Toying Around with Real Estate

Yoyos come in two basic styles: there is the “classic” which looks like a simple hamburger turned on it’s edge, and the “butterfly” which resembles a compressed hour glass, turned on it’s side.. The spinning toy may be clear like glass or made of some richly-colored opaque plastic. Perhaps his new toy is made of a hybrid space-aged metal or it just might whistle when he throws it just right. With a little practice the young lad learns legendary tricks like “the sleeper,” “walk the dog” and “rock the cradle.” But, even though there is a wide variety of flamboyant yoyo’s to choose from they all perform the same humble function - they go up and down.

Close your eyes and imagine such a youngster with a brand new cherry-red, semi-transparent butterfly-style yoyo. In your mind’s eye. notice him at the foot of a trail which leads up a hill towards a fantastic magical pot of gold. Observe him throwing the yoyo up and down. Up and down. Up and down. With that yoyo still in motion, envision our friend heading up that trail toward the awaiting treasure. Now, chart the path of the shiny red toy as it travels up and down the string and progresses up the hill at the same time. Notice that even though the yoyo sometimes goes down, the general trend is always up. That same pattern applies to real estate values in most markets.

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Cluttered Minds

Have you ever known somebody whose life was “broken’? You know the type. They always seem to be riding the drama train. They have problems holding relationships together. They make their work more difficult than it ought to be. Chances are they have weight problems. They worry too much. They might be wrestling with drugs, tobacco or alcohol issues.

Everything is out of control for these poor souls. There are all sorts of unfinished projects in their basement or garage. Their desk is untidy and overrun with dust. Their kitchen sink is full of dishes. They seem to have more stuff than places to put it. They have too much debt from entertaining their minds with unneeded purchases. It is obvious that they got off track somewhere along the way. They are overwhelmed.

I would imagine that psychologists make a fortune analyzing people like this but some times our problems come down to something as simple as we don’t know how to get organized. When the mountain is so large, we just don’t know what to do first. When we examine the sea of confusion that is our lives, we don’t know how or where to find an island of sanity. We need somebody to help us remove the clutter from our minds and lives. This is the case for the person suffering from a cluttered mind, and it is true for people who are struggling with financial drama. A person might have money woes because she is suddenly single due to a death or divorce. Someone else might have lost his job. Somebody else may have lost her home in foreclosure. Another person may have fallen ill or come across a personal tragedy of some sort. And very frequently men and women just never learned how to manage their money properly in the first place.

Obviously, I cannot fix divorces or make an employer give somebody a job, but I do know a bit about money management. My book, Stop Flushing Your Money Down the Drain, is devoted to shedding light on how we get into financial trouble and how we can get out.

Most people don’t have to get big pay raises or deny themselves basic pleasures. All they need to do is find out how they waste money, frequently in ways they do not even realize, and then redirect that wasted money into more productive endeavors.
For instance, do you know the difference between collision and liability insurance for your car? Which do you have? Why? What is the deductible? Why? Most people do not really understand their auto insurance policy and are most likely Flushing money down the drain that they could use more wisely.

Did you know many people pay for mortgage insurance on their home that they do not need and do not have to pay?

Somebody else may have been turned down for a new job just because his or her credit score was not very good. But nobody told them that new employers often look at credit reports and they didn’t even know there was some false and negative information on it. If they would only correct the false information, they will have a better chance at landing that next job. Failing to land a job is certainly Flushing money down the drain and you can fix that.

This is the kind of information we discuss in my book. If you would like a sneak peek, just let me know and I will be happy to share it with you.

Be sure to drop by my other blog.

How much is $100 per month worth?

I teach a Continuing Education class, to Realtors, about working with investors and how to become their own best client. One of the lessons has to do with the real value of a small regular income, such as $100 per month.

I show the students that $100 per month, at seven percent interest, for ten years compounds to $17,000. Furthermore, if a person was to invest $17,000 at that same 7%, the monthly interest income is, coincidentally, $100 per month.

Conclusion: One-hundred dollars per month is the equivalent of $17,000 and vice versa.

I am not hung up on the numbers of 7% or ten years. We could modify the interest rate or the term and end up with a modified conclusion, but that is not particularly relevant. My objective is to shine light on the fact that every $100 per month represents a great deal of buying power, and in my example that number happens to be $17,000.

Predictably, most people are more likely to be net borrowers than net lenders so the above dynamic works against them in ways they had not even imagined. That is to say that for every $100 per month we pay in interest, we are also losing the opportunity to use that money to generate passive income, which is the key to building wealth.

Passive income is money that jumps into your bank account, automatically, whether you work or not. Can you imagine how much easier life would be for seniors if they had an extra $1,000 or more in monthly passive income? If they could have saved $200,000 in their lifetimes, and if they could invest that money at a realistic rate of 6%, that is how much extra income they would have. This is a lot easier than most people realize. One important path is by stopping compound interest from working against us and instead make it work for us.

If you have a credit card balance of $5,000 that you do not pay off, and if the interest rate on that card is 14%, you will pay $700 per year, just in interest. If that was a one-time matter, it may not be that big of a deal, but this debt lives on and repeats itself year after year.

If we assume that you could have invested that money somewhere else at a mere 4% interest, it would compound and grow to nearly $80,000 in an adult’s lifetime of forty years.
So ask yourself if you would like to have an extra $80,000 when you retire? That is a big reward for simply paying off your credit cards in full and on time every month. You are going to pay them off anyway, sooner or later, so why not pocket 80 big ones for paying this debt the correct way? That is one reason why I say, if you cannot pay off your credit cards in full and on time every month, you are living beyond your means.

Avoiding unnecessary interest expenses is just like earning extra income, whether it is $100 per month, $700 per year, or any other amount. To stop flushing your money on lost interest expenses, I suggest you reel in your spending habits a bit and pay extra on your cards until you get them down to a zero balance. Then avoid debt that you cannot payoff when the bill comes in.

Then you can start socking away a $100 per month and when your retirement years arrive you will have a very pleasant life-style.

I hope you will also visit my other blog.

Lottery Facts

My newest book features a large section of the Worst Things on Which We Waste Our Money. In that section, there is an Honorable Mention category, wherein “Gambling” is discussed and I establish that your worst odds are found in the various Lottery games.

Before we look at a few lottery winners let’s take a quick look at the odds of common games of chance. If you play 21 in Vegas, the house keeps 3-15% of your money, depending on your skill level. If you happen to count cards and can tell when the remaining deck is ten-heavy (cards that are valued at 10 points), you can cut the house’s advantage a bit. Good players also learn when to double down and split cards. It is especially useful to develop money management techniques, like bet heavier in winning streaks and cut back when the gambling Gods are being fickle.

Other games offer similar odds. For example, most people can reduce the house’s advantage at Craps to below 2% without much trouble. Roulette, slots, KENO and sporting events offer you slightly worse odds, ranging between 5% and 17% Overall the house has an edge on everybody who is not cheating. The government sends all sorts of agents to make sure the evil Casinos don’t take advantage of the public’s collective stupidity.

Predictably, when it comes to government run lotteries, the government does not hold themselves to the same standards as they hold casinos. In fact, it is not even close.

The Colorado lottery is similar to most others in that regard. Our “generous” government only keeps 50% of all lottery money. I find that fascinating. In order to protect an innocent public, they forbid casinos to keep more than 17%, but the same State Government guarantees themselves nearly three-times as much. It is no wonder people scoff when they hear, “Hi, I am from the Government and I am here to help you.”

This means that every time they pay out a million-dollar jackpot, they keep a like amount for themselves. In essence they steal half of the pot. In order to make those payouts, there are over two-million people who had to lose a dollar: one-million people donated a dollar to the winner and another million people paid the state their million.

The officials like to tell us they put their money back into parks and other public programs, and indeed they do make a few token gestures to make it seem like they are on the up and up, but only a fool would believe that the public gets their money’s worth. A great deal of the public’s share is peeled off for “administrative costs”, so the lottery is really just another way to create more Government jobs.

But wait, it gets worse. If you happen to be the “lucky winner”, you must pay a hefty tax on your winnings. Depending on the size of your jackpot, the Feds keep up to 36% of your winnings, and the State (Remember them? They run the whole thing) grabs another 5% as state income taxes.

Anybody who understands the hopelessness of the matter would certainly curtail the amount of money they spend in this way. Most educated people “get it” and some of them buy tickets anyway. I do not criticize them because they basically understand the details and can afford to flush a dollar occasionally. But the real monster in this equation is the State itself because it preys on the ignorance of the public.

Very often, the people who can least afford lottery tickets are the ones who actually buy them. Half of the weekly players have annual household income under $35,000. Many of these people hear lottery success stories and fall victim to the excitement without really realizing that their chances of winning are ridiculously small. They naively use money that ought to go to food and shelter to buy a shot at wealth.

Even if these people do win the lottery, it usually makes their lives worse. Evelyn Adams is a classic example. She actually won two major jackpots in New Jersey, totaling well over Five-Million dollars. But she had no idea how to handle her money and went broke within a few years. Her friends and family all thought she was an endless fountain of money and she did not have the will power to tell them, “No”. Within a few years she was broke and ended back in a trailer court, probably buying more lottery tickets.

Bill Post of Pennsylvania hit a doozey of a lottery pot: Coming in at over $16 million. He too went broke. A girl friend sued him because she said she owned part of the winning ticket. His brother tried to have him killed. Other people also sued him. Eventually, he lost it all and now lives on social security. He admits that the whole thing made him miserable and he wishes he had never won it in the first place.

Janet Lee won 18-million and suddenly found out she had lots of new friends and power. She donated money to anybody who asked, and eight years later, she had to file for bankruptcy.

These people are not rare. In fact 75% of winners go broke within 5 years. They do not really understand what they have, so they do not know how to keep it. One of the best things they could do is restrict themselves to living on the interest that their money can earn. If a person has a million dollars and can get a 5% return,that amounts to $50,000 per year in income. Once again, they have to pay taxes on that income, so they will have something like $38,000 per year left over. That is a tidy sum, but not an infinite amount of money. Once they start digging into the principal, they are doomed to spend it all.

With 47 numbers, your chance of picking 6 correctly is one in fourteen million. To get an idea of how daunting that is, imagine a line of fourteen million people standing back to back. That line would be 6,629 miles long. That is like driving from New York to San Diego and back again. It would take you at least a week just to drive past all 14 million people. Imagine how likely it would be to guess which person in that group would have the winning ticket.

So, your odds of winning are astronomically low and the government steals the majority of the money: the state confiscates half the money before they payout any winnings, and then the winners have to forfeit half of the jackpot in the form of income taxes; furthermore, the majority of winners end up frustrated and worse off anyway.”

Once you understand the numbers and what happens to people who actually do win, it is clear that buying lottery tickets is a voluntary act of stupidity. Those poor people are the types who also believe the common lie, “Hi, I am from the Government and I am here to help you.” That is why I say, “Gambling, and especially the lottery, is one of the Worst Things on Which We Waste Our Money.”

Come back soon and don’t forget to check out my Human Interest blog.

Passive Income

In spite of all of our economic woes, there are still over seven-million millionaires in America…and you can be one of them, even if you are an ordinary Joe.

Chances are, you cannot throw a football sixty-yards or sing like a songbird. You probably are not going to inherit a half-billion dollars or create the next Microsoft. The lottery is not likely to smile upon you and you probably are not interested in stealing a fortune from somebody else. Good news! You don’t have to fit into those categories to attain wealth.

The first thing you need to do is adjust your mind set. When it comes to getting more money, people tend to think in terms if getting a better job, a raise or a part-time job. Those are honorable and worthy approaches, but they all come with limits. One can only get so many raises and there is only so much time to work.

The key to financial security lies in building “Passive Income”. This is money that visits you each and every month, whether you work or not.

When you hold a typical job, you go to work and on payday the boss hands you a check. To get another check, you have to repeat the cycle. You have to go back to work or you run out of income. But what if you could get somebody or something else to send you income every week, regardless of whether you get out of bed in the morning? Wouldn’t that be a lot better? It is not difficult to do.

Let me give you a few examples:

• I have a pop machine at an apartment building. There are 102 apartments. The average apartment contributes about $2.20 per month in profit to me. I have to buy the pop and fill the machine about twice a month. If I was to go get 100 accounts like that, the monthly income would be approximately $22,440. I could hire three people to do all of the work. Two of them would service machines and the third one would do all of the other stuff, like acquiring the pop, warehousing it, bookkeeping, machine maintenance etc. I would pay each one of them $4,000 per month, which would still leave me a nice passive income of $10,000 per month. (If you are asking yourself, “Why doesn’t he just go do that?” the answer is because I have other better options.
• Most of the time, when a consumer acquires a new computer, they end up paying Bill Gates for the software. But Mr. Gates does not have to sit down and design new software for every new customer. He simply employs talented people to attend the details while he enjoys the passive income.
• Every county in the land has tax certificates for sale. These are ultra-safe documents that pay nice returns (at least 10%). There is practically no management necessary to oversee these revenue generators.
• If you buy a CD at your bank, you automatically receive interest income whether you work or not.
• If you have a rental property, your tenant will go to work and contribute the fruits of their time to help pay off your building for you.

IT TAKES MONEY TO MAKE MONEY

In each of the above examples, it takes money to make money. This is the point where most people tend to bog down. They think “I don’t have enough money to buy 100 pop machines” and so, their dream dies before it ever begins.

Their mistake is in their original assumption. When they think in terms of “it takes money to make money”, they wrongly assume the investment dollars have to be “their” own dollars. Naturally it helps if you have a pot of gold sitting around waiting for you to invest, but that is not necessary. There are all sorts of people who will give you their money to invest.

For example, perhaps the guy that sells pop machines will finance them. You make a monthly payment to him until the machines are paid off. Used machines cost about $750, so it would only take 6 months to pay off any given machine.

Perhaps you can get grandma to lend you some money. She may have a savings account somewhere that is paying her a modest return. If she would lend some of it to you, you could pay her a higher rate and you both come out better.

If you have respectable credit, you can get a loan from your own bank or a credit union.

Perhaps you know some other person who is fed up with the stock market and he or she would consider being your silent partner. They put of the money and you guarantee them 5% on their money plus 10% of the profits.

In the example of the rental property, a mortgage lender loans you the money to buy a property and a tenant pays it back for you (this is my investment of choice).

There are other possibilities for the person who thinks it through.

Finally, I would suggest that you do indeed have some of your own money to invest: You just may not realize it. For example, if you are paying for the wrong type of auto insurance, a quick modification to your “deductible” or by dropping comprehensive coverage, you could use that money to invest. Or if you stop at Starbucks every morning for a fancy cup of coffee, you could forgo that luxury and have a nice income source. What about your cell phone program, your cable TV package, where you rent, that extra bull dozer in the back yard that you never use any more? These are all sources of funds that you can add to “Other People’s Money” and invest for Passive Income.

The point of all of this is that there is extra income for you, if you want it, but nobody else has an incentive to deliver free money to you. You have to put in the effort to get the income stream going. Once you get it in place, you will be rewarded again and again for the one-time effort, unlike the way your boss pays you.

So the choice is yours work for a wage, get paid, and then start over; or, work for passive income and let it roll in over and over,

Finally, if you take nothing else from this article, remember this: It does indeed take make money to make money, but it does not have to be your money.

By adjusting your approach to earning money and investing, you can join the elite group of millionaires bringing the new number of them to 7,000,001 Congratulations.

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Be sure to check out my Human Interest Blog.

Just for Asking

How would you like to make $500 easy dollars for your family in less than one hour…just for asking?

A while back one of my life-long buddies mentioned that she regularly calls some of the companies with whom she does business and asks for discounts. The other day, I decided to see if I could do the same thing with some of the companies who lighten my checkbook every month.

I called up our cable company and told them there have been a lot of attractive ads for satellite TV lately. I politely asked the lady if there was anything they could do to help me cut my cable costs - otherwise I would have to consider one of those satellite deals. She opened up my file and then put me on hold. A moment later she returned and apologized because she could only cut the bill by $9 per month for six months. She said they usually do better than that. I learned three things. 1) I will save $54 in the next six months; 2) I will be calling again as soon as my discount period expires; 3) I really will consider switching to satellite TV.

After I hung up, I called the satellite TV company that provides a signal to our mountain home. Once again, I mentioned the competition and asked for an adjustment to my bill. The lady reviewed my package and we discovered they had a new offer. I had to give up some sports packages (Who cares?) and a handful of secondary stations to get a permanent discount of $39 per month. We do not go to the mountains to watch TV so the deal made sense. The total savings the first year is $468.

At that point, I would have called my cell phone company, but I already have a great deal with them, so I could not make any progress there. My internet service is wrapped into my cable bill and we already talked about that. But, I still had work to do.

While I was inspired, I called one of my credit card companies and asked them to lower my interest rate. They dropped the percentage two percent. It was nearly automatic. It was not really beneficial because I pay off my account in full every month, so I never pay them any interest anyway. However, it still proves a point…you can get a lot of perks from your business associates if you just ask.

Then I called my other credit card company and asked them to raise my credit limit...even though I do not need the additional credit. I did that because of what is called a “Utilization Rate”. Essentially, you raise your credit score when you have more unused credit. They doubled my available credit…just for asking.

Insurance is another area where a person can usually get better rates. Insurance companies have been known to give low entry-rates then they raise premiums upon renewal. It is a good idea to regularly shop for the best rates. In my case, I have good rates for life insurance and hazard insurance for my home and rental properties, but my health insurance company has raised my premiums by quite a bit for two consecutive years. I am shopping as we speak. I am also ready to shop for better auto insurance rates. I expect to make improvements in both regards.

The point here is that it is easy to get lazy or complacent, but a small amount of effort can pay big dividends…just for asking.

My thanks to Pat W. for kicking me in the rear-end.

Be sure to check my other blog.

Gambling

One of the chapters in my new book is about the way adults waste money. Here is a section from one of the chapters.

Many years ago I recognized that gambling can be a lot of fun but I realized right away it is “nearly” impossible to beat the odds in the long run. We all have heard the idea that they don’t build those fancy casinos by losing to the common folks. Still, I knew that if I studied the industry I could at least reduce my losses to a minimum and even win from time to time. I checked out all the library books on the subject and soaked up the information better than Sponge Bob Square Pants would absorb a bathroom accident. Eventually, I became a very good amateur gambler.

I could expand on many of the lessons I have learned, but the most important one is this: There are only a few ways you can beat the odds and here are the ones I know about.

• The best one is to buy your own casino and be on the other side of the table.
• Become a card counter at 21. There are rare occasions when the deck will favor the player. In essence, you bet small amounts while you study the remaining cards in the deck. Then, when the deck finally has a sufficiently disproportionate number of face cards, you increase your bet substantially. There was a mathematics professor at MIT named Ed Thorp who developed and proved this theory in the 60’s. But, the casino bosses caught on and made some adjustments which make it a lot harder to duplicate his success.
• Become a highly skilled poker player. In the long run all players get essentially the same cards, but a few players (below 20% of them) grow their purses consistently while weaker players serve as their prey. But regardless how good you become, there are odds working against you in poker games too. The house takes a piece of every pot, known as rake, and most players tip the dealer with each winning hand. All this overhead makes it very difficult to overcome the daunting odds so the biggest winner is still the house.
• Get incredibly lucky. I know one lady who hit a Vegas slot machine for just under one-million dollars. Her payout is $47,000/year for 20 years. The problem was that she did not really understand how lucky she was. Millions of dollars have to be lost by other players in order to build the jackpot to that amount. In the meantime the machine had to cover all of the other smaller payouts along the way and earn a profit for the casino. Considering she was playing a quarter machine, and it only keeps about one cent per quarter, that is an astronomical number of losses. The first year, after she received her annual check, she tried to duplicate the feat, but she soon lost all of the money. The same thing happened the next year and the next. After that I lost touch with her, but I suspect she may eventually give all of the winnings back.
• Money management. The trick here is to observe streaks and bet a lot more when you are in winning streaks and a minimum when you are losing. The problem is the dice or cards have no way of knowing they are falling in any particular sequence and they have no obligation to continue in the pattern. Therefore, any new roll of the dice or set of cards has the exact same odds as any other. Your streak is just as likely to end as it is to continue. Still, anybody who has gambled a fair amount can tell you there are those occasions when the cards are especially cold or hot. If the gambler is astute enough to take advantage of the trends he can exaggerate his winnings and subdue his losses. This technique can be very successful in spurts, but it too is mostly a matter of luck and doomed to failure in the long run.
• Cheat. We have all heard stories about somebody who bought off an athlete, a coach or referee in a sporting event. Or, I guess someone could put doggie downers in the food of a lighting-fast greyhound and sway the outcome of a race. People have been known to shave the dice, so that one number is more likely to come up. Black jack dealers have been known to form partnerships with other cheaters and skim money. Others put invisible ink on the back of cards, and so on. This all sounds fascinating, but…I “bet” I don’t have to finish this sentence for you.

Everybody else is a net loser. The more you play the more you lose. The best you can hope for is an occasional good session and a lot of fun for your entertainment dollar. So dump the gambling bug unless you can accept those facts.

The lottery is your very worst gambling value. If you listen to the radio ads in Colorado and other places you will frequently hear this phrase: “Prizes equal 50% of sales.” Put another way, the house (the State) keeps 50% of all the prize money. The ruthless casinos give you much better odds than that. If giving up half the money is not bad enough, the “lucky” winner gets screwed even worse because the Feds and the State take another big chunk of the winnings in the form of income taxes; potentially over 40%. Good God, even the Mafia wouldn’t charge you that much. Still the state preys on the many lottery addicts who buy tickets week after week. Sadly, many of the people who live in this dream world are the ones who can least-afford it.

As far as I am concerned, there is nothing wrong with an occasional visit to Las Vegas or playing poker with friends a couple of nights a year. However, when the topic is wasting money, compulsive gambling is as bad as any other addiction. The hard-core gambler cannot get enough action, win or lose. In the worst cases, these people are known to lose everything they own and to destroy loving relationships. I have known three such addicts personally; two of them went broke and the third person could not get through the day without betting on all sorts of things. Obviously, anybody who has problems like these people needs to consult with qualified counselors before all is lost.

To close out this topic, let’s see if we can agree on something: Occasional small losses (let’s say $50 or so, a few times per year) can be a reasonable price to pay for entertainment at the gaming tables, and going to Vegas or Atlantic City can really be a lot of fun. It is okay to occasionally earmark a reasonable amount of money for this entertainment, but more than once per year, or losing regularly or losing large amounts, or buying any lottery tickets are among the worst things on which we waste our money.

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About Credit Cards, Debit Cards

If you are thinking of getting your first credit card, be sure you know the difference between a debit card and a credit card. A debit card is nothing more than plastic checks. It serves little purpose other than eliminating the need to carry larger amounts of cash around. It does not help your credit rating.

Therefore, a credit card is better than debit card.

Remember these fundamental philosophies:

• Credit can be a best friend or a worst enemy;
• Credit cards are not for incurring or accumulating debt: They are for emergencies, convenience and record keeping only;
• You should use your credit cards to pay for the things you already buy anyway, like gasoline, insurance, and groceries;
• Do not charge things unless you can pay your statement “On Time and In Full” when the bill comes due;
• I suggest you get an account with no annual fee, even if the interest rate is higher.
• The interest rate is not overly relevant if you pay the card in-full every month and thereby avoid paying any interest
• If you are thinking about getting a new credit card, I suggest you check out www.creditcards.com

see my other blog

Advance Credit Strategies Part 2

This article is the second of two parts. It identifies some of the philosophies and practices of those with excellent credit. If you are looking to improve your credit score, you will want to know all of these items and implement them on a regular and on-going basis. The first half of the article can be found below. There were 32 points all together. Let's get after the second half of that list.

Negotiated Settlements – If you settle an account such as a Deed in Lieu of Foreclosure for a real estate loan, or an account that was sent to collections try to get the lender, as part of the settlement, to report the account as “paid as agreed” instead of “settled” or some similar damaging comment.

Old Accounts - Dormant accounts might get closed by the lender/creditor which neither helps nor hurts; but, using those old accounts enough to keep them active serves to help your score. You get the best impact on your report if you use the credit you have and pay it off each month. I suggest you use each account at least twice per year and pay them off in-full and on-time when the bill comes in.

On-time Payments – This is the single most important thing you can do to build your score. If it looks like you may not be able to make your payment on time, try to borrow some money from somebody else so that you can fulfill your obligation. Set up auto pay if it fits your life style. It is painless and it makes you smell like a rose.
If you want the best possible credit habits, observe that paying “on time” means no later than the due date. For example there are ordinarily four time-frames in which you might pay a mortgage payment: 1) It is due on the first of the month; 2) On the second of the month it is “late without penalty” and a grace period takes effect; 3) Somewhere around the tenth, a late fee kicks in; 4) On the thirtieth, it is late for credit purposes. Therefore, any payment that is not made before the first of the month is late, even if there is a grace period. The best practice is to pay such bills on or before the first of the month. This may be the one thing that gets you favorable treatment the next time you apply for new credit.

Plan Ahead - If you are planning on getting both a home mortgage and a new car (or other personal property) in the near future, it is much better to get the home loan first. When it comes to qualifying, auto dealers and banks are much easier to work with than Mortgage Companies.

Preapproved Credit - Ignore notices that you are “Preapproved” for a credit card or home loan. If the letter suggests that they still have to check your credit score, then they are no different than any other lender. This is not the best way to determine who deserves your business. A much better alternative is to check out www.creditcards.com.

Protection Programs - Somewhere along the way, your credit card company will probably offer you a “Protection Program”, which is nothing more than insurance wherein they propose to make payments for you if you get hurt or lose your job. I do not recommend these programs unless you have more of this type of risk than the average person.

Refinancing Real Estate - Avoid perpetual refinancing of your home to get cash out. It creates inquiries, it adds to your debt ratios and it cuts down on long-term reporting.

Reward Credit Cards - Certain banks offer frequent flier miles, cash-back or other perks each time you use your card. Sometimes they will even give you a huge upfront bonus for opening their account. My wife and I each obtained such a card just because they offered us a free round-trip ticket to San Diego with a popular airline. The interest rates they charge for these cards tends to be higher than some other cards, but if you expect to pay off your card each month the interest rate is not overly relevant.
If you acquire cards that pay you cash-back or bonuses, you can dig deeper for ways to use your card. For instance, many car dealers will let you pay the first $2,500 of your purchase with your credit card. You can also pay for most insurance, (health, life, auto, home owners) this way.

Security Issues - Do not ever give out your card numbers to anybody you do not know, especially over the phone. If someone wants your information, you should acquire the phone number of their company from an alternate and reliable source, and then call them back to be certain they are who they say they are.
I am not a fan of signing the back of my cards because I do not want bad guys to know what my signature looks like if my cards get lost or stolen. Sometimes, merchants will make me show an ID when they notice my card is not signed, but that is fine with me.
It is possible that someday, somebody will gain access to your card and charge stuff that you do not authorize. You will not ordinarily have to pay those expenses, provided you report the matter to your credit card company within 60 days. They will usually close down your account and issue a new card with new numbers. Obviously, this is an important example of why you need to pay close attention to the details of your statements.

Split Accounts – A married couple may find it useful to apply for some separate credit. That way, certain debts don’t count against both of you. Also, each individual is better off if there is a divorce or death.

The 45-Day Rule - Use this dynamic rule to your benefit. If there are multiple inquiries on your report for a similar-looking loan, within a 45-day window, the credit report believes you are rate-shopping, not buying multiple items; therefore all of those similar-looking inquiries combined, only count as one inquiry against your score. You can apply to several lenders for an auto loan or a new VISA card to see who might give you the best rate. You might even elect to take on two or more MasterCard accounts at the same time. If so, the damage from inquiries will be minimal. Furthermore, your utilization rate (see below) could improve substantially because you have more unused credit. On the down side, the average age of your accounts will drop, which usually lowers scores. However, a year later you would still be better off than the person who gets one such account now and another one after the year passes. Your two accounts will have an average age of twelve months but the other person’s accounts would only average six-months. Therefore, we are back to the fact that the 45-day rule can be an effective tool.

Transferring Balances - Pay debt rather than shifting it to new accounts. It seems smart to transfer debt to loans or cards with lower rates, but it can actually hurt you. New lenders will perform a new inquiry and may ask you to close an old account before they extend credit to you. You could end up with a closed account or an unwanted inquiry and both of those reduce your credit scores.

Tweak Older Accounts – From time to time, review your older established accounts and seek to improve them. For instance, you might be able to get the annual fee eliminated or the interest rate lowered. Sometimes lenders will update a comment from 30 days late to “paid as agreed” as a courtesy. It is fairly easy to get credit limits raised, which is usually an immediate improvement to your score.

Types of Accounts – It is considered prudent to have a variety of accounts. A good balance would be two to three major credit cards, one installment loan (car), one home loan, and a retail card or gas card.

Utilization Rate – Lenders compare your total debt to your available credit to get a measure of how much risk you present. Assume you have 2 cards, each with a $2,000 limit. One card is maxed out but the other card has a zero balance. Your revolving utilization is 50%. If you close the account with no balance, then your revolving utilization jumps to 100% which is horrible. It is far better to have a low percentage.

Verify – Whenever you open a new account wait for 60 days and then verify that the lender is indeed reporting your good behavior to all three credit reporting agencies.

I will have a couple additional articles on credit soon.

If you have some extra time, you might visit my other blog. The most recent article has to do with the likelihood the US will run out of oil.

ADVANCED CREDIT STRATEGIES - Part one

We have been discussing various sub-topics of the broader category of credit. To view those articles scroll down or check out the archives section in the right hand column. Most of the information comes from my newest book, Stop Flushing Your Money Down the Drain. Now we are going to explore advanced strategies for maximizing your credit score. If you learn these things you will be better prepared to deal with your credit and credit score for the remainder of your days.

Managing your credit is a lot like taking a shower. You will function better within our society if you make it an ongoing practice.

I suggest you make some sort of action-plan. For example, once every four months obtain and review your FICO credit score. (Note: If you didn’t obtain your FICO score when earlier suggested, I urge you to do it NOW! www.myFICO.com/12). After you review it, make a list of whatever you need to do and establish time lines to do them.

Following is a list of 16 items, in alphabetical order, which will assist you to build and protect your score. The worst your score is the more these things will help you. Once your score gets to 750 or so, your efforts and improvements will be of only minor benefit, but that does not mean you are done. The stronger your report, the better it can withstand problems like inquiries or a random late payment. Be patient but persistent. With consistent effort you should be able to join the exclusive “800 club” and find yourself among the top 5% of all consumers.

Adopt a New Attitude – You should only allow creditors that you interview and approve to have access to your report. Here are the things you should ask potential creditors BEFORE you make formal application and allow access to your information:

1. Which credit bureau(s) do you use?
2. Do you use FICO scores to determine my risk/
3. How does negative credit (bankruptcy, repossession) affect your decisions
4. What is the minimum FICO score needed for approval?
5. What is the minimum FICO score needed to get the best rate?
6. Do you report my high limit and my current balance?
7. Do you report my activity to all three credit bureaus?
8. If I give you a copy of my current FICO score and credit report, will you get my loan approval without any additional inquiries? (If the answer to this question is, “No” ask the next question)
9. If I give you a copy of my current FICO score and credit report, will you get my loan approved ”subject to verifying that the score is accurate”? (Note: This assures your loan is approved prior to any inquiries being entered on your report.)

Closing Older or Inactive Accounts - It is not usually a good idea to close old accounts or other accounts that you do not intend to use any longer. Lenders like to “average” the age of your accounts, and the older the better. However, if you have such an account that has an annual fee and you have a score above 750, you might contact the lender to find out if they would restructure the account to exclude the annual fee. If not, the damage from closing the account may be minor.

Cosigning - Do not get in the habit of cosigning for other people. It is very risky, no matter whom you are trying to help. If they default, you are responsible for the debt. You also expose your score to any of their actions or inactions such as late payments. Even if they pay on time, they pull your score down because they lower your debt to income ratio. If your score comes down, your own ability to qualify for later credit might be in jeopardy. Furthermore if your insurance company gets wind of your FICO Credit score dropping they might raise your insurance premiums. In my opinion it would be better to lend them your cash than your credit.

Credit Cards vs. Cash (and checks) – Paying with cash can actually hurt your credit scores because your creditors have no way of knowing that you pay back your debts. Whenever you have an option, you should pay with credit cards instead of cash or checks because paying back those debts builds your credit score. This is especially true if your card offers cash-back or other bonuses. You can even build your credit or accumulate freebies by paying somebody else’s bill with your card and collecting cash or a check from them.

Credit Unions - Credit Unions tend to be more liberal in their lending guidelines, but the majority of them do not report to any bureaus. So use them if you will have trouble qualifying for a traditional loan or if you wish to hide a debt from your credit reports, but, if you want your good habits to be reported, do not use Credit Unions for loans. Obviously you should verify their philosophies before you decide if they are right for you.

Debit Cards - Debit cards are not the same as credit cards. They are just plastic checks.

Department Store and Other Retail Cards – These stores can be a good place to get a credit history going, but after that, do not apply for these cards. They frequently come with annual fees. Their interest rates are high and you cannot use them for other purchases. If you apply to several of them on one weekend, each inquiry counts against your credit score (the 45 day rule does not apply). That can lower your score substantially for one year and raise your insurance premiums. They will try to offer you a one-time 20% discount to get their card but resist the temptation and use your VISA or MasterCard instead.

Divorce - Do not be cavalier about who pays what. In most cases you are both responsible for any debts you took on jointly, even if just one person agrees to take over the debt. If a court orders your spouse to pay a joint debt, that does not remove your obligation as far as the lender and credit bureau are concerned. Try to get the lender to release you, in writing, or refinance the accounts into the proper person’s name. It may even be better to take on all of the debts yourself, rather than expose yourself to years of bad credit because your ex does not look upon your score with the same seriousness that you do.

Explanation Letters - You have the right to explain anything on your credit report and it might make you feel better, but such explanations do not affect your score. Very few lenders read them anyway. If you feel a need to dispute something, your time will be better spent by going directly to the creditor who reported the activity in the first place. If needed, you can hire an attorney or a credit repairing company to help you.

Finance Companies – Your FICO score likes banks a lot more than finance companies. Finance companies usually (but not always) include the word “financial” in their name. Having any loan at a financial company can actually lower your score. Avoid them.

How Income Affects Credit Ratings - Ordinarily, your income has nothing to do with your credit score. High income, raises, bonuses etc. will not overcome poor credit. It illustrates your capability for making payments, but it does not indicate whether you will pay your bills on time or at all.

Inquiries – There are two basic types of inquiries to your credit scores. One type is relatively harmless but the other one poses more risk to you. If someone is checking you out just to find out if you are a responsible person, like a potential employer or an insurance company, there is little or no affect to your credit score.
But, if you knowingly give a lender or anybody else your social security number or apply for credit, their inquiry can bring down your score. People with scores above 750 do not have to worry about this very much because they will only lose a few points, but people who are just starting to build their scores or pose other risks might see drops in their score of 10 points, or more. Credit related inquiries remain on your report for two years, and count against your score for one year
Ordinarily, all similar inquiries within a 45 day window count as one inquiry. The system understands that a person might be “rate shopping”, so bunch similar inquiries together to prevent unnecessary damage to your score.
To reduce or avoid unnecessary inquires, obtain your own current copy of your credit report and FICO score, and then provide that to lenders yourself for review prior to formal application. Your inquiry of your own score does not count against you.

Lag Time – In a worse case, it may take up to 60 days for changes to show up on your report after they are received.

Late Payments - Know what constitutes a late payment with your creditors. Sometimes you have a grace period but sometimes not. It is not just a matter of when late fees kick in. You want to know about their reporting practices.
Recent late payments or a pattern of late payments will be more damaging to your report than a late payment in the past. When a lender reviews your payment pattern they can recognize that one late payment is an exception to your usual good habits.

Limit Reporting - Some lenders do not report your “limit”, or even worse, they report your current balance as your limit. This implies that you are stretched financially and brings down your score. You should avoid these lenders.

Negative Comments – Do not allow negative comments to invade your credit report. These include collection accounts, judgments, deed in lieu of foreclosure, write offs, repossession, negotiated settlement, accounts included in wage earner plan, bankruptcy, negotiated settlement, and FED actions (financial arrangements with tenants facing eviction). These comments lower your score and paying them off will not raise the score back up. If you pay such an account after it shows up on your report you are stuck with it as negative information on your report for 7 years. Work with lenders to remove such comments or hire an attorney or credit repairing company to help you remove these types of comments ASAP.

I will post the second half of this list in a few days. Be sure to come on back.

Don't forget to check out my other blog

CREDIT: STARTING OVER

We have been discussing various aspects of credit issues. Most of the information is right out of my new book, Stop Flushing Your Money Down the Drain. This particular article is dedicated to those who are wrestling with poor credit or considering bankruptcy.

BANKRUPTCY
Nobody wants to go through this situation, and it should be avoided if possible, but if you find yourself in a credit hole that you cannot realistically expect to resolve for three years or longer, it may be your best choice. The first thing to do is consult with a credit counselor or a qualified bankruptcy attorney. If you do elect to go this route, do not make things worse by beating yourself up.

It does not benefit society to punish people who have struggled financially, so laws are in place to give people a second chance at productivity. Lots of good people have had to go this route including four past Presidents and this author.
Once the bankruptcy is over, it is not overly difficult to get new credit established. With prudent action, a person in this situation can usually obtain new credit to buy a home and car in one to two years. Thereafter, responsible behavior will pay dividends, just like it does for everybody else.

To get back in the game, follow the steps later in this chapter called The Starting Gate.

CLEANING UP BAD CREDIT
Perhaps you are struggling financially, but not so badly as a person who goes the bankruptcy route. For those with serious, but less dire, circumstances here are the basic steps to clean up your credit reports.

1) First things first. Take your financial temperature by getting a copy of your FICO credit reports (www.myFICO.com/12). Examine the report in detail. Dispute anything that you think you can improve such as debts that are inaccurate or not yours (see previous chapter for details). Pay special attention to the four reasons your credit is suffering. Take any immediate steps that you can to address those issues and especially whichever item they have listed first. Write a quick letter to the credit bureaus to clean up any inaccurate personal information such as marital status, address, and employer.

2) It is better to spread your credit card debt out so that no one card is overly burdened. For example, if you have three cards, each with a thousand dollars in available credit and one card is maxed out while the other two cards have a zero balance, it would be better to shift the debt so that each card is carrying one-third of the debt. Generally, you do not want your balance on any particular card to exceed 30% of the available credit. If you are still over the 30% balance, contact your lenders to see if they will raise your credit limit. This will usually increase your score.

3) If you have equity in your home or other property, consider consolidating your debts into one larger loan. This seems like a contradiction to the previous paragraph, but real estate loans are treated differently than consumer credit. There are several other benefits: You should get a lower rate; you can probably make lower payments; and the interest is probably deductible on your income taxes.
Unfortunately, I have seen MANY people abuse this tactic. The ink is barely dry on their loan documents and they go out to dinner to celebrate. When the bill comes they pull out their credit cards… again!!! Before long they have the same problem, only this time they also have a new and bigger debt on their home to go along with it. Refinancing is very dangerous if you do not modify your spending habits because sooner or later real estate values won’t be able to bail you out. Then you might lose everything you own.

4) Lenders are eager to overcharge anybody who is willing to pay a higher interest rate than the lender is willing to accept. Be certain you are not among that group. Call you creditors and ask them to lower your interest rate. They will frequently do so right on the spot, simply because you asked. This exercise will lower your payments. Repeat this procedure every 90 days or until you are certain they will not lower your rates further.

5) If you have any fees such as over-limit fees or late-payment fees, call your creditors and ask them to waive the fees. If you have been a customer for several years, and you have a decent long-term record, you have a good chance of getting these fees waived.

6) Cash-out other accounts. If you have an IRA or a stock portfolio or other path to cash, consider tapping those accounts to pay off your debts. It makes no sense to have one account paying you a small interest rate (which is taxed) while you have your own debt at an even higher rate.

7) Modify your behavior. If you cannot pay your cards in full every month, put them away and make other sacrifices. Keep modest amounts of cash on hand instead of credit cards. That way you will guard your cash carefully (Note: this technique will not do you any good if you constantly run to the ATM to make up the difference),
Depending on how serious your problem is, you may need to get rid of a car that has payments and drive a clunker with no payments. Sell any frivolities such as a boat, an unnecessary vehicle or raw land that you might have. Use the money to pay down your debts.

8) Renegotiate your debt. If the above items are not enough for you to solve your problem, you can contact your creditors (not collection agencies) and restructure the debt. You usually have to be behind on your payments to convince them this step is necessary, otherwise everybody would seek such relief. If you elect to go this route, the creditor will likely post a derogatory comment to your credit reports indicating what happened. That negative remark will stick with you for a long time, but you can recover, usually within a year or so.

9) Adopt a new philosophy about credit and debt. Do not use your cards to buy anything if you cannot pay off 100% of the purchase when you get your next statement. Never, ever carry a balance on your cards.

10) Monitor your accounts forever. Paying attention and keeping score will keep you from getting into this problem again. But more importantly, it will free up money you can use in much smarter ways: Namely, to Save Consistently and Invest Wisely.

Oddly, it may be better to file for bankruptcy than take the slow path to recovery, as just spelled out. Creditors sometimes consider people who have filed for bankruptcy to be less risky because the process leaves them with fewer debts, and they cannot repeat the procedure for quite a while.

Your comments are welcomed

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YOUR CREDIT REPORTS

Did you know you have lots of credit reports? Why are there so many? Are the "free" ones any good? How do you get copies of the "right" credit reports? How do you fix a credit report?

We are exploring some of the data from my book about credit (see previous article, below). This article is about your many credit reports, themselves.

INTRODUCTION
Now it is time to make a transition from the “philosophy” of credit to the “mechanics” of it. Fortunately, somebody else will assemble all of the information for you, but it is still up to you to constantly review those reports and make effective changes as needed.
The next few chapters have the potential to change your financial life. This information is vital to your monetary success. It is simple but not easy. It takes knowledge and effort. Please believe me when I tell you that the people who employ these lessons enjoy very productive and satisfying economic lives.

THE GUTS
By understanding some of the specifics that lead to our credit score, we can make this dynamic tool serve us for all the rest of our lives, rather than the other way around. To begin with, let’s observe how much emphasis is lent to the various aspects of the reports themselves.

Recent Payment History – 35%
The single most important factor in determining your score is Recent Payment History. Any recent late-payments or on-time payments are weighted more heavily than those of years gone by.

Length of History - 15%
This category is different from the one above because it is concerned with how long this person has been managing his/her credit. Obviously longer is better. When combined with the previous category, we can see that fully one-half of our reports are based on our history, in one way or the other.

Amount of actual debt - 30%
Oddly, a lack of debt can actually lower a person’s credit score. That is because it is difficult to determine if this person actually knows how to handle credit at all. On the other hand, the person who rings up a bunch of new debt also appears risky. The trick is to slowly and consistently accumulate available credit without ever owing more than about 30% of the available amount.

New credit – 10%
It is an ironic fact that new credit diminishes our credit scores while our older and established credit enhances them. The obvious question is, “How the heck are we going to get solid established accounts if we don’t start out with new accounts?” The answer is, “You can’t.”

Type of credit - 10%
This part of the score is based on types of credit in use (retail, finance company, mortgage, auto). Short-term unsecured debt generally carries more risk than secured loans like real estate mortgages.

WHO ARE THOSE GUYS?
One of the all-time classic movies is Butch Cassidy and the Sundance Kid. In it, Paul Newman and Robert Redford are a couple of lovable bad guys who just can’t get away from the grasp of the relentless authorities. After all sorts of running and frustrations, an exasperated Butch (Newman) turns to Sundance (Redford) and gasps, “Who are those guys?”

In a similar way, you and I are to be forever pursued by a gang of determined credit reporting agencies. The primary gang members are Equifax, TransUnion and Experian. They are not affiliated with the government and they operate to make a profit by selling their products and services. There are many other members in the gang, who also gather and sell information on credit matters. There is even a company called Payment Reporting Builds Credit, Inc., which allows the public to report their own payments for items which are not customarily included on the reports of the better known credit bureaus (phone, cable, rent).

All three major bureaus provide a credit report and TransUnion provides two different types. No two reports are identical. Equifax and TransUnion offer FICO scores which are used in more than 75% of all loans. Mortgage companies review both FICO reports in their lending decisions, but other creditors (credit card, auto loans, retailers etc.) usually prefer one or the other and tend to rely almost exclusively on that particular one.
Experian and TransUnion each have a separate internal report and score. They aggressively try to market these own internal products, presumably because there is more profit in it. Equifax has no such alternative report.

Auto dealers have their own secret scoring system. They use a FICO Auto Industry Option Score. Once again, the scoring is similar to that of the standard FICO score, but they look more closely at how you handled previous auto loans. If you have had other financial problems, but always handled your debts regarding your auto loans properly, you might actually get a lower rate on an auto loan than you would have suspected. On the other hand, there is nothing stopping a dealer from reviewing your entire credit situation and then using other bad credit against you anyway.

Certain other industries have their own alternatives to the FICO system for their types of loans. They are called Non-auto Installment Industry Options. They include Bank Cards and Installment Loans (furniture, electronics etc.). These lenders treat their scoring system similarly to the auto dealers, with extra weight given to the items on your report that relate to their particular products.

CALL TO ACTION
You are entitled to one free consumer report from each of the major bureau every 12 months. You can get them at www.AnnualCreditReport.com. However, those reports do not provide the FICO score, which is what you really want because so many creditors use those particular scores.

You can also purchase three-in-one or “merged” reports, but I don’t recommend them either for several reasons: Too few creditors use them; they are expensive; and they are more difficult to read.

That brings us back to the FICO reports. The only way to obtain your FICO reports is to purchase them, so I recommend that you purchase copies of your TransUnion and Equifax FICO scores. They cost less than $20 each. You can get them at www.MyFICO.com/12.

As stated earlier, Experian no longer offers FICO scores so they only have a non-FICO report. However, you might want to get their report anyway, just to be certain it does not have any damaging information that you should know about.

Important: Regardless of your financial condition, I suggest you stop everything else and go order your exact FICO scores RIGHT NOW! You will have them on-line within minutes and you can print them out if you wish. Then you will be able to begin improving your credit score by implementing the recommendations in the next chapters. But do not put it off. There is no benefit in waiting. Go ahead, I promise to wait for you.

Remember, you want the FICO scores from TransUnion and Equifax (here is the website again (www.MyFICO.com/12). The non-FICO score from Experian is optional.

THE PAYOFF
Once you obtain your FICO reports, you can determine who has been checking you out. You will also look for errors you can correct and what areas need improvement. You will find out if you have been a victim of identity theft. You can verify if your lenders have been reporting your good behavior. Be sure to check all current accounts and verify accuracy. You will probably notice that the reports do not all have the same accounts listed. You will want to notify them of any good accounts you have that might be missing on their reports.

You will observe several rows of tabs running across the top of your report. Notice the row with tabs numbered one through nine (1-9). You should review all of these sections.

NEGATIVE REASON CODES
Click the tab marked “Understanding Your Score” (Number 2). This could easily be the most critical section of your reports. You will have up to four very specific things you can work on to improve your own particular credit score. They are listed in order of how important they are to your score, and they will tell you what to do about it. Begin fixing them, in order of importance. For example, if you have too much debt for the credit you have available (too high of a balance on your cards), you know to pay down your cards or increase your available credit.

INQUIRIES
Click the tab marked “Inquiries” (Number 6). Here you will discover who has been checking you out. If you do not recognize their names, you may need to perform a web search. For instance, my life insurance company does their investigating under a name I did not know.

In many cases, but not all, these inquiries can pull down your score, so keep an eye on this section. Generally, an inquiry by anybody who just wants to learn if you are responsible or not (insurance companies, employers, etc.), will not hurt your score. But, when you have applied for credit or somebody is looking to extend credit to you, your score is vulnerable.

If you see inquiries in that latter group, which you did not authorize, you should send then a letter and demand that they either prove they had a “permissible purpose” to investigate your report, or remove their inquiry.

BECOME YOUR OWN ADVOCATE
Click the tab market “Accounts” (Number 5). The specific information provided in this section will enable you to see if there are any accounts you can improve or upgrade. For instance, one of my credit cards accounts showed my unpaid balance, but it did not show how much available credit I had; so, it appeared I was using all of my available credit, even though I was only using 5% of it.

Verify the information for all of your accounts. If you find negatives on your report, you can dispute them for any reason. If you had an unfair bill that you refused to pay, but now it shows up as a collection account, you can write a letter to the bureau involved and dispute the charge as “not yours”. They are obligated to verify with the creditor that the entry is legit. Sometimes they are unsuccessful in contacting the creditor or getting a timely response, in which case, they are required by law to remove the negative comment from your report. If the creditor reaffirms the information, the bureaus will not modify your report unless they made some error of their own. They will notify you of their findings and make changes where appropriate.

Your next step, and best bet, is to go directly to the source of the problem. That means the lender or creditor (not a collection agency). Send a certified letter to whoever is authorized to review such matters. Do your homework and provide any documents that support your case. Remain civilized. Be sure to tell them exactly what you are asking for; “I would like you to withdraw the account from the collection agency and correct all three credit reports.”
Many lenders/creditors will grant one such correction per year as a gesture of goodwill. Sometimes they will even erase several old blemishes if you have a solid year of on-time payments. If they agree to your request, be sure to verify with all of the bureaus that they made the corrections.

DOES NO REALLY MEAN NO?
Just because you get turned down is no reason to give up. Wait a few months and try again. There are all sorts of examples of creditors removing bad marks after repeated requests. They find the small accounts, the old accounts and the ones with similar names are just not worth fighting over. Sometimes they change their minds or put a new person in charge or just don’t care enough to keep fighting. So stick with it. If you are still unsuccessful after several attempts, you can hire a credit repairing expert or an attorney to take up the battle. If you are serious about cleaning up your credit reports, this is worth the time and money.

COLLECTIONS AND PUBLIC RECORDS
Collections are accounts that have been turned over to collection agencies. I suggest you discuss these account with the lenders themselves and not the collection agencies. If you get an inheritance or a nice raise, and if you are willing to pay a substantial portion of what you owe, they may be willing to remove the accounts from collection status. If so you should see a good improvement in your score.

Public Records indicate any relevant legal proceedings. This includes judgments, bankruptcy, foreclosures, repossessions, tax liens or garnishments. Most of them will stay on your report for 5-10 years, but a tax lien will remain as long as it is unpaid.

OTHER TABS
Be sure to check out the remainder of the numbered tabs. There may be specific issues you can work on to improve your score.

IS IT WORTH THE BATTLE?
When it comes to your final FICO score some of the errors on your reports matter much more than others. In fact, some of them don’t matter at all. Generally, your time is well-spent if you are disputing things like late payments, collections, accounts listed as anything other than “Current’ or “Paid as agreed”, as well as any credit limits that are reported as lower than they should be, charge-offs, anything that is negative and not yours, any negative comments that are more than ten years old, and any accounts that were paid off or written off in a bankruptcy but still show up as unpaid.

Most inquiries are relatively harmless unless there are a bunch of creditors like car dealers and unfamiliar banks snooping around. If you see inquiries like that or accounts that don’t make sense, you may be the victim of identity theft. In that case, notify the fraud departments of the credit bureaus and they will tell you what to do from there.
Most other mistakes such as an incorrect spelling of you middle name or the address of your employer or who closed an old account should be updated, but they don’t usually play any role in your score.

CONCLUSION
Finally, your score will be constantly changing so you should regularly obtain new updated copies of your TransUnion and Equifax FICO scores. If you discover more than a handful of mistakes on your report, you may need to get an updated report once every quarter for the first year. Once you have things cleaned up, I suggest once every six months after that. Get the free Experian score once per year.
I suggest you establish a tradition or HABIT of an annual review on your birthday or new yeas or tax time or some other trigger-date that will be easy for you to remember.

Now that you have your credit reports in hand, you are ready to learn the secrets of building a much better score. We will discuss that next time.

Comments?

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RETHINKING CREDIT

My upcoming book, Stop Flushing Your Money Down the Drain has a strong section on credit issues. There is something useful for everybody including the best place to get your credit report to establishing credit in the first place to advanced techniques that will build a dynamic credit score in short order. I have elected to share a few excerpts with you. Here is a little section covering why I think people ought to be required to take a Credit Test before they receive any credit at all.

YOUR CREDIT AND YOU

Do you have car payments or a student loan? When you use your credit cards, do you get benefits such as frequent flier miles? How often have you refinanced your home? Do you pay off your credit cards every month?

Naturally, most people never give much thought to credit until they are confronted with an opportunity to buy something for which they do not have the money. Department stores, gas stations or cell phones can all be the starting point. The new consumer jumps in without much guidance. The first payments are relatively small compared to the benefits. It all seems so easy and painless, and before long the little card is like a Christmas present that just keeps on giving. But, credit can be very fickle.

Credit can be like a best friend or a worse enemy. It can allow you to take advantage of bargains, and thereby pay less for goods and services, which you already buy. But credit can also be a curse, stalking you, tempting you and stealing away your resources and your future. It can be an addiction, just as damning as alcohol or drugs or gambling. It is a like a powerful saw. In the right hands it can build an empire, but when not used properly, it can cut off the hand of the operator. One thing is for sure: Credit is not “free money”.

HOW IT OUGHT TO BE

Nobody ever asked me, but if I had my way, I would require that all consumers take some sort of preliminary credit-awareness course, and a test, before they are granted credit in the first place. It would be similar to the driver’s license procedure. I suppose if the idea was presented to the Congress or a local Governor, one might hear something like, “There is a big difference, because automobile drivers can hurt other people and property, but credit does not pose the same risk to the public.” Naturally, I do not agree.

When adults get into credit problems, which they cannot handle, families get destroyed. It is often stated that half of all marriages end in divorce and most experts agree that the number one cause is financial hardships. Inevitably, the children are forced to change schools, abandon their friends, adapt to more humble surroundings and live in single parent situations.

All of this leads to bankruptcies and foreclosures, which in turn, means more vacant homes. Basic economics tell us that when the supply of houses is increased, the prices come down; and that affects everybody in the neighborhood. Foreclosures also cause lenders to charge everybody else higher interest rates and loan fees to off-set their losses.

On a grander scale, the entire country was brought to its collective knees when the housing market crumbled recently. Nearly every one of us suffered as housing prices dropped. Trillions of dollars were lost. The Banks closed and countless Americans saw their stock portfolios wither away. The Federal Government took on record levels of debt as additional trillions were created out of thin air for bailouts. All of the new National Debt will be thrust upon future citizens, many of whom are not even born yet. Higher interest rates and hyper-inflation threaten us. We have had a very severe recession. To add more fuel to the already raging fire, many other nations are worried about the financial strength of the once strong America and there is even talk of a world-wide depression.

All of that was because government officials and consumers themselves did not understand how easy it is to abuse credit. So, I say it again, “If we require a test and a license of drivers, because they might hurt somebody else, we should also require consumers to have some basic understanding of credit for the same reasons.” The first class of students should be comprised of congressional members and other government officials.

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Next up: Fun Historical facts about credit

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The Perfect Investment

Perfect? You be the judge. If you could make a guaranteed return of at least 2-3% higher than the rate at which you borrow money; If you could make an investment that required virtually no management; If your investment was guaranteed never to lose money (tell that to investors in the stock market); If you could make an investment that has the potential to return many hundreds of times your original investment: If you could make an investment that has no overhead; If you could get all of these for as little as a few hundred dollars, would you be interested? Well, please allow me to introduce you to property tax certificates.

If you ever stumble upon late-night infomercials on TV you have probably seen John Beck; He sells a program that helps people to acquire tax certificates. His program is around $50 and probably worth the price but his customer service rating is rather dubious. [Click here;^http://www.infomercialscams.com/scams/john_becks_tax_lien] to see what I mean. He calls his system “Free and Clear.” I am neither endorsing him nor criticizing him. I am merely pointing him out because he is fairly well known. My focus is on the process and the concept itself, not on Mr. Beck or his particular program. The bottom line is I know that buying certificates works because I have bought some myself.

Here is how it works. Some property owners (do not restrict your thinking to residential properties, because it apples to vacant land, shopping centers and all other property) do not pay their property taxes when they are due. This can be because they have no loan so there is no monthly tax payment; or they might have a loan but pay their taxes separately. Or the property might be abandoned.

Enter the County Assessor. This government official is charged with the duty of collecting property taxes for the benefit of the related government. So, if the taxes remain unpaid for a few months, the assessor sends out notices to the appropriate owners but sometimes they still fail to respond. Eventually, the assessor schedules a time to sell the tax debt to an investor. They publish the sale details in local newspapers and on their websites. These sales are frequently held in the fall. Sometimes hundreds of buyers show up and on other occasions there might only be a handful of interested parties.

The various assessors do not all handle the details the same way, but their objective is always the same: To collect unpaid taxes. Sometimes the sale itself is carried out by a different government agency such as the Public Trustee’s Office. Potential certificate buyers register and get a bidding number, then the program begins.

At one such sale I attended, we were assigned seats. There were about 400 certificates up for grabs and about 250 registered investors. The assessor produced a list of the properties then randomly picked one investor as a starting point. The person in that seat was offered the first property on the list for the exact amount the taxpayer owed, including all fees and penalties to date. The investor could either decline or accept. If he accepted, he would not get another one until everybody in the room had purchased one certificate. If the investor passed, the assessor offered the certificate to the person in the next seat until somebody accepted it, which was usually very quickly. Once everybody had a certificate, the people who declined were granted a second and final chance to accept one. Then some people got a second certificate. The only variation was when they came across a certificate for a small lot or a commercial property. In the case of the land, they randomly assigned a certificate to an investor, but nobody got more than one of those. When the certificates for commercial properties came up, there was actually a bidding process to see who would pay the largest premium for the certificate. They went for about 5% over the total amount due. Before we left, I got a nice certificate for a middle class home. It cost me about $900. I also got one of the certificates for a lot. It was about $120. They both paid me 10% when it cost me about 7% to borrow from my bank.

At another such sale I attended, there were nearly one thousand bidders and most of the certificates were sold via a bidding process. Once again, they went for 5% over the amount that was due. I did not buy any.

After the sale, the tax payer owes the investor the amount he paid for the certificate plus interest to date. The owner and investor never actually meet each other because the government agency attends the details. If the taxes remain unpaid the next year, the certificate holder automatically gets to pay that tax for the property owner again, although he is not obligated to do so. In some cases the investor pays the taxes for three consecutive years. About that time, it becomes apparent that the property owner has no intent to pay the taxes, so the next phase kicks in.

The investor notifies the same government agency that the tax payer has never paid back the investor his money. At that point, the government makes a final effort to reach the tax payer to inform them of the impending loss of their property. They make a very sincere effort to make sure that innocent people do not lose their homes. But, sometimes they simply cannot find the owner, his heirs or anybody who has a legal right to the property. If all of that fails, they execute a deed transfering the property to the investor. In that event the investor owns the property free and clear of all debt and fulfills Mr. Beck’s promises.

One knowledgeable official told me that approximately one certificate results in a deed being transferred to the investor. All of the rest of them get paid off by the tax payer; but even in those cases the investors who hold those certificates still make a nice return on their money.

In some of the out-of-the-way counties, where it is difficult for masses to attend the sales, there are more certificates than bidders. If you are willing to do some homework, you can contact the appropriate agencies and buy the certificates that remain unsold. Sometimes you can complete the entire transaction right from your own computer, even if you live in another state and never do visit the property.

I think this is an incredible investment vehicle for certain people. You must have the time to do research and then be able to buy enough certificates to justify your time. But the rate of return is always good and occasionally it is awesome. Any investor who has lost money in the stock market or watched their property values drop would love those odds.

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