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.

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.

Over Your Head Financially? Here are your top ten indicators...

 1. Carrying a balance on a credit card. If you are not paying them off, you are paying interest. If you could shift all the interest you paid on your consumer credit cards to your retirement account, how rich would you be? 

2. You use payday loans to make ends meet at the end of the month. Bad consumer! 

3. You’ve been turned down for a consolidation loan. This is a sure sign you are already over-extended and that your debt-to-income ratio is too high. Time to budget your expenses and start paying down what you owe! 

4. You’re hiding your spending behavior from family members. This red flag indicates that you are aware of your personal finance problems, but are unable to acknowledge it. Fighting with your spouse is a related indicator as financial troubles often lead to domestic trouble.

5. You finance your vehicle for more than five years. This may be a clear sign that you’re buying more vehicle than you can reasonably afford.

6. You get more than one late notice per year. On occasion, everybody may let a bill fall through the cracks and forget to pay it. But if you find yourself getting multiple late notices for bills, especially for utilities, then that’s a signal that your finances may be in serious trouble.

7. You get more than one bounced check per year. Again, most folks have had an occasional overdraft of their checking account. But if this happens more than once per year, it’s usually a sign of trouble.

8. You need a co-signer to get a loan. Those without a credit history can ignore this warning sign. However, for everyone else, the need for a co-signer indicates that banks no longer find you credit worthy.

9. You find yourself borrowing from your family and friends. We have heard that borrowing from friends or family is a surefire way to sow the seeds of discontent — especially when you fail to pay the money back.

10. You lack an emergency savings account of at least three months living expenses. Those who are living from paycheck to paycheck can be completely derailed by even the most modest unexpected expenses, such as the need for major car repairs.

Credit: Credit Unions are providing their members and the public with more financial education classes than ever. This is done for free as a community service to their neighbors. Yeah! 

Debit: Over the past year, several national banks have raised fees on their checking overdraft and non sufficient funds transactions. Boo! 

Our Next Financial Workshop:

May 22nd - Preventing Identity Theft -6:30pm
Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328

The Long Shadow of Bad Credit in a Job Search: How does your credit effect your ability to find a job? This story, from New York Times Business Day section, will give you some insights into how hiring managers view your credit report. Click the link and learn! 

 

Len Penzo - One of the great financial bloggers! Check out his blog here: LenPenzo.com

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.