So, it happened again...

I had another piece published in www.LDSLiving.com 's magazine. Sweet! Here's the URL:

http://www.ldsliving.com/magazine/show/2085/Safer-Investing-Tools

Loads of great information about the better investing tools out there. Check it out... share with friends... and remember to eat your veggies.

Lesson 8: More About FICO and Understanding Your Report

More about FICO and Reports

Other Names For FICO® Scores
In general, when people talk about "your score", they're talking about your current FICO® score. However, there is no one score used to make decisions about you. This is true because:
Credit bureau scores are not the only scores used. Many lenders use their own scores, which often will include the FICO® score as well as other information about you.

FICO® scores are not the only credit bureau scores. There are other credit bureau scores, although FICO® scores are by far the most commonly used. Other credit bureau scores may evaluate your credit report differently than FICO® scores, and in some cases a higher score may mean more risk, not less risk as with FICO® scores.

Your score may be different at each of the three main credit reporting agencies.The FICO® score from each credit reporting agency considers only the data in your credit report at that agency. If your current scores from the three credit reporting agencies are different, it's probably because the information those agencies have on you differs.

Your FICO® Score Changes over Time. As your data changes at the credit reporting agency so will any new score based on your credit report. So, your FICO® score from a month ago is probably not the same score a lender would get from the credit reporting agency today.

Credit scores are important because they are used by almost all lenders and have a direct impact on your credit. The higher your score, the better your chance of getting good loan rates and approvals. The lower the score, the higher interest rates you will pay because you are 'more of a risk'. The chart below is intended to give you an idea of a given scores rating. Each lender uses their own criteria for approval and denial as well as rates.


For a FICO® score to be generated, your report must include at least one account which has been open for six months or longer. In addition, the report must include at least one account that has been updated in the previous six months.



Factors That Impact Your Score

What is calculated into your score:

• How long you've lived at your current address
• Residential phone number
• Employment history
• Your financial obligations (debt-to-income ratio)
• Any late payments
• The amount of credit you have outstanding
• The amount of credit you are using
• The amount of time you've had credit established
• Ratio of high limit to balance
• Derogatory information (late payments, collections, charge offs, bankruptcies, etc.)

Factors correlated with higher risk:
Excessive amount owed on accounts
Proportion of loan balances on installment accounts
Too many new or existing accounts
Too many recent credit checks
Proportion of revolving balances to revolving credit limits is too high (e.g. credit card balance vs. limit)

FICO® scores consider a wide range of information on your credit report. However, they do not consider:

• Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
  
• Your age. Other types of scores may consider your age, but FICO® scores don't.
  
• Your salary, occupation, title, employer, date employed or employment history. Lenders may consider this information, however, as may other types of scores.
  
• Where you live.
  
• Any interest rate being charged on a particular credit card or other account.
  
• Any items reported as child/family-support obligations or rental agreements.
  
• Certain types of inquiries (requests for your credit report). The score does not count "consumer-initiated" inquiries---requests you have made for your own credit report, in order to check it. It also does not count "promotional inquiries" ---requests made by lenders in order to make you a "pre-approved" credit offer---or "administrative inquiries"---requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
  
• Any information not found in your credit report.
  
• Any information that is not proven to be predictive of future credit performance.
  
• Whether or not you are participating in credit counseling of any kind.
  

Types of Reports

Individual Reports from One of the Big Three
Each of the Big Three keeps a data base of information which they do not share with each other. This information comes from many resources. The most unique source for each one is the creditors’ reports. Creditors may choose to report to one, two or all three of the Big Three. As a result, each repository has a unique set of data. Individual credit reports will only show information from their data base. To get the complete picture, a Tri-merge is necessary.

Tri-merge
This is a report that merges or blends all the information from all three credit reporting agencies into one report. This is almost always used by mortgage lenders. All three scores should be a part of the report. Most credit reporting agencies give a discount for a Tri-merge.

Score only
Some systems provide a FICO®, Beacon or Emperica score only. Typically, they are secured lenders such as: Automobiles, Home Equity Lines of Credit or smaller unsecured lines of credit. For the purposes of building, grooming, correcting or repairing your credit, these are useless.

Online
The Internet is full of advertisers suggesting you can have a copy of your credit report. Our research has led us to a conclusion that unless you are working with one of the three credit reporting agencies you may not be getting what you need. Here are some things to consider before ordering online.

· Many offer a free report with your 30-day trial membership in a monitoring system that will allow you to keep track of your report to make sure it stays accurate. Typically, you will pay an annual fee of $70--$90 for this service. There may be some value in certain circumstances---use caution before subscribing.

· The information is not always complete. The obvious danger here is that if you are not very familiar with your history in the first place, you may not recognize there are items missing that could help you. If you are going to use this service stick to one offered by one of the Big Three.

· Unless specifically stated, credit scores may not be included in the report.

Reading Your Report

The format for credit reports differs depending on the formatting preference of the company you have ordered it from. The best formats tend to be from local reporting bureaus that are customer friendly and are intended to be easier to read. Many of the online reports are poorly formatted and therefore difficult to read. However, they all contain the same information. So, we will use one type of format that is easy to read. From that you can look for the same information on the report you will receive.

Lesson 7: Getting to know your credit score

Lesson 7: Getting to know your credit score



We are going to cover a lot of information today. You will need 20-30 minutes to read this. Plan on coming back to review it.



Whether we like it or not, our society has come to rely on credit. Banks, credit unions, mortgage companies, credit card companies, potential creditors, insurance companies, employers, landlords, to name a few, all want to review your credit history as part of the process of deciding whether to do business with you or not.

Like any other system, if you learn how it works, you can actually have it work for you. If you do not learn the system, it can hurt you even without you knowing it.

Unfortunately, the system has many flaws. These flaws can cause hundreds, even thousands, of dollars per year in unnecessary expenses. For example, one little error can make insurance premiums increase by $150 per year. Inaccurately reported information seen by an employer can be the difference between getting a job with a $2,000 increase in pay and not getting the job. The most universally devastating cost can be a higher interest rate being charged on a car loan or mortgage, which of course translates to higher payments and more interest being paid.



The History of Credit Scoring

In the early twentieth century, credit was still a nascent system. As the years went on, credit began to become more necessary to life due to rising costs of houses and vehicles. However, today’s system of determining a person’s credit score was only really born in the late 1950s, as a direct result of the Civil Rights Movement. During this turbulent period, our society began to see that there should be an equitable system for lenders and creditors to use in order to determine who did and who did not deserve credit. Up until this time, creditors such as banks had been deciding who to give credit to based on appearances and prejudices.

Today we use the phrase ‘FICO® score’ to describe our credit. A FICO® score is a means of translating the information on a credit report into a number which is a score. Credit scoring is a method of determining the likelihood that a creditor will pay his/her bills. A formula was developed by Fair Isaac & Company in the late 1950s to help companies easily understand a person’s history with the payment of credit and debts. The FICO® Score has become widely accepted by lenders as a means of determining credit worthiness.

The Current System

Credit scores are formulated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves analyzing how millions of people have used credit. Score-model engineers find factors in the data that have proven to indicate future credit behavior.

As many people know, there are three major credit reporting agencies: Experian, Equifax, and TransUnion. These agencies are often referred to as the Big Three. Each of the Big Three uses the Fair Isaac & Co. scoring system, mentioned above, to produce a score. However, they use different names to distinguish which agency is reporting the score. They are:

Experian Fair, Isaac Risk Model
Equifax Beacon
TransUnion Emperica

What many people are not aware of is that these scores will be different for each individual and may vary greatly from each other. In other words, because one agency might not have the same information on a person as another agency, if you were to receive your credit report from all three of these agencies, you would likely receive three different scores.

Furthermore, many lending institutions have their own scoring system based on criteria which is specific to their lending guidelines. These other systems are so unique and vary so widely that any attempt to cover these systems would be futile. For the purposes of this system, we will focus on the three major scoring systems.


The higher a person’s score is, the better the credit rating. The highest possible score is 850. The lowest possible score is 250. Either extreme is virtually impossible. The common range of score is between 480 and 750. The exact formula for figuring your score is a closely guarded secret and somehow, the Federal Trade Commission has ruled this to be acceptable. But fear not, some guidelines as to what factors contribute and to what degree these factors influence the credit score are revealed in some later lessons.



The Players

There are many players in the credit system. We will discuss:
The Big Three (and a fourth)
Resellers or Bureaus
Creditors
Credit Counselors
Credit Repair Firms
Public Interest Research Groups
You

The Big Three
Experian, TransUnion and Equifax are the three major repositories of credit information in the United States. This is a billion dollar a year industry. They make their money by keeping, sorting and providing the information to their clients. They do not make their money making sure the information is accurate. Fortunately, the Fair Credit Reporting Act (FCRA) has established laws, which force them to be accurate or face the consequences of the law. This doesn’t mean they comply. In fact, they tend to comply only when forced. The only way they will be forced is if you and I exercise our rights under the FCRA.



The Fourth
We have heard that a fourth major credit reporting agency is forthcoming. It is called Innovis. As of this writing, no schedule or details are available.

Resellers or Bureaus
There are literally thousands of smaller agencies or bureaus that resell the information from the Big Three at local and national levels. Many of them are also part of the collection system. Some of them use information they collect for local purposes. Most also forward the data they collect to the Big Three.

If you look in your local phone book, you will find credit reporting bureaus listed. They provide credit reports, perform quick corrections and offer mailing lists and other useful services. Usually a local reseller or bureau is best for corrections.

Creditors
Of course, creditors report on a monthly basis to the agencies. The creditors and agencies rely on each other to make the system work. If the creditors don’t bother to report, allow themselves to get talked out of derogatory reports by consumers or don’t rely on the agencies’ reports for determining credit worthiness, their little coalition wouldn’t work. You can bet they are diligent in keeping what they consider to be the integrity of the system. However, it is common knowledge the system is anything but fully integrated.

Credit Counselors
We have never come across a true credit counselor. So-called credit counselors are thinly disguised bill-paying, debt-negotiating, fee-charging entities. They use non-profit status as part of the disguise. Actually, they are more accurately not-for-profit companies. This simply means they do not show a profit at the end of the year. There are a number of ways to achieve this. The most obvious is to pay all the earnings out in salaries! This non-profit status provides creditors with preferred tax benefits for reducing rates, balances, or payments when dealing with credit counselors.

The truth is, although there is a time and circumstance to use a credit counselor, most clients use them at the wrong time and for the wrong reasons. Credit counselors almost always ruin your credit in the process of reducing your debt and payment. The only reason we don’t say always, is just in case. We have never seen one that does not. They will deny this vehemently, but if pressed they will have to admit that your credit will be hurt.

Credit Repair Firms
As is usually true, some are reputable, fair, effective and valuable. Too many are not. Essentially, credit repair firms do exactly what you will learn to do using our system. If you would rather pay to have this done for you, seek a reputable firm that has a proven track record. Your ChartedCourse coach can give you some recommendations.

Public Interest Research Group (PIRG)
This group is organized to provide a balance to the system. They are the public advocate. They monitor the movement and activity of the industry and make the public aware of what is happening. By bringing information to the public, they empower us to take action in an effective way.

You

As valuable as the PIRG is, without you their efforts are hollow. Collectively, American consumers have the power to bring balance to the system. Through implementing the strategies that we will cover shortly, you will be wielding great power in the cause of bringing balance to the system and reaching your financial goals.



The Scoring System

Factors Contributing to FICO® Scores – Weighted by Category

Previous Credit Performance – 35%
Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, collection items, and/or delinquency (past due items), etc.)
Severity of delinquency (how long past due)
Amount past due on delinquent accounts or collection items
Time since (recentness of) past due items (delinquency), adverse public records (if any), or collection items (if any)
Number of past due items on file
Number of accounts paid as agreed

Current Level of Indebtedness – 30%
Amount owing on accounts
Amount owing on specific types of accounts
Lack of a specific type of balance, in some cases
Number of accounts with balances
Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Amount of Time That Credit Has Been In Use – 15%
Time since accounts opened
Time since accounts opened, by specific type of account
Time since account activity

Pursuit of New Credit - 10%
Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
Number of recent credit inquiries
Time since recent account opening(s), by type of account
Time since credit inquiry(ies)
Re-establishment of positive credit history following past payment problems

Types of Credit Use - 10%
Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

It is important to note that:
A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.

The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it's impossible to say exactly how important any single factor is in determining your score---even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.
Your FICO® score only looks at information in your credit report.

However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

Your score considers both positive and negative information in your credit report.

Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

Credit Scores are Liquid
That is to say, they are constantly changing based on the latest information. Most of the time, scores will not change more often than monthly because creditors report your status monthly. An exception may be “inquiries” which will appear immediately, since that information is generated by the credit reporting agency themselves. Another exception would be a quick correction. Since most creditors send account status updates at the end of the month, credit information and scores are usually freshest about the 5th, 6th or 7th of the month depending on weekends and holidays.

Here we publish again...

Alrighty then. Just when you thought I had disappeared from off the face of the Earth.

Not so much. Sorry to disappoint all the big-money credit bureaus and lenders who hate it that I'm revealing their secrets.

Here's a link to my newest article in LDSLiving's online magazine: http://www.ldsliving.com/magazine/show/2035/Bye-Bye-Debt

I'm angling to get into the print version in the coming months, too.

Now, just so you know what you're in for in the next few weeks as I get back into the swing of things.

Wait... you might want to know why I was out of the swing.

Let me tell you. No, it would take too long. Let me sum up: some poor time management, pressing deadlines for other projects, the need for steadier income requiring a serious search for full-time employment, home maintenance and garden needs, illness.

Does that work?

Now, here's a bit of what you can expect in the near future:

• The credit bureaus (TransUnion, Experian, Equifax) are not required to tell anybody how they determine your score. So they keep it secret. Fair? Not even close. I'm going to share specifics on how to improve your score. I'll share a link to a company that is actually enabling clients to improve their own credit score-- for a fraction of the cost that credit counselors charge.
• How to cut spending in your home. Practical tips. Awesome links to great money-saving deals. Even ways to use less gas and pay less for gas. Maybe even some recipes for easy homemade bread.
• How to use real estate to create a retirement that you can live on. Yes, even in lame markets like we're in now. This one isn't for the faint of heart. Start taking your courage pills now.

And more.

Spread the word. The Personal Finance Gym is helping people move up in the world.

Lesson 6: Twelve money principles

Lesson Six: The Twelve Money Principles for Financial Success

Take a moment to ponder how you would define ‘Financial Success.’ For some, this term refers to the ability to retire at a chosen age without having any worry that you will lack the resources to live out the rest of your life in comfort and happiness. For others, financial success is becoming wealthy. Still others define financial success as having enough passive income to replace all of your other active income.

Whatever your definition, we are all working toward a given set of goals. Most families are looking for ways to increase their chances of reaching a solid level of financial success. Studies indicate that75% of divorces can trace their fundamental cause to struggles and quarrels over finances. So while families and individuals work to reach financial success, unfortunately lack of communication and understanding work against them.

This being the case, let’s take a close look at twelve principles regarding money and its management. If each of us followed these principles, our country and our world would not be in the middle of such a profound crisis.

Before we begin with these principles, it is important that you understand that these principles cut to the heart of our relationship with money. Money needs to have its proper place in our lives and we need to treat it with both respect and wisdom. We must not, however, place money and the gaining thereof as our primary goals in life. Life is much more than a bank account.

Principle #1: Give
As soon as we receive our paychecks or other forms of income, we should designate a portion of it to others. Whether this be in the form of a religious tithe, in the spending of it on charitable items or supplies, or as a gift to an individual or family, this first step with money gives it the proper place in our lives.

We can look at the lives of many successful people in this world who have worked their way to their wealth. Most of these people have placed money in its proper place and have used their plenty to help those around them. As we do the same, we find greater fulfillment and are able to keep priorities straight.

Some might be tempted to skip this principle. We can promise any reader that if this principle is included as a regular part of your spending plan, you will absolutely achieve greater financial success.

Principle #2: Manage Money; Don’t Let it Manage You
Far too often, individuals and families wonder if they can earn a lot of money and they focus their efforts on increasing their income. This, however, is ultimately wrong-headed. Most people work for companies and organizations on which they depend for their income. In other words, most people simply don’t control how much money they make.

They can control how they spend that money. So instead of asking how much money you can earn, wonder if you know how to manage the resources you have. Honestly reflect on the knowledge you have about interest rates; taking loans to pay for education, vehicles and homes, and whether you have a workable retirement plan.

If you find that you just don’t know how to manage your resources well, immediately get the training required. Don’t waste time. You must learn to manage your money and pull yourself out of the consequences of ignorance. The lessons and training DebtZero provides can help you with this endeavor.

Principle #3: Self-Discipline and Self-Restraint
Learning and practicing discipline and restraint in regards to money and resources can be more powerful and freeing than accounting classes or a course in debt management. The idea that you control whether you live within your means seems to be out of fashion today, but that doesn’t make it any less valid.

As you assess your resources and your needs, you will need to be honest with yourself. You must ask yourself what you need, rather than what you want. Even in times of plenty and abundance, discipline is necessary.

Many people, upon considering their resources and needs with candid frankness, find that they can live quite happily on far less. One family that began using these principles went from living on nearly $4,000/month, which was already frugal, to living on less than $3,000/month. Belts were tightened, but the joy of being total masters over their resources outweighed any disappointment at not being able to buy whatever they wanted.

Principle #4: Make a Spending Plan
The common word for a spending plan is ‘budget,’ but most humans don’t like that word. It’s a lot like a diet: it is restrictive because it tells us what we can’t do and it doesn’t work! We must switch our thinking to the idea that we should have a spending plan, whether we are on our own or we have a family.

A spending plan accepts that we must spend money. Life costs money. Our home, car, food, education, clothes—these all cost money. If we will identify exactly how much money we must spend on these necessities, we can start to identify other financial goals that are necessary. Goals such as retirement or paying off a house might be identified. These are necessary, so our spending plan will allot a small amount of money each month in order to move slowly and steadily towards these goals, while still paying for our current needs.

Businesses are out to make a profit. Thus, they have a budget. If we are out to make a profit and increase our income, we should have a budget/spending plan as well.

Principle #5: Hard Work is How You Earn
In a recent poll done with American high school students, a significant majority of them said that they expected to be very wealthy as adults. The next question provided options for how they would become rich. Over half of the students polled declared that they would become rich through winning a major lawsuit.

This is a sign of financial illness.

The idea that hard work is how you earn money seems to be fading. Perhaps this is a product of the Information Age we live in, but this perception is wrong, even considering the unusual stories of overnight millionaires. The majority of people will only be able to provide for their needs by working hard.

We need to remember this every day. Disciplined, diligent labor increases our chances of providing for our needs and our family’s needs. Teaching children this principle, through example and instruction, should be a priority in families.

Principle #6: Teach Children to Manage Money
Obviously it would be useless to try to teach a five-year-old how to invest, but this child could certainly learn what a certain amount of money can buy. The necessity to teach our children how to manage money, both through indirect example and direct instruction, is great.

As our children grow up, we need to demonstrate to them where money comes from, how it is used, and the value and respect it deserves. This instruction should be age-appropriate, of course, but it should never be forgotten. This instruction, along with principle 5, will help our children avoid the entitlement attitude that is all-too prevalent today.

One thing to remember in connection with this principle is that children will learn best if they are given the opportunity to make money decisions. They should be given opportunities to earn money and save it toward certain goals. They should also be allowed to suffer the consequences of poor money management.

Principle #7: The Family is a Team
This principle applies, obviously, specifically to families. A family wherein the parents are worried about finances but the children continue to expect to have all of their wants met will have a very bumpy ride. Parents need to make an active effort to involve every member of the family in providing for the family’s welfare.

Whether this means everybody agrees to take shorter showers, collect aluminum cans, or simply not ask for a special treat for a period of time, doesn’t matter. What does matter is that the family members all understand that they are in it together and they each have an important role to play in the family’s welfare.

Principle #8: Always Seek Education
Education can be formal, college courses or simply trade school training. Whatever the case may be, constantly seeking improvement in one’s career, as well as making the effort to gain other skills, makes a person more valuable and employable. The goal is to become indispensable at your workplace, or to have other options to fall back on if you unexpectedly lose your job.

This prioritizing of education can have a great effect on the children in a family as well. As children see parents constantly seeking improvement, they will catch the vision and try to emulate their parents’ example.

Principle #9: Pay Off Your Mortgage
Most homeowners understand that their home mortgage is a useful tax benefit. However, this tax benefit is greatly outweighed by the immense amount of interest you will pay throughout the lifetime of the loan. This being said, you want to do your very best to accelerate the pay-off of your home mortgage.

The truth is that your home is not an asset until you truly own it. An asset makes you money, but your home doesn’t do this until you have eliminated your interest payments. So make it an asset as quickly as possible.

Principle #10: Use Insurance Appropriately
Life insurance is an important part of any family’s financial plan. However, it is easy to be deceived by the many slick salespeople and ‘deals’ out there. You want to take the time to educate yourself adequately before you choose an insurance plan.

Term life, whole life, universal life—these can each be useful at different times in your life. It is vital that you understand which one will work best for you at your current stage in life. However, it is also vital that you have something in place soon if you do not already. It is simply irresponsible to not have an insurance plan in place.

Principle #11: Understand the Impact of the Economy on Your Plan
Today, many people are seeing just how profoundly the economy can affect their current financial state, as well as their prospects for retirement. Important areas that you need to study include: inflation, the stock market and its trends, different approaches to investing in the stock market, tax-protected investment tools, the value of the dollar, bonds, company retirement plans and Social Security.

This is a long list, but isn’t your financial health worth the effort?

Principle 12: Plan for the Unexpected
How do you plan for the unexpected? With foresight and discipline, you can have enough resources stored away against emergencies so that, come what may, you and your family are well-taken-care-of. Things to keep in mind:

· Have a liquid savings that is equal to your needs for three months.
· Store enough food for at least three months. You need proteins, grains and water at the very least.
· Learn to garden for vegetables and fruit, and learn to safely process and store this produce.
· Have a three day emergency kit handy at all times, in the house and in the car.

Having these things in place will help you avoid dangerous situations that could result from the sudden loss of a job, electricity or fuel. We are not predicting some kind of cataclysm, but as the old adage says: Better safe than sorry.

Conclusion
These important money principles, if followed, can keep you and your family on an even keel, heading safely toward financial success and health. Obviously they are not get-rich-quick strategies. Rather, they are foundational principles that should inform the way you treat money and educate yourself and your family.

These principles are adapted from One for the Money, a publication of the LDS Church. http://www.providentliving.org/pfw/multimedia/files/pfw/pdf/88720_33293_OneForTheMoney_pdf.pdf