Ah, America, the land where everyone has a first chance, and after that they're screwed for the rest of their lives no matter what. Is this what Freedom feels like?
I don't know if this is the case for certain, a number of years ago my credit history was in the shitter, now, it is probably about 780 (I only check every November).
I screwed up my credit previously, nobody else did. And there is more to doing well than just hard work, it has to be hard work in the right direction. However, the basis of your point is correct. Prior to the field of economics being created, many british Monarchs (Henry the 8th in particular) got into insane levels of debt over silly wars (that sounds oddly familiar...) but no one understood economics back then, and the same with the industrial revolution, which was to a degree a level of financial slavery, but it was so with the serfdom that came before that. Overall, things have become better for people. However, in the United States, up until the about the 1960s or so, saving was considered the norm. Part of this was inspired by the great depression (which was the fault of the federal reserve to a large degree).
The culture of saving has largely fallen by the wayside, part of this is keeping up with the Joneses, and part is a lack of understanding. I drive a really crappy $3000 car. I can easially get a newer car, but I thought about what I really need to do with my car. Drive from A to B reliably, carry kayaks, and have good fuel economy. My 1991 Tercel does all that. Many of my friends (with one notable exception) drive much nicer cars, because they just HAVE to have a nice car. But I make more money than they do. Funny how that works.
The opposite is also true if you have credit available but don't use any of it (i.e. carry zero balance) it hurts your score. It sounds silly but I've been told that by several Mortgage companies. Say you had a 10K credit card and you paid them off but never closed the accounts those zero balances look bad as it looks like that credit line is open to you which hurts your score.
It hurts your score because you show a large amount of credit that you COULD draw upon. What you can do to improve your score in that case, is contact the credit card companies and request that they reduce your credit limit on those cards. If you cancel the cards, sometimes all that good credit history gets erased from your file.
FICO acutally has released a good deal of that information, I posted in another thread the breakdown of the report, but if you google for it is not hard to find. Heck, there is even a credit estimator at bankrate.com that I have found is very accurate. You just fill in your credit history, and it generates your FICO score:
Quit pushing your book (or your friend's book). 1) There are a lot of good books on Managing your Credit not one 2) Ditto for Web Sites and 3) You can get the information FREE from the Government. Common sense says an Emergency Fund is a good idea you don't need to spend $$$ to learn that!
It is not my book, nor does it belong to a friend of mine. I am a geek, and a few years ago, I started to become a finance geek. I have read over 70 books on finance, and I can reccomend a few having read so many because I have read many that are for the dogs.
The reason I recommend that book is that it is great for beginners, *AND* he outlines a plan that is simple and effective for savings. Furthermore, he explains it in a way that grabs the attention of new readers, and they are more likely to carry these plans out. Yes, all this information is available free from the government. How many people know how to find that? However, his book is ALSO availible for free, from a LIBRARY or, you can fire up bittorrent and download an audio version if you dont care about copywrite.
I happen to be fairly excited about finance/economics now that I understand much of what I previously did not. I like to help people and reccomend books that I feel will give people an edge. I have many more to recommend: http://slashdot.org/comments.pl?sid=196195&cid=160 78340 There is a short list if you care. I did not write any of those either, nor do I know any of the people that wrote them.
Read "Ordinary People Extraordinary Wealth: The 8 secrets of how 5,000 ordinary Americans became successful investors-and how you can too by Ric Edelman" ISBN:0-06-273686-8
Thanks! I will check it out. I have read about 70 books on finance/wealth/economics to date, but I have not heard of this one!
My short list of reccomendations:
Anything by Peter Lynch or Jeremy J. Siegel Millionare Next Door Automatic Millionare Rich Dad Poor Dad (Some of his later books are good, most are a tired rehash and contain fictionalized events, however, they are great for beginners) Every report issued by Berkshire Hathaway (written by Buffett and Munger yearly, and free on the intarweb) The Warren Buffett Way The Intelligent Investor
You left a few critical complications out of your equation. Any investment needs to take risk into the analysis. For example, what happens if you can't rent one of the properties out for six months? Then you end up paying $3,900 to the bank and you get nothing in return. Even if you rent the property out the remaining six months, you end up with a -30% return on investment!
Yes, I left it out, it is called the vacancy rate. You have to factor that into your equation, and take a look at the overall vacancy rate for your area. It is usually well known for a given area by most property managers or real estate agents. If they dont know what it is, find someone else who does as your advisors!
But yes, that is why I mentioned that the actual calculation is about 1 page long, it factors in vacancy rate, expenses, insurance, emergency repairs etc. However, my post would have been hella long, and readers would have gone to sleep before I finished my examples.
Ah, yes, that is what I do as well. For an emergency fund though, you can rotate a number of GIC's or CD's on a few months basis and use those as your emergeny fund, and they generate higher interest than a standard account. (But it sounds like that is what you are doing.)
For me, my emergency fund is in a separate bank that is hard for me to get to, and hard for me to get money out just to keep me disciplined!:)
The ironic thing about precious metals is that the get dug up out of the ground, then someone takes them and puts them in a vault... back in the ground... And that is where money originally comes from.
The danger of precious metals is that they are subject to swings like other debt instruments, and their value compared with compound interest relative to inflation. This can be seen in that about 100 years ago, to have a custom tailored suit made, it cost the equivalent of 1 ounce of gold. Today, having a custom tailored suit costs about the same amount, about 1 ounce of gold.
Whereas by using debt leveraging, you can take that same amount and increase that money faster than the rate of inflation. You can invest in securites that pay a greater rate than precious metals, which are in a bubble of their own right now, just like the housing market.
You need to understand the difference between the two kinds of debt. There is good debt (leverage) and bad debt like consumer debt. Using leverage can make you more money, using consumer debt takes it away from you.
It could yes. But it also means that you are putting YOURSELF at a disadvantage because you don't believe in using credit for leverage either. Would you rather a system where they can track all your banking? I know I would not!
But if the argument is that a credit rating is unrelated to employment, I agree.
The credit industry these days is designed around giving you way more credit than you could pay off in a month.
Yes, that is exactly how they design it. However, if you understand how their game works, you can benifit at their expense. For a crazy example, (This is so difficult to do, but it can be done, but it is basically not worth your time in the real world) You can get a low interest credit card with a limit of say, $5000 and an interest rate of 5%. Take out money on it, an get a bond that pays 6%, thus you earn 1% on $5000 that is not yours.
I say it is hard to do because you must find the appropriate bond, and you have to find the right card with the right features, and then phone them up and badger them until you get the lowest credit rate possible.
There are far better ways to leverage debt that what I just illustrated, but it gives you the idea.
Good advice all around, however, to add to what you have said, the best way to do this is to "pay yourself first". That is, have the money taken out of your paycheque automatically, prior to paying taxes, insurance, or even your bills. This way, you don't have to think about it, and you have a much much greater chance of sucess.
Your credit score will fall in line without having to try to trick it and possibly be penalized if you have bad information about this information that nobody really knows about, since it's secret.
It is not really secret, just not widely known, there is a huge difference between the two. I have written a number of articles on credit ratings and whatnot for work, and I have also worked to improve my own credit rating from some dumbass mistakes with my student loan, and a debt error of $0.25 that went into arrears... $0.25!! (I thought I had paid off one of my debts, then I moved, and kept getting collection notices for $0.25 at my old address...)
As for emergency funds, it is far far better to have emergency CASH than emergency credit. If you create an emergency fund, and build it over time it gains interest for you, whereas, credit you can get right away, but it becomes a liability if you are forced to use it in an emergency.
David Bach's "The Automatic Millionare" has a great introduction to the concept of the emergency fund, how much you need in it, and how to go about doing it.
If I found myself in a situation where I could feed and clothe my kids or pay my visa bill on time, I'm going to feed and clothe my kids. Any fucktards who thinks that's a sign of me being irresponsible should not be involved in the hiring process of any company.
Agreed. I don't know anyone who would not agree with this. However, so many people could make their lives so much easier by becoming financially educated. Sadly, none of this suff is taught in school, so most people never learn it. I only learned this stuff because I am autodidactic.
You can use a credit card in an emergency, but in the long run that costs you more money. I have an emergency fund for just this kind of scenario. Check out David Bach's book: "The Automatic Millionare". It will get you started on the Emergency Fund.
I think you are looking at this argument from the wrong side. The employer wants to check your credit rating because they believe that it will help identify if you are a good or bad employee. That may, or may not be true. But if the employer believes it, they will do it.
And the credit agencies are corporations out to make more money, and like you said, they make money every time someone pulls a credit report.
But your comment that "you shall either consume or be a second class citizen" is specious at best. I was out of work, but I had enough foresight to keep money in an emergency fund, and that coupled with other investments tieded me over. I can consume, sure, but I am responsible with my income, thus I become more weathy for it. And, my credit rating does not suffer, and I don't "slip" through the net.
If you want a really good look into the REAL difference between the Rich and Poor, or more accurately, the wealthy and affuent sectionn of society, pick up "The Millionaire Next Door." What you read in that book will likely surprise you.
Actually, this was due to some flaws in the credit calculations and a few other things (see his linked article).
Paying off debts generally HELPS your credit score, unless you have allowed the debt to go past 6 months. However, closing older credit cards is not a good idea.
If you have an old credit card with a high interest rate, but you have had it forever, pay off the balance and *KEEP* the card. The reason you want to do this is that the card has a history of credit tied to it, and sometimes when you pay the card off, and then cancel it, it is removed from your credit history. If a card in good standing is removed from your credit history, this shortens your credit history, and a shorter credit history lowers your score.
I have wondered that myself actually. It is wierd to have a 350 - 850 range. I know it is the output of the FICO algorithim, but I have no idea why it is not 0 to 500, and I would love to know.
Whoops! My bad, I quoted only part of your message. What I meant to point out was that the super-secret methods for calculating your credit are not so secret. Just not widely known.
Screw that. I can understand why they might want to look at a credit report to determine how responsible an applicant is, but I wouldn't do it as an applicant. Maybe if the credit bureaus start dishing out a "responsibility score" that just gives them a number based, basically, on absence of negative information without giving them the information.
That is called your FICO score, (Fair Issac COrporation). It is a number from 350 (absolute lowest) to 850 (absolute highest) that is a result of an algorithim applied to your credit history. Some organizations pull ONLY this score, and not your full credit report, that is, your credit history.
If you had paid cash for your house, all the interest (that the bank is making when the people upstairs pay the rent) would be going in your pocket. ROI might take awhile, but you could probably earn more than 10% APR, which is the best you could reliably get for the cash you dumped into the house, assuming you charge enough for rent and your house value goes up. You wouldn't be gaining equity if you paid cash, the whole house would be equity.
But your math could work even better than that: I will use different numbers from my own house here for ease of math, (and I don't want to be giving out real financial data on slashdot) I will leave out some of the more complex parts of the ROI equation for illustration (the true property calcuation is about a page long of basic math.) Note, I also have other property that is renting for much greater than 15% ROI.
Say you have a house costing $100,000. You have 2 options, pay 10% down ($10,000) with mortgage, or pay $100,000 full out in cash.
If you pay 10% down, how much money has come out of YOUR pocket? $10,000. The other $90,000 is the banks. If you rent it for say $800/month, and your mortgage is $650/month, then that works out to $150/month return, or $1800/year.
How long (ROI calculation here) does it take to get back your $10,000? About 5 1/2 years. That is about an 18% ROI. Thus, you gain 18% on your investment of $10,000. That beats the bank, and that does not even count equity!
If you buy the house outright, $100,000 down, and rent it for $800 a month, that works out to $1800/year as above, but at that rate it will take you about 55 years to get all your money back! That is a return of about 1.8% on your investment. Yes, you still have equity, and you can sell for capital gains, but you will pay tax on that. In the borrowing equation, you pay no tax, get a higher rate of return, and benifit all around.
Now imagine that there are 10 identical houses as above, with the borrowing equation, you can buy all 10 of them with 10% down, and that is about 1,000,000 worth of real estate ($100,000 down on all 10 houses) and income (before mortgage) of $8000/month, or, $1500/month after mortgage, or $18,000/per year! I don't know about you, but I like the idea where I get $18,000/year on my $100,000 investment as opposed to $1800.
And yes, I am really doing this, and no, the equation does not work this well with my duplex, because I am not renting the basement out - I do need somewhere to live! (Note, given the inflated values of the housing market, it is very difficult to accomplish this type of deal, the houses I have were bought 2 and 3 years ago respectivly. The market is due for a crash, so deals will appear again eventually.)
Between a set of people with perfect payment histories, credit ratings will vary dramatically.
I have not seen this... How your FICO score is calcualted is actually done by an algorithim, they should be nearly identical across the board. What CAN happen is that things can be reported in error on your credit history, or, things can appear in Equifax but not Trans-Union. Your FICO score is a dynamic number, and it is calculated at the time you acutally check your credit rating - or someone else does. It is not a number that sits in an account, but rather the sum of an algorithim that is applied directly to your credit history the instant that it is checked.
There are a large number of things that contribute to this, by far the single largest is how you pay your bills.
35% of your credit rating is determined by paying your bills (on time or not). 30% of your credit rating is the amount you owe (how much you can borrow, and how much you owe in total) 15% of your credit rating is how long your credit history it. (The longer the better) 10% of your credit rating is determined by new credit - that is, new loans or credit cards etc. 10% of the rating is due to type of credit you use.
Note, when someone checks your credit rating, that counts a little against you (it leaves a mark) the reason is, if your credit rating gets checked constantly, it is a sign that you are desperately seeking credit, however, these rules have been relaxed somewhat with people shopping for better loans or mortgages. The rule is, if you are shopping for credit, do a large amount of shopping all in a short time, don't spread it out over the course of a year.
When you check your own credit rating, that counts against you as well, but not nearly as much as someone else checking your rating. A soft pull is the industry term for you getting your credit history, and a hard pull is the term for a bank or some other service checking your history. You want to avoid hard pulls where possible.
Remember, in the US there are 3 credit bureaus (Equifax, Trans Union and Experian) that can hold your credit history and in Canada there are only Equifax and Trans Union. Occasionally you want to check all three (but not on a regular basis, it is not really worth it) but if you are using leveraged deals, you might want to check once a year.
At least, the father of little Suzy exists. For all practical purposes, I don't. It has been indicated to me (and I checked it) that I don't exist in any credit-reporting databases. My SS number and name are nowhere to be found.
Why would you want to do this? It makes little financial sense. It sounds like the stuff outlined in the book "how to be invisible", which may be a good idea if you are paranoid. Without a credit history, you will be in a position that makes purchasing a house difficult, unless you use cash, which you can do.
However, in the long run this hurts you because you will be unable to use your credit history to leverage different kinds of deals.
For example, in my current house I borrowed a fair amount of the money to buy it. It is a split-level duplex. I live in the basement, and rent out the upper floor. This gives me enough money to completely cover the mortgage through the rental. This way, I have borrowed money, but I am not the one paying the interest. Had I paid cash for this property, I would be making considerably LESS money on the property because I would have used all my money to buy the house, and my ROI on my property would be horrific. As it is, I am gaining equity, but had to use only some of my own money to do so, if I used ALL of my own money, my ROI would suffer, and thus so would my long-term ability to earn money/equity.
This is nearly impossible to do effectivly without a good credit rating. I check my credit rating once a year (usually every November) to ensure it is in good standing, and that there are no errors. By using debt effectivly I have a better life. By using it ineffectivly, you lose money. By having no credit rating, or a poor credit history, you close the door on using leveraged deals to improve your standard of living.
You always have to wonder why business professors -- if they know so much about how to read the market -- aren't out there making a fortune instead of making less as a professor.
A followup to my previous comment:
Economics professors also know that market timing is dangerous, and not often sucessful. For example, I knew that the housing market was headed for a downturn over 2 years ago, and Warren Buffet said the same thing when he sold his beach house. So, you can know that something WILL happen, but you may not be able to know WHEN. Since using hedging instruments like Options, Shorting, or Futures, profit depends mostly on knowing what will happen and when. If the thing you predict happens just after the term of your short, option or future expires, you lose money, you don't make it.
So, even Buffett knew there was a problem in housing, (Google for the CNN story on him selling his house in 2005) but not even the Oracle of Omaha could tell you WHEN it would fall, but he gives great detail on why. The same priciple goes for many even harder sciences, you can know something will happen within a certain degree of accuracy, but the amount of error can vary widely. In the case of the world of finace, the margin of error must be taken into account in financial dealings, otherwise you could invest in say, a Commodity Future on Oil because you KNOW that XYZ is going to happen, and the cost of oil will go up (or down, depending on Future type). Now, say this thing does happnen, but it happens 3 days after your future contract expires. If it goes down like that, you could find yourself bankrupt instead of filthy rich.
Always remember, a huge segment of stock traders made fun of Buffett for saying that the dot com stocks were not grounded in fundametals. I think he said this in 1995 or 1996. He knew they were over valued, so he did not touch them because he had no knowledge of WHEN they would fall.
The best "market predictors" like Buffett move very slowly, and don't count on "market timing" because predcting the market is risky - even if you get all the other factors right, if your timing is off, you lose.
It probably lies in the difference between knowing and doing. You can know something, but not act on that knowledge, and then after the fact say "oh, I knew I should have done XYZ". Of course, humans tend to forget the times that we were wrong about these guesses.
Most economics proffessors know that there is no sure-fire way to make money apart from saving and investing carefully. They know that just as many people lose money in the market as make it. But then again, you have some people that go to business school that don't teach, like Warren Buffet...
Just a like between action and knowledge. Most economics profs I would guess have a large amount of money in savings, bonds and blue chip stocks.
Slashdot Mirror
Ah, America, the land where everyone has a first chance, and after that they're screwed for the rest of their lives no matter what. Is this what Freedom feels like?
I don't know if this is the case for certain, a number of years ago my credit history was in the shitter, now, it is probably about 780 (I only check every November).
I screwed up my credit previously, nobody else did. And there is more to doing well than just hard work, it has to be hard work in the right direction. However, the basis of your point is correct. Prior to the field of economics being created, many british Monarchs (Henry the 8th in particular) got into insane levels of debt over silly wars (that sounds oddly familiar...) but no one understood economics back then, and the same with the industrial revolution, which was to a degree a level of financial slavery, but it was so with the serfdom that came before that. Overall, things have become better for people. However, in the United States, up until the about the 1960s or so, saving was considered the norm. Part of this was inspired by the great depression (which was the fault of the federal reserve to a large degree).
The culture of saving has largely fallen by the wayside, part of this is keeping up with the Joneses, and part is a lack of understanding. I drive a really crappy $3000 car. I can easially get a newer car, but I thought about what I really need to do with my car. Drive from A to B reliably, carry kayaks, and have good fuel economy. My 1991 Tercel does all that. Many of my friends (with one notable exception) drive much nicer cars, because they just HAVE to have a nice car. But I make more money than they do. Funny how that works.
The opposite is also true if you have credit available but don't use any of it (i.e. carry zero balance) it hurts your score. It sounds silly but I've been told that by several Mortgage companies. Say you had a 10K credit card and you paid them off but never closed the accounts those zero balances look bad as it looks like that credit line is open to you which hurts your score.
It hurts your score because you show a large amount of credit that you COULD draw upon. What you can do to improve your score in that case, is contact the credit card companies and request that they reduce your credit limit on those cards. If you cancel the cards, sometimes all that good credit history gets erased from your file.
FICO acutally has released a good deal of that information, I posted in another thread the breakdown of the report, but if you google for it is not hard to find. Heck, there is even a credit estimator at bankrate.com that I have found is very accurate. You just fill in your credit history, and it generates your FICO score:
http://www.bankrate.com/brm/fico/calc.asp
I have found that it is REMARKABLY close in my case, and has been over the last few years.
WHOOPS!
:p
My bad! Heh, this is why I keep my estate calculations on an easy to follow template, and just fill out the template step by step.
Quit pushing your book (or your friend's book). 1) There are a lot of good books on Managing your Credit not one 2) Ditto for Web Sites and 3) You can get the information FREE from the Government. Common sense says an Emergency Fund is a good idea you don't need to spend $$$ to learn that!
0 78340 There is a short list if you care. I did not write any of those either, nor do I know any of the people that wrote them.
It is not my book, nor does it belong to a friend of mine. I am a geek, and a few years ago, I started to become a finance geek. I have read over 70 books on finance, and I can reccomend a few having read so many because I have read many that are for the dogs.
The reason I recommend that book is that it is great for beginners, *AND* he outlines a plan that is simple and effective for savings. Furthermore, he explains it in a way that grabs the attention of new readers, and they are more likely to carry these plans out. Yes, all this information is available free from the government. How many people know how to find that? However, his book is ALSO availible for free, from a LIBRARY or, you can fire up bittorrent and download an audio version if you dont care about copywrite.
I happen to be fairly excited about finance/economics now that I understand much of what I previously did not. I like to help people and reccomend books that I feel will give people an edge. I have many more to recommend: http://slashdot.org/comments.pl?sid=196195&cid=16
Read "Ordinary People Extraordinary Wealth: The 8 secrets of how 5,000 ordinary Americans became successful investors-and how you can too by Ric Edelman" ISBN:0-06-273686-8
Thanks! I will check it out. I have read about 70 books on finance/wealth/economics to date, but I have not heard of this one!
My short list of reccomendations:
Anything by Peter Lynch or Jeremy J. Siegel
Millionare Next Door
Automatic Millionare
Rich Dad Poor Dad (Some of his later books are good, most are a tired rehash and contain fictionalized events, however, they are great for beginners)
Every report issued by Berkshire Hathaway (written by Buffett and Munger yearly, and free on the intarweb)
The Warren Buffett Way
The Intelligent Investor
You left a few critical complications out of your equation. Any investment needs to take risk into the analysis. For example, what happens if you can't rent one of the properties out for six months? Then you end up paying $3,900 to the bank and you get nothing in return. Even if you rent the property out the remaining six months, you end up with a -30% return on investment!
Yes, I left it out, it is called the vacancy rate. You have to factor that into your equation, and take a look at the overall vacancy rate for your area. It is usually well known for a given area by most property managers or real estate agents. If they dont know what it is, find someone else who does as your advisors!
But yes, that is why I mentioned that the actual calculation is about 1 page long, it factors in vacancy rate, expenses, insurance, emergency repairs etc. However, my post would have been hella long, and readers would have gone to sleep before I finished my examples.
Ah, yes, that is what I do as well. For an emergency fund though, you can rotate a number of GIC's or CD's on a few months basis and use those as your emergeny fund, and they generate higher interest than a standard account. (But it sounds like that is what you are doing.)
:)
For me, my emergency fund is in a separate bank that is hard for me to get to, and hard for me to get money out just to keep me disciplined!
The ironic thing about precious metals is that the get dug up out of the ground, then someone takes them and puts them in a vault... back in the ground... And that is where money originally comes from.
The danger of precious metals is that they are subject to swings like other debt instruments, and their value compared with compound interest relative to inflation. This can be seen in that about 100 years ago, to have a custom tailored suit made, it cost the equivalent of 1 ounce of gold. Today, having a custom tailored suit costs about the same amount, about 1 ounce of gold.
Whereas by using debt leveraging, you can take that same amount and increase that money faster than the rate of inflation. You can invest in securites that pay a greater rate than precious metals, which are in a bubble of their own right now, just like the housing market.
You need to understand the difference between the two kinds of debt. There is good debt (leverage) and bad debt like consumer debt. Using leverage can make you more money, using consumer debt takes it away from you.
It could yes. But it also means that you are putting YOURSELF at a disadvantage because you don't believe in using credit for leverage either. Would you rather a system where they can track all your banking? I know I would not!
But if the argument is that a credit rating is unrelated to employment, I agree.
The credit industry these days is designed around giving you way more credit than you could pay off in a month.
Yes, that is exactly how they design it. However, if you understand how their game works, you can benifit at their expense. For a crazy example, (This is so difficult to do, but it can be done, but it is basically not worth your time in the real world) You can get a low interest credit card with a limit of say, $5000 and an interest rate of 5%. Take out money on it, an get a bond that pays 6%, thus you earn 1% on $5000 that is not yours.
I say it is hard to do because you must find the appropriate bond, and you have to find the right card with the right features, and then phone them up and badger them until you get the lowest credit rate possible.
There are far better ways to leverage debt that what I just illustrated, but it gives you the idea.
Good advice all around, however, to add to what you have said, the best way to do this is to "pay yourself first". That is, have the money taken out of your paycheque automatically, prior to paying taxes, insurance, or even your bills. This way, you don't have to think about it, and you have a much much greater chance of sucess.
I posted elsewhere here a quick comment on how your credit report is calculated: http://hardware.slashdot.org/comments.pl?sid=19619 5&cid=16077485
Your credit score will fall in line without having to try to trick it and possibly be penalized if you have bad information about this information that nobody really knows about, since it's secret.
It is not really secret, just not widely known, there is a huge difference between the two. I have written a number of articles on credit ratings and whatnot for work, and I have also worked to improve my own credit rating from some dumbass mistakes with my student loan, and a debt error of $0.25 that went into arrears... $0.25!! (I thought I had paid off one of my debts, then I moved, and kept getting collection notices for $0.25 at my old address...)
As for emergency funds, it is far far better to have emergency CASH than emergency credit. If you create an emergency fund, and build it over time it gains interest for you, whereas, credit you can get right away, but it becomes a liability if you are forced to use it in an emergency.
David Bach's "The Automatic Millionare" has a great introduction to the concept of the emergency fund, how much you need in it, and how to go about doing it.
If I found myself in a situation where I could feed and clothe my kids or pay my visa bill on time, I'm going to feed and clothe my kids. Any fucktards who thinks that's a sign of me being irresponsible should not be involved in the hiring process of any company.
Agreed. I don't know anyone who would not agree with this. However, so many people could make their lives so much easier by becoming financially educated. Sadly, none of this suff is taught in school, so most people never learn it. I only learned this stuff because I am autodidactic.
You can use a credit card in an emergency, but in the long run that costs you more money. I have an emergency fund for just this kind of scenario. Check out David Bach's book: "The Automatic Millionare". It will get you started on the Emergency Fund.
I think you are looking at this argument from the wrong side. The employer wants to check your credit rating because they believe that it will help identify if you are a good or bad employee. That may, or may not be true. But if the employer believes it, they will do it.
And the credit agencies are corporations out to make more money, and like you said, they make money every time someone pulls a credit report.
But your comment that "you shall either consume or be a second class citizen" is specious at best. I was out of work, but I had enough foresight to keep money in an emergency fund, and that coupled with other investments tieded me over. I can consume, sure, but I am responsible with my income, thus I become more weathy for it. And, my credit rating does not suffer, and I don't "slip" through the net.
If you want a really good look into the REAL difference between the Rich and Poor, or more accurately, the wealthy and affuent sectionn of society, pick up "The Millionaire Next Door." What you read in that book will likely surprise you.
Actually, this was due to some flaws in the credit calculations and a few other things (see his linked article).
Paying off debts generally HELPS your credit score, unless you have allowed the debt to go past 6 months. However, closing older credit cards is not a good idea.
If you have an old credit card with a high interest rate, but you have had it forever, pay off the balance and *KEEP* the card. The reason you want to do this is that the card has a history of credit tied to it, and sometimes when you pay the card off, and then cancel it, it is removed from your credit history. If a card in good standing is removed from your credit history, this shortens your credit history, and a shorter credit history lowers your score.
I have wondered that myself actually. It is wierd to have a 350 - 850 range. I know it is the output of the FICO algorithim, but I have no idea why it is not 0 to 500, and I would love to know.
Whoops! My bad, I quoted only part of your message. What I meant to point out was that the super-secret methods for calculating your credit are not so secret. Just not widely known.
Screw that. I can understand why they might want to look at a credit report to determine how responsible an applicant is, but I wouldn't do it as an applicant. Maybe if the credit bureaus start dishing out a "responsibility score" that just gives them a number based, basically, on absence of negative information without giving them the information.
That is called your FICO score, (Fair Issac COrporation). It is a number from 350 (absolute lowest) to 850 (absolute highest) that is a result of an algorithim applied to your credit history. Some organizations pull ONLY this score, and not your full credit report, that is, your credit history.
If you had paid cash for your house, all the interest (that the bank is making when the people upstairs pay the rent) would be going in your pocket. ROI might take awhile, but you could probably earn more than 10% APR, which is the best you could reliably get for the cash you dumped into the house, assuming you charge enough for rent and your house value goes up. You wouldn't be gaining equity if you paid cash, the whole house would be equity.
But your math could work even better than that: I will use different numbers from my own house here for ease of math, (and I don't want to be giving out real financial data on slashdot) I will leave out some of the more complex parts of the ROI equation for illustration (the true property calcuation is about a page long of basic math.) Note, I also have other property that is renting for much greater than 15% ROI.
Say you have a house costing $100,000. You have 2 options, pay 10% down ($10,000) with mortgage, or pay $100,000 full out in cash.
If you pay 10% down, how much money has come out of YOUR pocket? $10,000. The other $90,000 is the banks. If you rent it for say $800/month, and your mortgage is $650/month, then that works out to $150/month return, or $1800/year.
How long (ROI calculation here) does it take to get back your $10,000? About 5 1/2 years. That is about an 18% ROI. Thus, you gain 18% on your investment of $10,000. That beats the bank, and that does not even count equity!
If you buy the house outright, $100,000 down, and rent it for $800 a month, that works out to $1800/year as above, but at that rate it will take you about 55 years to get all your money back! That is a return of about 1.8% on your investment. Yes, you still have equity, and you can sell for capital gains, but you will pay tax on that. In the borrowing equation, you pay no tax, get a higher rate of return, and benifit all around.
Now imagine that there are 10 identical houses as above, with the borrowing equation, you can buy all 10 of them with 10% down, and that is about 1,000,000 worth of real estate ($100,000 down on all 10 houses) and income (before mortgage) of $8000/month, or, $1500/month after mortgage, or $18,000/per year! I don't know about you, but I like the idea where I get $18,000/year on my $100,000 investment as opposed to $1800.
And yes, I am really doing this, and no, the equation does not work this well with my duplex, because I am not renting the basement out - I do need somewhere to live! (Note, given the inflated values of the housing market, it is very difficult to accomplish this type of deal, the houses I have were bought 2 and 3 years ago respectivly. The market is due for a crash, so deals will appear again eventually.)
Between a set of people with perfect payment histories, credit ratings will vary dramatically.
I have not seen this... How your FICO score is calcualted is actually done by an algorithim, they should be nearly identical across the board. What CAN happen is that things can be reported in error on your credit history, or, things can appear in Equifax but not Trans-Union. Your FICO score is a dynamic number, and it is calculated at the time you acutally check your credit rating - or someone else does. It is not a number that sits in an account, but rather the sum of an algorithim that is applied directly to your credit history the instant that it is checked.
There are a large number of things that contribute to this, by far the single largest is how you pay your bills.
35% of your credit rating is determined by paying your bills (on time or not).
30% of your credit rating is the amount you owe (how much you can borrow, and how much you owe in total)
15% of your credit rating is how long your credit history it. (The longer the better)
10% of your credit rating is determined by new credit - that is, new loans or credit cards etc.
10% of the rating is due to type of credit you use.
Note, when someone checks your credit rating, that counts a little against you (it leaves a mark) the reason is, if your credit rating gets checked constantly, it is a sign that you are desperately seeking credit, however, these rules have been relaxed somewhat with people shopping for better loans or mortgages. The rule is, if you are shopping for credit, do a large amount of shopping all in a short time, don't spread it out over the course of a year.
When you check your own credit rating, that counts against you as well, but not nearly as much as someone else checking your rating. A soft pull is the industry term for you getting your credit history, and a hard pull is the term for a bank or some other service checking your history. You want to avoid hard pulls where possible.
Remember, in the US there are 3 credit bureaus (Equifax, Trans Union and Experian) that can hold your credit history and in Canada there are only Equifax and Trans Union. Occasionally you want to check all three (but not on a regular basis, it is not really worth it) but if you are using leveraged deals, you might want to check once a year.
There you go, credit ratings de-mystified.
At least, the father of little Suzy exists. For all practical purposes, I don't. It has been indicated to me (and I checked it) that I don't exist in any credit-reporting databases. My SS number and name are nowhere to be found.
Why would you want to do this? It makes little financial sense. It sounds like the stuff outlined in the book "how to be invisible", which may be a good idea if you are paranoid. Without a credit history, you will be in a position that makes purchasing a house difficult, unless you use cash, which you can do.
However, in the long run this hurts you because you will be unable to use your credit history to leverage different kinds of deals.
For example, in my current house I borrowed a fair amount of the money to buy it. It is a split-level duplex. I live in the basement, and rent out the upper floor. This gives me enough money to completely cover the mortgage through the rental. This way, I have borrowed money, but I am not the one paying the interest. Had I paid cash for this property, I would be making considerably LESS money on the property because I would have used all my money to buy the house, and my ROI on my property would be horrific. As it is, I am gaining equity, but had to use only some of my own money to do so, if I used ALL of my own money, my ROI would suffer, and thus so would my long-term ability to earn money/equity.
This is nearly impossible to do effectivly without a good credit rating. I check my credit rating once a year (usually every November) to ensure it is in good standing, and that there are no errors. By using debt effectivly I have a better life. By using it ineffectivly, you lose money. By having no credit rating, or a poor credit history, you close the door on using leveraged deals to improve your standard of living.
Why would you want to do that?
You always have to wonder why business professors -- if they know so much about how to read the market -- aren't out there making a fortune instead of making less as a professor.
A followup to my previous comment:
Economics professors also know that market timing is dangerous, and not often sucessful. For example, I knew that the housing market was headed for a downturn over 2 years ago, and Warren Buffet said the same thing when he sold his beach house. So, you can know that something WILL happen, but you may not be able to know WHEN. Since using hedging instruments like Options, Shorting, or Futures, profit depends mostly on knowing what will happen and when. If the thing you predict happens just after the term of your short, option or future expires, you lose money, you don't make it.
So, even Buffett knew there was a problem in housing, (Google for the CNN story on him selling his house in 2005) but not even the Oracle of Omaha could tell you WHEN it would fall, but he gives great detail on why. The same priciple goes for many even harder sciences, you can know something will happen within a certain degree of accuracy, but the amount of error can vary widely. In the case of the world of finace, the margin of error must be taken into account in financial dealings, otherwise you could invest in say, a Commodity Future on Oil because you KNOW that XYZ is going to happen, and the cost of oil will go up (or down, depending on Future type). Now, say this thing does happnen, but it happens 3 days after your future contract expires. If it goes down like that, you could find yourself bankrupt instead of filthy rich.
Always remember, a huge segment of stock traders made fun of Buffett for saying that the dot com stocks were not grounded in fundametals. I think he said this in 1995 or 1996. He knew they were over valued, so he did not touch them because he had no knowledge of WHEN they would fall.
The best "market predictors" like Buffett move very slowly, and don't count on "market timing" because predcting the market is risky - even if you get all the other factors right, if your timing is off, you lose.
It probably lies in the difference between knowing and doing. You can know something, but not act on that knowledge, and then after the fact say "oh, I knew I should have done XYZ". Of course, humans tend to forget the times that we were wrong about these guesses.
Most economics proffessors know that there is no sure-fire way to make money apart from saving and investing carefully. They know that just as many people lose money in the market as make it. But then again, you have some people that go to business school that don't teach, like Warren Buffet...
Just a like between action and knowledge. Most economics profs I would guess have a large amount of money in savings, bonds and blue chip stocks.