So, your credit score reflects an estimate of how well you’ll be able to manage your credit in the future. Your past credit usage and mistakes factor into this score of course, but most people don’t realize that approx. two-thirds of your credit score is based on your current situation.

Your “current situation” means:

1. Are you paying your current bills on time?
2. Do you have a good “safety net”?

What Is A Safety Net?

So what is a credit “safety net” and why can’t you find this term mentioned anywhere else? If a “safety net” is so important, why hasn’t any other “credit improvement” website or article ever mentioned it to you before?

The reason is because “safety net” is my own term that I like to use to describe what a significant portion of the credit bureau score is based on. To me, it breaks down some difficult concepts into an understandable idea. You see, when you’re trying to figure out how to raise your credit score and people start talking about “Debt Ratios”, “High Credit Limits vs. Available Balances exceeding 30%”, or “Installment Trade Lines vs. Revolving Trade Lines”, it can get a bit confusing. I like simple terms and concepts, and thinking about these concepts in terms of a “safety net” makes it simple and easy to understand.

Just what is a “safety net”? Usually, you associate a safety net with a circus acrobat or tight-rope walker. The safety net is strung out under them in case something unexpected happens. If everything in their routine goes according to plan, the acrobat will never have to use the safety net. It’s only there – JUST IN CASE!

Your Credit Score Reflects Your Safety Net

It’s the same thing with your credit. If you have available credit that you can fall back on JUST IN CASE, then if something unexpected happens you will be in much better position to handle it. And your credit bureau score will reflect whether or not you have such a credit safety net. Here’s an example:

You have a credit card with a $1,000 high credit limit that you use wisely and sparingly which you faithfully pay off the balance in full every month on. One day, your dog Fluffy jumps off your apartment balcony and breaks two legs. You rush poor Fluffy to the vet who can fix up ol’ Fluffy in a hurry for only $600. Of course, you want to take care of Fluffy, but $600 is more than you have in your rainy-day fund.

Poor Ol’ Fluffy! But you have a safety net in the form of a credit limit you can use.

Without having that credit card spending option available, your only choice is to write the vet a check using the money you were going to pay your other monthly bills with, which means you won’t be able to make those payments on time – or at all that month. But because you have this available credit to fall back on, you can take care of Fluffy AND keep paying your other bills on time. That’s the kind of thing we’re talking about.

All I can tell you is, I’ve dealt with literally thousands of credit reports over the years, some good and some (ahem) not so good. And based on that experience, seeing reports with excellent scores vs. the kind of reports you take around the office and show your colleagues as you marvel at the way people have screwed up their credit to the point of wondering if they really did it on purpose.

So, with what I’ve seen over the years, here goes:

“You should have 5 credit accounts!”

That’s the number. If you want the very best score possible, you should have 5 accounts. And here’s the kind of accounts they should be. At least 3 of these accounts should be “revolving” credit accounts - 4 or all 5 can be revolving if you want, but at least 3 should be. If I was to paint the ideal credit profile for you, you would have:

• One car loan account (Installment-Type Account)
• One Visa card account (Revolving – Type Account)
• One American Express card (Revolving)
• One Department Store card (Revolving)
• Something else – Gas card (Revolving)? 90 day same as cash loan (Installment)? Another Department Store card (Revolving)?

At least one of the revolving accounts would have a high-credit limit over $2,000, and none of them would have a balance at the end of the month over 30% of the high-credit limit (i.e. $2,000 limit = no more than a $600 balance). Plus, at least one of the revolving accounts would have a history of being open and active for at least 24 months and 2 others would have been open at least 12 months.

Don’t Start Closing Accounts

Above is what I would consider the “ideal” profile. That’s what you’re shooting for. If you already have more accounts than this, or you have a different mix of installment vs. revolving – Do Not Start Closing Accounts! If you close a good account, you could seriously affect your credit score. Here’s a sad real-life case:

“And remember, a person’s credit rating affects other things, like home owners insurance and car insurance, and could even affect your ability to change jobs in the future, too.”

Most people, if faced with that kind of emergency, would find a way to do this. You’d go to any length necessary to make this happen, and you probably have some ideas about what you could do to raise the money. What that means is, if it was truly necessary, you could earn more money than you are currently earning, although it would very likely require certain sacrifices on your part.

Just 30 Days!

To do an “Income Blitz”, put together a plan where – for a short period of time – you can earn some extra income. How you use this “extra income” to improve your finances is a subject for another article, but for now let’s focus on some ways you could earn it.

In your present job, is there a way to take on more hours? Maybe one extra shift each week for the next month? Do you have the ability to cover for other people’s vacations? Can you convince a co-worker to take a personal day for themselves while you cover? Is there a special project you could take on that you could get paid “by the job”? If you’re in sales – can you work more hours and make more sales? A special Midnight Madness event?

What COULD You Do?

If you don’t have this option with your current job (Hey, did you even ask someone? You may be surprised. And what a “terrible” message to send to your boss that you are anxious and willing to work extra!), then what other kinds of things can you do to earn extra money for a short period of time? And face it, you could work two full time jobs for the next 30 days if you absolutely had to.

Yes, You Could – Just 30 Days!

My parents, for years, delivered phone books once a year to pay for our vacations. Short, sweet, well-defined short-term project with a fixed income amount in mind. I used to do umpiring in the summers – two nights a week, plus some weekend tournaments. I enjoyed it and would get a nice, fat chunk of money in September when they paid me for the entire summer all at once.

Recently, I was offering my mortgage services at a booth at a Bridal Show. Working across from me was a newer real estate agent who was working in the “Pure O” romance products booth. She would work one Bridal Show a year (they get names of brides-to-be and make appointments for in-home product parties) to earn extra money – and then she’d turn a lot of these contacts into real estate relationships.

You could make the rounds at garage sales and buy undervalued stuff to re-sell on Ebay. You could work security at local sporting events. You could work a booth at a local fair. You could deliver pizzas. There are so many ways that you could earn a few extra dollars over a short period of time. What “Income Blitz” could you do? Set an income goal for “extra” money and put together a plan. It could be fun! Send in your comments for other ideas!

What kinds of changes can they make? Well, they can immediately raise your interest rate up to a predetermined “default rate” that you’ll find somewhere in the fine print of your credit card agreement. It is quite common to find these rates ranging from 24% - 32% or more right now.

Oh, but you don’t need to worry about that – you’re responsible and pay your bills. They won’t ever think that you’re a riskier borrower, right? It may surprise you to learn how they define a “riskier borrower” …

What Makes You A Riskier Borrower?

• If your payment is even a minute late to them = Default Rate.
• If they discover a late payment to ANY company = Default Rate.
• If your credit score drops = Default Rate.
• If an old collection account shows up on your credit report = Default Rate.
• If you bounce a check = Default Rate!
• If you charge over your credit limit = Default Rate!
• If you apply for another card and get turned down = Default Rate!

I could almost agree with the idea of punishing borrowers for risky behavior if the credit card companies didn’t so actively do everything in their power to almost force you in to it. They’ve set the system up to encourage you to fail. How? Here’s a few ways they try to suck extra cash, in the form of late fees and higher interest, out of your wallet.

• Shorter billing cycles: You used to be able to pay each bill once a month on the same day, as in you get paid on the 5th of the month so you pay your bills on the 6th. But now, many of these companies bill you every 22-25 days, meaning your bill is never due on the same day of the month anymore.
• Offering more accounts: Credit card companies used to “reward” their best customers with higher credit limits to encourage more borrowing (to earn more interest). But that isn’t enough for them anymore. They’ve discovered that instead of raising your limit, it is much more profitable to offer you another credit card account instead. They’ll stick a teaser rate on it and a sweet balance transfer offer, and now you’ve got two bills to pay them each month, increasing the chances of you being late on a payment.Whereas your parents had one BankAmericard and one Mastercharge (remember when they were called that?) and maybe a Diners Club card for business, you’ve instead got a whole wallet full of cards – and a sock drawer full too – all with measly little balances and who knows when the bills are due on each one? Why did this happen? Clue: It Was On Purpose!
• Inconvenient Due Dates: They purposely choose a day where it’s inconvenient to get your payment there. For example, if you are an electronic bill payer, they set your payment to be due on a Sunday or a Monday holiday – days where they can’t process your payment. Who cares if you sent it to them, if they aren’t there to receive it, it doesn’t count.

If you pay by snail mail, figure having a due date on a Monday unless there is a Monday holiday, and then it’ll be on a Tuesday. I personally had 3 of my credit cards due on Christmas Day last year – oh, must have been a coincidence. And it is rumored that these companies actually pay people to monitor individual payment habits in order to set due dates that make it the most difficult for you to pay on time – hoping you’ll be a day late – because it’s oh-so-profitable.

I don’t know if that last one is true or is a widely used technique, but be aware: These companies are NOT your friends and most don’t care about playing fair. And if you run short of cash one month, don’t think you can choose which bill to pay late and the rest will be fine. These companies are constantly monitoring your credit activities and looking for an opportunity to sock it to ya.

And that is called “Universal Default”.

The Pay Day Loan Solution

Gonna be short one month on a couple bills? Get a Pay Day loan and pay your bills. I know the charges for one of these is ridiculous – but not nearly as ridiculous as suddenly having all your credit card bills jump to 32% and having your minimum payments quadrupled. Your Pay Day loan is a one-time charge of maybe a $100 or so. But this Universal Default doesn’t go away and can result in costing you thousands and ruining your credit (which, you can read here, will also increase things like your insurance costs).

Yes, they really ARE out to get you. Try to pay off your credit cards in full each and every month. If you can’t do that and you carry balances on your credit cards month after month, you’re going to get hit sooner or later. Watch your back!

And many credit card users have learned the hard way that failing to make your payment on time can result in a significant and immediate increase in your interest rate up to the “default rate” that is also listed in the fine print of your agreement. You’re sailing along with your introductory 3.9% interest rate and your monthly payment arrives 12 minutes late (seriously, many companies have actually gone to a “payment has to arrive on this date by this hour” or it’s considered late not) and BAM! Your rate jumped to 32% and your minimum payment just quadrupled!

Okay, you deserved that. You shouldn’t have been late. You’ve learned your lesson and you’ll do better. Right? But have you had the wonderful experience of Universal Default yet? If not, just wait. More and more credit card companies are utilizing this clause to increase revenues.

What Is Universal Default?

What is Universal Default? The clause buried in your fine print says, in some incomprehensible legal mumbo-jumbo pig-Latin language, that if you have a late payment, they have the right to raise your interest rate and change the terms of your agreement. But didn’t I already talk about that in the above paragraphs? No, no, no… the Universal Default clause says that if you have a late payment on ANY account, they can ding you.

• If your payment is 12 minutes late to us = Default Rate.
• If we find a late payment on your credit report to ANY company = Default Rate.
• If your credit score drops = Default Rate.
• If an old collection account shows up on your credit report = Default Rate.

Oh Wait – There’s More!

• Bounce a check = Default Rate!
• Charge over your credit limit = Default Rate!
• Apply for another card and get turned down? = Default Rate!

And watch out for those introductory offers. You might receive a nice offer of a low rate for an extended period of time, so you can balance transfer a bunch of money over. Then, they use the Universal Default clause when one of the above happens, and not only do they jack your rate – they can do it retroactively back to when your introductory period started – READ THE FINE PRINT!

They’re watching! They’re Waiting!

You may have a perfect payment history for 25 years with that company – doesn’t matter. You forgot to pay your phone bill or get into an argument with that book club company who refuses to cancel your account and keeps sending you Oprah’s recommendation each month, and any or all of your other accounts can call in their Universal Default clause.

What the @#$%#$ happened?

They don’t have to warn you or get your permission. You open your next set of statements, and OOOOOOOOOMMMMMMMMMMMGGGGGGGGGGGGGG??? What the @#$%#$ just happened?

They have the right to do this to you because it was in your credit card agreement. If you didn’t want this, too bad. They justify the clause as they lobby congress (and pay our representatives with massive perks to get them to listen) with the “missing payments make them riskier borrowers, and riskier borrowers should pay more”.

It Makes Me Angry!

I deal in mortgages. I understand the idea that riskier borrowers pay more for their mortgage loans. It’s a lot of money to lend you, and if you have not proved yourself to be reliable and trustworthy up to this point, you shouldn’t get your money as cheaply as someone who has taken care of business. I get that.

But what I don’t agree with, to the point of making me angry, is when they purposely try to trip you up just to get you to pay more. I would NEVER do that to a mortgage client. I am constantly trying to help them improve their credit and helping them get a better loan and interest rate. I can’t even imagine tricking them into doing something that would hurt their credit so they have to pay more for their loan.

And just how do they trick you? Stay tuned for the next article: “They’re Plotting Against You!” to find out what they are doing, and find some solutions to help.

In his book, The Automatic Millionaire, David Bach coined the phrase “The Latte Factor” to help us look at our spending habits with new eyes. You see, if you don’t currently have a habit of saving regularly and paying off your credit cards in full each month, Bach points out that it’s rarely the fault of you not earning enough money. Where the fault lies is in your unconscious or automatic spending habits.

To get you thinking about the ways you spend your money, Bach named this unconscious spending “The Latte Factor” because so many people can relate to spending significant amounts of money each day on their morning (and mid-morning, and afternoon, and on-the-way-home) coffee-drink fix.

A $300 Per Month Hole In My Pocket?

When I first read about this “Latte Factor”, I thought it was silly. Hey, I deserve this one little luxury, don’t I? I work hard each day, so having a little coffee treat – and maybe an over-priced pastry – once or twice a day is my right. But then I started doing the math. What I discovered was that between my wife and I, we were dropping about $300 a month at the little mermaid coffee stand each month, or roughly $10 a day!

Wouldn’t I rather be spending that $300 a month on paying off debt or saving it for retirement or college for my kids? It was an eye-opener for me. And it was surprisingly easy to break the habit – especially when I had other things that I really wanted to use that money for. I still enjoy my morning coffee, but now I buy just the premium coffee beans and brew my own at home in my fancy stainless steel drip machine. My wife discovered oodles of flavored creamers in the grocery stores, so neither of us really miss our old barista buddies, especially knowing we’ve got an extra $300 a month to use now.

What are your Latte Factors?

What are your Latte Factors? Even if you don’t drink coffee, you have some. As gasoline prices continue to rise and the American public is demanding congressional action, I couldn’t help but laugh out loud the other day while I was pumping $72 of liquid into my car. There next to the pump, was a stack of bottled-water cases – on sale for a special price. I did a quick calculation and realized that the bottled water – on sale – was roughly 50% more expensive per gallon than the over-priced gasoline I was so furious about.

And the water-bottler didn’t have to go into a hostile part of the world, construct a multi-million dollar drilling platform, ship the black crude to refineries, create the gasoline to conform with 50 different states’ fuel standards, and then ship the fuel across the country to the pumps. They just had to put water in a plastic bottle. Remember where we used to get water (the tap)? We can still get it there, for roughly a million-times cheaper than those little plastic bottles. Silly? No Big Deal??? Hmmm…

Any Of These On Your List Today?

• Car Wash (Go home and use a bucket and hose)
• Cigarettes (Do you know what this does to your wallet AND to your health?)
• Fast Food (See Cigarettes)
• Overeating (See Fast Food)
• Soda from a Vending Machine (Hmm… equivalent to $30+ a case, or purchase $5 a case in a grocery store and place them in your refrigerator. And don’t forget what soda does to you … yup, see Overeating!)
• Beauty Parlor Shampoo (Skip the pricey salon potions and lotions – get ‘em at your discount grocery store. Yes they do work just as well. Yes they do! Don’t argue with me!)

These are just a few of hundreds of things you are likely wasting your money on. None of them are evil or bad, but we’ve become so used to these conveniences that we actually forget we have choices that are not only cheaper but probably healthier for us too.

Give Yourself More Money Now!

So right now, before you click over to another article, decide to act. Identify one “Latte Factor” you can eliminate. Shoot for something that could save maybe $10 a week. And then eliminate it. You’ll be shocked how easy it is and feel great about yourself knowing you just gave yourself a $300 a month raise!

Well, don’t fret. Sunnier days are on their way, if you can figure out a good way to start getting rid of some of your accounts. And in this article, I’d like to give you a quick little formula to help you pay off your debts faster and more efficiently and start making progress towards being debt free again.

Don’t Drain Your Accounts

First, I don’t want you to drain your bank accounts or spend every last dime you have on this formula, but you may have some money you can start using for debt reduction right now. So this formula is designed to show you which debt to focus on first.

The idea is to concentrate on paying off completely one debt at a time. You make only the minimum payments on all other accounts and then take all extra debt-reduction money and concentrate it on one account until it’s paid. Then you move on to the next account. But which account do you choose?

Forget What You’ve Heard

Forget everything else you’ve heard about debt reduction. I want to introduce you to the S.P.F. formula. S.P.F. is a common acronym used on sunscreen lotions to let you know how strong the protection is. In our case, the S.P.F. stands for “Supercharged Payoff Factor” (Sunny Days & S.P.F. – Hey, I think I’m clever…) and we’re going to use it to determine how strongly each debt is affecting your overall finances. By getting rid of the debts that are tying up more of your monthly budget, we can free up money to pay off the other debts faster (and raise your credit score faster too).

To calculate your S.P.F., your take each debt account and divide the outstanding balance by the minimum monthly payment. For example, a credit card has a balance of $10,000 and your minimum monthly payment on it is $300. Your S.P.F. is 33.33 ($10,000 divided by $300). Another account has a balance of $500 and the minimum payment is $50, so the S.P.F. is 10.

Calculate Your S.P.F.

Calculate the S.P.F. on all your debts. Then rank them in order from lowest S.P.F. number to highest S.P.F. number. The debt you’re going to concentrate on first is the one with the lowest S.P.F. number. Why? Because this is the account that is taking a higher proportion of your income each month compared to the size of the debt. If you don’t understand that math – that’s fine. Just trust me, by getting rid of your lowest S.P.F. account, you’ll free up more cash flow each month, giving you more money to apply towards your next lowest S.P.F. account. And soon, you’ll have more Sunny days ahead.

Look at this example:

By focusing on the “Bank 1” account with the $500 balance, you can kill it off and not have that $50 a month obligation anymore. That $50 can now go towards paying off AB Auto. Once that’s gone, now you’ve got an extra $277 a month to get rid of Big Card.

You are now gaining momentum and the debts are disappearing, and hopefully your disposition will be turning sunny and bright again. Don’t forget to slap on the sunscreen!

You see, FUD’s will help you be cautious and make wise decisions. If you didn’t have any FUD’s, you would just head out and buy the first property you see, but this is NOT a healthy way to invest in real estate. You need to take your time, check things out, be suspicious, and LEARN as you go. So you’ll never “overcome” your FUD’s, meaning you won’t completely eliminate or conquer them, and that’s fine. What you need to do is “counteract” the FUD’s, which means to offset and neutralize.

FUD’s Will NEVER Go Away - This is a Good Thing

Maybe we’re splitting hairs here, but it’s important that you know that your FUD’s will never go away. Much the same way that most actors get stage freight before going on stage, you’ll still have your FUD’s every time you enter into a real estate transaction. Actors have learned that these FUD’s are normal and they go ahead and take the stage anyway. The key is to prevent the FUD’s from paralyzing you and keeping you from “acting”.

So, how do you do that? The best thing to do is to learn about the industry and get advice from others who’ve done this before. Reading articles like this is a great first step. Getting advice from people who are actively investing in real estate (and NOT from people who aren’t, but give their opinion anyway) will also help. And there are thousands of books and infomercial products available on the subject that will help you too.

Overcoming your real estate investing FUD’s by educating yourself and talking to people who do this is a great thing to do. But be aware that many potential real estate investors never begin because of “paralysis of analysis”. Yes, you should begin to learn by reading and studying and getting a basic understanding of the how’s and why’s, but you aren’t going to be able to learn everything before you start.

The Best Real Estate Teacher

Your best teacher is going to be experience. You’ll learn far more by doing your first property transaction than you’ll ever learn by reading about it. So get some basics so you’ll know enough to get started without hurting yourself, and then just go for it. Find a decent property in a decent neighborhood at a decent price, and pull the trigger. You’re now a real estate investor. As your business grows, your knowledge will grow with it.

Another source is the site www.AnnualCreditReport.com. Congress passed a law requiring that the 3 major credit agencies (Equifax, Experian, TransUnion) provide to anyone who requests it a free credit report once a year. What congress failed to include in the law was a requirement that the bureaus also provide you with your credit score for free. You can get some good information by looking at these free reports – like seeing if someone else is using your social security number to open credit accounts in your name – but it is much more helpful if you know your credit score, and you’ll have to pay for that.

How Much Does A Credit Score Cost?

A typical charge for obtaining a score from each bureau is about $10-15, so to get all 3 of your scores, it would cost you about $30-45. Being in the mortgage business, I am involved in working with credit scores every day. As such, I find the following two bits of info important to pass on:

• If you’re trying to get approved for a mortgage, you should know that mortgage companies use the middle of your 3 scores to determine your eligibility. So by only getting one score, you may not have enough information to know for sure if you will qualify or not. I have seen credit scores for the same person vary by over 150 points between the 3 credit bureaus. This isn’t common, but there will ALWAYS be some variance in scores amongst the 3 bureaus. So it’s best, if you really want to know if you’ll qualify or not, to get all 3 credit scores.
• Mortgage approvals are based on FICO scores (there are many types of credit scores – a subject for another article). When you buy your own credit report from the bureaus yourself, only Equifax will provide a FICO score to you. The other two bureaus provide something known as a “consumer” score – and this can be quite different from you FICO score. But since many non-mortgage factions will use your “consumer” score, the information is still valuable to you.

Get Turned Down and Get A Free Report

Another way to get your report – with a score – for free is whenever you’ve been turned down for credit. If you applied for a car loan or credit card and been denied, the company you applied to must provide you with a reason for the denial. If that denial reason mentions that they based their decision, in full or in part, because of information found on your credit report, then you have the right to request a copy of your report for free.

I don’t recommend that you start applying for loans you know you can’t get in order to qualify for a free copy of your credit report, but if you are ever denied for credit, this is a good opportunity to find out what’s going on. It’s your right to do so, so take advantage of it.

You Can Protect Yourself From Identity Thieves

Did you know you can prevent those offers from coming using www.optout.com? A very simple service to use. You simply pull up the site and enter your information and that’s all there is to it. By “opting out”, you prevent credit card and other companies from obtaining your information for marketing purposes from the credit bureaus. Within a matter of weeks, your flow of junk mail and pre-approved offers will be reduced to a trickle.

Does “Opting Out” Work?

Yes, it works. Credit card companies find you by buying lists from the credit bureaus. By “opting out”, you are removed from these lists – by law. You’ll still get some offers for awhile after you put your name on the “opt out” list, because many of the companies have already purchased your name. But they update their mailing lists constantly with new lists, so pretty soon, your name will cycle out of their system. You’ll also continue to get offers from companies you already do business with as your info for those offers isn’t coming from the credit bureaus, but is coming from their own internal records.

So, yes, it works remarkably well to reduce these offers. But the real question is, “Should you Opt Out?” It may seem like a no-brainer to assume that, well, of course you should opt out. Why would you want all these companies to have access to your personal information which they put into their offers and send through the mail to you – and easy access for thieves? Here’s an easy way to protect your identity, so why not?

Why Would You NOT Opt Out?

Many of you reading these articles are trying to learn how to improve your credit scores. So here’s some advice: If you have poor credit or limited credit – DO NOT OPT OUT! At least, not yet. You see, if you’ve had credit problems in the past, the credit card accounts that you currently have probably have very high interest rates. Once you’ve missed a payment deadline – even one time after many years of faithful payment history – your credit card company probably raised your interest rate on you. A 30 day late, and you’ve likely got a 30% interest rate on that card now.

As you focus on fixing your credit and you get your payment history back on track, you’ll once again be rewarded with a higher credit score. And as your score increases, you’ll qualify for better credit card offers. If you “Opt Out”, you will not get these offers coming to you, which would give you an opportunity to shift your high-interest rate balances to lower interest rate cards. Remember, the only offers you’ll get will be coming from credit card companies that you already do business with – the ones charging you 30% interest – if you opt out. You think they want to cut off the amount of interest they are charging you? No way.

So, if you have weaker credit and high rates on your current cards, don’t put yourself on the “opt out” lists because you WANT those credit card offers coming in, for a while at least. Once your credit score gets to where you want it – go ahead and Opt Out.