Teenagers Establishing Credit without a Co-Signer

What I mean here is establishing credit for those teenagers aged 18-19, or those in college. Anyone younger than 18 cannot legally contract for credit on their own as they are considered minors and require a co-signer. To sign a contract and have it be legally binding, you must be 18 years old or older. Very simply, credit applications are contracts where one is promising to repay money loaned.

One of the first steps in establishing credit is to open your checking account if you don’t have one.. I was surprised to learn that our credit files start the moment you open your checking account. As the nice new accounts person is getting your personal info and inputting it, their computer is reaching out to the credit bureau in the background and searching for your credit data and saying, “Does this person have any credit established?” If the bureau does not report any data back, your credit file gets established and you are given a score of 300. That is the lowest score you can have and generally signifies someone new to credit or never having credit in their lifetime. No need to panic, there are opportunities to increase your score going forward.

Now starts the task of establishing your credit and increasing your score. If you have any regular bills such as a cell phone bill, or other recurring bill, make sure you pay them on time. Failure to pay for 30 or 60 days won’t effect your credit but don’t let your utility or other recurring bills reach 90 days late. 90 days late is delinquent and can result in your debt going into collection. That can stop you from getting established before you have even started. I have seen hundreds of young adults have to struggle for years because of one or two poor decisions. Even your humble author had his share of bad credit in his early 20’s. Y’know, you write one bad check that becomes a collection and it stays with you for 7 years! Simple Fix: Pay your bills on time and don’t write checks on money you don’t have in your account. Got that?

Next, let’s save some money. Savings is an important aspect of our overall financial life. Before you get credit, get your emergency fund started. Financial Guru, Dave Ramsey, recommends that everyone should have a $1,000 emergency fund. You never know when you are going to get a ticket or may need to pay for an expensive repair to your vehicle so having this emergency fund to back you up is a necessity.

Now, let’s save some money for our credit. Huh? One of the best ways for young people to get credit is through a secured credit account. So, we are going to save money that will be used as security for our credit. Essentially, the financial institution or credit card company will hold our money for the time that we are managing the credit they grant to us. That’s how I got my start in credit. I deposited $1,000 in an account at a financial institution and they gave me a Visa card with an $800 available credit line. I had quite an incentive to make my payments; if I didn’t, they would keep my savings! I was careful and managed that card for 14 months using it and paying it down on time before I attempted to apply for unsecured credit. When I was eventually granted a new unsecured Visa card I was able to march down to the bank, pay off my secured Visa card and get my savings back.

That was 1985. Today, it has not changed very much as similar products like the secured Visa card are still available. What has changed is that secured Visa and MasterCard cards are more prevalent.  

Another secured type of credit is a credit union share loan. A share loan is an excellent way to improve or build your credit.  Luis Alvarez, a Financial Services Representative at our Hillsdale Financial Center said, “Anytime you use credit you essentially are paying for building up your credit history through a fee called interest.  Why not pay yourself some of that interest by establishing a share loan?  Share loans pay you while you pay a small interest rate throughout the term of the loan.  Here’s how it works.  Deposit a set amount of funds in a savings account that will be held as collateral for the share loan.  Meriwest will then loan you those funds and ask you to pay monthly payments back until the loan is paid off.  Once the share loan is paid off the collateral funds are released and made available to you.  During the loan term, the funds held as collateral also earn interest.  Ultimately, a share loan is a win-win loan for you and your credit.” Luis added, “Keep the share loan open for at least a year or longer so that your credit builds into a healthy report.”

“The secured Elan VISA is a great way to rebuild your credit or help you get started.” said Devon Foster, from Meriwest's River Oaks Financial Center.  “Simply, apply in one of our branches or online and send in a cashiers check in the amount of the limit you would like to have. You’ll receive the credit card in the mail and you can start using it right away. Even though your money is being held, the good credit history still gets reported to the credit bureaus boosting your score, history and your likelihood for getting an unsecured or larger loan in the future!”
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Are you interested in either of these programs? Would you like to speak to someone knowledgeable about them? You can speak with Luis Alvarez at our Hillsdale office at 408-365-6358. Devon Foster is available at our River Oaks Financial Center at 408-365-6411.

Credit Reports and Employment Background Checks

For jobs that require a high degree of trust and responsibility, a background check is required. Part of that check includes a review of your credit report.

In the business of finance, credit reports are critical to the hiring process. You would not want someone handling your money if they could not manage their own! The credit report can tell us a lot about our potential employee. It gives us insight into how responsible they are with their money and credit. The thinking is, if someone is responsible with their own money, they will be accountable and reliable when given responsibility for your money.

But, right now, it can be difficult to find someone who has been unemployed for a while with perfect credit. We are seeing people with a number of credit issues applying for jobs. The bottomline is: Honesty is the best policy. My HR team appreciates when an applicant is upfront about their credit status and speaks to us about the deficiencies in their report. In example, “I have been out of work for six months and had to make several concessions to my budget to make ends meet for my family. I have one Visa account that is 30 days in arrears and I am two months behind on my mortgage. I should be able to bring these items current within two months of being hired.”  In these recessionary times, we need to be flexible and do our best to see the entire employee and not focus on one or two aspects of their past credit behavior. If someone were to be upfront with us regarding their past credit, we would appreciate their honesty. It is best to know ahead of time and not be surprised than the other way around.

Credit checks or inquiries for employment do not show up on credit reports requested by employers or creditors. Where you apply for work is none of their business. Those inquiries only appear on your copy report if you request it from a credit bureau or if you order it through WWW.AnnualCreditReport.com.

A person has the right to add a 100 word statement to their credit report at anytime should they feel the need. In the case of someone being unemployed or underemployed for a length of time, one could place a message on their credit report with all three credit bureaus that they were unemployed from xDate to xDate and had to allow some bills fall into arrears.  The message will stay on the report for 7 years. This message also plays for someone who was disabled and unable to work for a time. These messages will not help you access further credit, but may be helpful in accessing employment or rental housing. 

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Are you looking for a new car this summer? Tired of feeling you paid too much for your car? You can make a change by contacting Bill Fultz, our Personal Auto Shopping Service Manager.  Bill is an Auto Broker who works for our members for FREE! Bill can get you the best deal on new and used cars; often at invoice or below. Learn more about our Personal Auto Shopping Service on our PASS Page.

Adustable vs. Fixed Rate Home Loans

Are you thinking of diving into the market and buying a new home? Home Loan Rates are at a historic low point. Fixed 30 year rates have just gone below 4.00% and could go lower if the real estate market stays slow for now. Interest rates are not effected by gravity so when they go down, they will not stay down. They will go up when the economy heats up. That could be by the end of 2012 or it could be a year or two away. The economic situation is very fluid right now.

This brings me to my point; rates don’t have very far to fall but they have a lot of headroom to rise. On a loan taken out today, an adjustable rate can go down a little bit over the near term, but those who have a new adjustable rate mortgage need to be conscious of the movements of the market and be prepared to refinance to a fixed rate loan quickly. The best bet is to grab a fixed rate mortgage now. At 4% a borrower is borrowing at one of the most significantly low rates in recent U.S. history!

The Fed says that rates will remain low for a while. If there is a fix to the EU Debt Crises and our economy heats up, rates can go up fast. We have seen it repeatedly since 1978. Each time a recession has ended, lending rates went up quickly. Those with adjustable loans were hit the hardest as their loans are tied to the Fed rate, LIBOR, or the prime rate. Those rates can be very volatile in a heated economy. The Fed controls the money supply with interest rates. If the Fed governors feel there is too much easy money or because of the easy money they are seeing inflation, they can put the brakes on the economy and slow it down with a rate increase.

One last thing to keep in mind is a lender’s spread; the amount of interest he makes on money he lends vs. what he is paying for savings accounts. Typically, the spread should be about 2% or greater between the average interest rate being paid on savings vs. the average overall loan rate. Right now, financial institutions are paying less than 1% on savings accounts. There is room for rates to go down a little bit so that may make an adjustable loan more attractive. Many adjustable loans can go up 2% in one year. Thus, one can go from 3% to 5% on a mortgage loan in about a year. That would cause the payment to increase pretty dramatically. I think this is a good argument for a fixed rate loan. 

Our next financial education workshop is:
 Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

Is Cash still King?

Cash is King. Or so I have been told over the years. But I have also found that cash is easily lost, burned, stolen, and can also be easily spent on impulse purchases. So, what if we completely dropped using traditional financial institutions and started paying for everything in cash? That means foregoing all checking accounts, debit cards, and credit.

The bank checking account that is free today may cost a consumer $5 to $25 per month next year if they lack direct deposit of their payroll or do not maintain a minimum savings balance. So the cash only question is a reasonable experiment; what is the process of not using a checking account or credit and going cash only for all transactions?

Sure there are some monetary advantages to using cash; you often get a discount on gasoline purchases. Some small markets and liquor stores will charge a dollar or more for using a debit card at their establishment. Using cash, one can forgo these fees. Technically, everyone accepts cash without question.

Where do we keep our cash? In a financial institution? The consumer might use only a savings account to maintain their cash and access what they need from an ATM.  They may keep a personal safe in their home. Of course, keeping cash in your home may open you up as a target for robbery.

To go “cash only,” a person will need to plan ahead and maintain a solid budget. They have to know how much they will need from day to day to cover the costs of groceries, gasoline, and whatever other sundry items they will need to purchase. I know people who currently don’t have a checking account who cash their paychecks and carry that cash with them all month long. Very few of them have any savings to speak of. Thus, the budget is critical to managing our spending cash.

There are a lot of things we won’t be able to do without a debit card or a credit card. How about renting a car? No debit or credit card, no rental car! You cannot make an online purchase with cash. You cannot reserve a room or an airline reservation over the phone or internet with cash.

Paying bills by cash creates a dilemma of time. A person would have to have all their vendors to whom they pay their bills local to their home or employment. You don’t want to mail cash! You would want to go to the bank that holds your home loan and make your payment there. Then you would have to go to a location to pay your power and gas bill, your phone bill, and your cable TV bill, etc. Do we have the personal time to run around and pay all of our bills this way? Gasoline is not getting any cheaper so running around like this is going to cost us.

I could not pay all my bills with cash and believe anyone with a few outstanding accounts would be challenged to go “cash only.”  In the situation that I have described thus far, a debit card with online banking makes the most sense.

Debit cards draw cash from your checking and, thru the merchant banking system, when we make a purchase the funds are transferred from our checking account to the merchant’s account. If a debit card is lost, it is easily replaced by the financial institution. If the consumer reports their loss immediately, they will suffer no monetary losses. If someone steals your debit card and they process transactions on it, the consumer is reimbursed by their bank for the fraudulent transactions. Not so for cash.

I don’t want to run around saying the “King is Dead!” but, it appears that there are a number of things we can do with cash in our pockets, but it seems there is more we cannot do without a debit card and only cash in our pockets. So, is going “cash only” a viable option in today’s world? Probably not.

And don’t forget our financial education workshops that we are offering here at our main office in the coming month of June:

Free Financial Education Class: Real World Budgeting for Teens (seems to be a lot of demand for this!)
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

Late Payments will have you Hurtin’ for Certain!

Paying our Visa card or car loan late is not something we want to do, but sometimes due to our finances or forgetfulness, it does happen. There is no worse feeling than mailing that payment and knowing it will be at least 30 days late. We know that there will be a mark on our credit and many of us believe that mark will be with us forever! I can tell you it will not be with us forever.

Most loans and credit cards give us a grace period in which to make our payment. If we make the payment before or on the last day of our grace period, our payment will be on time. If you let that payment go one extra day past the grace period, your payment will be considered 30 days late by your lender. Be careful with the grace period. Pushing the cut-off date to the wire can lead to consequences, depending on when/how payments are processed. This should be a last resort, it isn’t advisable.

How does that affect your credit? It depends on how much credit you are utilizing and how it is managed.

• If you have a lot of credit like a home loan, an auto loan, and some credit cards that are kept current, one late payment won’t take you completely out of the credit market. Yes, your score will drop as a result of the late payment but because you are managing several other forms of credit properly, the late payment’s affect on your credit will not be too severe. As you make your future payments on time, the effects of the late payment will be mitigated by the good credit you are continuing to manage.

• If you have a limited credit file and that credit card is the only card you have; that late payment could have a strong effect on your credit score. The late payment, whether you have an extensive credit file or a limited one, will be with you in your file for the next seven years. But, surprisingly, it does not have the same weight upon your score for the entire time.

The effect of late payments on your credit score is “front loaded.” What I mean by this is that 70% of the effect that late payment has on your score takes place in the first 24 months after the late payment! After that initial 2 year period, you will see your credit score bump up and, as it becomes 36 months, 48 months, and further into your past, its effect will be diminished each year and you will see your score bump up each year until it drops off your credit report completely at the end of the 7^th year. You can help yourself further by making all other debt or credit payments on time. Good credit offsets bad credit.

By the way, there is one additional cost to paying your credit card bill late: Penalty Interest. In many cases, paying your card late will not only decrease your credit rating, it can cause an increase in the rate you are paying for credit! Your interest rate can increase dramatically. It not uncommon for your interest rate to go straight up to 29.99% or even more with just one late payment. Depending on how large your credit card balances are, this can cost you thousands of dollars in additional interest charges and prolong your time in debt. Most issuers will require you to have six months of on time payments before reducing your rate. You need to check with your card’s issuer to determine their particular policy on late payment penalty interest.

One late payment is a cause for concern, but it is not, by any means, the end of the world or end of your credit file. One of the ways you can assure yourself that you will not be late is to utilize your online banking and bill pay here at Meriwest Credit Union to set up your automatic payments. Simply fund your account with your direct deposit, set your payment schedule in online banking as a transfer or in bill pay as an automatic payment and let the free online banking payment service do the rest!

Questions? Ask the Meriwest Credit Union Guy at gmeyer@meriwest.com

Don't forget our Free Financial Education Workshops offered here at our main office in San Jose:

Free Financial Education Class: Real World Budgeting for Teens
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 

Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

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