By Wendy Mihm | Thursday January 27, 2011

Everyone knows that credit scores are important, but now that we’re living in the post Great Recession economy, these three digit numbers, called FICO scores, are more important than ever.  Plus, banks and other lenders have become pickier than before the recession, so if you’re planning to borrow a big chunk of money any time soon, now is the time to work on your score.  The new number to beat is 740, up from 720, to qualify for the best (lowest) mortgage rates.

Higher Credit Scores Mean More Power

If you have a good credit score, you have the power to borrow money at the best rates.  This doesn’t just mean good mortgage rates, as mentioned above, it also means the best credit card rates.  By contrast, credit card companies can charge much higher interest rates in return for the risk they’re taking on by lending money to someone with a less-than-stellar record of paying it back.  But it doesn’t stop there.  Landlords use credit scores too, and if they see that you’re a riskier tenant, they may charge you more in rent and security deposits to compensate them for taking on that risk.  A potential employer may also look up your credit score before he or she hires you and assess that score as part of your overall assessment, and so on.

Ready to get your credit in tip-top shape?

Here are five ways to raise your credit score to 740.  All of these steps assume that you are not currently in a major credit card debt crisis.  If you are, you need to address that first.  For help with that, subscribe to Level 1 of our free FinancialRx series “Conquering Credit Card Debt.”

1. Use credit cards moderately and pay them off in full each month.

The credit bureaus rate your “creditworthyness” on how well you use credit, not on how well you can stash credit cards in a drawer.  Again, if you are in a credit card crisis situation, this advice is not for you!  Use them moderately and pay them off in full every month.  You do not need to carry a balance to earn a good score, nor do you need to pay a penny of interest, so don’t.

2.  Put your credit cards on automatic bill pay.

You can do with using the online bill pay feature on your checking account.  If you don’t have an online bill pay feature with your checking account, you need to graduate into 2011 and get one.  Just about the worse thing you can do for your credit score is to habitually pay your bills late.  Don’t do it.

3.  Check your credit report with all three credit bureaus.

They are Experian, TransUnion and Equifax.  In my experience they are, what shall I say… not very good.  They make lots of mistakes and no one can correct them but you.  You can get reports free from annualcreditreport.com once a year.  You can also pay to get them from any number of online sources, as many times as you need them, whenever you want. Just Google “credit report” and a zillion results will come up.  For more info on how to correct these errors, subscribe to Level 1 of our free FinancialRx series “Conquering Credit Card Debt.”  There’s a lot of good stuff in there, even if your credit card debt isn’t in a total freefall.

4.  Spread out your debt.

Credit bureaus like to see debt spread out fairly evenly across cards, and then they like to watch you pay it down consistently, on time.  So if you have a huge balance on one card from a major purchase, spread it out over several cards and attack the pay-down on those cards with gusto.

5.  Aim for 10% credit utilization.

What does that mean?  Suppose the limit on your credit card is $5,000.  Try not to spend much more than $500 on that card in any given month.  Why?  Because credit bureaus love to see plenty of leftover credit that you’re not using – specifically 90% of it leftover.  That makes you look really non-risky and they reward non-risky behavior with higher FICO scores.

Just like building wealth, it takes time to improve your credit score, so don’t be disappointed when your score doesn’t jump to 740 (or higher!) overnight.  But with time and effort, when consistently applied, these strategies really can help boost you into the highest levels of creditworthiness.

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By Wendy Mihm | Tuesday, December 14, 2010

When my website comes up in conversation, people often ask me if transferring their credit card debt to a low-interest rate credit card is really that big a deal.

In short, the answer is yeah, baby!

But rather than relying on me to convince you, let’s let the numbers talk.  We’ll do a little quick math to illustrate the point.

Let’s say you have an $8,000 balance on a credit card with a 17% rate, and you pay $250 toward the balance each month. It will take you 43 months to pay if off, and you’ll pay $2,733 in interest. 

If you transferred that balance to a card with 8% interested and paid it off at the same $250 per month, it would take you 37 months to pay off the balance and you would pay $1,028 in interest.

That’s a savings of 6 months time and $1,705. 

Not chump change.

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By Brittany Sorel | December 14, 2010

I used to be a big spender who could not control my credit card use.  I had a Visa, a Discover, a Dillard’s Card, a Gap Card and a Macy’s Card.  They were all maxed out except for the Visa card, and I had $14,600 in debt at the age of 27.  The worst part was that I felt ashamed and used to bring my shopping bags into our apartment when my roommate could not see me.

Then I got a new job that I really liked a lot and wanted to impress my boss and do well.  About a month after I started the job, my car died.  I needed to buy a reliable new car so that I could get to work on time every day, but I was turned down for financing because my credit had started to suffer.  I was making only minimum payments and was sometimes late or would even skip a month.  I didn’t know how bad this was at the time.  I just thought I’d catch up somehow later.

I had to tell my roommate my situation – leaving out some of the details about my credit problems – and ask her for a ride to work for a few days until I figured out there was a bus stop about a mile and a half from our apartment.  By the time I walked to the bus stop, rode the bus, and walked the rest of the way to work, it took an hour and a half to get to work.  My commute used to be about 25 minutes.

I finally talked to my Dad and asked him to help me.  He was pretty disappointed, but offered to help.  He put me on a plan similar to the one that Wendy writes about in her FinancialRx series on getting out of debt.  He also helped me buy a used car. He paid cash for the car up front and we wrote up a legal contract together, outlining how I would pay him back, and I signed it.  It said that I would pay him 2% interest over 4 years.  It was a great deal.

We also wrote up another contract and we signed it.  But this contract had a bunch of financial challenges in it.  I had to cut up and cancel all of my credit cards but one.  The one I did not cancel, I had to give to him.  He sat next to me while I did this on the phone!  I also had to pack a lunch to take to work at least three times a week.  My mom bought me a beautiful lunch cooler and stainless steel thermos so it would be fun.  Since they live just an hour away, they also made a standing “date” with me every Sunday night so I could have at least one home cooked meal and take leftovers home with me to save money.  The contract I signed with my Dad also said I could only spend $200 a month on “entertainment,” which includes things like eating out, movies makeup and clothes.

At first I thought it would be hard, but now I got my roommate on board and we like to scour the town for cheap happy hour food and drinks together!  I no longer hide my shopping bags from her, but instead show off a great recipe I just made.  Sometimes, to have fun for very little money, we invite our girlfriends over for a Trader Joe’s Wine Tasting night.  It’s a blast!  I’m finally living within my means and loving it!

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By Wendy Mihm | Monday November 29, 2010

Americans love new stuff.  Just look at our closets.  No, you know what?  Don’t look at our closets – it’s embarrassing.  But what’s interesting is that all the new stuff we buy often doesn’t make us any happier – it just racks up debt and clutters our closet.

So here are some clever tips I gathered from friends and experts for living happily on less.  There are all sorts of tips here and they are in no particular order, much like our lives.  So have a look – you might find, like I did, that the challenge of living happily on less is actually pretty fun.

• Cancel your gym membership and create your own home gym with some weights from Craigslist.  Or just rediscover pushups, jog through the local park, run a flight of stairs (a great glute and calf workout), or the hills in your neighborhood.
• Create a dinner menu for the week and go grocery shopping every Monday.  Stick to the list!  Make Friday leftover night and save the weekends for casual meals or restaurants.  This minimizes impulse purchases, helps your family to eat healthier, and saves money on unplanned restaurant trips.  And trade off cooking nights with your spouse – unless his arms are broken, he can cook.  We do this every week in our house, it rocks, and our whole family has gotten into the act of coming up with creative, healthy and fun meals.
• When you eat out, consider ordering one of the adult meals from the appetizer menu, splitting an entrée, or ordering one drink for two of you.
• Familiarize yourself with the restaurants in your town that offer free kids meals on certain days of the week.
• When meeting friends socially, opt to meet for lunch instead of dinner.
• Ask about memberships to local museums, clubs or other resources that you frequent to see if you can save money as a member, rather than paying in full each time you visit.
• The AAA Auto Club has negotiated discounts with many dining, travel, shopping, entertaining and everyday services that many people are unaware of, such as the Hard Rock Café and El Torito restaurants, The Blue Man Group shows in Las Vegas, the Aquarium of the Pacific, the DoubleTree Hotels and the Courtyard by Marriott, to name a few.  It never hurts to ask!
• Host a toys-and-clothes-exchange party.  Gather a bunch of your kids’ outgrown clothes and toys, ask your friends to do the same, invite them over, order a pizza, ask someone to bring a bottle of wine and start trading!
• Water down your kids’ juice.  It’s better for them anyway.
• Instead of heading to the mall in your spare time, head to a local park, library community center, or other free local resource.  By talking to a neighbor, we just discovered a little-known community pool in our town that is absolutely free. To add to the fun factor, set up a standing play date there with a friend or two so you have someone to chat with while your kids play together.
• Consider shopping at Goodwill.  You can save some serious money if you’re buying back-to-school clothes in bulk (they’re just going to get them dirty anyway), winter coats, camping gear, sporting goods and electronics.  This is an especially smart way to go when you’re buying something you’re not sure you will use much anyway – like sleeping bags for a camping trip, for instance.  Sure, you’ve got one camping trip planned, but maybe the jury is still out on whether your family will ever really become true campers.
• Create a “black-out-weekend” once every month.  No one is allowed to shop at a store, go out to dinner or order anything online for two whole days!  Create your own fun on the cheap by making blueberry pancakes for dinner, having a family popcorn and movie night at home or going on a “snipe hunt” through the local park.

So that’s the short list of our ideas.  I hope it’s just the beginning of what will become a rich and interesting conversation about how to live happily on less.  So fire up the comment section—let’s hear from you clever household CFOs out there!

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