Building a Good Credit Rating When You Have No Credit History

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For those people who are dealing with a sub-par or super-low credit score, there is an abundance of good advice available regarding how to improve a poor credit rating. From debt negotiation to loan refinancing, New Jersey credit repair attorneys are able to help their struggling clients watch their scores go up, up, up!

Obviously, on the other end of the spectrum are those people who’ve (almost) always made sound financial decisions, haven’t experienced any major catastrophes, and therefore have great credit scores with glowing credit reports. They obviously don’t need help in this arena.

There’s a much less talked about gray area of the credit spectrum, though, where some young people are finding themselves stuck. These people are generally either in their late teens to early 20s, or they’ve been living at home with their parents and may be approaching their mid-20s or even 30.

What does it mean to have “NO credit history”?

While the terms “bad credit and zero credit history” can often be confused, the two situations are entirely different and it’s important to know your options if you’re in the zero credit history category.

A bad (or low) credit score suggests that you have made some significant missteps in your financial history. This means you may have: had a number of late payments on any of your expenses, racked up too much credit card debt, co-signed a loan that defaulted, defaulted on a loan of your own, recently applied for a number of new loans, closed credit accounts that you don’t use (which lowers your credit utilization ratio), had your home foreclosed, or filed for NJ bankruptcy.

As someone with zero credit history, you’ll face similar problems as those with low credit scores when it comes to getting a loan, credit card, buying a car, purchasing a home, and sometimes even renting an apartment.

Having no credit history, however, is generally much easier to “fix” than having a bad credit history. That’s because you haven’t necessarily made any bad money choices – you just haven’t appeared on the credit system’s radar yet. You don’t have any credit cards, you’ve never applied for a loan or financed a vehicle. When performing a search for your credit history, lenders will simply come back with….nothing. Zero. Zilch.

Does zero credit history mean my score starts at 300?

Just because you have no credit history doesn’t mean you have to start at the bottom of the credit rating scale, which ranges from 300 – 850. Your credit worthiness will be given a score, but not until you have engaged in some activities that can be “rated.”

It can be frustrating when you have no credit history because, although you don’t have a bad credit score, creditors still can’t tell much about your credit worthiness. They don’t know if they can trust you to pay back money or not. Because of this, getting your credit history rolling can be tricky.

Naturally, everyone had to start with no credit history, so building a good credit score from your vantage point is definitely doable. Because lenders will be wary of you at first, you’ll need to start with baby steps.

What kind of credit will I be able to get?

Although you won’t be able to apply for a high limit credit card or a home mortgage right off the bat, there are low-risk ways for you to build a credit history. Start by asking your bank if you can apply for their secured credit card. If you’ve been banking with them for awhile, they’ll be more likely to approve you since they at least know your banking habits. For those who’ve never had a bank account, your first step will be opening a checking account. Do some research first so that you’re sure to open an account with a bank that offers a secured credit card.

It may be possible for you to receive a slightly larger loan, like a used car loan, but you may have to ask a parent or close friend (with good credit) to cosign the loan with you. Most importantly, no matter what your first loan is, you must be sure to make your monthly payments on time. Eventually your responsibility will pay off and your credit score will rise.

At first, your score will not start at the bottom (300) of the scale, nor will it skyrocket to the top (850) simply because you make a few timely payments. However, as soon as you are granted a loan and begin making payments, your credit history will no longer be a giant blank space. Your score is likely to start off somewhere in the middle of the range, and will only continue to rise as you demonstrate credit worthiness.

Which Credit Card is Right for You?

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While we maintain that it’s better to pay for things with money you have in your bank account, we acknowledge that most people today have at least one credit card. Whether you keep a card around for emergencies, or keep a running balance from month to month, it’s important to know how to navigate all of the fine print that credit card companies don’t advertise.

Which Type of Card Should I Look For?

First, you’ll need to figure out what you want out of a credit card. Are you looking for perks – like free airline miles, cash back, or other incentives? Perhaps you have had financial trouble and your credit score has suffered. In that case, you’d need to look for a credit card specifically targeted for people with bad credit.

Check your credit score before applying for a credit card so you’ll know what kind of interest rates to expect. The higher your credit score number, the lower your credit card interest rate should be.

If you’re transferring a balance from one card to another in order to save money, beware of cards that offer teaser rates. In most cases where a credit card is offering an unbelievably low interest rate on balance transfers, that super low rate is only temporary, and will skyrocket up after your introductory phase is over. This could be anywhere from 3 months to one year. So, if you’re tempted to move your balance from a credit card with a 12.99% interest rate to a card that offers free transfers and a 3% rate on the balance – get out your magnifying glass and read the fine print!

Many credit card companies make the above (or similar) offers to attract customers who may have a significant balance sitting on a different card with a medium to high interest rate. The other problem with these types of offers, beyond the introductory rate jumping up after a set time period, is that the “free balance transfers” offer itself often has a time restriction.

For example, let’s say you see a commercial for a credit card that is offering new customers “free balance transfers” with 3% interest on said transfer. What isn’t advertised is that many of these offers expire 60-90 days after you’ve signed up. So, you see an ad, apply for the new card intending to transfer your balance from another card, get your new card in the mail, and then…..LIFE HAPPENS. You get busy, and put off making the balance transfer. Several months later (probably while paying bills), you have a light bulb moment – “Oh right! I need to transfer my balance so I can stop paying all this interest!” After all, your new card offers free balance transfers and a much lower rate.

Unfortunately, by the time you remember to make the transfer, the “offer” may have already expired, which means there will probably be a fee on the transfer, and you may not be able to get the super low rate anymore, making the whole reason you switched companies null and void.

Your best bet is to research until you find a credit card with no yearly fee and a low fixed interest rate. This will guarantee you the same interest rate until you’re able to pay off the balance. Also, be sure to pay your bill on time every month, even if you’re only paying the minimum amount. This will help you avoid late fees – and being late with your payments can often cause your interest rate, even if it’s fixed (again: Fine Print) to go up.

 

Image Credit: Sean MacEntee

5 Reasons to Choose Paper Over Plastic

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If you are anything like the thousands of customers who were spooked by the recent Target security breach, you’re probably wondering if cash is back in style. It doesn’t come with the convenience of a credit card, but it does come with the extremely important ability to protect your personal information. Financial experts have noted that the majority of shoppers, although concerned about possible fraud, have not stopped using their credit cards altogether.

It has been shown, however, that at least some Americans have switched back to carrying cash at all times, and this change started even before the infamous Target breach. With the widespread, lightning speed increase of the use of technology in virtually every corner of the world, consumers have very valid fears about the possibility of having their information stolen. With the deluge of stories on the news about identity theft and credit card fraud, plenty of people have chosen paper over plastic.

Keeping your personal information safe is just one of many reasons that cash is back in style.

Money Mindfulness

Spending cash only allows customers to physically see the money leaving their hands with every purchase. For many, this means that spending dollar bills instead of swiping a piece of plastic will actually help them spend less. Sometimes that little piece of plastic can feel like magic, and can cause a denial about how much is actually being spent.

For people who really need to gain control of their spending habits, instilling a cash only policy is a great idea. It is very easy to set yourself a spending budget for the week when you’re only allowed to spend cash. Withdraw a reasonable amount of cash once a week, use only that money for casual spending, and you’ll quickly realize that you’re putting much more thought into each purchase.

Small Business Appreciation and Awareness

More and more Americans have become increasingly loyal to their local mom-and-pop stores, wanting to help small businesses succeed as much as possible. And, while this is a fantastic shift away from throwing more and more money at big-box retailers, handing a credit card over to your local mom-and-pop store owner negates your small business loyalty a bit. Remember that every time you use your credit card, around 3% of your purchase amount goes directly to the bank instead of to the store owners. Paying in cash helps small business owners avoid the outlandish fees they are charged by banks just for accepting credit cards.

Negotiating Power

While it’s true that you won’t be able to negotiate for every purchase you make, it’s much easier to haggle when you have a fistful of cash to wave around. This is especially true if you do a lot of shopping at flea markets, farmers markets, thrift stores and independently owned small businesses. Any place where the actual business owner is present is a great place to negotiate. These types of sellers are not controlled by a corporation, and can raise or lower their prices as they so desire. And, as mentioned above, they’re motivated by cash so that they can avoid those outrageous credit card fees (also known as interchange fees).

Showing Gratitude for Good Service

Whenever possible, try to bring cash with you to establishments where you know you’ll be expected to leave a tip. Some of the most common places to leave a tip include restaurants, salons, hotels, airports, and anywhere with valet parking.

Many people can and do tip using their credit card, however, this does not benefit the tip recipient nearly as much as when they get paid in cash. For example, waiters and wait staff are often required to pool their tips and then redistribute it evenly amongst the entire staff at the end of the night. Although it would require that your server pocket the extra cash you leave, if you have experienced exemplary service, it may be a good idea to give them a little kickback.

As a general rule, wages within the service industry still remain too low. Many of these workers simply depend on tips to boost their income up to a respectable level. Some locations only distribute tips that were left by credit card on a weekly basis. For those workers who are living paycheck to paycheck, leaving their shift with a wad of cash can really make a difference in their day-to-day lives.

Credit cards definitely still have their place in today’s spending world. Of course, there are pros and cons to everything, including paying with credit. We’re not saying that you should go dump all of the cards out of your wallet and cut them up; but do use them wisely and sparingly. We all know the phrase “Money talks,” but remember that you have a say, too.

How to Get Out of Holiday Debt for Good

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So many people have a tendency to hugely overspend on friends and family during the holiday season – charging hundreds to thousands of dollars on credit cards. The holiday hangover comes in January when the bill start rolling in.

In fact, countless people are still paying off holiday debt from years past [PLURAL]. However, it does not have to be that way! There are steps that you can take to reduce your overall credit debt and specifically, your impulsive holiday spending spree. Facing pressure from children, friends and family members, more and more people are spending higher dollar amounts during the holidays in order to get the gift that everyone wants. You are not alone, and there is hope!

The first step to eliminating the extra credit card balances that you racked up in November and December, is to admit that you have a problem. Put the credit cards down. Take them out of your wallet and put them in a place where you can’t easily access them. Start using your debit card for all shopping so that you are forced to use only the money that you actually have in your bank account. To continue using your credit cards after December will only compound the problem.

Sit down and open up all of your credit card bills. This may be a difficult and emotional step, but ignoring the bills will not make them disappear. List all of your credit cards, their balances, their percentage rates, and the minimum monthly payments. Determine how much money you can allocate toward credit card payments each month.

One effective debt reducing method is tackling the credit card with the highest balance first. In doing so, you will eliminate your biggest money suck, and you will have more money to throw at your remaining cards. During this phase, pay only the minimum on any other credit cards. This is known as debt stacking, and will save you a lot of money in the long run.

Another option is to pay off the card with the smallest balance first, working your way up to the card with the highest balance. Debt snowballing gives consumers a quick taste of success with the first card paid off quickly, which may be the motivation you need to keep going.

It’s also a good idea to call up your credit card company in an attempt to negotiate a lower percentage rate (APR). Use language like, “In an effort to reduce my bills, is there any way to lower my interest rate in order to help me pay this debt off?” Avoid telling them that you can’t pay your bill. You can also look for offers from credit card companies offering 0% interest for balance transfers. By transferring your highest balance onto this card, you’ll save on interest payments and will be able to pay your debt off that much faster.

Find one or two expenses that you can eliminate in order to push that money towards eliminating your holiday debt. Call your gym and ask about freezing your monthly membership. Alternatively, find a cheaper gym. Talk to your cable or satellite provider about lowering your monthly payment by stepping down to a lower package temporarily. You can reward yourself by reinstating your original package once your debt is paid down. Resolve to not purchase any new clothing or unnecessary items until you have managed to eradicate your holiday debt. Check out local thrift shops like Goodwill and Salvation Army if a need arises like an outfit for a job interview or a warmer winter coat. Remember to check eBay and Craigslist for other absolute necessities that may arise during your debt elimination period.

If all of these changes aren’t making a big enough dent in your holiday debt, you may have to find another way to make additional money, at least temporarily. Have a yard sale, or scour your house for any valuable items that may be in demand and try your hand at eBay. You may have jewelry, art or expensive clothing that is just sitting around the house. It’s better to sell some things than risk going into further debt and not being able to find your way out.

Finally, remember that there will be another holiday season at the end of 2014. The sooner you start planning for it, the better. As soon as your previous year’s holiday debt is wiped out, set up a holiday budget and start taking notice of what your friends and family are interested in now. Buying slowly throughout the year, while looking for sales and using coupons and promo codes, will allow you to shop for the holidays with cash, hopefully avoiding a holiday hangover in 2015.

Do You Really Need a Credit Card?

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So many people in America and all around the world think that living on credit cards is a normal and appropriate way to pay for things.  While it has definitely become commonplace, the practice of regularly paying by credit card is a surefire way to find yourself doomed to a long and tortuous climb out of debt hell. Keep on paying just the monthly minimums on your Visa or American Express bill and before you know it, you’ll easily rack up a $20,000+ debt that you can’t handle. Paying for items, gifts, groceries and bills with real money is always the desirable way to go, hands down.  A credit card is not real money; in fact, it’s one of the most expensive loans you could possibly ever take.

However, there are certain instances that will call for you to have access to a credit card, so don’t go cutting them all up in a fury. By all means, feel free to cut most of them up if you’ve got more than one or two accounts, but be sure that you keep at least one card handy, and use it only as we are about to explain.

As a friend of the Veitengruber Law family recently realized, her attempt to live completely debt free, although it was doing fantastic things for her credit score, was putting up roadblocks that she didn’t anticipate. It’s true; using a credit card can be beneficial in the following situations:

  • Taking a vacation – From renting a car to reserving a hotel room and booking spa services, a huge percentage of your vacation amenities must be paid for by credit card.  Usually, you can simply reserve the service with your credit card number and then pay cash by using your debit card when you arrive. In instances where you must put the entire balance on your credit card, do so with great caution and be sure to make payment to your credit card company as soon as your vacation ends to avoid paying huge interest fees.
  • In the event of emergencies – Suppose your home’s entire heating system simply goes kaput in the dead of winter and you just don’t have enough of a buffer in your bank account to pay for the repairs.  You’ve got no choice other than putting it on your credit card, but make large payments every time you get paid until your new heater bill is completely erased from your card history.
  • Dealing with someone you don’t completely trust – Using a credit card creates a history that using cash does not, and if a merchant turns out to be corrupt, credit card companies will take care of the problem for you by reversing the payment and cutting you a break.
  • While travelling – Aside from booking all of the details surrounding your vacation, carrying a credit card as opposed to cash on a trip is advisable as long as you know you can pay for what you spend once you get back home.  The reasons are a combination of possible confusion in unfamiliar countries and with merchants you’ve never dealt with, and the risk of credit card theft or loss.  In all of the hustle and bustle of a vacation, things can easily be dropped, lost, or stolen.  Cash can never be replaced, but a credit card, once stolen, can be reported immediately and no charges will then count against you.

Here at Veitengruber Law, we definitely don’t advocate for the regular use of credit cards, and if you’ve already been there, done that and you need help to get out of debt, we’re here to help.  Using a credit card wisely is ok; just be sure to keep your use extremely limited and within your actual spending budget.