Difference Between Credit Score and Credit Report

by Patrick on November 9, 2009

It seems like you can’t turn on the television or the radio without hearing a catchy jingle about your credit score. And if you listen to some of the personal finance gurus like Dave Ramsey or Clark Howard you will hear frequent references to checking your credit reports for accuracy. While these two items both deal with your credit, they are quite different, and quite important.

The difference between credit reports and credit scores

Your credit score is a numeric value based on a weighted formula and your credit history is just that – a list of your credit accounts, payment history and more. These two items are often used to determine your credit worthiness and the likelihood you will repay your loan.

What you need to know about your credit report

Your credit report, sometimes called credit history, tracks your credit reliability based on your history of making payments on your loans and other debts. Your credit report usually goes back 7 years, or up to 10 years in the case of a bankruptcy. Your credit history is tracked by the Credit Reporting Agencies such as Equifax, Experian, and TransUnion, which maintain records of your current and past lines of credit, payment history, age of your credit accounts, collections or settlements on your loans, credit utilization, bankruptcies, and other information. Your credit report will also list credit pulls, or inquiries made against your credit (what is the difference between a soft and hard credit pull?).

Why is your credit report important? Your credit report is considered the definitive record for your credit history and is used to judge your credit worthiness. Your credit score is based from the information contained within your credit report. You should check your credit report at least once a year to ensure accuracy, or before applying for a loan. You can get a copy of your free annual credit report at www.annualcreditreport.com.

Note: Your credit score is not contained within your credit report. You usually need to pay to receive your credit score.

What you need to know about your credit score

There are several credit scoring systems out there, but the most widely used is the FICO credit score, which is a proprietary formula from the Fair Isaac Company (FICO). (find more information at the MyFICO website). You credit score is a numeric value used to rate your credit risk at the time the score is reported. The FICO credit score system ranges from 300 to 850, with a higher score representing a lower perceived credit risk.

This graphic shows the factors used to determine your credit score.

credit-score-breakdown.png

Credit score uses. Your credit score is used to judge your credit risk and is referenced by lenders when you apply for a loan, landlords, and some employers when you apply for a job. The lower your score, the higher your perceived credit risk, which will result in a higher interest rate or the inability to secure a loan. Low scores may also prevent you from being able to rent property, apply for some jobs, or get a security clearance.

How can you improve your credit score? The best way to improve your credit score is through on time payments and maintaining a clean credit history. Here is more information about how your credit score is determined and how to improve your credit score.

Ensuring accuracy in your credit report is important

Your credit score is based upon your credit report so you should check your credit report for accuracy at least once a year to ensure everything is as it should be. You should contact the 3 major credit reporting bureaus if you find information that appears erroneous. Another benefit to checking your credit report is to verify you have not become a victim of identity theft, as any new lines of credit will show up on you credit score. You should file a police report and contact the credit bureaus if you discover you have become a victim of identity theft.

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Berkshire B 50-1 Stock Split

by Patrick on November 8, 2009

Warren Buffett recently announced that the Class B shares of Berkshire Hathaway are going through a 50 to 1 stock split, which is the first time he has split Berkshire stock – something he has claimed for years he wouldn’t do. Buffett has stated multiple times that he prefers not to split stocks because the higher prices make it less likely that day traders will cause major price fluctuations. He changed his mind this week though, after Berkshire’s acquisition railroad company Burlington Northern Santa Fe for a mix of cash and stock. Splitting the stock was a byproduct of the deal and was done for tax reasons.

What is a stock split?

A stock split is just what it sounds like – the stock is split into multiple parts. It actually doesn’t change the overall value of the stock, just the number of shares. For example, if you have a $100 stock and the company does a 2 to 1 stock split, then the original share is now two shares valued at $50 each, which still equals $100. But in the case of  the BRK.B stock, it is a $3,425 stock (Friday’s closing price) being split into 50 shares, valued at $68.50 each. (As an interesting note, the Class A share of Berkshire trades for over $100,000).

This shouldn’t change the overall value of the shares, but it will make it much easier for the average investor to purchase shares of the Berkshire B stock, as not everyone can come up with $3,400 to purchase one share. But when the stock splits on Tuesday, people will be able to pick up shares for less than $100, which makes it easier for the average investor to purchase shares.*

*Partial share investing. Some online brokers, including ShareBuilder and a few others, offer investors the opportunity to purchase partial shares of stock, so in the case of BRKB, one could have already been making purchases of partial shares before the stock split. However, not all brokerages offer this.

Recommended financial and career articles:

This week’s carnivals:

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How Much Can You Save By Doing a Balance Transfer?

by Patrick on November 6, 2009

If you have high interest credit card debt, balance transfers can be a great way to save some money and pay off your credit cards more quickly. Basically, a balance transfer is a way to consolidate your debt on a credit card at a lower interest rate than what you are currently paying. Instead of paying interest rates of 20% or higher, you may be able to transfer your credit card debt to a credit card with a lower fixed interest rate than what you are currently paying; possibly as low as 0% if you qualify for a 0% balance transfer credit card.

Determine how much you can save with a balance transfer

The first thing you will need to do is gather all your credit card bills and add up how much you owe and the interest rates on each card. If you haven’t done this before you may be shocked at how much interest you are paying! You may get angry once you see how much of your payment reduces your debt and how much goes straight to the lender. Use that as motivation to get out of debt more quickly!

After you determine how much you owe and the interest rates, you need to look at various balance transfer options and try to determine what your interest rates would be if you complete a balance transfer. Keep in mind that some credit card companies charge a balance transfer fee, so don’t forget to add that in your calculations. Then use to an amortization calculator and put in your new interest rate and the loan duration to calculate how much interest you will pay after you make the balance transfer. The difference is your savings.

For example, you can transfer a credit card balance from 20% to 0%, and pay a 5% balance transfer fee. You can either add the balance transfer fee to your balance or pay it when you do the balance transfer. Either way, your new interest rate would be 0% and all payments would go toward reducing the principal of the loan. If you direct the interest savings toward your monthly payments you will reduce your credit card debt much more quickly than you otherwise would have. They key is not to add new debt as you go.

Comparing balance transfer credit cards

There are a couple different balance transfer options – a 0% balance transfer if you qualify, or a low interest rate credit card, which may be easier to qualify for. Some examples of each are listed below.

The most popular 0% balance transfer credit cards

0% balance transfer cards often seem like the best way to go, but there are usually fees attached to them. To determine how much you will actually save on a balance transfer you need to consider the balance transfer fees in your calculation. Take a look at the top three 0% balance transfer cards:

Based on these three cards, it is easy to see that you will save the most money if you can pay the card off within 6 months. That may not be realistic for everyone, so the 12 month option is a better deal for many people, even though the transfer fee is 5%. That still beats most credit card interest rates which hover in the 20%+ range.

Comparing low interest balance transfer credit cards

Low interest cards offer another solution to paying outrageous interest rates. Some low interest balance transfer credit cards don’t come with a balance transfer fee. Their interest rates may not be quite as good as a 0% balance transfer card, but the difference often isn’t very far off when you consider the fees that often come with a 0% balance transfer card. Check out these low interest balance transfer options:

These two cards are great options for those looking for a good low interest credit card to reduce their current interest rates, or for people who are searching for a credit card with low interest rates for making new purchases.

Other balance transfer options or debt consolidation options

You may be able to find a quality balance transfer credit card with your local credit union or bank, or through a job or organization to which you belong. Other options to help consolidate your debt at a lower interest rate are a Home Equity Line of Credit (HELOC), or by getting a peer to peer loan from a company like Lending Club or Prosper. P2P loans allow you to borrow money from individuals instead of a bank. If you have good credit you can often consolidate your loans at a much lower interest rate than many credit card interest rates, though not as good as a 0% balance transfer offer.

Which balance transfer option is best?

It depends on your situation – specifically how much debt you currently have, how quickly you can repay your debt, whether or not you can qualify for balance transfer credit cards, etc. But in most cases, it is well worth consolidating your credit card debt at a lower interest rate as long as you make the commitment to changing your spending habits and paying off your debt.

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How to Lower your Auto Insurance Bill

by Patrick on November 4, 2009

Auto insurance is one of those necessary expenses in life that many people don’t pay much attention to. Once you purchase your auto insurance policy inertia sets in and it is easier to simply renew your policy every 6-12 months than it is to shop for better insurance rates. But you may be able to save 30% or more on your annual bill by shopping for cheaper car insurance rates, making it well worth the effort.

How to shop for affordable auto insurance

The first thing you need to do is grab a copy of your current car insurance policy and write down your coverage and rates. Next, get car insurance rate quotes from other automobile insurance companies. You can call or visit an independent insurance agent, visit individual websites, and check online comparison sites for multiple auto insurance quotes. Be sure to check the major companies as well as some of the smaller companies – you never know which company will have the best rates until you get a quote. It’s also a good idea to read customer reviews to make sure you are going with a reputable company – the cheapest car insurance doesn’t do you any good if you can’t file a claim.

Be sure to double check your current insurance policy when making comparisons between auto insurance companies to ensure you are comparing apples to apples because a small difference in the language of the policy can have a big influence on the price.

Get multiple auto insurance quotes

Ideally you want to compare 3-5 car insurance quotes before deciding to switch companies. The following list is a good place to start. Some of these websites in this list are insurance companies and a few are insurance aggregators that will give you multiple quotes from various auto insurance companies. There may be some overlap if you get quotes from more than one aggregator, but you will need multiple quotes to do a car insurance comparison anyway.

Get new quotes for major life events. Your insurance rates may drop when you turn age 25, get married, move to another city or state, have a shorter commute, change jobs (certain occupations may qualify for discounts), or for other major life events. It is always a good idea to get a new car insurance quote for any of these events.

How to lower your auto insurance premiums

Mitigate your risk profile

Your insurance rates are often based on the perceived risk you pose. Factors such as your age, marital status, how many miles you drive, where you live, your credit score, driving record, claims history, auto insurance coverage history, occupation, and other factors can affect your auto insurance rates.

Increase your deductible and drop unnecessary coverage.

Raising your deductible can save you up to 30% on your auto insurance premiums. Increase your deductible to $500 or $1,000 if you can afford that much for repairs. With an older car, drop collision and comprehensive coverage when the car is worth less than 10 times what you pay for the insurance (check Kelly Blue Book for used vehicle values). You can also consider dropping comprehensive coverage if you have fully paid any outstanding loans or if you can afford repairs if you are at fault.

Maintain a good driving record.

One ticket or accident may not increase your auto insurance payment, but then again, it may. Your best bet is not to find out! Drive defensively and observe traffic laws to avoid traffic tickets and possible increases to your insurance premiums. Defensive driving is not only safer, but you will probably save money on gas and maintenance costs as well. Win-win situation.

Pay your premium up front.

Many companies offer a discount on your auto insurance premiums if you are willing to pay your entire premium in advance instead of paying each month. Be sure to ask your company if they offer this type of auto insurance discount – you could save up to 10% or more.

Get good grades.

Many auto insurance companies offer discounts of 10-15% for students who maintain good grades. These discounts are often available for high school and college students. Check with your insurance agency for more details.

Join an association or club.

Many large associations and clubs are able to negotiate group discounts for auto insurance. Examples include AARP, Costco, AAA, military organizations, trade groups, unions, and more.

The type of vehicle affects insurance rates.

Vehicles with higher safety ratings, lower maintenance costs, or lower purchase prices may be cheaper to insure than expensive vehicles or those with low safety ratings. Ask about discounts for day time running lights, multiple airbags, anti-lock breaks, and other safety features. It’s a good idea to get an auto insurance quote when shopping for new cars so you have an idea of how much it will cost to insure your new vehicle.

Combine insurance policies under one roof

Some insurance companies will give you a multi-line discount when you have multiple insurance policies through their company. This can include a multiple car discount, but also for combining other insurance policies such as your homeowner’s insurance policy, renter’s insurance, etc.

Other discounts to ask about:

Defensive driving discounts, low annual mileage discounts, no accidents or moving violations, policy renewal discounts, etc.

Car insurance may be a requirement, but that doesn’t mean you should pay too much

You now have the information you need to search for lower auto insurance rates. Take the time to run some quotes and you may save yorself a couple hundred dollars per year – money that can certainly be put to better use.

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Alternatives to High Yield Savings Accounts

by Patrick on November 3, 2009

Right now savings account rates are relatively low, which leaves a lot of people looking for a better return on their money. While many people prefer leaving their money in a standard savings account, there are some options where you may be able to earn a little more interest. These tips are primarily for people who have an established emergency fund and are looking for a better return on investment for money they do not need immediately.

High yield money market accounts & high yield checking accounts

Many banks offer high yield savings accounts, high yield money market accounts, and high yield checking accounts, each of which may offer different interest rates or benefits. Be sure to check with your local bank or credit union, which may have better offers than you can find online – particularly for high yield checking accounts. Also be sure to read the fine print before opening an account because money market accounts and high yield checking accounts often have a list of requirements that must be met to achieve the highest interest rates. High yield checking accounts often have a long list of requirements, such as maintaining a minimum balance, completing a certain number of debit card transactions per month, a maximum deposit for the highest interest rate and more. In some cases they are more hassle than they are worth.

Certificates of Deposit (CDs)

Certificates of deposit are term deposits that customers deposit with a bank for a set period of time. The amount of money banks can lend is tied to their deposits, so having a customer deposit locked in allows banks to offer better interest rates than a standard savings account. Most banks will charge a penalty if you end your CD before it has matured, so be careful not to put your money in a CD if you think you will need it soon.

How to avoid breaking CDs. The two best ways to avoid breaking CDs are to build a CD ladder or use a no-penalty CD. CD Ladders stagger your CDs on a monthly or annual basis, giving you access to a portion of your funds with more frequency. No-penalty CDs allow you to withdraw your funds without incurring a penalty. These often come with shorter terms and potentially lower interest rates than other CDs, but often beat high yield savings account rates. You can find no-penalty CDs at Ally Bank.

Purchase Bonds

Bonds are essentially loans that you give to the government or a business in return for a promise of payment at a future date. not all bonds are guaranteed, so be sure to investigate the risks before investing. You can purchase guaranteed savings bonds from the US government which are exempt from state and local taxes. Many states, cities, counties, and towns issue Municipal Bonds to pay for public projects and other activities, such as building schools or repairing roads. The majority of municipal bonds are exempt from federal, state, and local taxes, which, depending on your tax bracket, can raise the effective yield above other types of bonds or above savings accounts.

Retirement contributions

If you have extra cash in your savings accounts, you can consider increasing your retirement contributions above what you are currently making. You can contribute up to $5,000 in a Roth or Traditional IRA, and you can contribute up to $16,500 to your 401k in 2009. One way to max out your 401k contributions this year is to increase your payroll withholding and make withdrawals from your savings account to make up for the difference in cash flow. Only do this if you have a buffer in savings and don’t forget to reset your contribution levels after you max out your 401k.

Peer to peer lending

Lending Club - Start Investing Online Today! Before reading further you should realize the P2P lending is not a guaranteed investment and is not backed by the FDIC. So if you are looking for a place to stash your short term reserves without risk, then this is not an option for you. But if you are looking at a short term investment with potential returns better than a standard savings account, then you may consider purchasing loans through Lending Club or Prosper, two of the leading P2P lending institutions. While these loans are not guaranteed, there is an opportunity to return much more than a standard savings account or other investments, with Lending Club loans recently returning an average of over 9%.

Pay off debt

If you have extra cash sitting around your savings account and want to get a better return than current interest rates, then consider making additional payments on any outstanding loans, including your mortgage. Chances are you will receive about a 5% return on investment or higher, which is much better than the sub 2% interest rates offered by most banks right now.

Where is the best place to stash your cash?

The best place to stash your cash depends entirely on your financial situation and risk tolerance. You should maintain your emergency fund and as much additional cash as you deem necessary. If you have extra cash after that then it doesn’t hurt to look for a better return on your investment.

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