Millennials Are the Worst at Managing Debt
(Dallas, TX-National-Credit-Solutions) Millennials have had a rough entry into adulthood: not only have they struggled to find entry-level jobs in a tough economy, but they are also the worst at managing their debt.
Most Millennials (ages 19-29) have piles of student loans to pay off, shaky job prospects, and a poor understanding of how to properly manage their credit. Experian’s “State of Credit” study found that the average credit score of Millennials is shockingly low: 628.
This low number is surprising, considering that Millennials own an average of only 1.5 credit cards and carry an average balance of $2,700. While other generations have higher balances than these Millennials (the national credit card balance average for people 30-65 is $5,300), this younger generation has little knowledge of how to properly manage its debt.
Although Gen-X and Millennials are just as likely to make late payments or max out their credit cards, Gen-X has more assets and longer credit histories than the Millennials, which means that their credit scores do not suffer like those of Millennials.
Experian’s study also showed that Millennials are the most hesitant generation to accept loans, which is largely due to the unstable economy and the poor job market for young adults. Yet despite the fact that more young adults are avoiding borrowing money, their generation still finds itself burdened with debt and at a loss of good debt-management skills.
It seems as though many Millennials were never taught how to properly build credit or how to manage their debt so as not to damage their credit score. So if you are one of the millions of Millennials struggling with debt, here are three ways you can improve your credit score:
1) Get a Credit Card
More and more Millennials are avoiding credit cards, perhaps because they fear they won’t be able to control their spending habits. However, since you need credit history to have a credit score, it is essential for young adults to have a credit card. Even if you only charge a small amount to your credit card every month, you are still building good credit!
2) Pay your bills on time
This one might seem obvious, but many young adults are juggling new careers, student loans, car loans, and rent, so many of them decide that making a late payment now and then is acceptable. Unfortunately, this is not the case. Since Millennials have a short credit history and few assets, it is important that you pay your bills on time. Start budgeting your money to ensure that you can make your payments every month.
3) Choose transportation wisely
Don’t splurge on that expensive SUV that will eat away at your bank account. Instead, find a reasonable, affordable car or rely on public transportation. This will help you save money so that you can pay off your bills on time and keep your credit score strong.
Although Millennials are facing a tough job market and are wary of borrowing money, it is important for them to learn how to manage their debt more effectively in order to improve their credit scores.
Smart Credit Decisions for Entrepreneurs
(Dallas, TX-National-Credit-Solutions) Without inventive young entrepreneurs, we would have no iPhone, no Facebook, no Starbucks, and no Disneyland. Thankfully, bright young thinkers still continue to take risks and dream big, but many of the most creative entrepreneurs still have trouble funding their startups. Here is a look at how entrepreneurs can make smarter credit decisions that will help them transform their ideas into reality:
1) Open a business credit card
Many entrepreneurs do not have a long credit history, which can be problematic when applying for small business loans. However, it is crucial to start building good credit as soon as possible to further your business. Once you have enough personal credit history to open a business credit card, create a separate account for your business so that you can start funding it with credit.
2) Don’t mix business with your personal life
While there are a few success stories where entrepreneurs have used their personal credit cards to build their business, this often causes more problems than not. Separating your personal finances from your business finances can save you a great deal of stress and endless headaches.
3) Create a cash reserve
It is a good idea to build a cash reserve in case of emergencies. Entrepreneurs often hit snags in their plans, and many have to fail a couple of times before they succeed. Don’t let this deter you from pursuing your ideas, though, just consider setting aside a certain amount of cash each month in case you run into a rough spot. This cash can help bail you out of debt that could (if left unpaid) wreck your credit score.
4) Be aware of your debt-to-income ratio
While ambition is one of the most admirable qualities of entrepreneurs, it can also lead them into tumultuous financial situations. Instead of being overly ambitious and optimistic about your new business, play it a little safer so as not to max out your credit cards and become burdened with debt. Keep your debt-to-income ratio low to avoid sinking your business.
Entrepreneurs need to maintain a good financial record for various reasons: to appeal to potential partners, to obtain a loan for business expenses, to start another business, and to attract investors. It’s no secret that entrepreneurship requires risk, but it also requires attentive financial maintenance and smart credit decisions.
5) Know what’s on your Dunn & Bradstreet report
FICO vs VantageScore
(Dallas, TX-National-Credit-Solutions) When discussing credit scores, FICO – the credit scoring company, Fair Isaac Corporation – always comes up at some point during the conversation. Because of FICO’s dominance in the lending industry, fewer people know about VantageScore, a second credit scoring company that started as FICO’s rival eight years ago. Both FICO and VantageScore provide lenders with credit scores, but each one takes a different approach to calculating the scores. Here is a look at some of the biggest differences between the two credit scoring companies:
1) The Scoring Models
FICO’s scoring model consists of combining various elements of your credit history to obtain a score between 300-850. The higher your credit score, the less of a risk you are to lenders, which means you will qualify for better loans, top cash back, and more reward cards. If your score is on the lower end of the scale, you are considered a high-risk borrower, and therefore you may have trouble getting a loan.
The VantageScore is largely based on a 24-month review of your credit report, which includes components similar to that of the FICO score – payment punctuality, your available credit, the amount of debt you have, etc. One of the most noticeable differences between FICO and VantageScore is the scoring model: VantageScore combines a three-digit number ranging from 501-990 with a letter grade to reflect your credit standing. For instance, if you have a VantageScore of 850, you will be assigned a letter grade of “B”, and if you have a score of 920, you will have an “A”. Similar to the FICO scoring system, a high credit score is desirable, and a low score means you have poor credit.
2) Scoring Requirements
It shouldn’t come as a surprise that to have a credit score, you must have some sort of credit history. FICO requires you to have at least six months of credit history and at least one account reported in the past six months. VantageScore, one the other hand, requires only one month of history and an account reported to the Credit Reporting Agencies within the last two years.
So what does this difference mean for credit card users? It means that VantageScore can score millions more people, which can be especially beneficial for those who have just recently started to build credit or those who have not used credit recently.
3) Late Payments
Late payments can damage your credit score, which is why it is crucial to always make your payments on time. That being said, VantageScore looks at the various types of late payments differently. If you are late on your mortgage payments, your VantageScore will be negatively impacted more than it would if you made a late payment on a car. Alternatively, FICO treats all late payments similarly; so paying your mortgage late won’t devastate your FICO score as much as it will your VantageScore.
Although many experts see great benefits in the Vantage scoring system, most lenders still rely on FICO. Since FICO remains #1 on the credit scoring scene, you should focus more on your FICO score than your VantageScore. However, it is a good idea to ask your lender which scoring method they use so that you can determine what type of rate you may qualify for before applying for a loan.
While you may think that it is prudent to cancel old or unused credit cards, this seemingly harmless action can actually backfire and hurt your credit score.
“But how?” You may be wondering, as closing a credit card may seem like a financially responsible decision. Many people think that since closing a credit card will lower their credit limit, it will help them spend less or will make their finances easier to manage. Unfortunately, what people don’t realize is that canceling a credit card often directly affects your “credit utilization ratio” – your debt-to-credit ratio.
For instance, if you have a credit limit of $1,000 and have a balance of $800, your debt-to-credit ratio would be 8-10, which is considered extremely high. Ideally, you should try to spend between 10%-30% of your credit limit, and then pay off the balance quickly.
If your credit utilization ratio is high, credit agencies will consider you a financial risk, which can negatively impact your credit score. And even more bad news: your credit utilization ratio is the second largest component of your credit score – a whopping 30%. Therefore, keeping a low debt-to-credit ratio is crucial for maintaining a good credit score.
To understand how closing a credit card can affect your credit utilization ratio, consider this example: if you have three credit cards that, when combined, give you a $10,000 credit limit, and you typically only charge $2,500 to your cards each month, your credit utilization ratio is 25%, which is within the desired range. However, if you decide to close out one of these cards, whether because it is old or because you think it might simplify your finances, your credit limit will drop drastically.
Closing out a card with a $3,000 limit will now give you a debt-to-credit ratio of 2.5-7, or about 36%. So just by canceling one credit card, whether or not it is one you actually use, you have significantly raised your credit utilization ratio, thereby damaging your credit score.
However, there are certain instances when it makes sense to cancel your credit card: when your card is used fraudulently and the credit card company does not cancel the card and issue a replacement, or when you find a lower rate card and want to switch.
In these cases, it is still important to take precautions when closing old credit cards and opening new ones. First, make sure that the credit limit of the new card is equal to or higher than the one you are closing, as this will help ensure that your credit utilization ratio is not affected. Also, timing is everything when canceling a credit card. If you decide to cancel one, avoid doing so before applying for a loan in order to keep the interest rate low. Wait until after the loan is approved to close the card. And, of course, it is always important to manage your credit utilization ratio wisely to keep your credit score strong.
If you feel that having multiple credit cards is causing you to spend beyond your means, shred one of them or hide it somewhere deep inside your closet, just don’t cancel the card!
How to avoid credit card fraud
It may seem odd that a small piece of plastic is more desired by thieves than a stack of cash, but your credit card offers them the possibility to spend significantly more money than if they just swipe a few twenty dollar bills out of your pocket. Unfortunately, credit cards are very susceptible to theft and fraudulent purchases, mainly because they are small, easy to lose, and you regularly enter your credit card information online. So what measures can you take to avoid credit card fraud?
Protect your credit cards – This may seem like an obvious tip, but many people are too cavalier with their credit cards, treating them like disposable pieces of plastic rather than actual money. Keep your cards inside your wallet or zipped up inside your purse at all times to protect them from sticky fingers, and never leave your credit card out in public, as thieves can easily take a picture of your card and use its information to make purchases under your name.
Invest in a shredder – Never throw away your bank statements before shredding them, as these documents contain your personal banking information that thieves can use to steal your money. To avoid someone rifling through your trash and finding your bank account number and other confidential information, shred each piece of paper before tossing it in the trash. This also applies to old credit cards: cut them up before discarding them so that your credit card number is illegible and won’t be of use to potential thieves.
Guard your credit card information – Scammers are rampant online, and guarding your credit card information while browsing the web is crucial. Be wary of online scams that ask you to enter your credit card information, such as shady online vendors or businesses that pretend to have your personal information. If you are ever suspicious of online communication with someone claiming to be from your bank or credit card company, call your company immediately to see if this is, in fact, a scam.
Keep track of your purchases – Some thieves choose to play a more coy game, where they steal small amounts of money each month in hopes that the card’s owner will overlook these small purchases (and most of them do). If you do not pay close attention to your monthly statements, you may fall victim to credit card fraud without ever knowing it. Even if a scammer only takes $20 a month out of your account, this still amounts to $240 a year that is being stolen from you. So keep track of your purchases by saving receipts or keeping a journal documenting your spending so that you can compare your purchases with your credit card statement at the end of the month.
Report lost or stolen cards immediately – As soon as you notice your credit card is missing, contact your bank or credit card issuer immediately and have them cancel the card. If you report a loss or theft immediately, you will decrease your chances of being charged for any fraudulent purchases. Similarly, if you begin to notice fraudulent activity on your bank statements, contact your bank immediately and notify them. The sooner you become aware of credit card theft, the less damage you will be responsible for.
If you do happen to be the victim of credit card theft, your first thought may be that it will damage your credit score. Fortunately, fraud alerts do not hurt your credit score, but it will make creditors more cautious when approving a credit application in your name. In order to make sure that a thief is not applying for credit under your name, they will go through a double-check process, which can slow down the process of getting a loan.
So if you are the victim of credit card fraud, report it immediately, as this will likely save you money and stress, and will not harm your credit score.
Why Students Should Start Building Good Credit Now
For many college students, the idea of establishing credit rarely crosses their minds; or if it does, they assume that credit is something that they won’t have to worry about until far after graduation. This isn’t the case, however, as building good credit during your years in school is crucial for preparing you financially for life after college.
Why Good Credit Matters to Recent College Grad
1) Employment Opportunities
Your credit score can start impacting your life immediately after college. Many employers conduct credit checks of potential employees, and a bad credit score could make you seem financially irresponsible, which could ultimately deter an employer from hiring you. If you choose to follow your dream of becoming an entrepreneur instead of finding a job right out of college, a good credit score is even more important. Most young entrepreneurs do not have the capital to successfully start their own businesses, and therefore must rely on receiving small business loans, which are difficult to obtain without good credit.
2) Living Situations
Aside from your career, your credit score also affects your day-to-day life. Unless you plan on moving back in with your parents, having a good credit score will help you find a place to live after graduation. Many landlords will conduct credit checks when you apply for a rental to ensure that you have a good history of paying off your debts, and a bad credit score could cause landlords to turn you away.
Finding a method of transportation can also be difficult when you have bad credit, as both leasing and buying a car is easiest and most affordable with a good credit score. Most recent grads do not have the cash to buy a car, which means that a loan is necessary. Not only does your credit score determine whether or not you qualify for a loan, but it also helps lenders decide on the interest rate of the loan. Establishing a good credit score while you are still a student can help you save money by avoiding high interest rates on car loans.
Ways College Students Can Build Good Credit
Many students are under the impression that they can only start building credit once they have a reliable source of income. Whether you work part-time at your school’s cafeteria or babysit occasionally on the weekends, you can (and should) start building credit immediately.
1) Ask your parents for help
Owning a credit card is a huge responsibility, as you must realize that every time you swipe the card, you are using real money that you are obligated to pay back. Because of the weight of this financial responsibility, students can ease into establishing credit by “piggybacking” on their parents’ account. The parents can monitor the student’s spending since the child is an authorized user of the account, and if the parents have good credit, the student’s credit score will also improve.
2) Apply for your own credit card
It is surprisingly easy for most college students to get a credit card, as many lenders assume that your parents will help you out if necessary. When deciding on which credit card to apply for, make sure to consider the card’s interest rate, credit limit, fees and penalties, and rewards program. Be extremely cautious when using your credit card, however, as many students tend to get carried away with spending when their credit limits are high. To avoid this, ask your credit card issuer to keep your credit limit low so that you can easily pay off any balances you incur.
3) Make small purchases
As a student trying to build good credit, it is important that you do not spend more money than you can afford to pay off. Try to keep your spending under 30% of your card’s limit, and use it mainly for occasional small purchases such as food, music, or movie tickets.
4) Pay off your balance every month
The most important step in building good credit is paying off your balance every month. When you are first trying to establish credit, it is a good idea to avoid carrying a balance on the card. To do this, though, you must be strict in your spending habits and only purchase things that you know you can afford.
College is not only a time to receive a good education and to learn how to live independently, but it is also a great time to start establishing yourself financially. Building and maintaining good credit in college can be easy and hassle-free if done correctly, and a good credit score can be invaluable after graduation.
I think we all make mistakes with credit cards at one point or another. I made mine in college, and paid for those mistakes for years. The trick is to learn from those mistakes—or better yet, learn from other people’s mistakes and never make them yourself. Here’s a list of what I think are the 4 biggest mistakes.
1. Taking what the credit card companies give you.
I don’t understand why people just take what the credit card companies offer them. Interest rate is going up? Okay. Your credit limit is being lowered? That’s fine. This attitude baffles me. You, yes YOU, can negotiate with credit card companies. I know this from experience on both sides of the issue—both from working for Household Bank and later HSBC, and from being a consumer myself. Call the credit card companies and talk with them about better rates. The credit card industry is a business, and like any business they want to keep their customers. It’s cheaper for them to give you a better rate than it is for them to find a new customer to replace you. Advertizing is expensive.
2. Paying late because you forgot.
This is something we’ve all done at one time or another I think. You get your statement, you open it, and you see the due date is a couple weeks out, so you set it aside intending to mail the payment Friday after you get paid. Then Friday comes and goes and that bill you set aside is out of sight, out of mind. A week later you’re opening up a new bill and you go to set it aside and what do you find? The bill that you set aside 2 weeks ago that’s now late. It’s a slippery slope; because once you start paying late you open the door to penalty fees and rate changes. Find an organizational system that works for you. One thing that works for me is having a file box with 31 folders in it. When I get a bill that I am not going to pay immediately I decide when I am going to pay it and put it in the appropriate file folder. I check the folders each day to make sure there isn’t anything there that I forgot about. This system works for me, but you might be different. Either way, find fail safe that will keep you from paying a bill late just because you forgot about it.
3. Not paying your balances in full each month.
Hopefully it’s not too late, but if you’re not already in the situation where you are carrying balances on your cards, don’t! The temptation can be so great. You know you have the money to afford something if you save up for it, so you justify putting a large expense on your credit cards promising yourself you’ll pay it off quickly. But like the slippery slope of paying late, this is a slippery slope coated in Teflon and you’re wearing silk. Use your cards responsibly, don’t put yourself in a situation where you’re carrying a balance and making minimum payments. Before you know it you’ll look at the new section on your credit card statement that tells you how long it will take you to pay the card off and you’ll be sick to your stomach.
4.Last but not least, denial.
Just like with alcoholism or gambling problems, or any issue really, you first have to acknowledge that you have a problem. If you’re deep in credit card debt and unwilling to admit to yourself that you have an issue, you’ll never be able to get out of the pit of debt. You need to honestly evaluate your credit card situation and figure out what needs to change. Are you in massive debt because you spend money on credit cards because the cost is less real to you because you’re not physically handing someone cash? Are you addicted to the convenience of cards? Are you just living beyond your means because you want to keep up with the Joneses or you just have to have the latest gadget? Whatever the reason is, you have to first admit you have a problem, identify the underlying cause, and work out a solution. If this is something you need help with, give us a call here at NCS, we can help.
There’s been a lot of talk in the news today and over the weekend about Obama meeting with the heads of the largest banks today. He’s having a little sit down in Washington with over a dozen bank heads from Bank of New York Mellon Corp., Bank of America Corp., U.S. Bancorp, JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs, Citigroup, etc, to supposedly read them the riot act about lending to small and medium size businesses.
The main thrust, which he alluded to over the weekend on television when he called the heads of the banks (the people he called “fat cats” on national television), is that these banks largely created the current economic crisis, were bailed out with hundreds of billions of dollars in tax payer money, got back on their feet, paid out huge bonus to their executives, but now aren’t stepping up to the plate to lend money again, helping put the 10% of unemployed Americans back to work. He’s also more than a little peeved that these banks aren’t jumping on the bandwagon to support the Consumer Financial Protection Agency that cleared the House last week, but are instead spending millions lobbying against it. Banks on the other hand argue that Obama is greatly oversimplifying the issues at hand, that it’s more complicated than just saying “okay, we’re going to lend money again”, and that the tighter lending standards are necessary to keep the country from going into another economic whirlpool of defaulted loans.
Michael Steele, the Chairman of the Republic Party, agreed with the bankers that returning to the loose lending practices of the past would be disastrous. He instead suggested an alternative to irresponsible lending by saying “Let’s eliminate the capital gains tax, reduce the unemployment tax and give some incentives for small businesses.”
So who’s right? Do the “fat cat bankers” need to open the floodgates of cash? Do we need less regulation for the banking industry so they can make their own corrections? Should we give small and medium size business owners a break on taxes and instead incentivize them? In my opinion it’s a little of all of the above. Let’s hope these talks bring some cooperation rather than the typical blame game, because that’s the only thing that’s going to benefit the common man.
So here’s my open letter to bank executives, Obama, and everyone else with a say in this:
To whom it may concern,
Please relax lending standards, but do it responsibly. There is middle ground between the loose and fast practices of the early ‘90s and the almost complete lack of lending now, find that middle ground for the sake of the 10% of the country out of work, the hundreds of thousands of people who have applied for mortgage modifications and have been denied, the business owners working hard to turn a profit and create and maintain jobs who desperately need funds to grow, and everyone else who is just fine right now, but won’t be if the economy doesn’t turn around. Obama, please stop playing the blame game and focus on responsible solutions to unemployment and practical banking regulation. Congress, for the love of all that’s good and decent, fix the mess you created with the Credit Card Reform Act. By giving in to lobbyists you’ve created a situation where the banks are killing us with fees and interest rate hikes while destroying our credit with lower credit limits before the new rules go into effect next year.
There’s a way out of this economic mess, work together to find it for the good of everyone rather than covering yourselves. Be unselfish for once. Turn this all around before it’s too late.
“Debt consolidation.” It has such an alluring ring to it. It creates this fantasy that you can wrap up all your debts into one attractive, low interest package, and everything will be hunky dory with your debt. Sadly, the easy quick fixes are often rather bad for you, financially and credit worthiness-wise.
This glorious idea of an easy fix to being thousands of dollars in debt has been fertile soil (fertile with manure) for an entire industry with fabulous claims of lower monthly payments, low interest rates, and zero hassle.
You know what they say about something being too good to be true though…
So before you jump feet first into debt consolidation, be sure you’re aware of a few things.
- Debt consolidation companies are not nonprofit organizations, they won’t improve your credit, and they won’t do anything you can’t do yourself. Here’s the deal, from an industry insider: you gather all your paperwork and send it to them, they tell you how much to pay them each month, then they’re supposed to negotiate lower payments and interest with your creditors and make the payments for you. The reality is they are notorious for paying your bills late, destroying your credit, they take 10-20% of what you pay them each month for “administrative costs” (it’s not profit, they’re a nonprofit organization, remember), and they once again can’t get better rates than you can by spending some time on the phone with your creditors. Some of the worst of them will even purposely let your debts charge off so they can negotiate a better settlement on your debts once they’re turned over to a collection company, allowing them to take a portion of the money they “save” you. Believe me, with the hit your credit will take by doing that, and the resulting higher interest rates and fees you’ll have on everything after that due to your abysmal credit, you’re not saving anything.
- So what if you’re not going with a debt consolidation company, but are instead getting a debt consolidation loan? Well, that is a much better option, but it’s still not a good option. First of all, chances are good you’ve got some dings on your credit already if you’re looking for a consolidation loan, so the chances of you getting a loan are pretty slim, and if you do get the loan, your interest rate isn’t going to be better than the cards you’re paying off. So you get the convenience of one payment, but no monetary savings, and that’s what this is supposed to be about, saving money, not just convenience. So don’t believe the promises of easy money, it’s just a lure to get you in the door like a wide mouth bass.
- What about flipping your debt from card to card chasing the no interest balance transfers? Well, it’s bad for your credit, the banks will catch on and cancel the cards, it’s illegal, and there is the little thing of our failing economy and the fact that those zero percent interest cards just aren’t available anymore. This solution is so… 2007. Reality caught up to this plan about a year ago.
So what should you do?
- Get a home equity loan. This will have a low interest rate and the interest will be tax deductible. You’ll have the up-front costs of origination fees, insurance, and an appraisal. Warning though, this isn’t as easy as it once was before the mortgage crisis, but if you’re lucky enough to still have equity after the freefall of housing prices, this is an excellent option.
- Negotiate with your creditors on your own. Remember the credit card industry is “losing” tons of money right now because the impending enforcement of the credit card reform act, so they’re probably going to be more willing to bend to keep the paying customers they still have. This gives you leverage. They want you paying, and paying them, not defaulting or taking your business to another bank.
- Refinance your home, cashing out your equity. This is different from a home equity loan and will give you lower monthly payments because you’ll probably get a longer loan term than a standard equity loan. Keep in mind though; this is going to cost you more in the long run because you’re extending the length of your mortgage without lowering the price of the home. If you can get your credit cards debts paid off though, and then apply all or a portion of what you were paying the credit cards companies toward your mortgage, you can minimize or overcome the damage though.
- If you have somehow weathered this without destroying your credit already, a personal loan from a credit union might be an option. You’ll get interest rates in the 10-15% range most likely, but that’s still better than the 24.99-29.99% you’ll be paying on credit cards these days.
- If the situation is truly dire, you might also want to consult with an attorney. It’s sad, but true, that is some situations bankruptcy might be your best option. I strongly advise seeking legal advice before going down this route though.
- Last, but certainly not least, there’s the hardest, yet easiest option. Living within your means. Paying off your debts can be accomplished by putting more money toward them each month. That might mean cutting back on eating out, getting rid of the 300 channels of cable since you probably only watch 3 of them anyway, maybe carpooling to save gas, get a second job, etc. Make a personal budget, find where you can cut back, and put that money toward the bills. This doesn’t require loans or lawyers or anything else because it easy, but living within your means can be so hard. It takes self control and determination, but the rewards are great.