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Credit Scores

October 31st, 2013 at 03:25 am

If you're like me, you've wondered at some point how they come up with that strange "credit score" that all of our borrow, and many of our payments are affected by, if not controlled by. I was browsing the Experian site, and came across the following.


30% of your credit score is based on your credit usage
Credit usage refers to how much money you've spent on accounts that have credit limits, such as credit cards. Also called a utilization rate, it measures your total balances compared to the total of your credit limits. High credit usage or utilization rate is a strong indicator of credit risk and can lessen your ability to gain new loans.

31% of your credit score is based on your payment history
The most significant factor in determining your credit score is your payment history and making your payments on time. Late payments remain on your credit report for 7 years from the original delinquency date. The original delinquency date is the payment date that was first reported late by your creditor.

15% of your credit score is based on the age of your accounts
Having a lengthy credit history shows lenders you have an established record of managing your debt. Closing older accounts, such as credit cards could negatively impact your credit score. Experian retains closed accounts with no negative information associated with them for 10 years from the date they are reported closed. As a result, positive credit information remains on your credit report longer than most negative information, such as late payments.

14% of your credit score is based on the types of accounts you have
There are four basic types of credit: Real Estate Loans, Installment Loans, Credit Cards, and Retail Cards. Having a good mixture of credit types along with high quality accounts, such as a mortgage loan, shows lenders you can manage your credit responsibly.

10% of your credit score is based on inquiries or "credit checks"
Every time you apply for credit, a "hard inquiry" is placed on your credit report. Having too many hard inquiries could indicate to lenders that you're trying to overspend. Hard inquiries stay on your report for 2 years.


So that's at least how one bureau does it.

Death and Money

March 10th, 2013 at 06:41 pm

Sorry for yet another long post.

I have lived a very charmed life. My parents are in their 70's and are still alive, as are all of my brothers. Very few people who are or were close to me have died. Due to this, death is still very foreign to my experience, and any deaths that have occurred have left a profound impact on me.

In other posts, I've alluded to losing my girlfriend of many years when talking about my retail therapy binge. A recent thread in the forums (actually, I think the word is "fora," but no one uses it, so I won't either) got me to thinking about my outlook when it comes to money, which brought me to write this post.

My father came from a very large family. He had five brothers and two sisters. Most of them are still alive and in their 70's and 80's. When I was about eleven, my father's father (my paternal grandfather) passed away. The family all gathered at his small house and had the near-reunion that always accompanies the death of a family patriarch or matriarch.

With that many children in their 30's and 40's, and all of their children (my cousins), you can imagine the scores of people in my grandparents' house. I would say the house was about 1000 square feet, and two bedrooms with only one bathroom and one common area plus a kitchen. All of us kids were basically left to our own devices. The older teens wandered off to the local hangouts - there was a park nearby where they could go sit on the play ground equipment and smoke cigarettes unbeknownst to the adults back at the house - while us younger kids pretty much just hung around the house and probably made pests of ourselves until we were given something to occupy our time.

My cousin Roger and I were eventually dispatched to my grandfather's bedroom. We were given the task of clearing out his dresser. Roger was about a year younger than I was, and his father and mine were the two sons who had made decent livings for themselves. My father's family was not rich by any means, my grandfather being a retired police officer from the 1950's when pensions were small but sufficient; however, my father had put himself through university to get a BS and eventually an MBA, and my Roger's father had opened his own successful business. The other aunts and uncles, though, were basically living paycheck-to-paycheck like most Americans still are doing today.

While clearing out the drawers, Roger and I came across my grandfather's old service revolver. We were southern boys, so we knew about guns and merely set it safely aside with the other items we were cataloging. We also came across a "blackjack." I asked my father about it when we told him about the revolver (which my father put out of the reach of our younger cousins). A blackjack is a leather device that looks much like a very small dumbbell, and has a small weight made of lead - maybe a fishing lure weight - at either end of the "dumbbell." The wielder holds one piece of leather-covered lead, and swings the blackjack as a small club. The leather and the weight of the lead increasing the force of the subsequent impact. A blackjack is a close cousin of "brass knuckles." My father explained that my grandfather had disarmed the blackjack wielder after being struck by it, and had kept the blackjack as a souvenir. I can tell you no more of the fate of the blackjack wielder.

Roger and I continued to go through my grandfather's things. We came upon a pencil cup full of pens of various types. My cousin ran his fingers across the top of the pencils and pens, and remarked, "Wow! There are enough pens here that all of the grandkids can have one." Now, I immediately realized that Roger was thinking, "What can I get out of Grandpa's death?"

This statement had a very profound effect on me. I was disgusted with Roger. I must admit that to this day, I cannot look at Roger - we're both in our 50's now - without remembering this statement. My grandfather had died, and Roger was wondering "What's in it for me?"

About 15 years later, my maternal grandmother passed away. Although my mother's family was much smaller than my father's extended family, we still had the typical near-reunion gathering.

We dutifully gathered at my grandmother's house - not much larger than my paternal grandparents' house - and talked about my grandmother's life and death. My mother and her three sisters were going through my grandmother's things and I was told "to take something for myself." I demurred, but my mother insisted I take something with me. One of my brothers had taken the color TV, and another of my brothers had taken my grandmother's Buick.

I remembered as a kid, we would sit around listening and basically being bored as the older folks talked, and I would mostly stare at a "century clock" - also called an anniversary clock - that my grandparents had on their mantle. I was always fascinated with that clock and the small weights at the bottom that would spin one direction and then the other apparently forever. This clock was the one item I always equated with my grandparents' house.

So, of course, that's what I asked for. My mother's younger sister immediately chimed in very vehemently, "No! That's mine! I have already packed it away." Now, I had only spoken up because I had been forced to do so, and I had chosen that item because it was what most reminded me of my grandmother. Immediately upon my aunt's tone and statement, I saw images of my cousin Roger and his coveted pencil cup. Instead of the anniversary clock, I asked if I could have the "rag rugs" that my grandmother had made herself.

Rag rugs are made by taking old scraps of material and making them into long, thin tubes. The tubes are then braided, and lastly the braids are sewn in a spiral fashion to make oval throw rugs. After the clock, these rugs, hand-made by my grandmother, most reminded me of my grandmother, so that's what I asked for instead of the clock. Even with a lot more cajoling, I took only the three rag rugs. When asked, I said, "These are what remind me of Grandma, so these are what I want."

I have a few other stories and memories, but these two tidbits illustrate why I've never put much value on things or money. I really don't need much, and I never saw the reason to accumulate wealth. I was born smart and I have always had the ability to make as much money as I wanted to; I just never really wanted to make money.

Now, I'm setting aside cash for my retirement, which is why I came to SA. As I never saw any value to money, but realize rationally that I need to save some for my DW when I eventually pass away, I came here to Dubai. I love my job, but I've had other jobs I love more. When I leave here, I'll go back to training - my true vocation. I doubt I ever "retire," as I actually love being in front of a class and the interaction and challenges of putting across the information so folks can genuinely understand the material. It's just that here in Dubai I make enough money to easily save and that's really all I'm here for.

New car, new me

December 22nd, 2012 at 06:59 pm

After nearly a year at the new job, we were finally given "our" car. For the last 51+ weeks, we've been driving a rental Toyota Camry. Now, this isn't a bad car, unless you're 6'4" tall, which I am. This means my knees were in the dash for the last 11+ months.

Thursday of last week, we picked up a new Nissan Armada. Gas over here is a little less than $2.00 per gallon, so being a V8 isn't that much of a drawback.

Thursday was also the last day of work before my Christmas vacation. Except I have to go in today to meet with a prospective new customer. We get to pitch him on using us as his one-stop shop for upgrades. As we've done this for others, we have a great chance of doing this for him, as well.

The "new me" is that I've started exercising regularly, so I'm down about 8 lbs (3.5 kg). I'm at 205 (93 kg). As noted, I'm over 6' tall, so that's very close to my target weight. I was getting a bit soft in the middle, and my legs weren't able to get me going like they used to.

I read an article where folks over 50 have a new test. The object is to start from a standing position, then sit on the floor, then stand again, all without help from the floor or using your hands. That means "no hands on knees," or any "kneeling as you stand up." The object is to go from standing to seated to standing without using any other body parts.

You lose one point for every "help" you give yourself. Eight or higher is good. Three or lower is bad. I've been doing this every night for about ten days. I've gotten ten all but three times. Not bad for a guy over 50, but my goal is to keep this at 10. You also lose half a point if you struggle too much, even if you don't touch anything.

The point of this is that the researchers found that folks who scored less than 3 had like an 80% mortality rate over the 6 years of the study. I think it was three; don't quote me on it, though. The explanation was that those who are overweight are more prone to diabetes and similar problems and those who lack the lower body strength and coordination don't get enough exercise/activity. I don't think this addresses smokers directly.

Time to get ready for work... I hope your vacations are better than mine, in this respect. DD2 gets here with her husband in five more days. We're really looking forward to their visit, even though it puts at least another month on the home payoff. Sometimes you just have to get off the rice and beans, and forget about the lions chasing you. We've set aside a considerable amount of blow money for this Christmas, starting with the plane tickets.

I had gone to Bath and Body Works to get some candles for DW, but they didn't have the correct scent in stock. I gave them my cell number and told them to call me when they were in. I was driving with the car pool, including DW, and my phone rang. I don't take calls while driving most of the time, so I handed my phone to DW, who answered. It was B&BW, telling me the candles are in. So much for that surprise. She doesn't know about the others, though, so at least not all of Xmas presents are known.

Retail Therapy has Causal Link to Sadness

November 16th, 2012 at 05:27 am

A few of you may remember my post where I talked about spending a lot of money when I lost someone very close to me. Well, according to this link, sadness apparently causes people to make bad financial decisions.

http://www.livescience.com/24801-sadness-financial-decisions...

From the article:
'"Our results suggest that individuals who are sad after the death of a family member might exacerbate their financial hardship by making intertemporal choices that favor immediate consumption more than is wise," the researchers wrote.'

What I find interesting is that being behind on everything tends to make people feel bad - which must be close to being sad - which might cause them to become even more behind due to bad decisions.

I know that I did exactly what the research indicates. Anecdotal, assuredly, but still it jibes with my personal experiences.

Reappearing Deposit

September 27th, 2012 at 11:22 pm

After two more visits and another telephone call to the US, we finally got a call from our local agent that we could come in to pick up our money.

At this point you may be thinking "he got resolution," and - eventually - we did, but the story has quite a few twists in it. Please, read on to see what I deal with over here in Dubai.

During the call, the agent said, "The German bank only sent XXX amount, so you won't be getting back your whole transfer payment."

Needless to say, I disagreed fervently, and even eventually mentioned, "Not only did you not perform the service that was contracted, you had my money for four weeks. In actuality, you should be paying me interest, not cutting my refunded amount."

I decided this was better discussed in person, and went into the office where I made my initial transfer, along with my copy of the contract. Again, they said that "since the money has already been converted to US currency" I'd only be refunded the amount of the returned deposit, less fees for the conversion, fees for the new conversion back to local currency, and less the fee for the initial transfer.

No deal. I said again that they were going to give me the entire amount for failure to perform according to the contract. The agent made a call, and said, "OK, we'll refund the whole amount."

Again, the story does not end there.

The agent then started working with another agent, going through the drawer, counting money in their machine, filling out forms... basically spending more than five minutes before having me sign 3 different forms (without a lot of explanation), and finally handing me a bundle of money and saying, "Goodbye."

I then counted the money right there on the counter where I was given the money. Stashed right there in the middle of what was more or less a pile o $250 dollar bill equivalents was a single $125 equivalent. I pulled it out, and put it with the other bills of the same denomination and kept counting.

I came out $125 under the amount I was due. They then made another big show of balancing the guy's drawer, even going to the point of grabbing a briefcase from the back full of $3.00 bill equivalents, and finally gave me the balance I was due.

My wife, who was there at the time, asked me if I felt they shorted us on purpose. My answer, "Definitely. That's why they made the big show. They saw I never did anything but count the money. They only needed to recount it themselves to see I was shorted. They showed no surprise or suspicion that I might have shorted them. The whole refund show was a fabrication to try to get us to walk away without counting."

I got all my money.

No, I won't be using this shady group ever again. Instead, I'll be paying the bank more, for more security.

The Requisite Dave Ramsey Post

August 23rd, 2012 at 09:17 pm

Most people who start looking in to personal finances fall into two categories:

1. Someone who realized the need without making mistakes.
2. Someone who realized the need after making mistakes.

Most of us fall into the second category. I know that I am one of the latter group. Someday I may post my personal story, but that's for a later day.

After making financial mistakes, most of us find ourselves deeply in debt. Now, the term "deeply" is a relative term. If you're making minimum wage and find your bills add up to 105% of your income, $1000 can look like an insurmountable debt. If you're making $100K per year but spending $105K per year, then maybe $50K isn't "too uncomfortable."

Regardless of your personal debt depth gauge, if you're looking at this site, at some point you found it necessary to do something about your finances. If you're like most people, you probably googled "get out of debt." Guess what (as of today) the first entry is? Dave Ramsey's site.

Now, I'm not going to try to sell you on Dave's methods. Dave does a good job of selling himself, because that's how he makes his living. And he's doing a fine job of both the selling and the living. I find no fault with that.

This post is written because there are a lot of Anti-Dave snobs out there. For some reason, a lot of people like to tell you everything wrong about Dave's plan. I'm going to tell you the best thing about Dave's plan: It works for everyone who actually uses it.

Dave has a seven-step plan to get out of debt. He calls his steps "baby steps," because each step is a small thing in itself. I think some of the baby steps are fairly large and shouldn't be called baby steps, but that's neither here nor there.

Dave's Plan, Baby Step 1: Emergency fund
His first step is to set up a $1000.00 emergency fund. Now, the wisdom of setting up an emergency fund cannot be argued. Having nothing as a financial shock absorber merely guarantees you're going to have a very uncomfortable time when life's bumps and pitfalls come your way (or you go theirs).

Here's my first problem with Dave's plan. I'm an engineer. Think "Dilbert on brain steroids." Engineers do one thing: Make decisions to solve problems. Maybe that's two things, but you get my point. I approach debt as a problem to be solved.

The first thing you do to solve a problem is to determine what is causing the problem. Dave omits this basic step. Are you in debt because you spend too much on electronics, because your child needed hundreds of thousands of dollars in medical payments, because you were uninsured and had a fire that destroyed your brand new house, car, boat, and ATV?

Each of the above possibilities has a different solution. Yet Dave would tell each of them: "First save $1000 in an emergency fund."

I have a different first step: Figure out why you are in debt. You do this by writing down where and how much money you have coming in, and you write down where and how much money you have going out. You can call this a budget, or you can call it a financial health check, or you can call it a worksheet.

In any case, you need to figure out the problem before you start to solve it, and Dave does have you do this as part of his plan if you purchase his plan, but he doesn't call it a baby step, and I believe he should.

Now, his Emergency Fund (EF) of $1000 is rationalized by him as "enough for emergencies" but small enough to keep you motivated to pay down your other debts more quickly. I would be petrified to have only $1000 as a buffer. I've had car failures of nearly $3000. According to Dave's method, I would then have to either use a credit card, take out a short term loan, or do without my car. None of those are good options, in my opinion. Remember, Dave wants you to put ALL money above the EF into loan/debt payments.

So, for me, I would need at least $5000 for an emergency fund, even at this stage. I don't need any external or false pressure to pay down debt. If I'm motivated to do something, then I'll do it.

My point is that this "one size" fits all doesn't really fit all. Now, the universal truism you get from this first baby step is that you should have some cash-on-hand in case you need it. How much is debatable, but the fact you need something available for outside-the-budget required expenditures is not debatable.

Step 2: Pay off all debt using the Debt Snowball
The debt snowball is not Dave Ramsey's creation. Almost everyone uses some form of it once they realize they are carrying too much debt and need to reduce it quickly. Dave has made it popular, and may even have coined the term "debt snowball," though I doubt he did.

I think this might be better described as a "debt payment snowball." It is a method of using the monies that were used for a retired debt to pay on the next debt-to-be-paid. Therefore, if you're paying $150 per month for a bill, and you pay off that bill, then you have $150 more to pay off the next bill.

Now, Dave suggests you pay off the bill with the smallest balance first, then go on to the next bill in ascending order. This is the first place that many people have a significant problem with Dave Ramsey's plan; mathematically, the debt with the highest interest rate should be paid first.

Now, no one can argue with that last statement, because I specified that it is a mathematical calculation, and it is true. The largest interest rate should be paid first mathematically.

Dave's plan trumps math at this point. In his own defense, Dave states that you need to get some victories early to really adopt the plan. The easiest and fastest way to get a victory is to pay off the smallest loan, regardless of its rate.

Why can I say you should do it? Well, "because it works" is the best argument, and the best basis for that statement is this recent study Kellogg Debt Payoff Study

The study above really isn't the whole story. I will say that once you have made the lifestyle change that this whole project really requires, you can change to the "highest interest rate" first method. Once you actually are dedicated to removing debt, and you have developed the discipline to do it, you should go back to Math and use it to your advantage. The real caveat here is that if you were doing what was mathematically correct, you probably wouldn't be in debt to begin with.

The method I used was "neither of the two above." I have to travel for a living. I have been to 71 different countries as of this writing. There is absolutely no way I could do this without a credit card or charge card. I have brought home expense reports of over $30,000 for one month. Try living in Singapore or Tokyo for a month - as well as pay for the plane ticket - on less than $15,000. Let me know how you fare.

I couldn't do one of Dave's other "truisms:" Cut up your credit cards. That just isn't going to happen. I could easily get 150,000 reward points from Amex every year if I were still on the heavy travel schedule.

Because I could not easily cut up my credit cards when I didn't have the cash to finance my travel, I set up my bills by "loans and lines of credit" followed by "credit cards." Even though most of my debt was business-related, it is just too easy to buy souvenirs and other fluff on credit when you're so used to using the cards. This was a discipline problem, not a financial problem. The financial problem was the symptom. My reasoning was that once the loan was paid off, it was gone. I then snowballed that payment into the next loan.

Of course, I paid the penalty of still spending a bit more on credit than I should have but after a few months, I stopped doing the credit card dance (spend too much, pay some off, leave some debt, cha-cha-cha), and started to put all the excess cash into paying off the loans and LOC's. The point is that I paid off debt in my way, not Dave's but the goal was the same: Pay off all debt.

Step 3: Save up 3 to 6 month's bills in an EF
Once again, I believe this is a good idea, but I question both its timing and its universality. I've already outlined why I believe the fund should be set up as Step 1 (after the budget, but that dead horse has already been beaten).

My second problem with this step is that everyone has unique circumstances. Let's look at my present situation. I work overseas for tax purposes. My job pays for my house, my car, my maintenance, my furnishings... everything except food and entertainment. So, my 1 month expenses that must be paid is about $400, unless I go out more than necessary. The food over here is expensive. According to Dave, I need less than $3000 in the bank for six months.

It will cost me about $4000 to ship my two dogs back to the US when I leave. I need to keep that money in the bank. So, my emergency fund should be at least $15000, for return travel and homestead set up upon my travel back to the US.

So, I modified Dave's plan to be "$5000, plus travel expenses" as my emergency fund. I do agree with his basic premise, once again: Save up enough so that if everything crashes in your life, you can ride through it for at least 6 months without panicking.

Step 4: Invest 15% of your income in your retirement fund
Once again, I don't disagree with the step itself, but I do disagree with the timing and the static amount. If you're 28, then 15% is a great amount to save toward retirement. If you're 58, you probably need to be doing a bit more than that to have any chance of retiring at all.

Secondly, I think the debt snowball should be modified. One warning, though, is that you MUST be committed to reducing your debt to follow my method instead of Dave's method. I will state that mathematically, Dave's method in this case is probably better than mine.

I think you should take at least 20% of your "snowball increase money" after paying off a bill, and put that toward increasing your EF and then toward retirement. In other words, using my $150 example from above, I would suggest you put $30 of that toward your savings or retirement, and the other $120 toward your bills.

My reasoning is that the markets fluctuate. You need to be buying continually to get the smoothest outcome. The old term for this is "dollar cost averaging," and its basic premise is valid: Investing a large amount at one time has the possibility that you have invested at a peak, and you can lose much of your value overnight. If you instead break up the large amount into smaller amounts and invest them over time, then any peaks or valleys are smoothed over. So, the longer you spread out your investments, the greater the likelihood that you won't lose significantly in one crash or downturn. Also, during the downturn, you're buying more shares rather than earning more income.

Again, Dave and I are not in disagreement, but his method does pay off bills more quickly. Also, since many employers offer 401K plans, you lose out on the "free money" of their match if you don't contribute, so using part of your money toward getting the match, which is typically at least 50% of your deposit, is only good financial sense. Dave's plan does not allow even this smart investment strategy until debts are paid off.

Step 5: Save for Children's College
I don't see this as a separate savings at this point. Rather than this title, I would say, "Max out tax-deferred savings, then save the remainder to taxable and therefore more liquid savings." This then allows you to pay for college, cars, or toys, at your discretion.

Why does one earmark his savings for future expenses? I can see the wisdom of making room for this, but by the time you get to this point, you should be able to save at least 30% of your income in some vehicle or another. If you haven't made the lifestyle change, then you're not even going to get to this point. By the time you're to this baby step, you should already have more money than you can spend wisely - and you should have developed the wisdom to know what "wisely" means. If you're still borrowing $50K to buy a $60K BMW, then you never got this far.

Step 6: Pay off your house
This one is a hard one. If you are close to retirement, then I agree with this wholeheartedly. If you are far from retirement, then this may not make financial sense for a different reason.

Once again, I agree with Dave in general. I think everyone should pay off his primary residence in full. I am now going to go into the reasons why you may not want to do so personally.

Right now, you can get a 15-year house loan for right around 3%. Historically, index funds have returned more than 10% over any significant period of time. So, you can reasonably expect to be paying 3% interest while earning 10% interest.

The simplistic reasoning above is correct in itself. Where it fails is that there are a lot more payments you make on your house that are not the loan amount. You pay taxes, insurance, maintenance, and improvements in addition to the payment. Will you still make money buying a house on credit? You most definitely will unless you buy stupidly. Who bought stupidly? About 90% of the people who bought a house from 1998 until 2007. OK... the 90% figure is fictional, but the trend is not.

Real estate was booming in the timeframe I mentioned. This chart shows that from about 1997 until 2007, housing prices were literally skyrocketing. Why was this? Because everyone who played this game was greedy and figured, "I can buy this $100,000 house for $150,000, then sell it a year later for $200,000 and use that $50K for toys." And that's what most people did. People are not underwater on their loans, they are watching their loans on big screen TV's and riding to work in their loans inside Mercedes SL cars.

The money was borrowed and wasted. This is the reap what you sow part of life.

Regardless of the pontificating above, housing prices are now at a decent level, but loan money is cheap. I suggest that if you're young you may want to use a house loan to increase your income. My personal opinion is that you should pay off your principal residence, and use your "extra money" to purchase real estate for rental or investment purposes.

I just don't think I should use a necessity as collateral for investments. I see it as only a small step above using your house title as your bet on one roll of the dice in Vegas. It's still gambling with your house, no matter how you rationalize it. Sure, the odds are better with an index fund than with the roll of the dice, but the payoff with the dice is quicker and more definite - both of these statements are predicated with "if you win." Both of them can be lost.

Step 7: Build Wealth and Give
No argument at all at this point. How you build wealth here is up to you.