Minors with Credit Cards-Good idea?

As minors cannot sign a contract until they are 18 they cannot be involved as a co-signer on a card. A parent cannot cosign for their kids as the kids cannot sign on to the card with them. Cosigning for your kids is a relatively straightforward process, both of you will be on the application and both will sign. The parent’s credit will be evaluated for approval. If it is approved, the proper management of the card and the parent’s credit background will elevate their adult child’s credit score. Of course, if the card is not managed well or the parents have a lapse in managing their credit, that can be detrimental  to the young person’s credit score. 

 

 

However, being younger than 18 does not lock a young person out of having a credit card. They can be placed on an established credit card as an authorized signer. This gives them all the rights of usage without the responsibility. But it will start to build their score for them provided the parent has a good score to start with. Yes, the minor can start building that FICO score while they are a minor. The best option:  Parents can remove the minor from the account anytime they wish! 

 

This is especially helpful when the card has been misused.

 

The major disadvantage of minors with credit cards is their occasional lack of responsibility. They might use the card for parentally unauthorized usages like a Miley Cyrus concert or go hog wild buying MP3’s on iTunes or Amazon. There are a variety of opportunities for minors to misuse a card. It is up to the parent to ensure the child understands the limitations and responsibilities related to managing the card and teach them how their current authorized usage will benefit them in their adult life.

 

One option that families have in training their kids to manage money is the Meriwest Credit Union Flow Card. The Flow Card is an electronic checking account (no checks allowed) that is managed by a parent and their child. Flow Cards come with free online banking, online bill pay, and mobile banking options. Your child cannot overdraft a Flow Card! The account is ideal for those students who are aged 13-24 years old. It gives parents an opportunity to teach their kids about managing money with a debit card as the parent and the kid will both have access to the account information. This is good training for eventually managing a credit card.

 

Meriwest Credit Union is an Equal Housing Lender. All accounts are insured by the NCUA to $250,000.

College Students Using a Credit Card

The best way to use a credit card is only for emergencies. A blown transmission is a good example. Not everyone has $2,000 to fix it when it goes. But that transmission is an integral part of your car and your car is an integral part of your economic development; i.e. it gets you to class and to work on time. So fixing that transmission quickly and being able to pay it off over time may be very important for many students.

This brings me to my second point beyond emergencies, use your card to only purchase assets; not liabilities. The transmission is an asset to your car. Liabilities? Vacations are a liability. When you pay for a vacation on a card, you are only deferring the costs. After the vacation, you only have memories. Pizzas, movies, concerts, fancy dinners, fashionable splashy clothes and such are drags on our monthly budgets if we decide to place them on our card. These things have virtually no value after we pay for them and have the experience of the movie etc. You want to go to a concert or a movie? Save your money for it. Make it a special part of your budget. Paying for it with saved money is much more satisfying.

Use the card to purchase assets. Your school books are an asset to your education. If you use your card to buy household items, use it for furniture like a couch. Then you are buying an asset for your house. Then, when you sit on that couch and write out your checks for your bills, you are sitting on your asset. J (A little banker humor.) But, think about it, if you suddenly fall on hard times, you can sell that couch and pay down your card. You can’t sell the memory of a concert or the taste of a meal from three months ago.

Also, whenever one uses their credit card, consider how you will pay it off before you charge it!

Here are some other ideas fresh from my blog:

1. When establishing your first credit, consider using a secured credit card; a card where you have to make a deposit in a savings account in order to establish and maintain the card. The money on deposit is your collateral for the credit. You now have an additional incentive besides maintaining our credit to be on time with your payments; your own money is at stake. Meriwest Credit Union offers this type of Secured Visa Card. Info on our Secured Visa Card is here.

2. Another secured type of credit option is the credit union share account loan. Most credit unions have this. You make a deposit to an account and then take a loan out against the funds in the account. As you pay it back on time, your CU lets the credit bureau know and it helps get you get established in managing credit. Secured Share Account Loan info is available here.

3. When you get your first credit card, do not celebrate. There are those who like to go out and get a quick pizza or a movie when their new credit card arrives. A new credit card is not a good excuse to go out to spend and celebrate.

4. Avoid gas cards issued by Shell, Chevron, and other oil companies. Those who are new to credit are often unaware that gas purchases on oil company cards have to be repaid monthly. Only repairs and major purchases, (tires, transmissions, etc.) can be paid over time.

5. Check your credit report annually at AnnualCreditReport.com to verify your current outstanding credit and prevent identity theft. Do you see a card on your report you didn’t order or apply for? If you are reviewing your report annually, you can take action fast and stop identity theft.

6. It seems simplistic, have a budget and plan your spending. A good budget can keep you from using your credit cards to supplement your monthly budget and help you pay off the debt you already have. 

*   *   *
Our next Free Financial Education Workshop will take place Dec. 11th at our Main Office. 

Credit Myths and Repair
6:30pm to 7:30pm
5615 Chesbro Ave
San Jose CA 95123

Please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328

Should I close a Credit Card? Will that hurt my credit score?

A question I hear often is, “Should I close out old credit cards that I don’t use anymore?” Is that a good idea? First we will talk about why closing a credit card may not ever be a good idea and then we can look at some reasons to close out a credit card.

Closing credit cards should never be taken lightly. Closing a card removes that available balance from our overall available credit. Removing these available balances by closing the cards can reduce our FICO/Credit score. 30% of your score is based upon the ratio of used vs. available credit. Reduce the ratio and reduce your FICO score.

Example: A person has $20,000 in available lines of credit and has $5,000 charged up. They are using 25% of their available credit; a 1:4 ratio of used credit to available credit. Then they close a credit card with a $5,000 available balance. This decrease in their available credit, from $20k to $15k, increases the percentage of credit they are using to 33% and takes them to a lower and less desirable 1:3 ratio in credit usage. This will lower their FICO Score.

Closing cards can be a big deal if consumer credit cards are your only form of credit. If you have other types of credit, a mortgage or car loan for example and have other credit cards, closing one card may not be a big deal. But if one has a thin or minimal credit file, it could be detrimental.Also, the history of your card usage will drop from the report after 18 months and it will no longer be a factor in your FICO score. Ouch!

Why close a card? Fees. Some cards have instituted annual fees; one must pay an annual fee just to possess the card. These annual fees can range from $25 to $100 depending on the card and its features (rewards, vacation insurance, travel services, etc.). If the fee is too much for you to afford or you just won’t pay it on principle, then it might be time to look for a new card to replace this one or close it altogether.

Interest rates can be an issue for people who carry balances. An increase in the APR of 3%, say from 15% to 18%, can cost a cardholder an extra $150 over a year on a $5,000 credit card balance. If the APR is a concern, I would recommend finding a lower rate replacement. Credit card issuers will often offer reduced rates for balance transfers. This may be an opportunity to transfer the balance to a new card with a lower rate and close the old card.

The card has been stolen or compromised by an identity thief. Good reason to close it. Often your card issuer will offer to replace the card with an entirely new account, transferring your balance to the new account.

Sometimes people get tired of making payments and are simply through with debt. They will cancel their cards to prevent further accumulation of debt. If you are ending your relationship with debt, that may be a good reason to close a card or two. That being said, keep one general purpose card such as a Visa or Master Card open for emergencies. Go to McDonalds once every six months and buy yourself a Happy Meal for lunch. Pay that bill at the end of the month and your card will remain active. Do this every six months to keep that card active. You never know when you will need it! 

*   *   *   

Our next Financial Education workshop will be taking place at our Sunnyvale Financial Center at 563 E. El Camino Real in Sunnyvale, next to Togo's Sandwiches. To attend, please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328.

Credit Myths and Repair - Learn how to access your credit report from all three credit bureaus and your credit score for free. How do inquiries effect your score? What happens to your credit after you pay a collection? Have a late payment? Get a divorce?

6:30PM - 7:30PM on Oct. 23rd 

Sunnyvale Financial Center

Meriwest Credit Union

CAR SALE!!!

 November 9th and 10th at the Meriwest Credit Union Main Office 

5615 Chesbro Ave, San Jose CA 95123

Come to see our wide selection of late model, gently used cars offered at bargain prices by our MCU approved dealers.

A History of FICO Scores Part II

In the 1950’s, someone asked the question, how can we judge someone’s credit without having to read the entire credit report?

You see, not only was time an issue, reading the reports and making judgments based on the information in them became an issue. You could have two loan underwriters look at the exact same loan package and come up with wildly different opinions on a person’s credit. Some would give their approval of the loan and others denied the credit. There was no set of rules that told underwriters how to decipher and utilize the information they were gleaning from credit reports. It was all just “someone’s opinion,” very subjective.

Thousands of new borrowers were being approved daily and lenders needed a way to mitigate or gauge risk and develop a national standard for credit worthiness. In 1956, a company named Fair Isaac Company came out with a revolutionary idea; Credit Scores, also knows as FICO Scores.

How does the scoring work? FICO takes several important financial factors into account. The two most critical factors are the borrower’s payments and the balances they maintain. These items make up 65% of the score; 35% for the payment history and 30% for the balance ratio. That’s why a late payment has such a serious effect on our score. Collections are worse for us and our scores. The effect of a late payment on a loan or credit card will start to diminish after 24 months. If one has an open collection, the collection will have the same weight on their score on the last day of seven years as it did on the first day it was placed on the person’s report. The lesson here is very simple, make your payments on time and you will never have to deal with late payment issues or collections.

Balances play a role in our score if we don’t pay them down. 30% of your score is determined by the balances a person is carrying vs. how much they have available. Maintaining outstanding credit card balances by paying only the minimum payment can be very detrimental to your score. We have to make an effort to pay our outstanding balances off. For scoring purposes, the balances are added together and a ratio is calculated vs. the total amount of credit available.

The three remaining factors are our History. How long have we managed credit? That accounts for 15% of our score.

Finally, 10% each is allocated to the types of credit we manage and the number of inquiries made on our report annually.

With this data put into a computer algorithm, a number could be determined. That number would be an indicator of risk. A high number would indicate less risk is involved in lending to a person where, conversely, a low number would indicate a lower likelihood of repayment. This also led us to “FICO Score Lenders;” lenders that only grant credit based upon a predetermined level of score.

What is a “FICO Score Lender?” Typically, our major banks are using the FICO score as the primary determining factor in making their initial credit decisions. Let’s say a financial institution has 300 offices in California. On any given day, each office might send a loan application to their loan underwriting department. The underwriters, the staff who decide credit decisions, might number a dozen but receive 300 applications in one day. Prior to 1956, they would have to view each credit report to make a decision. Now, they enter the social security number of the applicant and the credit bureau gives them a number. If today’s number is 740, then any applicant with a FICO Score of 740 or above will get a further review of their loan package. The borrowers with a FICO Score of 739 or less are declined for credit as they did not make the score. Not only does the FICO Score help us determine risk, it helps lenders render faster credit decisions. Often, we can approve someone based on their credit within 24 hours.

Some may ask if using a score like this is fair. The FICO Score is basically colorblind. Credit is ultimately granted to those who have proven they can manage it well. It is typically declined for those who manage it poorly. Over the years, the score has been adjusted down for times when credit was loosened and adjusted upwards for times when we had to tighten up on the use of credit. Today, most financial institutions are looking for borrowers with a FICO Score of 740.

Are credit unions just like banks on FICO Scores? Not necessarily, credit unions generally take a more holistic approach to lending; meaning they tend to take a look at the “whole borrower,” not just their credit score. Before a credit union renders a credit decision on someone, we will take into account how long this person has been on the job? How long have they have lived in the area? How long have they been a CU member? Of course, a CU will consider their income and debt to income ratios before we provide our final decision. What this means is, if a borrower comes in with a FICO Score at 739, or 735, we don’t automatically decline their loan request. We take a wider look at our borrower to determine their creditworthiness.

Can banks help their clients with loans just like credit unions do? Sure they can, but they don’t! They will tell you they don’t have the time. It takes to much time to make decisions on marginal credit applications. Time is money and we need that money to show a profit to our shareholders.

I used to work for a bank that called itself the “Largest Financial Services Provider in the World.” One of my bosses once said to me, “We need to make profit. If we don’t make a profit, we might as well be a credit union.” As if there is something wrong with that?

*           *           *

Thank you. I hope you enjoyed our history of FICO scores. If you want to learn more about credit, please attend our next Credit Myths Workshop this Wednesday the 24^th at our Monta Loma Financial Center in Mountain View: 580 North Rengstorff Ave, Mountain View CA.

To RSVP for this workshop, click this link.

Credit Myths and Credit Repair

Credit Myths and Repair    April 24th at 6pm   Monta Loma Financial Center

Learn how collections, credit inquiries, and late payments effect your credit score. What is a FICO score? You will learn how to access your credit report and your credit score for free. Learn from the experts.

A History of FICO Scores and Why We use them - Part One

We have spent a lot of print on what goes into creating your FICO score. We know who FICO is, Fair Isaac Company, and they invented the score. We have learned the five factors that go into it; Payments, Balances, History, Inquiries, and Types of Credit and how each of these factors are weighted. We have learned how FICO scores are affected by debt and collections. What we have not covered is why FICO exists at all. Why do we need FICO Scores?

Back in the day, we used your entire report, read it page by page, to learn how you manage your credit. We would check your collections, payment histories, and other data in making a lending decision. It took time to make loan decision. It was not like today where lending decisions can be made instantaneously online or within 24 hours of receipt of the application. Often, two or three people would have to review a loan file before it could be approved. That all changed with the advent of the FICO Score in the 1950’s.

Okay, so FICO saves us time in getting loan approvals. How did it come about?

In the 1860’s, a few regional credit bureaus started to crop up. They maintained lists of people or businesses that used credit and kept a record of their credit volume and payment histories. This allowed merchants to give credit to their customers without having to have a personal relationship with them as had been customary in the past.

In 1898, the first national credit bureau opened its doors. The Retail Credit Company, later to be known as Equifax, was born in Atlanta. For $25, merchants could get a list or “Merchant’s Guide” that listed those who were known to have good credit habits and would be a good credit risk. For many years, the Retail Credit Company (Equifax) would be the only game in town, and in the USA for that matter, where financial institutions and other lenders could gather information to judge risk when lending.

In 1900, the first versions of a credit card were issued. “Proprietary Cards” were issued by oil companies and department stores to good customers. This allowed these customers to purchase goods and pay them back at a later date. The cards were only accepted at the issuing store. While modern credit cards are issued for consumer convenience, “Proprietary Cards” were issued as a means of stimulating customer loyalty.

What about the other two credit bureaus? Where did they originate? In 1866, UTLX started doing business. They were a manufacturer of tank cars to be pulled by trains. Later, they started their own credit bureau and were known as TransUnion. In  1901, the Cleveland Cap and Screw Company was founded and that was later to became known as TRW and, eventually, the Experian Credit Bureau we know today. These companies, TransUnion and Experian, started tracking consumer credit usage in the 1960’s.

Between World War II and the advent of the other two credit bureaus in the late 1960’s, there was an explosion in credit! Prior to WWII most lending was local; merchants provided credit to local families or businesses. Many loans were made on the basis of bank references and personal recommendations. During this time, the ability to check someone’s credit on a nationwide basis had not been established.

As G.I.’s returned home after the war, the job market expanded and the demand for consumer products and home purchases grew dramatically. Loan volumes grew and financial institutions hired large numbers of loan processors and loan underwriters. As volumes grew, processing times got longer and customer patience was shorter.  

Finally, someone asked the question, how can we judge someone’s credit without having to read the entire credit report?

Check out Part II of our History of FICO Scores coming in next week!

 *   *   *

Workshops!

This month's Financial Education Workshops are taking place at our Monta Loma Financial Center in Mountain View: 580 North Rengstorff Ave, Mountain View CA. Please RSVP for either of these workshops at this link.

Auto Financing 101       April 17th at 6pm    Monta Loma Financial Center

Learn what insiders know about the auto buying process. What tricks do dealers use to get you to buy? Is my interest rate negotiable? How do I get the best deal on a purchase and financing? Meet our Personal Auto Shopping Service Manager, Bill Fultz who has 25 years of experience at car dealerships and now shares his knowledge with our members. 

Credit Myths and Repair    April 24th at 6pm   Monta Loma Financial Center

Learn how collections, credit inquiries, and late payments effect your credit score. What is a FICO score? You will learn how to access your credit report and your credit score for free.

Consolidating Debt with Personal Loans - Good idea?

The New Year is nearly here. A lot of us are thinking about our finances and how we can improve them in 2013. Personal loans play an important role for those who are trying to get out of debt quickly. Properly used, they can be an easy way to paying off high interest credit card debt. If they are used improperly, they are a fast ticket to a lower credit score.

Let’s keep in mind that bill consolidation, from the standpoint of a credit union, means eliminating debt, building credit scores, and creating a consumer solution that can be easily managed based on the member’s income. Depending upon the extent of the member’s debt, we will often ask that they close several of their outstanding credit cards. Why? It will do no good to consolidate their debt and have them run it back up. We will take a look at their credit and income to determine what credit can be retained by the member and what they would need to close in order to receive the loan or line of credit for the bill consolidation.

Often, CU’s will recommend a member gets credit counseling prior to their consolidation. Credit Counselors teach the member how to budget, to use their online banking to manage their finances, and help them understand the consequences of extensive debt and its effect on their credit scores. It can also be helpful if the credit union offers workshops on these subjects as Meriwest Credit Union does. For more info on personal lines of credit, click here.

Any bill consolidation should offer you a lower rate of interest than that which you are currently paying and a more affordable payment. Currently, for someone with a 740 FICO score, we can offer 15% on a personal bill consolidation loan or 10.50% on a personal line of credit. Please keep in mind the line of credit is adjustable and when rates go up, which they will, this rate could rise rather quickly.

One of the dangers of bill consolidation is irresponsible borrowers. A person can get a consolidation loan, consolidate their debts into a more reasonable and affordable alternative and then go out and acquire more debt. This completely defeats the purpose of bill consolidation and puts them on the fast track to a low credit score or worse.

We must also consider that closing out a credit card account can lower your credit score. Closing out cards that we have had for a long time will negatively effect our credit. When those credit lines are removed we lose the available line as part of our balance ratio calculation (for more info on this, see our blog “Your Fico Score, Mystery No More”) and we lose the history of managing that credit after a few months. Opening a new line can offset some of the FICO points lost to closing a line.

Don’t want to close the line of credit? You have some options. You can cut the card in half and simply not use it thus leaving the account open. If you are a disciplined person, you can lock your credit cards in a drawer and avoid using them; out of sight, out of mind.

Homeowners have another option available to them; the Home Equity Line of Credit or HELOC. The HELOC is line of credit based on your home’s equity. Typically, it has a lower rate than unsecured personal loans and may offer tax advantages for some homeowners. It is handy for home improvement, bill consolidation, and a myriad of other uses. As a matter of fact, Equity Lines of Credit are worthy of their own blog! We will have one for you on that next year.

Alternatives: There are offers from credit card vendors to transfer balances at a lower rate. They encourage borrowers to use a credit card check to pay off debt at other vendors and transfer that debt to their card. Consumers need to be mindful that the low interest rate offered on these is usually a teaser and may go up in time. Some cards may offer a lowered rate for the life of the transferred debt. These can be a pretty good deal provided the borrower is responsible and does not incur further debt during the pay off period. But don’t miss a payment! You could be subject to penalty interest and see your preferred low rate rise well above 18%.

Some things to consider before combining balances on another credit card:

-          Do you have adequate credit limit for the transfer?

-          Is the Introductory rate a temporary Teaser Rate or fixed for the term of payoff?

-          Is there a fee for the balance transfer? (this increases your cost of borrowing.)

Finally, before considering any consolidation, can you buckle down and get out of debt on your own without help? Can you rearrange your budget, be disciplined in your spending, and commit your spare dollars to paying off your debt? If one eats out for lunch everyday, it can cost over $35 a week. Bringing a lunch from home can save $100 a month. That money can go a long way toward paying off debt. On any credit card or loan, you can make larger payments and any amount you pay over your monthly interest gets credited against your principle, thus reducing the amount of interest you will pay the next month. Keep that cycle up and you will pay off your debts a lot faster.

*           *           *          

Reality Based Budgets for Teens and College Students – Jan. 16^th

Our next Financial Education Workshop will be Reality Based Budgets for Teens and College Students. It is a post college simulation of renting an apartment, buying a car, and developing a spending and savings plan. It is a fun and interactive session for the whole family and really opens the door to discussions about managing money. If this is something you or a member of your family needs, please feel free to join us. These workshops are open to the public.

Reality Based Budgets

6:30pm January 16^th at our Chesbro Main Office Location

5615 Chesbro Ave, San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com.

*           *           *

Hungry for more information on Money Management? Check out Len Penzo’s Financial Blog. Len provides excellent financial insights with a sense of humor.

Does Good Debt Exist?

Good debt does still exist. Home debt, if you are not dramatically underwater is still good debt. Please remember that the majority of home owners have seen some degradation of their equity, but most homeowners are not underwater. The generally accepted number is somewhere between 20-25% of all homeowners have a home that is underwater. Most of these were either purchased or refinanced during the recent boom in prices, especially 2005 to 2008. It is a simple truth that 75% or more of all U.S. homeowners are not underwater. Homes purchased today with a reasonable downpayment of 20% or more may have some stagnant price growth in the near term, but historically, owning a home is a sure path to wealth creation. When you consider the tax advantages of owning a home and the increase in value even if it only follows regular inflation rates, new homeowners will incur good debt.

Is college debt good debt? Many are of the opinion that education is important and the resulting debt from financing it is still a good debt. That is provided the student finishes and graduates. Statistics show that lifetime earnings of those with bachelors and masters degrees are substantially higher than those with only a high school education. I have many former college students in my workshops who have not graduated and have substantial student loan debts. Those debts become good debt and will be well worth it when they finish their degrees.

Is all credit card debt bad debt? Not necessarily. Often, young persons will use a credit card like it is going out of style. They will pay for movies, dinners out, concerts, and other fun items with their credit cards. That is some bad debt; debt where you have little or nothing but memories to show for it. I think the responsible use of credit cards is in purchasing assets for your home or car. Use the card for furniture, needed appliances or a major car repair. That way, when you are on your couch writing a check for your Visa card payment, you are sitting on your asset. (A little finance humor.)

Vehicle debt can often be termed good debt. Your car is an economic development vehicle. It gets you to work on time and gets your kids to school. Is spending 2 hours plus on a bus or train daily the best use of your personal time? It is a matter of opportunity cost. How much is your personal time worth?

In the end, I think that the difference between good debt and bad debt is subjective. Our income, education, and cultural background all play a role in how we view the value, really the personal value, of our debt. 

*   *   *

Our next financial workshop:

Today's Real Estate Market and Tips for Purchasing Foreclosed Property
Saturday, October 13, 2012 - 10:30 a.m.
Chesbro Financial Center, San Jose, CA