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If you are on the same schedule as me, this week is the time to check your Experian report at annualcreditreport.com, the government approved, free place to get a credit report.  My report is a little different from last year, but there are some new accounts.  The annual credit report is part of your personal finance arsenal.

Your credit report is a major part of raising your credit score.  When you have you credit report, you can underwrite yourself for a loan and see how you stack up.

You get three credit reports for free each year.  One from TransUnion, one from Equifax, and one from Experian.  I get one every four months so I always have a good idea of what is going on.  You can also dispute items if you find something wrong, as I did once before.

Also remember, sites like FreeCreditReport.com are a scam.  If any site has free in the name and asks for a credit card number to sign up, it is not actually free.

The final round of changes from the Credit CARD Act is going into effect, and consumer advocates expect mixed results for the average customer.  The changes are great for credit card customers, but the banks will be looking for other ways to increase revenue to make up for the losses.

The good parts of the act for consumers are going to help many people.  Credit card late charges are now capped at $25, which is significantly better than the typical $39 fee before.  However, if you are constantly late, you may be charged $35.  Optimally, you are never late anyway.

Consumers are also protected from high fees for going slightly over their credit limit.  For example, if you go $3 over your limit, the fee cannot be higher than $3.  Inactivity fees are also banned.  If you want to read a great post on the new changes, check out explanations of the CARD Act at Free From Broke.

I am worried, however, about the ways banks are going to make up for the costs.  I have had cards start charging an annual fee.  While it was free before and only the “bad customers” had to pay high fees, they are now being given to everyone.  This is mostly impacting cards with good rewards programs.

The banks are also looking into traditional banking and checking accounts for revenue.  The Wall Street Journal thinks that free checking might be coming to an end.  My main brick and mortar checking account at US Bank is a free checking for life account.  You might consider finding something like that before it is too late.

Over all, I think we are moving in the right direction.  With any legislative intervention into the financial industry, there will always be some sort of workaround and fallout.  Time will tell how this new law will impact the industry and consumers.

As of today, my credit score on Credit Karma is 757.  At 25 years old, the average credit score is just over 650.  I am proud to be 100 points over the average for my age group.  I am closer to the 55+ age group for my credit score.

Here is a breakdown of credit scores by age from Credit Karma (click to enlarge):

So, is your credit score age appropriate?  This is one of the few places where I am proud that I appear much older than my age.  Let us know how you fit into the spectrum in the comments.  Don’t know your credit score?  Read my post on finding your score for free.

Effective Document Shredding Tool

It seems that every few weeks, I get a letter in the mail from one of my credit card companies with convenience checks inside.  Those checks are a tool that lets you put a cash advance on your credit line, which is bad news for most of us.  When I worked in banking, we would get checks like these every day written to max out a credit line deposited into a checking account!  I couldn’t believe people would even consider doing that.

There are many reasons to avoid using these checks.  Some that come to mind are below.

The cash you take out using a convenience check begins to charge you interest at your credit card rate, which can average over 20% APY for some people.  Why would you ever do that for extra cash?  Unless you can invest it with a guaranteed rate of return above that 20%, there is no reason to pay that kind of interest.

Some cards charge a cash advance fee if you decide to use the checks.  While not all cards charge a fee, it is often about 2% up front.  That is a 2% fee just for writing the check before interest even kicks in, which includes the fee in the compounding balance.

When you use them to withdraw from your credit line, you generally do not get the rewards associated with the account.  I get 2% on my credit card, I get 0% if it is from a convenience check.

These checks can be a possible source of identity theft.  Smart thieves know what these are, and know they can be used to tap into your credit card.  While you are likely not going to be responsible for the charges, it is a headache to get fixed.  Additionally, the thief gets you address and other personal information from the check which can be used for further identity theft in the future.

So why do the banks keep sending the checks?  Temptation and convenience.

How easy would it be to take that check over to the store and buy a brand new 60″ flat screen TV?  It would be as easy as doing it with you credit card, but the bank gets more money if you use the check, and that comes from your pocket.  Millions of people are dumb enough to use the checks, so the banks will keep on sending them.  However, before you get to the store, make a stop by the shredder to put the checks to rest.

Also, thanks to Mighty Bargain Hunter for including Narrow Bridge in this week’s Carnival of Personal Finance.

I often talk about credit cards on this site.  I talk about how keeping them open can help your credit score, but using them irresponsibly can lower it.  I also talk about reward programs. 

There is another, generally more prominent issue with credit cards that I often assume you already know about, but seeing as most Americans have huge credit card debt, I wanted to dedicate a post to that issue.

First, here is why credit cards are good for many people.  Keeping the accounts open for a long time can increase your average account age.  That, combined with on time payments, is the easiest way to quickly establish a good credit score.

Rewards programs are another great benefit of credit cards.  I get 2% cash back using my primary card.  Other people get points and miles used for travel and hotels.  Others get discounts on frequent purchases.  The value of these rewards can add up quickly…

However (isn’t there always a however to spoil our fun), credit card rewards become a burden if you have to pay more than you get back.  The two causes of this symptom are self control and carrying balances.

Self control is a real problem for many people, particularly young people, with credit cards.  It can be so tempting to use that $1,000 open credit line to buy a giant TV or a trip to Costa Rica, but it is not a wise decision unless you have the cash to pay off that bill right away. 

My credit card bill that I paid this morning in full would have taken 4 years and nearly $100 in interest had I only made minimum payments, and that balance is only about $600 that I spent on food and living expenses, not frivolous toys and trips.  The $100 in interest is much more than the $12 in rewards.

So, credit card rewards are good unless the cost of credit is higher than the rewards.  Be careful and vigilant to ensure you are not waisting more money than you get from your cards.

I got a lovely letter in the mail from Citi this week.  Starting April 1st, if you spend less than $2,400 per year, you get a $60 fee for your Citi credit card.

I have verified this at a few other sites around the web.  It is not just me.  It is a lot of us.  Click on the image below to read the entire letter.

This is not my first credit card to start charging an annual fee.  I do like that Citi gives me a chance to get out of it, so I am not sure if I am going to close this card.  It might be worth giving up the annual fee from my Charles Schwab card on $2,400 of purchases, $48 in rewards, to keep my credit score from being lowered.  As we all know, average age of credit is an important part of your credit score.

What do you think?  It is worth $48 today to keep my credit score up?  Please give me your opinions in the comments.

It has been a while since I gave you all an update on my credit score and why things have been moving.  There is no mystery to why my score has gone down and back up.

As you can see, my score went down from about 770 to 747.  Over those months, one of my banks closed my credit card accounts that I never used and I opened up a new credit card account to use as my primary card.  The combination of events decreased my average account age significantly.

The only way to raise your score after something like that is to be patient and keep paying everything on time.  I have, and my score finally took a jump up early this month.  I am now sitting at a cool 757.  It is just a step on the road to 800.

So, until further notice, you will see this credit score on the right side of the blog:

While credit reports are only built on your responsible use of credit, the companies that issue you the cards look a little deeper into your spending habits to build a bigger risk profile for you.

What does that mean to you?  If you are an avid Internet porn fan or a weekly boozer, you should pay in cash or check, not with a credit card.  The companies, notably Amex, look at your specific transactions to find patterns that lead to bad debt write offs.

According to Realm of Prosperity (hat tip to Wise Bread), these items should be paid in cash:

So, while you are doing your last minute shopping, take cash to Fascinations and the liquor store.  Read the rest at How To Hide Naughty Credit Card Purchases care of Real of Prosperity.

Have you ever wondered how bandit kers decide whether or not to approve a loan?  Have you ever been rejected for a loan?  Are you interested in a new loan sometime in the near future?  If so, you should probably know a bit about how bankers underwrite loans to decide whether to approve or deny prospective customers.

To start, print out a copy of your annual credit report that you got for free from annualcreditreport.com.  I am a fan of going paperless, but the bankers really do print your credit report out in full for review.  I did when I was working in a bank, and that is what we were all taught to do. 

Remember that your credit score is more of a screener than an approval tool.  If your score is really bad, you will be screened out right away.  If it fair or good, you will go through the process below.

Once you have your credit report in front of you, start at the top and cross out any credit account that says “authorized user” next to it.  Those are generally accounts that someone else is a primary user for.  The bank assumes that you do not pay for those.

Next, go back to the top of the report and highlight any late payments.  The report usually makes it easy to find those in your payment history.  Look for a grid with stars representing on-time payments and 30, 60, 90, etc representing the number of days late.  This is what my report looks like, as I have no late payments.

If you have any late payments, highlight them with a bright pink highlighter or circle it with a red pen to denote it as bad.  If all payments on the account were on time, put a check mark next to it.  Make sure every account is either crossed out (authorized user), checked off (on time only), or marked for late payments.

Next you need to look at balances.  Look through your accounts and circle any account balances with a black or blue pen or highlight it with a color that is not what you used for the “bad” items.  Make sure every balance is highlighted.  For revolving credit accounts, such as a credit card, highlight the credit line amount as well.  Add up all of your balances and credit limits separately and write them at the bottom of the report.  The account below has a balance of $299 and a limit of $2500.  Look for something like that as an example.

Next, go through and highlight all of the minimum payments on your installment loans, such as a car loan, mortgage, or any loan with a fixed payment and end date.  Add those up and write that number at the bottom as well.

Now, divide your outstanding credit card balances into your credit limits.  This gives you a utilization percentage.  In the $299/$2500 example above, you would have an 11.9% utilization rate, which is acceptable by most banks.  Any number over 25% might hurt your chances on the loan.  Anything over 75% will almost certainly disqualify you.  If your total outstanding revolving balance is over $10,000, you will probably have a tough time getting a loan as well.

Now, multiply your outstanding revolving balances by .1 to give you 10% of your balance.  For example, 10% of $299 is $29.90, or about $30.  That is what most banks will assign you as a minimum monthly payment.  Add that to your installment minimum payment, and you will have a total debt servicing payment amount.  If you have $300 in revolving balances and a car loan that requires a $220 monthly payment, your debt servicing payment is $250 per month.

Now write down your monthly regular income.  You can include child support, alimony, or social security. if you receive payments.  Subtract your monthly rent or mortgage payment and fixed expenses from that number.  Next, divide your debt servicing number by your income after fixed expenses.  That gives you a debt servicing ratio.  If you have a $250 payment and your income after fixed expenses is $2000 per month, your ratio is .125.  Any number below .1 is great.  Many banks would consider any number below .3 acceptable.  Over .5, you probably will not get the loan.

Now look at the whole picture.  Past performance is the best prediction of future performance.  If you have a lot of late payments, you will probably have trouble getting a loan.  If you have high balances on your credit cards, you will have a tough time getting a loan.  If you are using 90% of your available credit, most banks will not give you more.  Any one issue might be looked over, but the big picture is what will get you.

If you have any questions, please let me know in the comments.  I am happy to give you a free generic credit report underwriting if you want.  For questions about any type of credit or personal finance consulting, ask my through the contact form.

It was bound to happen eventually.  I pay my credit cards off every month and only regularly use 1 or 2 of my four cards.  Well, four cards is now three.  One of my banks closed my credit card due to inactivity and having “no banking relationship” beyond the card.  It is far from my oldest card, but it did have a high limit.  It will undoubtedly lower my credit score.  When I got the letter in the mail, I started to think: is this even legal?  Can the bank close my card for not doing anything wrong?

The Federal banking regulation that answers those questions is Regulation Z, also called the “Truth in Lending Act.”  Reg Z defines the reasons a bank can and can’t make changes to credit accounts.  Reg Z was updated with the recent congressional credit card law changes.  It is important to know what your rights are when the big bad bank does something to your credit accounts.

So, can the bank close my account for inactivity?  For now, yes, as long as I am given 30 days notice.  With 30 days notice, they can do pretty much whatever they want.

The regulation also covers new loan accounts.  The best summary I found is at LoanBiz.com.

Have any of you seen your credit lines slashed or cut off completely by the bank while you were doing everything right?  It seems counter-intuitive that using credit responsibly is now a grounds for closing accounts.  Please let us know your experiences in the comments.