Thanks to the virtual meltdown of the financial sector in the United States, credit issuance is likely to become a much stricter industry, especially in the United States. Many people have found themselves with a low credit score, and considering the changes in the formula for determining FICO scores, some of the things you do can hurt or improve your score. Here are some of the actions you can take which may alter your FICO score compared to how it was calculated in the past:

• Applying for new credit may hurt your score less
• Using the accounts you have on a regular basis may increase your score
•  Carrying a high balance on your cards may hurt your score more

Some of the major changes include authorized users on cards no longer being able to “piggyback” the credit rating of someone with good credit. Single infractions are now going to have less of an impact on a credit score reduction as well. If you paid a bill late even once your score used to drop by as much as 100 points. Now, the focus is more on whether or not you make regular payments on time, and single infractions no longer have the devastating effect they used to on your credit.

With this new information, I’ve compiled a list of 5 things you can do this year to improve your credit score, taking advantage of these new rules:

1. Watch your limits. Try not to use more than 30% of your available credit and if you can use less than 10% that is even better. The higher your balance, the more your FICO score will be negatively impacted. The credit bureaus don’t distinguish between the balances which you pay off each month and those you carry. If you carry high balances but pay them off every month, consider asking for a credit limit increase to reduce the amount of available credit which you are using.
2. Don’t close your accounts. It’s well known that having open yet inactive accounts is better than closed ones. With these new rules, having open accounts in good standing will help increase your score even more than in the past, while too many closed accounts will hurt it.
3. Keep your accounts active. The FICO score is now recognizing when you leave your cards at a zero balance, so it’s best to make a couple of small purchases on your cards every month and then paying them off when you receive your statement. Cards which have carried a zero balance for a long period of time are going to start having a reduced impact on your score, so you want to keep them at least somewhat active.
4. Mix things up a little bit: FICO scores are now taking into account your mix of revolving credit, which allows you to take money out and pay back at will, such as credit cards and lines of credit, as well as installment loans where you can only pay back the amount (such as mortgages and car loans). Your mix of credit types will become much more important in 2008, and if you’re trying to increase your score a good way to do this is by ensuring you have a mix of these two types of loans. However, be sure not to get extra credit if you cannot afford it: it’s better to have your credit score be average because you didn’t get that extra loan than poor because you got the loan and couldn’t afford to repay it.
5. Pay your bills on time. While a single late payment won’t have the impact it used to on your credit, a bad track record for payments will have a much larger impact on your credit score. Make one mistake and you’ll be fine, but make many and you’ll be worse off than you were before!

If you’re looking to increase your credit score, using these techniques to take advantage of the new system is one of your best options. Keeping up to date with FICO formula changes helps ensure that you know what’s important when it comes to your credit.

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I received a question via e-mail by a reader, Michelle, yesterday. Michelle recently turned 19, and hasn’t got any credit. She wanted to begin establishing credit and so applied for a card at her local bank, which was declined due to a lack of credit history. Michelle wants to know what she can do to establish initial credit.

Credit cards are without a doubt the easiest way to establish credit. Try applying for a card at another bank: my first credit card came from an institution other than the one where I had banked for 6 years because they were able to offer me a card, whereas my current bank wasn’t. If you’re asked for a specific limit, ask for $500. This is generally the lowest available limit on basic cards and increases your chances of being accepted.

If this still fails, you will have to go with one of the following options: a secured card, or having a co-signer. A secured card is where the bank puts a hold on a sum of money and gives you a credit card with a limit equivalent to the hold on your account. You need to be relatively stable financially in order to do this safely, as generally those funds must be on hold for 18 months before the credit card company will look at your credit to see if they feel safe enough to release the hold. Your only other option would be to close the card, which will have negative implications on your credit.

If  you have a parent or close relative willing to co-sign for you, there is a good chance you will be able to get a credit card without securing it as well. However, you need to be sure they are co-signing for you, and not simply adding you as an authorized user on a card in their name. If they simply add you as an authorized user, your credit is not affected.

Credit cards are the easiest way to establish credit, and it is good you want to get on it so early. A large determinant of your credit score is the length of credit history, so getting a card now and using it responsibly will have a large positive impact on your credit over time.

Popularity: 4% [?]

When you speak with a financial advisor about your debt, most will recommend that it be paid off in a specific order: the highest interest rate to lowest interest rate. This obviously makes sense, as the debt which you are paying back the most on will be gone as quickly as possible. Assume you are in the following debt:

• Student loan of $15 000 at 6% interest
• Credit card debt of $9 000 at 19% interest
• Line of credit with a $2 000 balance at 11% interest
• Car loan of $6 000 at 5% interest.

Yes, you would be saving the most money by paying the credit card, then the line of credit, then the student loan and finally the car loan. This system works wonders with the people who have the self-discipline to stick to such a system and eliminates the debt as quickly as possible.

However, a large number of people don’t have the self-discipline to pay off this debt in this manner simply due to the fact that when you’re paying off a large debt, it looks like you’re making virtually no progress. The credit card debt in the above example is the debt at the highest interest rate, which would be best to pay off first, mathematically.

However, when you look at the numbers, $9 000 and $7 000 are still two enormous numbers. Psychologically, paying off the credit cards first is the most difficult as progress is much more difficult to physically get a grasp of.

This is when the system recommended by Dave Ramsey in the book The Total Money Makeover comes in: he recommends organizing the debt, not according to interest rate but according to total balance:

• $2 000 line of credit at 11%
• $6 000 car loan at 5%
• $9 000 credit card debt at 19%
• $15 000 student loan at 6%

Dave’s recommendation is to pay the minimum payments on all of the debts, but to put every extra dollar you can gather towards the smallest debt, the line of credit. Once the line of credit is paid off, move onto the car loan. Mentally, you’ll feel as though you’re making much more progress than you would if you were paying the credit card debt off first. This method of debt elimination is known as the snowball method.

You will end up paying more interest if you do this method as opposed to the traditional method to eliminate your debt. However, if you’re the type of person who is likely to give up paying your debt entirely if you can’t physically see results, this is definitely a better option. You may pay slightly more, but you will end up paying off your debt entirely, which is the end goal.

Popularity: 5% [?]

Have you ever wondered whether or not you would be able to afford a mortgage payment, on top of other home owning expenses? Do you currently own a home and wonder whether or not you can afford to upgrade? There’s one way to find out: try it without consequence!

Regardless of whether or not you think you can afford a new home, an upgrade, etc, I would always recommend doing this for a few months before making a final decision. Choose a home, and using a mortgage calculator, determine what your monthly costs would be. Add a percentage point to the current rates just to be sure that in five years you will still be able to afford it.

Once you know your monthly mortgage payment, take that number and add 5-10% for maintenance, property taxes, etc. This is your total cost. Subtract your current rent (or mortgage payment) by this number to find the difference you’ll be paying each month.

As an example, say you’re paying $1200 per month in rent, and your dream home, costing you $250 000 at an interest rate of 8%, would cost $1908 monthly over 25 years. Adding 10% for home care and maintenance, your total costs for the new home is $2091 per month. As such, you’re going to be paying $891 more per month.

Now that you’ve got the numbers in order, it’s time to put this into practice: every month, stick $891 in a high-yield savings account. Not only will your savings increase (which you can add to the down payment for your home!) but you’re now living at the level which the house will cost you.

You need to live at this level for at least three months, but by all means keep doing so until you’ve accepted the idea that you will be able to continue living at a comfort level which is acceptable to you. If you find that you can take the change easily then you’re ready to make your purchase. If not, well while you have decisions to make, you at least didn’t make the purchase before discovering this.

Too many people don’t understand the lifestyle changes often associated with a higher mortgage rate. Finding out what it’s like beforehand is a great way to avoid making a major financial mistake.

Popularity: 8% [?]

Be it for an RRSP, a 401k, a Roth IRA or any other vehicle of retirement savings using the stock market, if you’re not going to be retiring for another 15 years or so, now is not the time to sell and try to re-invest later. In fact, it’s time to buy!

I’ve had a few people, both online and in real life, ask me whether or not they should sell the stock they own in their retirement savings and take the penalties to avoid the losses. What people don’t understand is that this money won’t be touched for at least 15 to 20 years (if you plan on retiring in the next five to ten years then this doesn’t necessarily apply to you and you may be better off investing in GICs for the remainder of your working life). The way to make money using the stock market is by buying low and selling high.

Right now, given the recession we’re in, people are selling low, when they should be buying low. In 15 years, the stock market will have recuperated and be higher than it is today, making selling stock now virtually useless and a great way to lose money. But by buying now, however, they’re buying low and increasing their chances of higher profits over the long term.

This is why you should be contributing as much as you’re able and allowed to into your retirement fund right now. This is the time when you’re going to be getting deals which will increase the worth of your fund over time. And by no means should you be selling anything right now if you intend to hold onto it for a long period of time. It’s Warren Buffet who says to buy when people get scared and sell when people get greedy. Well, people are scared and selling: this is when you should be buying.

Popularity: 6% [?]

One of the problems which can cause even the most fiscally responsible people years of trouble is identity theft. This problem has been on the rise in North America for years, and is something that we should all be taking as many steps as possible to avoid. Having your information discovered by even one wrong person can be devastating. There are some things you can do to reduce your risk of being a victim.

1. Don’t give out your personal information to just anybody. Your SSN (or SIN in Canada) is something that you should keep as private as possible. If a website requires that you enter it, make sure that you know what the information will be used for. If they list it as being optional, do not give it to them. The same applies for telephone conversation as well as real life meetings. If you don’t have to give it out, don’t.
2. Watch for phishing. Phishing occurs when somebody sends you an e-mail asking you pretending to be a service you use (for example your bank) asking you to click a link to verify your personal information. NEVER do this. The website is a sham, and they will steal your personal information by doing this. Never click important links through e-mail. Navigate directly to the website if you need to access the service.
3. Shred documents with your personal information on it, such as credit card bills. Trash diggers do exist, and you don’t want that information to be available for them to find. Always shred any information which is personal before throwing it in the garbage.
4. Take care when entering your PIN and using your credit card. Criminals have started using cell phones to take pictures of credit cards, so try to hide the information on your card. The same advice goes when entering your PIN number: cover the pad with one hand and hold the machine close to your body to reduce the view anybody around you may get.
5. Look at your statements closely. Make sure there are no charges you haven’t made, and if there are alert the appropriate bodies immediately. Your bank or credit card’s customer service lines will be most able to help you if they’re aware as fast as possible of strange charges.

While there are a huge number of things you can do to help protect your identity, these are the basics. If you do not do any or all of these things, by all means start doing so now. It could protect you from years, or even a lifetime, of stress and trouble. Protect your identity at all times by all means necessary.

Popularity: 4% [?]