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When you
try to lose weight, one of the first things you need to
do is hop on the scale and get a real number.
Painful
as it is, you must get the real score when you’re
tackling your debt, too.
So
we’re starting our dozen ideas for 2012 by suggesting
that it’s time to know what you owe.
No. 1:
Get a free credit report to see a listing of credit card
debt, loans and liens.
Receive a
free report every 12 months from Equifax, Experian and
TransUnion at www.annualcreditreport.com .
You also
can phone: 877-322-8228.
No. 2:
Get a free score.
You have
to pay for a credit score via www.annualcreditreport.com.
But you
can get a free score — not a FICO score but another
type of score that is worthwhile — at a Detroit-based
outfit called Quizzle, which is part of Dan Gilbert’s
Quicken Loans family. See www.quizzle.com.
Another
spot for free scores: CreditKarma.com. Again, you
don’t get a FICO score. But this can work, too.
No. 3:
Give up the notion that if you pay your bills each month
you will have a good credit score.
It is
important to make at least the minimum payments on your
credit cards each month and on time. But John Ulzheimer,
president of consumer education at SmartCredit.com in
Atlanta, notes that paying on time only amounts to 35
percent of a credit score. Other factors apply — and
30 perrcent of your score is based on how much you owe.
No. 4:
Pay down your credit card debt.
Ulzheimer
said one strategy could be to tackle debt on department
store or specialty store cards, which tend to have
credit card rates that exceed 20 percent.
No. 5:
Yes, throw extra money at credit card debt first.
“Always
prioritize your plastic over your metal or your
brick,” Ulzheimer said. Your mortgage rate is far less
than most credit card rates; your car loan rate is often
lower than credit card rates.
No. 6:
Watch how much you borrow on individual cards.
If
you’re trying to get out of debt, use cash.
“You
will find that you will pay more attention to your total
sale if you are using cash,” said Andrew K. Johnson, a
spokesman for GreenPath Debt Solutions in Farmington
Hills.
For a
stronger credit score, use a small percentage of the
available credit on a card.
It’s
not a lot to borrow $300 on a credit card. But you
don’t want to borrow $300 on a credit card that has a
limit of $400 — especially if you don’t have other
credit.
This is
true even if you pay off the balance each month.
No. 7: Do
not start the year by just closing credit cards.
Todd
Albery, CEO of Quizzle, said consumers could unknowingly
hurt their scores by closing a card that has a large
credit line or closing a card held for years.
Say you
owe $10,000 on three cards that together have a $30,000
line of credit. You’re using 33 percent of the total
available credit — not bad. But ideally, Albery said,
you’d want to use less than 30 percent of your
available credit line.
What if
you close one of those cards? You would owe $10,000 with
a $20,000 line of credit. Bingo: You’re at a 50
percent utilization rate and your score drops.
No. 8: Be
extra, extra careful about offers you get in the mail
that promise ways to be debt-free in two or three years.
Gerri
Detweiler, a personal finance expert for Credit.com,
said one concern is whether credit card companies will
sue you. That could happen if a debt-settlement company
waits too long to pay off large credit card balances on
major cards.
One
consumer noted that a firm she talked to wanted to try
to settle smaller debts first, but after talking to
other experts she realized that she would be vulnerable
to legal action if a bigger issuer was left hanging on
the hook.
Some
companies claim that they’re part of a reform effort
instigated by the U.S. government. No such thing,
Detweiler said.
No. 9:
See if you can settle debt with collection agencies. But
do not agree to pay more than you are able.
Go to
www.ftc.gov for a video that explains consumer rights
relating to debt collection.
No. 10:
Be aware of your debt-to-income ratio.
How much
of your monthly gross income must be used to pay debt
each month? That number should be less than 36 percent
to have the best chance for qualifying for a mortgage,
Albery said.
No. 11:
Be cautious about a 0 percent balance transfer offer.
The
strategy can work for consumers who pay attention to how
much debt they have — and when introductory offers
end.
But will
you pay down debt aggressively while the rate is 0%? Or
will you just have more debt when a much-higher rate
kicks in in six months or 11 months?
You could
pay $5 or 3 percent of the amount of each transfer,
whichever is greater, too.
FICO
notes that you don’t want to just move around credit
and consolidate on one card.
“In
fact, owing the same amount but having fewer open
accounts may lower your score,” according to
MyFico.com.
No. 12:
Go a week without spending money. See what you can live
without for seven days.
If you
see you can easily save $50 in one week, why not set
that as a goal and use that money to pay off existing
debt? Or better yet, set aside some of that money for
emergency savings — and use some to pay off debt?
———
MORE INFO
—Read
your credit report to see whether someone else’s
credit cards or loans are showing up on your report.
Correct the mistakes.
—Stay
away from a scam that tells you to clean up your credit
by obtaining a federal employer identification number
and using it as a new Social Security number to apply
for credit.
—Never
apply for credit by transposing the digits on your
Social Security number. Such plans are illegal and will
make you liable for fraud and criminal prosecution,
according to Brette McWhorter Sember, author of “The
Complete Credit Repair Kit.”
—Do not
use your credit card as a license to spend, McWhorter
Sember said. Decide you’ll spend X amount each month
to pay down your debt and stick to it.
—See
www.myfico.com for information on FICO scores.
—See
www.quizzle.com for a Detroit-based service that offers
free credit scores.
—Debtors
Anonymous offers help to compulsive spenders at www
.debtors anonymous .org .
—Talk
to a nonprofit credit counselor, such as www .green
path.com; reach them by phone at 800-550-1961.
—More
information on debt collection is at www .ask
doctordebt.com . The website was created by the ACA
International Education Foundation.
—Credit
Karma, a free credit education website, this week began
offering free credit monitoring to registered users. The
service tracks credit reports provided by TransUnion.
You’d have to provide details such as a Social
Security number. Members are notified of any significant
change in their credit report. Credit Karma earns its
revenue through advertising on the site that may be
targeted to users.
—To
find a certified credit counselor and a National
Foundation for Credit Counseling member agency, call
800-388-2227 or go online to www.DebtAdvice .org .
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