monthly balance, incurring penalties and interest, and potentially plunging him into debt. If you don’t have the income and level of responsibility to pay off your credit card balance every single month, don’t get a credit card.

Even if you are responsible enough to get a credit card, maybe you just don’t like the idea of having one and want to avoid credit card debt altogether during your younger years. Smart move.

So what if, for whatever reason, you want to avoid getting a credit card, is there any way to still build up your credit history or are you doomed to high interest rates when you apply for a mortgage later on?

Despite what some people may tell you, it is possible to establish a credit history and improve your credit score without a credit card. If you’re a college student, you likely have student loans. As soon as you graduate, start paying your loans back on a consistent basis. Boom. You’ve got a credit history.

Another way to establish your history without a credit card is to apply for a small loan through your bank and have your parents co-sign on it. Make regular payments and pay it off as fast as you can. More credit history.

But let’s say you’re a complete Dave Ramsey devotee and decide to not use credit at all: no credit cards, no student loans, no car loans. Nothing. How can you secure a low interest rate when you’re ready to buy a house if you don’t have any credit history (assuming you haven’t reached the Ramsey pinnacle and are able to buy a house in full with cash!)?

By applying for a PRBC Alternative Credit Score. A PRBC Credit Score shows lenders you’re financially responsible and trustworthy by keeping track of how well you pay non-credit bills like rent, utilities, and insurance on a regular basis. It’s relatively new, but many lenders will accept a PRBC Alternative Credit Score when determining interest rates for mortgages and other loans.  Unlike your traditional credit history or scores that begin tallying as soon as you use credit, you’ll need to self-enroll to obtain a PRBC Alternative Credit Score.

Any other things a person heading out on their own for the first time needs to know about credit? Share them with us in the comments!

No related posts.

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The Builders

By: Henry Wadsworth Longfellow

All are architects of Fate,
Working in these walls of Time;
Some with massive deeds and great,
Some with ornaments of rhyme.

Nothing useless is, or low;
Each thing in its place is best;
And what seems but idle show
Strengthens and supports the rest.

For the structure that we raise,
Time is with materials filled;
Our to-days and yesterdays
Are the blocks with which we build.

Truly shape and fashion these;
Leave no yawning gaps between;
Think not, because no man sees,
Such things will remain unseen.

In the elder days of Art,
Builders wrought with greatest care
Each minute and unseen part;
For the Gods see everywhere.

Let us do our work as well,
Both the unseen and the seen;
Make the house, where Gods may dwell,
Beautiful, entire, and clean.

Else our lives are incomplete,
Standing in these walls of Time,
Broken stairways, where the feet
Stumble as they seek to climb.

Build to-day, then, strong and sure,
With a firm and ample base;
And ascending and secure
Shall to-morrow find its place.

Thus alone can we attain
To those turrets, where the eye
Sees the world as one vast plain,
And one boundless reach of sky.

Related posts:

1. Manvotional: Unseen Influences
2. Manvotional: The Power of Personal Influence
3. Christmas Eve Manvotional: The Night of Oranges
4. Manvotional: A Son’s Regret
5. Manvotional: Discipline-The Means to an End

via The Art of Manliness http://bit.ly/NqVOB9

Back when I was in high school, a mentor of mine gave me a copy of a small book that I’ve read and re-read several times over the years. The Art of Worldly Wisdom or The Pocket Oracle and the Art of Prudence, is a book of 300 maxims and commentary written by a 17th century Jesuit priest named Baltasar Gracián. Considered by many to be Machiavelli’s better in strategy and insight, Gracian’s maxims give advice on how to flourish and thrive in a cutthroat world filled with cunning, duplicity, and power struggles, all while still maintaining your dignity, honor, and self-respect. In many ways, The Art of Worldly Wisdom is a how-to book on fulfilling Christ’s admonition to his apostles to be “cunning as serpents and as innocent as doves.”  Philosophers Schopenhauer and Nietzsche both admired Gracian for his insight, subtlety, and the depth with which he understood the human condition.

While Gracian’s maxims were directed to men trying to gain favor in the dog-eat-dog world of 17th century Spanish court life, they’re just as applicable to a 21st century man trying to both succeed in a hyper-competitive globalized economy and develop an upright, heroic character. Taken together, Gracian’s frank, incisive maxims are reminders of the power of living with sprezzatura and that practical wisdom–the ability to do the right thing, at the right time, for the right reason—is essential to success in life. Below I highlight a few of my favorite Gracian maxims. I highly recommend that you pick up a copy of his book with all 300 nuggets of wisdom and keep it on your nightstand. It’s a great little book to flip through and read in spare moments. You’ll be a better man for it.

Maxims of Baltasar Gracián

In your affairs, create suspense. Admiration at their novelty means respect for your success. It’s neither useful nor pleasurable to show all your cards. Not immediately revealing everything fuels anticipation, especially when a person’s elevated position means expectations are greater. It bespeaks mystery in everything and, with this very secrecy, arouses awe. Even when explaining yourself, you should avoid complete frankness, just as you shouldn’t open yourself up to everyone in all your dealings. Cautious silence is the refuge of good sense. A decision openly declared is never respected; instead, it opens the way to criticism, and if things turn out badly, you’ll be unhappy twice over. Imitate divinity’s way of doing things to keep people attentive and alert.

The height of perfection. No one is born complete; perfect yourself and your activities day by day until you become a truly consummate being, your talents and your qualities all perfected. This will be evident in the excellence of your taste, the refinement of your intellect, the maturity of your judgement, the purity of your will. Some never manage to be complete; something is always missing. Others take a long time. The consummate man, wise in word and sensible in deed, is admitted into, and even sought out for, the singular company of the discreet.

Don’t arouse excessive expectations from the start. Everything initially highly praised is commonly discredited when it subsequently fails to live up to expectation. Reality can never match our expectations, because it’s easy to imagine perfection, and very difficult to achieve it. Imagination weds desire and then conceives things far greater than they actually are. However great anything excellent is, it’s never enough to satisfy our idea of it and, misled by excessive expectation, we’re more likely to feel disillusionment than admiration. Hope is a great falsifier of truth. Good should rectify this, making sure enjoyment surpasses desire. Good beginnings serve to arouse curiosity, not to guarantee the outcome. Things turn out better when the reality exceeds our initial idea and is greater than we anticipated. This rule doesn’t apply where bad things are concerned. Here exaggerated expectation is helpful, for reality thankfully contradicts it, and what was greatly feared can in fact even seem tolerable.

Never exaggerate. Take great care not to speak in superlatives, whether to avoid offending truth or tarnishing your good sense. Exaggeration is an excess of esteem and indicates a lack of knowledge and taste. Praise arouses curiosity, goads desire, and if, as normally happens, true worth falls short of the initial evaluation, our expectation turns against the deception and gets even by scorning both the praiser and the praised. The wise take their time, then, and would rather understate than overstate. True greatness in things is rare; temper your esteem. Exaggeration is a form of lying; using it, you lose your reputation for having good taste, which is bad, and for being knowledgeable, which is worse.

Never lose your self-respect. Even when alone, don’t be too lax with yourself. Let your own integrity be the measure of your rectitude; owe more to the severity of your own opinion than to external rules. Stop yourself doing something improper more through fear of your own good sense than of some stern external authority. Stand in fear of yourself and you will have no need of Seneca’s imaginary tutor.

Never lose your composure. A prime aim of good sense: never lose your cool. This is proof of true character, of a perfect heart, because magnanimity is difficult to perturb. Passions are the humours of the mind and any imbalance in them unsettles good sense, and if this illness leads us to open our mouths, it will endanger our reputation. Be so in control of yourself that, whether things are going well or badly, nobody can accuse you of being perturbed and all can admire your superiority.

Don’t be uneven, or inconsistent in your actions: either through inclination or choice. The sensible man is always the same in all areas of perfection, this being a mark of intelligence. He should change only because the causes and merits of the situation do. Where good sense is concerned, variety is ugly. There are some who are different every day; uneven in their understanding, more so in their will, and even in their luck. What they approved of yesterday, they disapprove of today, forever negating their own reputation and confounding others’ opinion of them.

Choose a heroic model, more to emulate than to imitate. There are examples of greatness, living texts of renown. Select the best in your own area, not so much to follow as to surpass. Alexander wept, not for Achilles in his tomb, but for himself, not yet risen to universal fame. Nothing so incites ambition within the spirit as the trumpeting of another’s fame: it demolishes envy and inspires noble actions.

Understand yourself: your temperament, intellect, opinions, emotions. You can’t be master of yourself if you don’t first understand yourself. There are mirrors for the face, but none for the spirit: let discreet self-reflection be yours. And when you cease to care about your external image, focus on the inner one to correct and improve it. Know how strong your good sense and perspicacity are for any undertaking and evaluate your capacity for overcoming obstacles. Fathom your depths and weigh up your capacity for all things.

Don’t hang around to be a setting sun. The sensible person’s maxim: abandon things before they abandon you. Know how to turn an ending into a triumph. Sometimes the sun itself, whilst still shining brilliantly, goes behind a cloud so nobody can see it setting, leaving people in suspense over whether it has or not. To avoid being slighted, avoid being seen to decline. Don’t wait until everyone turns their back on you, burying you alive to regret but dead to esteem. Someone sharp retires a racehorse at the right time, not waiting until everyone laughs when it falls in mid-race. Let beauty astutely shatter her mirror when the time is right, not impatiently and too late when she sees her own illusions shattered in it.

Get used to the bad temperaments of those you deal with, like getting used to ugly faces. This is advisable in situations of dependency. There are horrible people you can neither live with nor live without. It’s a necessary skill, therefore, to get used to them, as to ugliness, so you’re not surprised each time their harshness manifests itself. At first they’ll frighten you, but gradually your initial horror will disappear and caution will anticipate or tolerate the unpleasantness.

Never complain. Complaining always brings discredit. It incites the passionate to disrespect you more than the compassionate to console you. It paves the way for anyone who hears it to follow suit and, learning of the first person’s insult, makes the second feel theirs is excusable. By complaining of past offences, some people create the basis for future ones, and seeking help or comfort, they encounter only satisfaction and even disdain. A better policy is to celebrate the benefits received from some so others will imitate them. To enumerate favours received from those who are absent is to solicit them from those present; it’s to sell the credit due to the former to the latter. A circumspect man never makes public either slights or flaws, only the marks of esteem received, for these serve to maintain friends and restrain enemies.

Avoid familiarity when dealing with people. It should be neither used nor permitted. Anyone who does will lose the superiority which stems from dignity, and so lose esteem. The stars, precisely because they remain so distant, maintain their splendour. Divinity demands respect; familiarity breeds contempt. With human affairs, the greater the familiarity, the lower the esteem, because communication reveals the imperfections which reserve concealed. Familiarity is not advisable with anyone: with your superiors, because it’s dangerous; with your inferiors, because unseemly; and especially not with the rabble who, being stupid and so insolent, will not recognize the favour shown them and will take it as their due. Familiarity is a form of vulgarity.

Know how to appreciate. There’s no one who can’t be better than someone at something, and none who excel who can’t be excelled. Knowing how to enjoy the best in everyone is a useful form of knowledge. The wise appreciate everyone, recognizing the good in all and knowing how much it costs to do things well. Fools despise everyone because they are ignorant of the good and choose the worst.

Undertake what’s easy as if it were hard, and what’s hard as if it were easy. In the first case, so that confidence doesn’t make you careless; in the second, so that lack of confidence doesn’t make you discouraged. It takes nothing more for something not to be done than thinking that it is. Conversely, diligence removes impossibilities. Don’t think over great undertakings, just seize them when they arise, so that consideration of their difficulty doesn’t hold you back.

Take a joke, but don’t make someone the butt of one. The first is a form of politeness; the second, of audacity. Whoever gets annoyed at some fun appears even more like a beast than they actually are. An excellent joke is enjoyable; to know how to take one is a mark of real character. Getting annoyed simply prompts others to poke fun again and again. Know how far to take a joke, and the safest thing is not to start one. The greatest truths have always arisen from jokes. Nothing demands greater care and skill: before making a joke, know just how far someone can take one.

Carry things through. Some people put everything into the beginning, and finish nothing. They come up with something, but never press on with it, revealing their fickle character. They never receive any praise because they don’t press on with anything; everything ends with nothing being ended. In others, this arises out of impatience, a characteristic vice of the Spanish, just as patience is a virtue of the Belgians. The latter finish things, the former finish with them. They sweat until a difficulty is overcome, and are happy simply to conquer it, but they don’t know how to carry their victory through; they show they have the ability, but not the desire. This is always a defect, arising from taking on the impossible or from fickleness. If an undertaking is good, why not finish it? And if it’s bad, why was it started? The shrewd should kill their prey, not give up after flushing it out.

Don’t be carried away by the last person you meet. There are people who believe the last thing they hear, stupidity always going to one extreme or the other. Their feelings and desires are wax: the most recent thing stamps itself upon them and effaces everything else. They are never fully won over because they are just as easily lost: anyone can dye them to match their own colour. They make bad confidants and remain forever like children: with their opinions and emotions ever changing, and their will and judgement crippled, they veer along, tilting this way and that.

Go with the flow, but not beyond decency. Don’t always be affectedly solemn and annoyed. This is part of good manners. To gain everyone’s affection, you must dispense with a little dignity. You can sometimes follow the crowd, but not into indecency, for whoever is taken for a fool in public will never be thought wise in private. More is lost in one day of relaxation than was ever gained with seriousness. But don’t always stand out from the rest: to be an exception is to condemn everyone else. Far less affect fastidiousness – leave that to women. Even in spiritual matters, this is ridiculous. The best thing about a man is acting like a man. Whilst a woman can gracefully affect a manly air, the reverse is never the case.

Act as though always on view. The insightful man is the one who sees that others see or will see him. He knows that walls have ears, and that what’s badly done is always bursting to come out. Even when alone, he acts as though seen by everyone, knowing that everything will eventually be known. He looks on those who will subsequently hear of his actions as witnesses to them already. The person who wanted everyone to see him wasn’t daunted that others could see into his house from outside.

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1. Practical Wisdom: The Master Virtue
2. Manvotional: The Cardinal Virtues — Wisdom
3. First Look: The Cover of Manvotionals: Timeless Wisdom and Advice on Living the 7 Manly Virtues
4. Announcing the Launch of Manvotionals: Timeless Wisdom and Advice on Living the 7 Manly Virtues

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