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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.

I just got off the phone with Experian.  I just checked my annual credit report from Experian and found two things that are not accurate.  Here is a rundown on the items and the process to remove the items.

The first problem I found was in my address.  This is not my real address, but here is what I found.  Say I live at 2345 Washington Street.  The report said 2340 Washington Street.  That is an easy fix.  I went through the automated system, which asked for my credit report number and the last four digits of my social.  I worked through the easy automated menu and told them which address is wrong.  The system said that Experian would contact the bank that made the error and remove the item within 30 days.  That does not impact my score, but it is wrong.

The second issue is a bit more complicated.  I opened a line of credit at one of my banks, and they opened two of my accounts.  I did not authorize two accounts, so two accounts should not be on my credit report.  It looks bad to open and close accounts quickly from the bank perspective.  I approached the bank about it and they were very apologetic and closed the account.  The person that helped me said the bank can’t take it off my credit report, but I should be able to get it off if I dispute it with the credit agency, so I did.

To fix that there was no menu option to correct it.  I had to talk to a real live person.  The wait was long, but the real live person was polite and helpful.  I explained the situation and gave her my e-mail.  Experian will contact the bank and fix the problem within 60 days.  They will e-mail when it is done.

Overall it was a fairly painless procedure.  I spent about 20 minutes on the phone all together but was working while on hold.  Kudos to Experian for their customer service level.  If you don’t know what is on your credit report, it is probably a good time to look.

I am, as always, happy to answer questions in the comments.

If you have ever done any sort of loan search, specifically student loans, you have probably come across the phrase “consolidation loan.”  If you have multiple credit cards, you have probably seen offers to consolidate on one card.  These loans are often a good idea, but you should know how the work and what they do before you jump in.

Consolidation loans are essentially a new loan that pays off multiple old loans.  Rather than having, for example, two student loans with different lenders for $5,000 each, you could have one $10,000 loan.  That means one payment instead of two.  That means one company to deal with instead of two.  You can do a consolidation loan at either lender you are with originally, or you can pick a new one if you can get better terms.

There is always a however, though.  If you have two Federal student loans at 6.8% and your consolidation offer is for 7%, you should keep the loans where they are.  If the interest rates are the exact same, you should probably stay where you are.  Consolidation loans have the same set of origination fees as any new loan.  Unless interest rates are going to be lower for a long enough time to save you money over the fees, it is probably best to endure the headache of multiple lenders.  Alternatively, if you have the cash, you could just pay one (or both) of the loans off early and make no payments and pay no interest.

The same is true for credit cards.  Balance transfer offers often come with fees.  There may be a temporary no interest period, but the interest rate eventually goes up.  Unless you are transferring the balance to a card with a lower interest rate, you should not do it.

To summarize the pros of debt consolidation:

• Fewer payments
• Fewer lenders
• Less hassle

And the cons:

• New fees
• Possible higher interest rates
• Your new lender might be an asshole

If you are moving around debt balances, you should be careful, educated, and calculated.  Treat your loans like you treat your cash.  You are not going to move your bank accounts to a company that charges fees and pays you less interest.  You are not going to pick some sketchy guy on the street to trust your money with.  Loans should be the same, they have a long lasting impact on you and your credit.  Be smart and consolidate, if it is the right thing to do.

While I was approved for a new credit card this week, I have pristine credit.  Most credit card companies, including Schwab, are looking for excuses to turn people down.  Credit used to be easy to get.  Anyone with a credit history that was not too bad could get a credit card.

Millions of people are being turned down for credit.  I was given a lower limit than ever before on my card, and I have never had a late payment or missed payment.  Credit companies are looking for the smallest problems on credit histories.  A 30 day late payment used to be looked over without a thought.  Now it is a reason to turn down unsecured credit.

It is important to note the difference between secured and unsecured credit when looking at this issue.  Unsecured credit includes credit cards and “personal loans.”  If you stop paying these, the bank has no recourse to collect the money outside of damaging your credit report.  Secured loans, such as car loans and mortgages, give the bank the option of taking the property.  That gives the bank the opportunity to recoup their costs in the event someone stops paying.

What can you do to avoid the shared fate of millions of applicants?  Keep paying your credit card and loans on time.  If you are 18 and have never had a credit card, it is time to get a student card, but use it responsibly, to establish credit.  If you have negative information on your credit report that is inaccurate, dispute it.  If you really did screw up, pay off that card and close it.  Credit history is only good if you have a good one.

This issue is also impacting current credit holders.  Banks are looking for ways to make more money and cut losses sustained from bad loans.  As a result, people are getting credit lines slashed and seeing fees and rates increase.  If you are a regular reader, you saw that I was given a new $30 annual fee on my Chase card (which led to me closing the account).

If you are denied, don’t be discouraged.  The credit crunch is not over and people around the world are suffering as a result.  Just do the right thing with your current credit and things will slowly start to turn around.

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I just wanted to write a quick update. I was called by a Charles Schwab bank representative to discuss my income and outstanding debt.

She said that everything looked like it is well handled and under control, but I have a fairly short credit history. I agree with that. I got my first credit card about five years ago, so I don’t have the long payment history most adults have.

I was given a $2,500 limit. I was hoping for $5,000 to cover what I am replacing, but I will not complain. I don’t spend all that much and will keep my balance low to keep my debt ratio in check.

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Do you struggle with making your minimum credit card payment every month but pretend that the issue does not exist?  Do you ignore that you are behind your payments on student loans or a car loan?  If so, you might be suffering from debt denial.

I hope that readers of this blog do not have the common debt denial problem.  However, your savvy financial mind might be able to recognize the problem in someone else and help them deal with it.

In the UK, for example, 37% of those who have fallen behind in their payments have found debt counseling or assistance.  That means, though, that the remaining 63% have not tried to find outside help for their problem.

While it is true that many of these people may be formulating a plan to deal with the problem, many of them are ignoring it.  Just stopping your payments is a bad idea.

While we don’t all have debt problems that are spiraling out of control, we need to always be prepared to deal with future uncertainty.  If you don’t have one already, put together an emergency fund that can cover 3-12 months of your expenses.

Do not buy things that you don’t need.  It is just not necessary.  You are smarter than that.  Only use credit cards to make purchases that you will be able to pay off in full so you do not have to pay interest or get stuck in a rut making monthly payments.

If you are in trouble, get help.  While those ads on the radio mislead people to think they have a “right to lower your debt”, you don’t.  However, there are people that will help you.  Bank often are willing to settle, though that will cause severe damage to your credit report.  Do not pay some company a lot of money for help, most legit agencies are not for profit and will help you for free.

Debt is like alcoholism.  You have to start by admitting you have a problem.  Don’t skirt around it, deal with it head on.

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