Simple Tips to Change Your Financial Behavior

Americans have a renewed interest in all things frugal during this recession.  They’re spending less money, using credit cards less. 

About ½ of Americans report they either avoid shopping altogether or shop only for those things that are absolutely needed, according to a survey sponsored by Citi.  72% of Americans say they have cut back on everyday expenses. 

In addition, 80% claim to have at least a plan for income and expenses, up from 47% in 2006, according to a survey by Synovate commissioned by personal finance author Matt Bell

Since consumer debt peaked in 2008, Americans have chopped $922 million from their debt, or 7.4%, according to the Federal Reserve.  Americans are reducing debt at a pace unseen in at least a decade, according to a recent Fed report.

 How do we make these changes? 

Change your words – instead of a temporary exercise in deprivation, view it as a lifestyle. 

Have goals – “I’ll pass on purchasing this item because I want to go on vacation in June.” 

Track Progress – Monitor your debts and vacation accounts.  When you see that spending smart is getting you closer to accomplishing your goal, that’ll motivate you to keep going. 

Make savings automatic – The easiest way to save is to have your savings deposited automatically from your paycheck to a savings or retirement plan

Make a windfall rule – When you receive a sudden increase of cash (i.e. tax refund, bonus, gift); make it a rule that these are used to paying off high-interest debt or savings.

 Source: RIS Media

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How to Improve your Credit Score before Searching for a Home

If you are thinking about purchasing a home, it is best to look at your credit report at least SIX months prior to purchasing a home.  It is a good idea to give your credit score a check-up and then take positive stps to improve your credit score if you find problems.  Make sure you check all three of the national credit reporting agencies: Experian, Trans-Union and EquiFax.

Review your credit carefully for items that may be reported incorrectly.  If you believe something is in error, you have the right to contest it.  You will need to contact the credit reporting agency and explain why you believe the item is inaccurate.    Alternatively, you can engage a credit report repair services firm to fix your credit report.

If there are derogatory items on your credit report that are accurate but which could cause problems in your loan application, you cannot have them removed; however, you can take steps to counteract them.  If you have missed payments in the past, take steps now to get your bills current.  Even if it means using the funds that you might be planning to use for a down payment.  It is extremely important that you get your accounts current and keep them current.  There is nothing which can lower your credit score more quickly than late payments.  Over time, this can make a significant difference in your scores.

Also keep in mind that removing all of your credit balances is really not the solution.  In fact, credit can be your friend when you are looking to purchase a home.  Make sure your credit is POSITIVE, not NEGATIVE.  Toward that end, avoid closing out your accounts.  Instead, make an effort to pay down your balances and keep them paid down below the minimum or completely paid off, but DO NOT CLOSE THE ACCOUNT. 

After reviewing your credit report and you see that most, if not all of the credit cards are nearly maxed out, it is time to sit down and plan an agressive strategy for paying some of them down.  One of the critical factors that often determine your ability to be approved for a mortgage is your debt to income ration.  In addition, high credit card balances can drag down your credit score.  Therefore, it is important to look at paying off some of your balances.

By following these steps, you can improve your credit score and improve your chances of being approved for your home loan

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What your FICO Credit Report Score Consists of

It seems today that everything revolves around your FICO score (i.e.  Insurance, Auto Loans, Mortgages, Employment).

Your FICO Score consists of five different categories:

 35% – Payment History
30% – Amounts Owed
15% – Length of Credit History
                                                          10% – New Credit
                                                          10% – Types of Credit

Payment History
– This is the most important category, it gives the overall picture of how well a person handled loans, credit cards and other types of accounts in the past.  Are the payments made on time versus payments that are delinquent.  Time does play an important factor.  If you have a history of past due amounts, the amount of time should play an important role in how a FICO score will be affected in addition to the number of occurrences.  On the other hand, good payments on your past accounts and the number of accounts that were paid on time will be reflected positively on a person’s credit score.

Amounts Owed –
This portion consists of how much you owe, or have a balance on, what types of accounts the amounts owed are a part of as well as the capacity of unused credit a person currently has available to them.  Each type of account is weighted according to the type of loan per se a retail store account versus a mortgage.  This is all taken into consideration when calculating your score.  The amounts owed on card balances and other accounts or loans are totaled and expressed a s a ratio of what you currently owe versus what your currently have avaialbe to you.

Length of Credit History – This portion looks at the length of your overall credit history.  It is calculated by gathering up data on all previous and current accounts and analyzing how long you have had the accounts as well as the time of your most recent activity on the accounts.  Also taken into consideration is the types of accounts that you have been using or have not been making payments on, such as mortgage versus payments on new purchases on your credit card.

New Credit – This section reviews the number of new credit inquiries or new credit that has been obtained and/or applied for, such as new credit cards, car loans, mortgages, etc., as well as any repaired credit or re-established credit for those who have made an improvement on their credit score after their credit score had dropped due to past delinquent account activity. 

Types of Credit – The types of credit has a lot to do with how much of an influence it will have on the actual credit score.  Credit cards or other revolving debt, installment loans, consumer financing and mortgages are all considered when observing the types of credit a borrower has established and/or is currently making payments on.

 Even with the breakdown of categories and the percentages each category bears on your FICO score, it is nearly impossible to figure out on your own.  You can obtain a free credit report online and for an additional fee, you can obtain your FICO score at several sites.

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