I took the information found in that chart and made another graphic showing just how much interest a person would pay over a 30-year mortgage depending on their credit score:

As you can see, the difference is significant. Just moving from the second highest to the highest FICO Score ranges saves you nearly $10,000 in interest over 30 years (even more if you factor in growth on the $27 per month payment difference). The difference from the lowest to the highest ranges, is nearly $100,000 in interest expense over 30 years (or nearly $200 per month)!

My advice to anyone looking to finance a purchase is to first GET A HANDLE ON YOUR FICO SCORE! The $16 spent to find out your score is an investment—especially if you have no idea what your FICO score is. The information provided to you by myFICO is easy to understand. They also show you areas that are hurting your score and things you can do to improve it.

Then take the time and effort to improve your score. Remember the two most important areas of your FICO score are:

• How timely you are with your payments, and

• How much you owe compared with your total available credit.

I would keep those in mind, along with the other items that go into calculating your credit score (found here) if a major purchase in your future.

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?

• Remember your credit card utilization rate, which is your total card balances compared to your total credit limits. To calculate this, divide your credit card balances by the total available credit. Money recommends trying to keep it at 10% but says this will be harder to accomplish with credit card companies slashing available credit and closing accounts.

• Keep your oldest cards in play. The length of your credit history plays a role in calculating your FICO Score so it’s a good idea to keep your oldest credit cards active. This could be something as simple as putting a monthly charge on your card and paying it off monthly.

One last thing, the article included a graphic that showed what goes into a FICO Score. They had a pretty graphic but I’ll break it down for you in percentages:

• 35% How timely you’ve been with payments.

• 30% How much you owe compared with your total available credit.

• 15% How long a credit history you have.

• 10% Whether you’ve recently taken on new credit/debt.

• 10% What mix of credit types you have.

As you can see, the first two are EXTREMELY important. DON’T BE LATE and DON’T CHARGE TOO MUCH!

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?

I then ran my wife’s number and found out it’s 802! GEEZ…

My wife has two accounts with balances, which helped her score. The only thing hurting her score was that she has 35 accounts. I’m going to look into this one. They don’t give much information on how to fix this one.

So, what’s your score?

I received a notice: “In order to make the account more profitable,” Chase is changing the minimum payments from 2% to 5%.

No mention is made about the promotional rates – I included a question to Chase about the minimum. Their response (paraphrased) was that the promotional rates were for rates only and did not include the amount of required payments. Yes, the minimum payments were changing effective with the August statement [no mention if August payment or ending date] and if minimums were not met, the account would be in default.

Continuing, they state they are doing me a favor by accelerating the payments and reducing the amount of interest I will pay in the long run. They then state if I cannot make the payments to contact their special account number to arrange payment at the higher interest rate, or close my credit line and the full amount would become due and immediately payable.

Just to be sure, I did some checking and sure enough, Chase is in fact raising minimum payments (see here).

As many of you know, this is a double-edged sword. As is mentioned above, the new minimum payment will bring the balance down much faster than before. On the other hand, the payment will go up significantly. For example, say you have a credit card with a $5,000 balance. At 2%, your minimum payment is $100. With the new 5% minimum, the payment would go up to $250—a 150% increase. This is significant for several reasons:

1. People who are paying minimums could be doing so because they can’t afford to pay any more than that. Increasing their payment by 150% is not going to help.

2. Not being able to pay the minimum payment will cause the account to lose it’s promotional rate and the interest rate will soar higher, but the minimum payment will stay the same.

So why would Chase do this? Because of the fact that they can’t just raise interest rates like they were able to do. So, instead of raising rates, they increased the minimum payment, hoping people with promotional interest rates would default and become subject to the higher interest rates.

The article I referenced above did mention that some people were able to keep their minimum payments the same by calling Chase’s Proactive Solutions department (1-800-404-6220). The downside is that they will close your account, which could affect your credit score.

Of course the best thing to do is pay off all credit cards. But, I realize that that’s not possible for lots of people.

So, have any of you experienced anything like this?

AT&T mailed me one of those Visa Rebate Cards for my BlackBerry Curve. I think it was originally for $99 or so. I used the card a couple of months ago but still had a balance of $8.19. I tried using it again but got the remaining balance wrong, thinking it was $8.91 so the transaction didn’t go through. I called to get the correct balance and found out it was $8.19. I put the card in my closet and sort of forgot about it until this morning.

I pulled it out and tried to use it only to find out that it expired on the last day of May!

OOPS!

I’m a little surprised at how quickly the card expired. I don’t remember for sure when I got the card but I think I received it after the first of the year. It seems like the expiration date would be longer than a few months.

Now, had it been a paper check, I would have deposited it into my bank account and the money would have been mine free and clear. I never liked paper checks. I thought the rebate card would make things easier but I found it to be a hassle—especially if it takes more than one transaction to use up the card.

Anyway, LEARN FROM JLP. Use those rebate cards quickly. Don’t allow the companies to keep your money!

UPDATE: I guess I’m not the only one complaining about the AT&T Visa Rebate Card.

Dear JLP:

At Discover® Card, we are committed to working with you to manage your credit needs. This includes periodic account reviews.

Our latest review of your account shows that it is not currently active. we are sorry to see tha tyou have not taken advantage of what Discover Card has to offer.

Due to this inactivity, we are closing your account. Should you have any questions regarding this letter, please call us at 1-800-DISCOVER.

Sincerely,

Discover Card Customer Service

Good riddance! I never liked Discover’s two-cycle billing during the period in my life when I carried a balance. My guess is that I’ll be getting more of these letters from other inactive credit card accounts.

Have any of you experienced having your credit card accounts closed for whatever reason?

For those of you who aren’t familiar, credit card insurance is an insurance that supposedly makes your credit card payments in the event that you can’t make the payments. I have never seen or read an actual agreement for this type of insurance but I am certain that there are lots of catches and exceptions involved with this kind of insurance.

That said, let’s assume that you actually purchased such insurance. How much will this insurance cost you? To run an illustration such as this, we’ll need to assume the following:

• Beginning balance of $5,000
• Credit card insurance is $.49 per $100 of the outstanding monthly balance (around $25 for the first month). Some companies charge more and some companies charge less.
• Monthly payment of $100 applied to the card with the insurance and $125 for the card without insurance.
• No additional purchases are made.
• Annual interest rate is 13.99%

I ran an illustration using Excel and this is what I found:

As you can see from my example, you would spend nearly $300 in credit card insurance premiums. Remember, this amount is charged per $100—so it declines as the balance declines. In my opinion, you are better off taking the credit card insurance premiums and putting them towards paying down your debt. Yes, it is an insurance product, which could be useful if you lost your job. But, as I mentioned earlier, these plans can be full of loopholes and exceptions. You may not be getting what you think you are paying for. My guess is that the $25 per month they charge you in premiums is pure profit for the credit card company. If it wasn’t, they wouldn’t be calling us every other day trying to enroll us in such a program.

Here is what the letter said:

Dear Mr. JLP,

It is my pleasure to invite you to apply for the exclusive Black Card. Limited to only 1% of the U.S. residents, Black Card members are ensured the highest caliber of personal service. Cardmembers enjoy a 24-hour Concierge Assistant, Exclusive Rewards program, and Luxury Gifts from some fo the worlds’s top brands. Made with carbon, the Visa Black Card is guaranteed to get you noticed.

Apply now by filling out and mailing the enclosed postage-paid application. You may also apply online at blackcard.com, or by calling (866) BLACK CARD.

Best regards,

Laura Shaw
Director, Customer Experience

This card has a $495 annual fee! Yes, there are supposed benefits but are they worth $500 per year? That’s a lot of money in order “to get noticed!”

I think I’m going to decline this one. I don’t need a card made of partly made of carbon.

Who’s right?

This is a very tricky situation for a couple of reasons:

1. People who have lots of credit card debt probably don’t have the self-discipline necessary to put money into a savings account. In other words, they may save up some money and then go blow it on something just because they have the money. People usually don’t get into credit card debt because they are practicing financial prudence. That said, do these same people have the self-discipline to pay more than the minimum towards their credit card debt? Good question.

2. Not having an emergency fund while you are paying off debt is scary too. Why? Because when an emergency comes up (like the transmission goes out on your car), it will have to go on a credit card. It’s very demoralizing to pay down a credit card only to charge it right back up again when something bad happens. I know this from experience. It makes you just want to give up.

My thoughts:

I think the solution depends on the person but I kind of like the idea of doing both at the same time. Regardless, I think a real behavioral change is going to have to take place. I think such a change starts by creating a budget. You have to know where your money is going so that you can find out how much extra you can put towards debt liberation.

For example…

Let’s say you write out your budget and you have $100 extra per month to put towards your debt. I would recommend setting up an online savings accout and direct $50 of that $100 to that account, automatically each month. FORGET THE ACCOUNT IS THERE! Just keep socking away $50 per month. Then, I would either use Dave Ramsey’s or Suze Orman’s approach (which method’s better?) and put the other $50 per month towards getting out of debt.

What are your thoughts? Do you have anything to add to the mix?

Policy Makers Take Aim at Credit-Card Practices

Credit-card companies are going to have to start adhering to the followin rules, which take effect in July 2010:

• Banks can’t treat payments as late unless consumers have a “reasonable amount of time” to make the payment; at least three weeks before the due date.

• Banks must allocate minimum payments to balances with the highest rate first, or pro-rata among all balances.

• Banks cannot raise interest rates from the opening amount unless it’s a variable rate or an introductory rate with an increase disclosed in advance; or a year after the account opens, a 45-day advance notice has been made; or if a minimum payment is received more than 30 days after the due date.

• A ban on double-cycle billing, which allows banks to calculate interest based on a prior month’s balance in addition to the current month, even if the prior month had been paid off.

The comments from “advocates” and politicians are what bug me (emphasis mine):

Consumer groups have been pushing lawmakers to act, saying cardholders need relief now. The current rules “give very little help to families that are struggling with their debt,” said Lauren Saunders, managing attorney at the National Consumer Law Center.

“I don’t think the issuers should wait for these rules to come out to start dealing fairly with consumers,” she said. “The issue that’s hurting consumers the most right now are these big retroactive rate increases. They could just stop doing those tomorrow.”

Okay, here’s the deal:

If you are a debtor, you are a slave! You don’t get to pick your payment and you aren’t entitled to help when something bad happens and you can’t pay your bills. That’s the RISK of credit card debt (or any debt for that matter). You made that choice when you opened the account and started using the card—for whatever reason that was.

As much as I disliked the consumer advocate’s comments, these comments from Lawrence Summers really get on my nerves:

Over the weekend, White House economic adviser Lawrence Summers said President Obama would focus on “credit-card abuses” and “the way people have been deceived into paying extraordinarily high rates that they wouldn’t have paid if they knew what they were getting themselves into.”

Mr. Summers, speaking on NBC’s Meet the Press, added: “We need to do things to stop the marketing of credit in ways that addicts people to it and so that our households are again saving, and families are again preparing to send their kids to college, for their retirement and so forth.”

I’m not sure that people were really deceived into paying high interest rates. I’m pretty sure all the terms were spelled out in the fine print. If they weren’t then people should have the right to take legal action.

I also think Mr. Summers is smoking somthing if he thinks the big bad credit card companies are the reason why people aren’t putting money back for their kid’s college educations. If people are so stupid that they are “deceived into paying extraordinarily high rates” do you really think they are going to be smart enough to figure out how much they should be saving for their kid’s college education?

The victimization of America…

Where does it end?