Getting from point A to point B.  If you live in an area without a lot of public transportation, or spread out over a wide area like the Minneapolis area is, you’re probably going to need transportation of some sort.

We use cars for commuting to our jobs, driving to the grocery store, going to the doctor or visiting family. Having a reliable car can be pretty important just for living every day life.

Buying a car is also one of the biggest purchases you’ll probably make besides your house, and as such it’s important to consider the financial ramifications of this important decision.

So when it comes time to buy a car, the question is, how big should your car down payment be?  How much of a car can you afford?

A 100% Down Payment?

At our house, we’re at a point financially where the only down payment we’ll consider on a car is a 100% down payment.  While that may sound a bit crazy, it’s actually not as hard as you might think.

We follow a plan similar to “Drive Free Cars and Retire Rich” plan offered by Dave Ramsey where you first buy an older car worth $1,000-2,000 in cash.  Instead of paying a car payment, you then save up what would have been your car payment, and within a year or so, you’ll have enough money in the savings account along with your trade-in in order to afford a significant upgrade in car.  Do that once more and after a couple of years you’ll be able to afford a nearly new car with what you’ve saved. At some point the car you’re driving is going to last longer than you’ll need to save up the replacement cost for a new car, and you’ll be able to start putting that money away for retirement or other savings goals instead.

Consider this: The average new car transaction price last year was $29,509.  The average down payment in 2011 was 11%, so that leaves a loan balance of $26,246.   If you were to get an 5 year loan on that car, with an average 5% interest rate,  your monthly payment would come out to $495.29.   Without any extra payments you would end up paying over $3700 in interest over the life of the loan.

So let’s say instead of buying a new car with that $495.29 payment, you banked it for 12 months while driving that old beater.   At that point you’d have $5943.48 saved up, along with a car that is still probably worth about $1,000-1,500 (since used cars don’t depreciate as fast).  You use that money to buy a car worth somewhere in the range of $7,000-8,000, and then repeat the process.  This time, however,  you can save up for longer since the car is in better shape and should last longer without major repairs.  After repeating this process a couple of times you’ll already have the balance saved up for your next car, without needing to replace the current one. At that point you can start taking that extra money and putting it directly into savings, retirement or some other savings or giving goal.

What If You Can’t Afford 100% Right Now?

What if you can’t afford the 100% down plan like we propose? What’s the next best thing?  I would suggest that you put down as much as you can without affecting your other goals.   Some good reasons to put down as much as you can:

• Larger down payment can mean a shorter term, and less interest: A bigger down payments can mean shortening the term from 5 to 3 years, and reduce the amount of interest you’re paying over the life of the loan.
• A larger down payment will help avoid being upside down in the car:  A new car depreciates on average about 21.8% in the first year of ownership. Putting down as much as you can help avoid a situation where you’re upside down if you wreck the car or want to trade it in a year later.
• A bigger down payment means a lower payment, leaving more money to pay extra on the car, and pay it off sooner: With a bigger down payment your monthly payment will be lower, leaving more left over to make extra payments – and pay the car off sooner.

So putting down as much as you can on the car is a good bet.

What’s The Minimum I Should Put Down?

So let’s say that you don’t have a lot of extra to put down on a car, what’s the minimum that experts suggest that you put down?

Reading a bunch of sites I’ve found that the minimum to put down varies from new to used cars.

New Car Minimum Down Payment – 20%

The average down payment last year on new car purchases was 11 percent of the purchase price, or an average of $3,263 per vehicle.   That is less than most experts would recommend, and many think it’s because of the low interest rates and low down payments required these days.  People think they can get better returns on their money elsewhere.

Based on the fact that the average new car will depreciate between 20-25% in that first year, most experts suggest that you put down at least 20% on a new car when you purchase it.  That way you’re covering that first year’s depreciation and won’t end up underwater if you decide to trade the car in one year later, lose a job or if you end up in an accident.  If you don’t put anything down you could end up in a situation where you have to pay several thousand dollars out of pocket to settle  your loan – if the worst case happens.

Used Car Minimum Down Payment – 10%

Used cars depreciate at a much lower rate than a new car, with an average depreciation of around 10% per  year.  Because of that a lower minimum down payments is suggested by experts.  Edmunds.com suggests a down payment of at least 10% for used car purchases to cover the depreciation.

What Other Things Do I Need To Consider?

When considering how much of a down payment to to pay, there are some other things to think about.

• How is your credit?  If you’ve got bad credit, you may want to wait longer and save up a bigger down payment because you’re probably not going to get a very good interest rate on a car loan.  That means you’ll pay a ton more in interest if you do end up getting a loan.  Here’s how to figure out if you’ve got a good credit score.
• Do you really NEED a new car?  In my opinion far too many people decide that they absolutely need a new car, when the reality is that their current car would probably last a few years longer with a few repairs.    Figure out if your current car can be made to last longer, and save up a bigger down payment in the meantime!
• If your down payment isn’t enough on the car you want, downgrade! If you’re only able to get a 10% down payment on that new car, consider buying a used car or a less expensive car instead.  It will depreciate less anyway, and your down payment will be a larger percentage of the purchase price.

What We Did At Our House

At our house, as mentioned, we follow a plan where we put 100% of the purchase price down – we pay cash. So for my wife’s car that we purchased last year, here’s the progression we followed to get where we are today.

• Purchased an older Honda Civic for cash in 2000:  She paid about $5000 for the car before we were married, and it ran like a champ for several years, while we saved up payments for the next car.
• Purchased a 3 year old Honda Civic for cash in 2005:  We paid about $15,000 in cash after selling the old Civic for about $4,000.
• Purchased a 2 year old Honda CRV for cash in 2011:  We paid about $21,000 in cash, after selling the old Civic for about $8000.

So each time we’ve bought her a new car we’ve upgraded a bit, buying a more expensive lower mileage car, but paying cash because we saved a car payment automatically ever month into our goal based savings account with ING Direct. We also did our research and bought cars that held their value well so we were able to re-sell them at a decent price with minimal depreciation.

We are still saving our car payment every month in anticipation of my next car, and at this point we’ve already got almost enough saved. After that is saved we’ll start adding that monthly payment to the retirement accounts.

What are your thoughts on how much to save for a car down payment?   Do you prefer to pay a big down payment or to pay cash, or a smaller one and put your money elsewhere in hopes that it will grow? Tell us your thoughts.

• Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back
• How And Why To Check Your Credit Score If You Plan On Buying A House
• How To Pay Less For Auto Insurance: Top 10 Tips
• 5 Things You Should Not Do If You Have Debt

Dave Ramsey is fond of saying that you don’t want to be normal because “normal” is broke.  Now, CreditLoan has graphic proof of that in the infographic, “A Lifetime of Debt: The Financial Journey of the Average American.”   Comprised of information from several sources, this infographic, which is laid out like the Life board game, shows Americans’ journey into debt.  Would you believe that it begins in high school?

Debt Often Begins In High School

By high school, the average American has a department store credit card.  While many teens want to be independent and show that they are grown up, is incurring debt the way to do this?  I would prefer that my kids show they are grown up by avoiding credit until the end of their college career, but that doesn’t happen typically.  In fact, according to the infographic, 84% of college students have credit cards, and the average undergraduate carries a balance of $3,200.  Only 2% of college students do NOT have a credit history.

I don’t know about you, but I didn’t earn much money in college.  I did have credit cards, and I was “normal” and carried a balance.  All I could afford was the minimum payment, which was often just enough to pay the interest for the month.  Let the enslavement begin.

Student Loan Debt

The infographic explains that the average undergraduate graduates with $20,000 in student loan debt; if they go on to graduate school, they amass $17,000 more for a total of $37,000 in student loan debt.

Unfortunately, once again I was completely normal.  My mom was a widow who had never worked outside the home until my dad died, so she didn’t have any money to pay for my college education.  I got the first two years of college free by attending a community college’s honors program, but I amassed $20,000 in student loan debt for my last two years of undergraduate work.  I took two years off after that and worked and paid down as much debt as I could before going to graduate school, which is the only reason why I left grad school with “only” a combined total of $22,000 in student loans between undergrad and grad school instead of the “normal” amount of $37,000.

Sadly, I am still paying down my student loan debt, in part because my husband and I thought we could afford our lifestyle when we should have been paying down debt.  However, the student loan is my next target on my debt snowball, so I expect it to be gone by this fall.  Yeah for giving up a lifetime of normalcy!

Home Loans And Auto Loans

According to the infographic, after students graduate college and move on to adulthood, they continue to amass debt.  The average home loan is $240,000 and after 30 years of making payments, the homeowner will have paid a total of $580,000 over the life of the loan.  (Suddenly the monthly payment doesn’t seem so affordable.  I wonder how many new homeowners take the time to compute exactly how much they will pay over the life of the loan.  I am guessing that most blissful believe they are paying down $240,000.)

Most “normal” Americans own two or more cars and take out a car loan of $30,738 for 6 years.  Their average interest rate is 7 to 9%.  (This infographic was created in 2009, so I am guessing the interest rate should be lower now, but on a loan of more than $30k, you are still paying quite a bit of interest.)

A Lifetime Of Debt And Interest

The most staggering fact of all—over a lifetime, a “normal” American pays out $600,000 in interest for all of these loans they take out over a lifetime.

Paying cash and paying for only what you can afford is considered weird, but it is no wonder “weird” people get ahead in life—they have an extra $600,000 to use or invest that they are not paying out in interest.

Until last year, I was living a very “normal” life.  However, last October we swore off credit cards and have paid down nearly $10,000 in debt in 7 months.  We are on our way to being “weird” and couldn’t be happier.

How about you?  Have you thought about being weird and swearing off debt?

• 5 Things You Should Not Do If You Have Debt
• How To Negotiate With Your Credit Card Company: What Options Do You Have When It Comes To Credit Card Debt?
• How Much And What Kind Of Debt Have You Incurred In Your Lifetime?
• Building Up Debt Is Easy. Getting Rid Of Debt Takes Dedication And Hard Work

My wife and I have pretty good credit. We’ve never missed a payment on any of our debts, have had a variety of credit types (installment loans, mortgages and credit cards) and the cards that we do still have, we’ve had for years.

We’re not too concerned about having a good credit score these days because we don’t really use debt that much, we pay cash for most things.  There is one thing that we DO need a good credit score for, however, that may be happening within the next year or two. Buying a house.

When buying a new home it is important to stay on top of your credit situation as your credit score can have a huge impact on what rate, and what type of loan you can get.  In the end it can save or cost you thousands of dollars. So today I thought I would do a quick review of why it’s important to stay on top of your credit when looking for a home loan, and how to do it in a way that doesn’t cost you very much.

Why Having A Good Credit Score Matters When Buying A House

When you’re buying a house having a good credit score is integral to getting a decent rate on a home mortgage.  The better your rate, the less you’ll pay both in the short term on your monthly payment – and in the long term in interest.  It can also mean the difference between getting a longer and shorter term loan – which can end up saving you even more!

Let’s look at an example scenario in my home state of Minnesota using the calculators found at myFICO.com.

Let’s say you are you seeking a 30 year fixed loan for $250,000 to pay for a new house.  Depending on your credit score range the rate that you get can vary pretty widely.

Even if you have a good credit score, and not an excellent score, you’re losing out on thousands of dollars in interest.  Boosting your credit score to the excellent category would save you an additional $11,107 in interest!  Going from an average or poor credit score to a higher credit score range could save you even more!  So be aware of where your credit score is, and do your best to improve your score!

What Is A Good Credit Score?

What a good credit score is can vary a bit depending on who you ask, but in general it’s safe to say a good FICO credit score is going to be anything above a score of 700-720. In the 680-700 range, you’ve got average credit. If your score is 620 or below you’ll most likely be tagged as a poor credit risk.  Here’s a general look at the credit score ranges.

So what is taken into account with your credit score?  According to the FICO site:

• Payment History (35%): How good are you at making your payments, and making them on time?
• Amounts Owed (30%): How much credit are you using – how much do you owe?
• Length of Credit History (15%): How long have your accounts been open, and how long since you’ve last used them?
• New Credit (10%): Are you opening a lot of credit cards lately, or other lines of credit? Lots of inquiries for credit?
• Types of Credit Used (10%): Number of and different types of accounts.

Where Can You Check Your Credit Report?

There are a couple of things to stay on top of when carefully monitoring your credit, your credit score and your credit report.  Your credit report will be a detailed listing of your credit situation showing all of your accounts, loans,  negative events on your record, missed payments, etc.  In other words it will give you an overall look at your credit situation.

You should never really have to pay for your credit report as you can get a free report from each of the big three credit agencies every year through the government site at AnnualCreditReport.com.  Personally I like to stagger pulling my reports for each agency, and get one every 4 months to better monitor my situation.  If you haven’t pulled one in a while, however, and you’re hoping to get a loan soon, you may want to pull all three.

• AnnualCreditReport.com

Where Can You Check Your Credit Score For Free?

There are several places that you can check your credit scores from the three agencies, TransUnion, Experian and Equifax, for free.    Keep in mind these credit scores are not the FICO score used by the banks when deciding on your rate, but they are similar and can help to inform you and give you a good idea of where  your FICO credit score will probably be.

You can currently get your credit scores from the big 3 agencies for free if you know where to go.  Here is how I get mine.

• Credit Karma: Get your TransUnion credit score for free.  Credit Karma Review.
• Credit Sesame:  You can get your Experian credit score for free. Credit Sesame Review.
• Quizzle: You can get your Experian credit score for free here as well. Quizzle Review.
• Equifax: Get your Equifax score for free by signing up for a free 30 day trial. Just don’t forget to cancel.

Your credit score for the three agencies can help to inform you of approximately where your credit score will be when the mortgage companies check it.  But where can you go to get your actual FICO score?

Where Can You Get Your MyFICO Score?

Your FICO score, the one used by the mortgage companies in order to give you your home loan rate, is a bit harder to come by without paying for it.   Places I’d recommend going to get it:

• FICO score from Equifax:  a $15.95 one-time fee.
• FICO score from MyFICO.com: Several different ways to get your score. The cheapest is a free 10 day trial in their Score Watch product, or a one time $19.95 fee.

Conclusion

Changing your credit score isn’t an easy process and won’t happen overnight. So if you’re hoping to make a big purchase anytime soon, like a home, make sure to get your credit scores early, and do what you can to improve them by the time you finally apply to get a loan.  Have a decent amount of accounts, utilize the credit responsibly, don’t cancel old accounts and make sure that all of your payments are on time.

Have you recently purchased a home and seen what kind of an impact a credit score can have? Hoping to buy sometime in the near future?  Tell us your thoughts on credit scores and buying a home in the comments.

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• Will A Short Sale Hurt Your Credit, And Will You Even Qualify For One?

It’s not just a three-digit number.

It bears importance to your financial future. Credit scores indicate how well a consumer is at repaying debt. Everybody from credit card lenders to realtors to car salesman want to know your credit score.

Before they take a look at your score, you should get to know your credit score. Here’s a breakdown of what comprises your credit score. Use this to target the most weighted elements of credit scores, especially if you struggle with a certain area.

Payment History – 35 Percent

Payment history accounts for a plurality of your credit score. Late bills, unpaid bills and bankruptcies hurt your score in the worst way. Worse yet is letting bills get to a collection agency. Lenders consider this facet of the score because they seek reliable customers who can make payments on time.

Current Debt – 30 Percent

With too much debt to your name, your score takes a hit. Exactly how big of a hit is difficult to pinpoint. Fair Isaac Corporation (FICO) has proprietary rights and ownership of the formula used to calculate scores. Regardless, focus on lowering your utilization rate, which is how much credit you’ve used compared to how much credit you have. Keep credit card balances below 30 percent of your limit as a general rule.

Duration As A Consumer – 15 Percent

It’s better to have had credit for years than for months. How long you’ve had credit is 15 percent of your score. With a longer history of paying of debt and bills in a timely manner, your score rises.

New Credit – 10 Percent

This 10 percent is based on starting new types of credit. In the short run, opening new accounts is bad for your score. That changes in the long term. Also considered in this 10 percent are types of inquiries on your credit. Hard inquiries are those made by lenders, credit card companies and car dealerships. Several hard inquiries in a short period of time poorly affect your score. Soft inquiries are made for informational purposes and barely affect your score, if at all.

Existing Credit – 10 Percent

Ideally, your credit history includes more than one type of credit: loans, credit cards, lines of credit or a mortgage. Scores weigh the types of credit you have or had for 10 percent of your score. Carrying or having carried different types of credit gives lenders more reason to trust you.

It may seem unnecessary to know the breakdown of your credit score, but it can only help you. Look at what aspect(s) you need to improve and how heavily weighted they are. Then prioritize them, fix them and watch your score increase.

Christian Losciale is a staff writer for Smart Military Money, a personal finance site for service members, veterans and their spouses.

• How Big Should A Car Down Payment Be?
• Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back
• How And Why To Check Your Credit Score If You Plan On Buying A House
• 5 Things You Should Not Do If You Have Debt

For many people in the United States the credit card is their only source for “backup cash” in case of an emergency of some sort, be it an unexpected medical bill, a burst pipe in their basement or a need to replace an appliance. In fact last year The National Foundation for Credit Counseling found in an online poll that fully 64 percent of Americans would use a source other than their savings account in order to pay for an  unplanned $1,000 expense.  When those unplanned expenses do arise, they’re not left with a lot of good choices beyond using credit.

“Without adequate savings, consumers have poor resolution choices when an emergency arises,” said Gail Cunningham, spokesperson for the NFCC. “People often say they can’t afford to save, but the truth is that they can’t afford not to.”

Money magazine once stated that 78% of us will have a major negative event happen in any given 10-year period of time.  In other words, most of us are going to have a major negative event whether it be a health issue, a flood in our home or something else.  At our house we’ve had a few of these major negative events, with a hospitalization costing almost $250,000 (paid for by insurance) along with other various health issues.  We planned ahead with insurance and a 12 month emergency fund so we weren’t adversely affected.  Having a problem is a near certainty, so it’s important to prepare yourself for that eventuality.

But what if you didn’t plan ahead for whatever reason – or you weren’t able to save up an emergency fund in time before your major negative event happened?  What if you’ve already built up a bunch of credit card debt and are now having problems keeping up on the payments?  What are your options for negotiating that credit card debt to a lower amount, getting rates reduced or otherwise getting help from the credit card companies?

Dealing With Credit Card Debt

I’ve only had to deal with credit card debt a few times in my life. For the most part I’ve never had more than a couple of thousand dollars on my cards, and was able to pay them off in a relatively short time frame.   I’ve had family and friends, however, who haven’t been as lucky and have had thousands upon thousands in credit card debt racked up due to medical bills, property taxes and other things.

Dealing with credit card debt can be a painful and demoralizing experience.  For a lot of people it is a scary process because there is so much confusing information out there about how to deal with the debt and work with the credit card companies (or others) in order to get the debts paid off, and they’re not sure what options are the best.

So what are some options when you find yourself deep in credit card debt?

Negotiate A Lower Credit Card Rate

One thing that I’ve learned over the past few years is that it never hurts to ask a company to help you out. Whether it’s asking your bank to remove an overdraft charge, your TV provider to remove a fee increase or negotiating a lower amount on your medical bills, it never hurts to ask.  In many cases it will save you a lot of money.

Negotiating a lower rate on your credit card isn’t always going to be successful, but if it is you could save thousands in interest, depending on what rates you receive and for how long.

Debt Goal has a tool called Negotiate My Rate where you can go to see what your potential savings might be from getting a lower rate, as well as showing you what success other people have had getting lower rates from certain companies.

Some things that you should do when calling to renegotiate your rate:

• Gather information on competitive credit cards:  Save a few of the best credit card offers you get in the mail with lower rates than your current card and 0% introductory offers.   Use these as a starting point for your negotiation, as a tool to get your own company to lower their rate – or risk losing you.  Make a list of all the offers.
• Call and ask for a supervisor:  While you don’t necessarily have to talk to a supervisor right away, you will want to ask if the rep you’re talking to is authorized to lower your rate.  If not, ask to speak to a supervisor.
• Always be polite and courteous:  As the old saying goes, you’ll catch more flies with honey than with vinegar. I’ve always found that I have better success getting what I want when I can be nice and get the rep on my side, instead of being threatening and angry.  
• Mention your history with the company:  Mention that you’ve been a good customer for x number of years, and that you’d like to continue being a customer.  If you’ve got a good payment and credit history, bring those points up.
• Ask them to match offers or rates from other companies, or match their own offers:  Ask the person with the authority to lower your rate if they will match the rate you could get with one of the other offers you’ve received and kept.   Ask if they have any promotional rates you can take advantage of.   Ask what you would need to do to qualify for a lower rate, and if you could qualify later.
• Ask about hardship or workout programs: If you’re really struggling to make payments you can ask about any hardship or workout programs that they have available, and whether you would qualify.  Your rate reduction may be even greater if you qualify, but sometimes you’ll also be required to close the credit card and convert your debt to an installment loan with direct pay from your bank.  Other times the rate reduction is temporary.

One thing to remember is that you may have to call and ask for a reduction more than once.  Be persistent.

Questions To Ask

Negotiate My Rate offers some constructive questions that you can ask your customer service rep if they’re not willing to offer a reduction right away.

• “Are you authorized to lower my rate?”
• “Are there other people who have the authority to lower my rate? May I speak with them?”
• “Do you have a promotional rate that I can take advantage of?”
• “What would I have to do to get a lower rate? Can I call back later when I meet those criteria?”
• “Can I qualify for a hardship program?”

Sometimes you may not be successful in getting a lower rate with your current company. In such a case you may want to consider transferring your balance to another card if you can find a good offer.  Just be sure to take into account whether or not they have balance transfer fees, as fees can seriously eat into any savings you may see.  Also know the terms of your new card as well, and how long promotional rates last.

Working With A Credit Counseling Agency

Sometimes you may not be able to get a rate reduction on your own, and you may be better off working with a credit counseling agency.

I recommend working with the National Foundation for Credit Counseling to find an accredited non-profit agency that can help you come up with a good plan for dealing with your debt.  Steer clear of for-profit companies or those who charge outrageous fees upfront before settlements are made.

A credit counseling agency can help you to figure out what is the best course of action for your situation.  Some of the options are discussed below.

Debt Management Plans

If you’re dealing with severe enough debt and you qualify, a credit counseling agency can help you to set up a debt management plan.

A debt management plan will allow you to pay back your debt over time, often at a reduced interest rate or with reduced balances.  The counseling agency will meet with you and make arrangements with all of your creditors on your behalf.   Typically all your cards will be included in the program, and your cards will be closed.  You’ll typically make payments to your third party agency instead of your creditors, and depending on  your debt can take anywhere from 3-5 years to pay off.   Typically a credit counseling agency will charge a setup fee of around $30-$40, and then collect monthly fees of about $30 while you’re repaying debt.

Be careful to work with a reputable debt management company as many bad debt management companies have been sued by the FTC for taking people’s payments and then never forwarding them on to the creditors (and then working towards a settlement on the debts later).

Debt Settlement

Sometimes you can work with your credit card company on your own, or through a third party agency to settle your debts for less than you owe.   It can be tough to get companies to agree to these types of things, however, unless you’re already in trouble (missing payments/etc).   Make sure to get everything in writing when agreeing on a settlement.

Beware of third party companies who make wild claims about how they’ll get your debt settled for pennies on the dollar for an upfront fee.  Quite often they’re not very reputable, and don’t offer any extra services than you could have done on your own.

If you do enter a debt settlement agreement be aware that it in some situations it may open you up to an IRS tax obligation.  Any forgiven debt could be treated as taxable income, and you could end up with a big tax bill the next year.  (This isn’t always the case)

Debt settlement will also damage your credit score as it will show as a debt settled for less than the full amount.   Creditors don’t like to see that.

Bankruptcy

In some extreme cases you may want to consider filing for bankruptcy.  If you aren’t able to make payments on your debts, and there isn’t a foreseeable future where your income and situation will be improving, it may be an option to discuss with a credit counselor or a bankruptcy attorney.

Just keep in mind that bankruptcies will look bad on your credit report, appearing there for 7-10 years.  It can make it difficult to do anything for quite a few years as far as buying a home, renting, etc.  As such it should only be considered as a last resort measure.

Conclusion

Dealing with credit card (and other) debt is not a fun thing to go through.   Your best bet is to plan ahead so you don’t end up in debt, but in case you do, there are options.  You can work with your credit card company to lower your rates, or to set up a hardship or workout program.  If that doesn’t work out you can always work with a non-profit credit counseling agency in order to help you figure out what your best plan of attack is.    They could help you to set up a debt management plan, work out a debt settlement or  even advise you when bankruptcy may be an option to consider.

The bottom line is that there is hope, and there are options.  Just make sure you know what you’re getting into, how much you’ll be paying,  what the repercussions are to your credit and taxes, and whether or not the plan will actually improve your situation.

Have you ever successfully had your rate reduced?  Had to work out a debt management program or debt settlement?  Tell us your experience in the comments.

• Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back
• 5 Things You Should Not Do If You Have Debt
• How Much And What Kind Of Debt Have You Incurred In Your Lifetime?
• Building Up Debt Is Easy. Getting Rid Of Debt Takes Dedication And Hard Work

I was scouring my website’s analytics this morning in search of some good topics to write about. One set of keywords I saw pop up several times in the logs was the “what is a good credit score“. People were finding one of my posts on google that talked about how to improve your credit score, and a commenter had asked the question of “what is a good credit score anyway?”. The question was asked, but I realized that I had never really answered the question of what a good credit score is.

Today I want to take a brief look at the question of how credit scores are created, what factors are taken into account and what exactly is defined as a good credit score.

A Good Credit Score Is..

There are several different credit scores floating around out there from different credit agencies, but the important one used by lenders is the FICO (Fair Isaac Corporation) score.  FICO credit scores range from 300-850.

It’s generally agreed that a good FICO credit score is going to be anything above a score of 700-720. Average credit scores are going to be around the 680-700 range, depending on your source. You’ll be tagged as a poor credit risk if your score is 620 or below.

Here’s a table showing approximate credit score ranges (There is no universally accepted credit score range).

What Goes Into A Credit Score?

One thing that confuses a lot of people is just what goes into your credit score. I searched around and on MyFICO.com I found the following explanation of what factors go into your credit score, and how much they count towards your total score.

• Payment History (35%): They will look at your account payment information for different types of accounts, look for adverse public records, delinquency, paid accounts, number of past due items and more.
• Amounts Owed (30%): How much you owe on your accounts, number of accounts with balances, proportion of credit lines used, and more.
• Length of Credit History (15%): Time since accounts opened, and time since account opened by account type, time since activity on an account.
• New Credit (10%): Number of recently opened accounts, number of recent credit inquiries, time since credit inquiries, time since recent account openings, etc.
• Types of Credit Used (10%): Number of and different types of accounts.

For a more detailed explanation of how your credit score is determined, check out the post on MyFICO.com.

What Effect Does A Credit Score Have?

So the question is, what kind of an effect can a credit score have on what you pay for a home loan, an auto loan or other type of loan?

Home Loan Credit Score Effect

Here’s an example of what type of interest rate and payment you could expect to see depending on what your credit score range is. I created the following from a credit score calculator on MyFICO.com. It assumes a 30 year fixed loan for $200,000.

As you can see the total interest paid can vary pretty greatly depending on what your credit score range is. For example, someone with excellent credit can expect to pay $67,638 less in interest over the life of the loan than the person with poor credit. That’s a big price to pay for having poor credit! Here’s a look at how your payments would differ if your credit score were to drop from an excellent credit risk in our scenario above.

Auto Loan Credit Score Effect

For an auto loan, the effect is very similar. Here’s a look at a $20,000 48 month used auto loan.

So the difference in interest paid for someone who is at the top of the range and the bottom would be around $7,318 over the 4 year loan.  That’s a big penalty for bad credit – it’s enough to buy another used car!

Get Your Credit Score

Find out how to get free credit scores from the big three credit agencies (TransUnion, Equifax, Experian) via this post: Free Credit Reports And Scores

You can also find free non-FICO credit scores by using these free sites (with screenshots showing how your score will look):

• Credit Karma – TransUnion Credit Score

• Credit Sesame – Experian Credit Score

• Equifax Score – 30 Day Free Trial – Cancel before 30 days to avoid paying

Get your actual FICO score (the one actually used by lenders) for a one-time fee (It can be harder to find the FICO score for free):

• FICO Score – $19.95 One Time Fee

Get instant access to your credit report and free credit scores with GoFreeCredit.com.

Your Credit Score Is Important

Whether we like it or not we live in an age when having a good credit score is important.  Having a good credit score can have an effect on whether you get a good loan, your insurance premiums are high or low, whether or not you can find a place to rent, whether you can get certain jobs, and whether or not you can sign up for certain services that require a certain credit score (cell, satellite, etc).

Whether or not you believe that credit scores are a good thing or not, the fact remains that they are becoming an integral part of our financial framework in this country.  So you better know what you credit score is, especially if you want to get the best rates, the best job or a nice place to live.

• How Big Should A Car Down Payment Be?
• Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back
• How And Why To Check Your Credit Score If You Plan On Buying A House
• 5 Things You Should Not Do If You Have Debt

In the past couple of years we’ve heard announcements from several companies who have had their databases hacked and private customer information compromised. When this happens the data breached isn’t always financial data, but nonetheless you still probably don’t want your personal information floating around out there where it can be used by a malicious hacker.

Just last week Zappos.com, an online shoe retailer announced that they had been the victim of a cyber attack, and although credit card information hadn’t been accessed, there was still plenty of private information compromised. As such they announced to customers that all passwords would be reset, and all users would have to choose a new password. They also suggested changing password information on other sites where similar passwords were used.

Not only is it a headache for the company when something like this happens, but the potential for identity theft and credit card fraud could be a huge liability for us as consumers.

So what can we do to protect ourselves from finding ourselves in a situation like this?

How To Protect Yourself When Shopping Online

There are a variety of ways that you can protect yourself from hackers, criminals and identity thieves when shopping online.

• Limit your exposure:  The best way to avoid having your information compromised is to limit where you have it stored.  The less places you save your information, the less databases you’ll be in and the less risk you’ll be exposed to.
• If the site looks fishy, stay away:  If you’ve gone to a site and it looks a little risky to be shopping there, trust your instincts.
• Make sure you’re checking out on a secure page:   When you’re checking out on an e-commerce site, make sure to look for the https:// in the url bar, instead of just http:// on the checkout pages.  If the page isn’t secure, avoid entering any personal or financial information.
• Avoid public Wi-Fi or hotspots when shopping or accessing financial data:  When shopping online, try to avoid entering passwords, credit card numbers or other personal information when on a public Wi-Fi access point or hotspot.  Yes, it’s convenient, but it can also leave your data accessible to hackers in some cases.  Also avoid financial sites like bank accounts, mint.com, adaptu.com or other aggregators. If someone gets your password for those accounts you could lose a lot of money, and you may have no recourse.
• Never give your Social Security number online:  If you’re shopping on a site and they ask for your social security number, it’s probably a scam. They shouldn’t have a need to use your social. The exception may be sites like TurboTax and other tax preparation software where you need to enter your number to file taxes.
• Check your credit reports and scores:  Most people these days will do some shopping online.  To make sure your data isn’t being used in a negative way, make sure to check your credit reports regularly.  You can get one free credit report from each of the credit agencies once a year through http://www.annualcreditreport.com.   You can also check your free credit scores from free websites like Credit Karma  or Credit Sesame on a regular basis.   A drop in score could mean something is up.
• Use anti-virus and anti-malware software: Make sure to have a regularly updated anti-virus software installed on your computer, and make sure it is set to update on a regular basis.  Also make sure that it’s actually set to scan at regular intervals.  My in-laws had the anti-virus software, but never updated it or scanned – leaving them vulnerable.   When I did update their system we found they had a newer virus that it took me several hours to remove.
• Use a credit or debit card with protection:  When shopping online make sure to use a credit or debit card with identity theft protection of some kind – just in case. Some credit cards also offer one time use credit card numbers. Use them!
• Be careful what you click on:  When you’re online use some common sense and don’t click on links when you don’t know the source of the email, social media message or e-card.  All are ways that viruses are spread, so only open links from known sources.
• Use a third party payment system:  Consider using a third party payment system like Paypal when buying things online to add an extra layer of protection – where your credit card information isn’t stored with the retailer.
• Use strong passwords:  Make sure to use strong passwords that include random numbers, capitalized letters and symbols.  Avoid using family member names, pet names or the word “password”. >

When it really comes down to it you just need to use a bit of common sense, follow the guidelines mentioned above and be wary of where you’re putting your personal information.

Note: If the worst case happens despite your best efforts, be prepared to follow through and know who to call in case your identity is stolen. Here’s a identity theft checklist to walk you through what steps to take next.

Have you ever had your personal information stolen or compromised? What would you have done different? What steps do you take to avoid having your information stolen?

• How Big Should A Car Down Payment Be?
• Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back
• How And Why To Check Your Credit Score If You Plan On Buying A House
• 5 Things You Should Not Do If You Have Debt

This was a year of several big ticket purchases for the Extra Money Blog household and throughout the year, my advocacy of using credit cards responsibly was further reinforced and validated by each big ticket purchase experience.

Note that I mentioned using credit cards responsibly. Those without discipline shouldn’t be carrying plastic to begin with. It is because of the undisciplined that many personal finance writers often trash credit card usage, and rightfully so. However, there are circumstances where using a credit card over cash or checks is really the most prudent approach.

Using Credit When Giving A Down Payment

One of those circumstances is putting down a down payment or deposit on a deliverable (whether a good or a service) that is to be expected sometime in the future. Why is this a qualified circumstance? Consider a local home remodeling store in your city goes out of business. What happens if you ordered carpet and prepaid a portion of it at the store while awaiting delivery and installation on a future date?

Most businesses are volatile just because they are a business and their success is predicated on several variables that they cannot control. For example, a local home remodeling store in your city relies on the city’s residents to have discretionary income to spend on home improvement and remodeling projects. It also relies on home ownership and the establishment of new homes. But what happens when the housing market slows down?

File A Dispute To Avoid Losing Money

Something similar happened to us this summer. My wife and I were shopping around for basically an entire bedroom. We wanted to furnish it with a twelve inch thick memory foam mattress and box spring bed, a maple bed stand with headboard and two night stands on each side. In addition, we had lamps, dresser cabinets and drawers picked out to match the bed stand.

Just a week after our visit to the store, the store closed its doors. Fortunately for us, we had paid for the items using our credit card and were awaiting delivery. By rule, if a transaction exchange is not honored by the time it is promised, you can file a dispute with your credit card company to get a refund on your payment.

Whether a credit card can collect from the business that shut down is irrelevant to you as the customer. The credit card company is obligated to reimburse you for your loss. It is part of the risk that a credit card company takes when it agrees to process payment charges. They key point to remember is to file the dispute within 60 days or you lose the right to a refund.

Use Credit To Minimize Risk

This risk management strategy can be applied to other transactions as well. Let’s say you are planning a family vacation to a small town and plan on staying at the local bed and breakfast. When making reservations, pay with your credit card instead of sending them a check or “PayPaling” over the funds. Yes, I’ve actually paid for a bread and breakfast stay through PayPal (oooh technology).

When you make the reservation, ensure that it is no more than sixty days outside your planned stay. By doing this, you are assured some safety in the event the bread and breakfast shuts its doors for whatever reason.

Credit cards are not always evil if used responsibly and appropriately. Hope you found this tip helpful.

Can you think of other strategic uses of your credit card that can benefit your pocket?

Sunil owns over a dozen profitable niche websites and is the author of “How to Go from $0 to $1,000 a month in Passive and Residual Income in Under 180 Days All in Your Spare Time”, a FREE report you can download instantly from his blog, where he discusses expedited wealth building through solid personal finance, entrepreneurship and internet marketing. In 2007, he sold his ecommerce website for $250,000 to a top Ebay Power Seller and since then has sold several niche sites for five figures each. You can read more about him on his Extra Money blog.

• How Big Should A Car Down Payment Be?
• Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back
• How And Why To Check Your Credit Score If You Plan On Buying A House
• 5 Things You Should Not Do If You Have Debt

Wow. It’s been two years since we had our credit cards, and we’re still alive. We made it two years without borrowing! But was that the best financial decision?

My Credit History

I remember my very first credit card. It was a Chase card. Oh, how I thought I was special when I received it in the mail. I was ready to enter into the realm of fiscal responsibility, become an adult, and pay off my credit card in full every month.

And I did. I always paid my credit card on time, every time.

In preparation for marriage, my soon-to-be wife and I sat down with a Wells Fargo representative and was sold on the idea of getting another credit card. This time, it was for “overdraft protection” so that anything we overspent in our checking account would be transferred to our credit card. This was intended to save us overdraft fees, of course. Or was it?

That’s about the time I read Dave Ramsey’s 7 Baby Steps.

A New Beginning – Without Credit Cards

Everything changed. All of the sudden I saw money in a whole new light, and started understanding the dangers of credit.

Although I had never gone into any credit card debt (besides what I owed each month), I identified two ways having credit cards was holding me back:

• I didn’t have an emergency fund. I thought that if we got into a bind, we would always have our credit cards to rely on. This might have plunged us into a sea of credit card debt.
• I didn’t strive for a better job. Because of the false sense of financial security my credit cards gave me, I didn’t see the value in getting a higher paying job.

So in a Dave Ramsey style ceremony, I cut up the credit cards with the largest pair of scissors I could find – with my wife’s approval, by the way.

That day was a turning point. We set our course on something we felt was better. But was it the best decision?

20-20 Hindsight Tells All

Looking back, we find that we don’t regret our decision to destroy our credit cards! It pushed us to follow a financial plan that kept our household financially secure.

The pressure of not having a safety net pushed me to find a different job: one that nearly quadrupled my income. We paid off our student loan debt, and built a fully funded emergency fund! We also were able to save some money toward an account designated for my wife’s continuing college education.

Sure, we might have achieved some of these goals without sacrificing the cards, but I’m pretty sure not all of them – and not as quickly as we have.

What About Credit Card Rewards?

We certainly missed out on some sweet credit card rewards. But later we learned about a financial institution that had a cash back debit card. We signed up, and are enjoying over $550 in perks every year.

What About Building Our Credit?

Our goal is to have a zero FICO score. Weird, isn’t it? Let me ask you this: if you don’t plan on borrowing in the future, why would you want a good credit score?

Although we may pay a little more for on our insurance premiums, it’s well worth not having the risk of going into debt.

We do plan on getting another home in the future, but plan on a mortgage with a company that can look at other factors besides credit score.

Are You Ready To Cut Up Your Cards?

You might not be ready to cut up your credit cards like we were. But let me tell you, two years of being credit card free has been nothing short of wonderful.

Meet me in the comments and let me know your thoughts! It’s okay to disagree!

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Many credit card companies urge their consumers to consider buying credit card payment protection.  This type of insurance can put your payments and interest accrual on hold should you become unemployed (for up to 24 months in some cases).  In the event of your death, payment protection can pay off the remainder of your credit card balance.  The question to ask is if it is a wise use of your money.  Consider my parents’ own example.

An Example Of Utilization Of Payment Protection

At the end of 1985, my mom and dad were 36 and 37, respectively.  They had just gotten on their feet again financially because my dad had finally been able to obtain a job after two years of unemployment.  They had $10,000 in credit card debt (mainly because they used credit to help float them through the long stretch of unemployment).  In today’s dollars, that is $20,000 in credit card debt.

They had not taken out individual, private life insurance policies because they thought they couldn’t afford them.  What they did have were two small life insurance policies, one from my dad’s employer that covered him automatically, and one from the credit union that they paid a small amount for monthly.  His total life insurance protection was less than 2 times his annual income, and he was the primary breadwinner.  They also had credit card payment protection on their cards.

Six months later, my dad passed away; he was diagnosed with colon cancer in late January and passed away by early May.  My mom was very grateful for the credit card payment protection as the balances were paid in full upon my father’s death, and she used the little bit of life insurance to pay off their house.

Why Credit Card Payment Protection Is Not A Wise Investment

Based on this experience, one might expect me to endorse credit card payment protection plans, but I do not.   Most plans require that the user pay an amount per hundred dollars owed on the card, usually .89 to .95 per $100.  In today’s dollars, getting payment protection on my parents’ credit card debt of $20,000 would cost them an average of $178 a month in payment protection alone.  To make matters worse, many cards offer a maximum payout amount, ranging from as low as $5,000 up to $25,000.

Most term life insurance policies cost far less than the amount someone $20,000 in credit card debt would pay on payment protection coverage. For example, my husband and I each took out 20 year term life insurance equal to 10x our income when we were 31 and 33 respectively.  My husband’s policy costs us $32 a month, which is far cheaper than the $178 a month required for payment protection to cover $20,000 of credit card debt.  I would love to go back in time and tell my parents to forgo the credit card payment protection and to instead buy term life insurance policies for each of them.

While the credit card debt was wiped out upon my father’s death and the house was paid off, because they were underinsured, my mom only had a small amount of money to live off for the first year after my dad’s death.  She had been a homemaker and an in-home child care provider for the 15 years they were married; she had no college education, and yet she found herself having to enter the workforce.  The term life insurance policy, had they purchased one, would have provided her with enough money to pay off the credit cards and her home and still have money to invest and live off, giving her time to pursue her education so she could have found  a career she enjoyed.

Even if life insurance policies were more costly 25 years ago, it still would have made more sense to buy a term life insurance policy instead of payment protection as it provides much greater security.  Instead of paying for credit card payment protection, calculate how much it would cost you monthly and use that money to invest in a term life insurance policy.  Use the remainder, if you have a remainder, to pay down your debt so you don’t need to worry about payment protection.

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