faith & finance week 6: credit score and living debt free

Faith & Finances - Oct 10, 2008

• Happenings in the market over last week

• How the credit score system works

• Living debt free - some tools on getting out of debt and staying out.

• Panic of 1907: Economy failing, no Fed. JP Morgan (the man) bailed out country.

• Great War 1914: US markets close for 4 months. Foreign investors pull out money. Market loses 30%. All losses recouped by 1916.

• Great Depression 1929 – 1941. Unemployment @ 25% in 1932.

• ’73 – 74 Crash, 45% value lost over the 2 yrs. Recovered in about 2 yrs.

• Black Monday Aug 1987 – Dow drops 23% in one day. Recovered value within 24 months.

• Tech Bubble 1999 – Dow <8000 up to almost 12,000 by beginning of 2000.

• 9/11 – Dow back below 8000. Rebounds to peak at around 14,000 in Oct 2007.

TRUE OR FALSE?

Each time you initiate an inquiry on your credit report, or get your score it,

negatively impacts your credit score.

FALSE - FALSE - FALSE - FALSE - FALSE

The scoring model does not count:

“consumer-initiated” inquiries - requests you have made for your credit report, in order to check it

“promotional inquiries” - requests made by lenders in order to make you a “pre-approved” credit offer

“administrative inquiries” - requests made by lenders to review your account with them

“employer initiated” inquiriesSource: myfico.com

QUESTION

If I pay off a collection amount or missed payment, will record of it be removed from

my credit file?

ANSWER

NO

Paying off a collection account / late pay / derogatory item will not remove it from

your credit file. It will stay on your file for 7 years along with any dollar amount

associated with the past due.

TRUE OR FALSE?

Your age and income, including salary or wage increases, impacts your score

FALSE - FALSE - FALSE - FALSE - FALSE

Factors such as sex, income, age, and length of employment are not taken into

account when the bureaus evaluate scores.

Source: myfico.com

TRUE OR FALSE?

Accurate negative information can be removed from your credit files to bump

up your credit score

FALSE - FALSE - FALSE - FALSE - FALSE

No one can legally remove negative information like bankruptcy, lien,

foreclosure that is accurate and current from your report. Only the passage of time

can erase these blemishes.

TRUE OR FALSE?

When you get married your credit information is combined with that of

your spouse

FALSE - FALSE - FALSE - FALSE - FALSE

Credit reports are individual. However it might be possible that there will be certain items

that will be reflected on your as well as your spouse’s credit reports. For instance, the info

regarding the accounts that you hold with your spouse will show up on both the reports.

.

Effect of hypothetical scenarios on credit score

Source: identitymonitor.citi.com Credit Analyzer tool

Event Effect on score

Max out all my credit cards (8%)Miss 2 payments on all my credit cards (18%)Miss 1 payment on all my credit cards (16%)Miss 1 payment on one of my credit cards (11%)Consolidate all credit cards into one line of credit (1%)Declare bankruptcy (20%)Pay off debt on all my accounts 4%Close all unused accounts 0%Take out a student loan of $30 k (2%)Apply for credit 1 time without opening any accounts (1%)Apply for credit 5 times without opening any accounts (1%)Open a new credit card and transfer existing card balance representing 90% of the new limit

(6%)

Some resources

• Credit score monitoring:

– Various products available which allow you to monitor your credit reports and/ or scores

– Free annual credit report (no scores) from www.annualcreditreport.com

• Dispute an entry on your credit report:

– Each of the agencies allow you to submit a dispute online, via phone or through the mail.

– www.transunion.com / www.experian.com / www.equifax.com

Comparison of some credit monitoring products

One time score and report

Monthly score & report(1 agency)

Monthly scores & reports(All 3 agencies)

www.myfico.com$42.84

*Report & score from all 3 agencies

www.myfico.comScorewatch: $8.95

* Experian score and report

www.identityguard.com$11.99 per month

www.myfico.com$15.95

report & score from1 agency

www.experian.comTriple Advantage: $14.95

* monthly monitoring of all scores, copy of Experian report

and score monthly

www.truecredit.com$14.99 per month

Most of these products offer the same general features: Credit score simulation, fraud / ID theft alerts, ID theft insurance (not every product)

Steps to becoming debt free

2. Confront the situation – don’t just hope it goes away

3. Make inventory of all debt

4. Consider discussing your situation with somebody you respect and trust in the area of Godly finances

5. Decide on a plan to pay down the debt

6. Track your progress each month

Example of an inventory

Amt owing

4,000

3,500

1,000

6,000

30,000

44,500

Monthly min. pmt

50

40

80

197

608

$975

APR

30%

12%

15%

11%

8%

10.9%

Pmt. status

Late

Up to date

Late

Up to date

Up to date

Creditor

NYC Bank credit card

Staten Island credit card

Forever Young store card

NYC Bank personal loan

Graduate Bank student loan

TOTAL

Tracking progress: Snowball method

Illustration of Snowball method Jan-08 Feb-08 Mar-08

CreditorAmount owing

Min monthly

pmt APR

Late pmt owing at

1/1/08Amt paid

Balance owing

Amt paid

Balance owing

Amt paid

Balance owing

Forever Young store card 1,000 80 15.0% 240 320 693 390 311 315 0

Staten Island credit card 3,500 40 12.0% 0 40 3,495 40 3,490 155 3,370

NYC Bank credit card 4,000 50 30.0% 150 160 3,940 90 3,949 50 3,997

NYC Bank personal loan 6,000 197 11.0% 0 197 5,858 197 5,715 197 5,570

Graduate Bank student loan 30,000 608 8.0% 0 608 29,592 608 29,181 608 28,768

TOTAL 44,500 975 10.9% 1,325 43,578 1,325 42,646 1,325 41,705

Amount available for debt payments per budget: $1,325

Minimum monthly payment at January 1, 2008 $975 Excess available for debt paydown $350

Tracking progress: Highest APR method

Illustration of Track High APR method Jan-08 Feb-08 Mar-08

CreditorAmount owing

Min monthly

pmt APR

Late pmt owing at

1/1/08Amt paid

Balance owing

Amt paid

Balance owing

Amt paid

Balance owing

NYC Bank credit card 4,000 50 30.0% 150 200 3,900 360 3,638 400 3,328

Forever young store card 1,000 80 15.0% 240 280 733 120 622 80 549

Staten Island credit card 3,500 40 12.0% 0 40 3,495 40 3,490 40 3,485

NYC Bank personal loan 6,000 197 11.0% 0 197 5,858 197 5,715 197 5,570

Graduate Bank student loan 30,000 608 8.0% 0 608 29,592 608 29,181 608 28,768

TOTAL 44,500 975 10.9% 1,325 43,578 1,325 42,645 1,325 41,701

Amount available for debt payments per budget: $1,325

Minimum monthly payment at January 1, 2008 $975 Excess available for debt paydown $350

Tracking progress: Snowball vs Highest APR method

Comparison of the two methods over 12 monthsBalance owing at

12/31/08

Creditor

Amount owing @

1/1/08 APR SnowballHigh APR

first

Forever Young store card 4,000 30.0% 0 31

Staten Island credit card 1,000 15.0% (0) 0

NYC Bank credit card 3,500 12.0% 3,773 3,437

NYC Bank personal loan 6,000 11.0% 4,207 4,207

Graduate Bank student loan 30,000 8.0% 24,920 24,920

TOTAL 44,500 10.9% 32,901 32,596

Interest paid over the 12 months 4,301 3,996

Month in which 1st debt fully paid off March '08 Nov '08

Month in which 2nd debt fully paid off Nov '08 Jan '09

Some points to consider

• Tithing – do not stop being faithful with your tithe to try pay down debt faster. You will block God’s provision in your finances.

• It is not irresponsible to give over and above your tithes if you are in debt. Continue to be generous (possibly to a lesser extent) and make room for the supernatural in your finances.

• Debt consolidation can be a useful tool, but consider it carefully. It could end up costing you more in the long run and it can negatively impact your credit score.

• A situation where you are unable to pay your minimum monthly payments would require some additional steps to what we have discussed here. If you are in that situation, don’t go it alone – ask somebody for advice and to walk it through with you.