7 Tips for Keeping You in the Black this Black Friday

November 23, 2010Keeping your own finances in the black this Black Friday

If you’re a Black Friday junkie, before you head out the door this Friday morning (likely EARLY Friday morning), please consider the following 7 suggestions for keeping your own finances in the black:

  1. Have a simple financing plan in place. There will be WAY more cool and attractive stuff on sale than you could possibly afford, so you’ll need to decide AHEAD OF TIME for whom you are purchasing the items, and how much you’re willing to spend for each person on your list. Create a simple chart with the names of gift recipients down the left hand column and the amounts you’re planning to spend on them in the right hand column. If you want to be more detailed, you could split the “Amount” column into two, with “planned amount” in the middle and “Absolute Maximum” amount on the right. Aim to spend no more than the middle amount, but commit now NEVER to exceed the right hand amount.
  2. Leave the cards (credit and debit) and the checkbook at home. You can’t overspend if all you’ve got is cash.
  3. Take a shopping buddy… but NOT JUST ANY shopping buddy. Go with the friend, family member or neighbor with whom you enjoy spending time but who will also keep you on financial track. Verbally commit to each other to stay within your stated spending limits.
  4. Budget for your Black Friday breakfast or brunch. Many make this meal part of their holiday traditions (in fact, for many, if may be the first time since consuming the Thanksgiving meal 20 hours or so earlier that they’re even able to eat). Just make sure you have a limit, you know restaurant’s price range, and you stick to your plan.
  5. Compare prices online: Make sure you know how much competitors are listing the items on your want list for. Check out their web sites. Of course, you have to take shipping and handling costs into account.
  6. Think in dollars, NOT percentages. Forget the sale signs. “75% off” doesn’t mean anything to your purse or wallet. The reality is NOT how much you’re saving but how much you’re spending. Remember that sales come and sales go. What’s “hot,” “in” and “cool” this year will be next year’s forgotten fad. However, you only get to spend the dollars in your wallet once. After that, they’re gone, and they’re not coming back. Make sure you’re spending them on your own priorities and not what the stores are telling you your priorities should be.
  7. Make your Christmas about the people in your life rather than the “stuff” you’re buying for them. We all know that relationships are more important than things, yet too often we get caught up year-after-year in buying and consuming. This year, get creative by spending MORE TIME with the important people in your life and spending LESS MONEY for stuff that will sooner or later likely end up in the attic, garage, or, worse, the dump just taking up space.

I wish you all a Happy Thanksgiving, Happy Holidays, and (although still a few days early by my standards, but if you can’t beat ’em…) a very Merry Christmas!

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
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Reality Check-Credit is Used for More than Just Loans

September 22, 2010

Cut credit cards from your budget

Put foot down on credit cards

The titles of articles such as these are clever, intriguing and seemingly sensible, so why do I have a problem with financial experts (even if he or she is nationally recognized) who preach total abstinence from credit cards across the board?

At a class I taught this past week for individuals going through bankruptcy, I fielded a question that touches upon this very subject. A couple attending the class had been pushed into bankruptcy for several reasons, some of which were somewhat out of their control and others which were within their control. To get a grip on those issues within their control, they had decided to pay $100 to take a financial education course at their church. The creator of these classes preaches life without credit cards.

National Financial Education Center Explains Ups and Downs of Going Cash OnlyAt first glance, the concept seems completely financially responsible: get rid of credit cards, especially if they have been a past temptation to overspend and live above one’s means. So how do you answer someone, like the couple in my class who accepted that principle but are also hoping to purchase a home in the next couple of years, who asks me, “so how can we build our credit without credit cards?”

You see, they want to buy a home in the next few years, and they realize that they’re going to need a decent credit rating in order to qualify for an affordable mortgage. So I ask again, how can they build their credit without credit cards? After all, FICO estimates that about 50,000,000 adults in the US don’t have enough information on their credit reports to generate a credit score.

Here’s my answer, without giving an oversimplified “yes” or “no” answer: you can build your credit rating without credit cards, but you must remember that your credit score is based upon credit-related information on your credit report, and your credit report only contains information relevant to your credit usage and debts. Your credit is NOT based upon your income, your checking or savings account balances, or your debit card usage.

In other words, if you don’t use credit, you won’t have a credit history. I’m sorry to say it, but it’s true. You cannot build credit without using credit in some form.

Here are the types of credit that exist:

  1. National Financial Education Center Explains Ups and Downs of Going Cash OnlyRevolving Credit: Accounts like credit cards that allow you to make charges, pay some off each month, make more charges, etc. These are the most influential types of credit accounts on your credit report.
  2. Installment Credit: Accounts with fixed pay-off dates and generally fixed monthly payments, such as car loans and student loans.
  3. Mortgage Credit: Accounts that look like installment loans but that are tied to real estate.
  4. Home Equity Credit: Accounts that function like revolving lines of credit but  are tied to real estate, like mortgage credit.
  5. Service Credit: Accounts for services such as electricity, gas, or other utilities where weNational Financial Education Center Explains Ups and Downs of Going Cash Onlyreceive the service and are then billed for our usage. Note: phone accounts that are paid in advance are not considered service credit accounts. Also, most service credit accounts are not automatically reported to the credit bureaus that keep track of your credit history.

That’s it! If you don’t have any of these accounts listed on your credit report, you have “no file.” That means that FICO can’t find enough information to generate a standard credit score for you.

You have two options:

  1. Build your credit report wisely, starting with retail (think department stores), gas, or tire store cards or lines of credit that are generally easier to qualify for. However, using credit wisely means you pay off any balance IN FULL EVERY MONTH. After a period of time (perhaps 12 months or so), you might consider applying for a major credit card through your bank or credit union. If you’re tempted to use the card inappropriately (not paying it off in full every month), then cut it up.
  2. Ask your potential lender if they subscribe to the FICO Expanded Score. FICO is able to create a “credit score” on a large percentage of those with no traditional FICO score by accessing information on bank accounts, purchase payment plans, and property and public records. However, you will likely find it much more difficult (if not impossible) to qualify for a mortgage loan through most lenders based solely upon the Expanded FICO.

In the end, credit is about personal financial responsibility. Living without credit may be the financially responsible thing to do. However, it leaves no record or proof for potential lenders to convince them that you are likely to repay their loan to you.

And I haven’t even mentioned yet (since each would be a topic for another day) that your credit report and score are used for various reasons other than just qualifying for a loan. Here are some of the more prominent among those who are using your credit score to make decisions:

  • Many auto, home and life insurance companies (your score affects your premium)
  • Property management companies and many landlords
  • More and more employers (during the hiring process)
  • Utility companies (determining your security deposit)
  • Cell phone companies

So while I am, in theory, a fan of the “credit card-less” household, I don’t see it as practical for many if not most households. Since it takes two or three years of responsible credit usage to build a strong credit history, you may particularly want to focus on building your credit if you’re looking at buying a home, applying for a job, getting a cell phone account, or renting a home or apartment any time soon.

Otherwise, by all means, go cash only!

I may be opening up a can a worms, but I’d be happy to hear other opinions on this.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Plastic or Cash?

How to Use and Not Use Credit CardsWith all the talk about the dangers of credit cards, it might be easy to decide to bury your Visa, MasterCard, American Express or Discover cards in your back yard and just stick with your debit card instead.

Before doing so, you should be aware that studies have indicated that regardless of whether you use a credit card or a debit card, you still spend about 12% more than you would have if you were to use cash or a check.

This fact should bring home several implications, including the following:

  1. We overspend when we use credit cards rather than cashIf you use credit cards, and you pay off your balance in full every month, you probably think your pretty wise for taking advantage of the credit card companies. After all, using a credit card is generally more convenient and more secure than carrying around cash. After all, with credit cards, you don’ t have to go to the bank to withdrawal cash, you don’t have to reorder checks every 6 months to 2 years, and you essentially get an interest free loan on your purchases if you pay them off in full with the next bill. However, be aware that if you’re an ultra credit card user (perhaps making $2,000 or more in credit card purchases each month that you pay off with the next bill), you’re likely spending an additional $250 or more every month in real money because of the psychological temptation to purchase more expensive items and to do so more often due to the convenience of the plastic in your purse or wallet.
  2. We spend 30% or more at restaurants paying with credit or debit cards than if we were to use cashIt gets much worse if you’re using plastic when you go out to eat. Think about it! If you walk into a restaurant, all of your senses combine against you as they try to communicate this one issue: satisfy us NOW! There are smells; there are often sounds of food cooking; there are brightly colored menues; and then there is your stomach growling at you. That’s why, when you use a credit or debit card in a fast food or other restaurant setting, you’ll probably spend upwards of 30% to 40% more than if you had brought in cash. It’s no wonder, then, that when McDonald’s began accepting credit cards, their average purchase when from the $4 range up to more than $7!!!

I’m not suggesting you ditch credit cards. As I mentioned (and I truly believe), credit cards are safer and more convenient to use than cash, not to mention that their proper use can help us to build a solid credit history, especially important in advance of a large purchase on credit such as a home or car.

However, I do believe that too many people use their credit cards without setting and sticking to actual spending limits. That’s my challenge to all of us: establish your spending limit long before you enter a store or restaurant and stick to it. Otherwise, you ought to consider putting your plastic on ice.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Education@NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Published in: on August 19, 2010 at 11:59 am  Leave a Comment  
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