10 Months to Better Credit

My Credit Improvement Journey

The credit journey I began ten months ago has now fully paid off; I now have:

  • A higher credit score, 749, than when I started (747)
  • About 3 times the total available credit
  • 3 new credit cards with top-notch benefits
    • A total of $400 cash in signing benefits
    • 2% cash back on all purchases
    • 5% cash back on rotating categories
    • 15 months of interest-free balance transfer

Ouch! The Lowest Score Matters Most!

My wife has recently joined me on this credit journey. We are joining forces because we want to do a cash-out refinance of our mortgage to do some home improvements.

It turns out that when a married couple applies together to refinance a mortgage it is the lower partner’s score that impacts approval and rates. Specifically, the mortgage lender pulls three credit scores for each partner from Experian, Equifax, and TransUnion.  It then determines the middle credit score for each partner. Finally, the bank (or credit union) uses the lower of the two middle credit scores.

Late Payments can Hurt Both Partners

Due to a auto-pay mix up, I have two late payments just over 3 years ago on a credit card solely under my name. Strangely, this card started showing up on my wife’s credit report about 5 months ago. I called a credit agency and they claimed that this is perfectly legal for them to do!  They can put negative credit items from one spouse onto the other spouse’s credit report.  (They don’t tend to use positive credit information this way.)

The mix-up was my fault. I am now much more diligent in keeping up with my credit cards! It sucks that my mistake pulled down my wife’s score.  When the credit card showed up on her report her score dropped about 30 points.  The timing strongly suggests that the score drop and the inclusion of this credit card are related.

Credit Prep for a Mortgage Refi

In order to qualify for the best mortgage rates and terms possible our goal is to boost our lowest credit score (between us) to about 750.  750 gives us a little wiggle room to make sure the credit score that the lender uses is 740+.  Keep in mind that the credit scores you receive are not the same as the ones the lenders get.  That is why the 10-point safety margin is useful

We want to do our mortgage refinancing while mortgage rates are still very low. The easiest quickest way to pull up my wife’s credit score is to pay down more of her credit card debt — even if it is interest-free at present.

We are both self-employed now, so we face an uphill challenge with our goal of refinancing our mortgage.  Working together we hope to meet this challenge by having solid credit scores.

Credit Score Challenge

My previous several posts have described a credit card experiment I started last August — about 8 months ago.  During 2014 I went from 2 cards to 5 and tripled my available credit.  Instead of paying off about $12,000 in business debt, I transferred it to a card with zero-transfer fee and an introductory rate of 0% for 15 months.

On thing I learned is that the credit-score simulators I used were pretty inaccurate. My score dipped, but over 8 months has recovered all but 10 points.  It tends to keep ticking up about 2 points per month — presumably because my “age of credit history” — the average age of my credit cards, really — gets a month older each month (obviously).

I have all of my cards on auto pay.  I have all but my “balance transfer” card set to pay the full balance every month.  Thus I never pay interest or finance charges.  For the “balance transfer” card, I have auto-pay set up to pay the minimum statement balance. On this card there is 0% APR on balance transfers until September. This card just sits in a drawer.  I will pay it off in full in September.  Until then I will continue to enjoy 0% interest.

I’ve benefited by my choice of cards.  It may be a small thing, but 1.5% cash back adds up after a while.  And 5% cash back on “rotating categories” can be nice depending on the categories.  I almost always simply apply the cash back rewards to my current balance.  Logging on to check my cash back is also a good incentive to review my cards for any suspicious charges.

I also have credit monitoring that double-checks for charges or other activity that may indicate “identity theft”, or simply errors like being double-charged for a purchase. Personal diligence is the first line of defense against ID theft, and anything like cash-back rewards that makes it fun to log into your account means you have a better chance of catching ID theft early.

I’ve read that credit card fraud often starts with small charges.  The criminal is just checking to see if you are vigilant or lazy in your credit monitoring.  If you catch these small charges quickly and get them reversed/cancelled you are likely avoiding big fraudulent charges later.

I hope you found these credit score articles useful.  Best of luck in your credit score journey.  And please feel free to shared your credit stories (or questions) by leaving a comment.

Credit Card Experiments, Continued

Quick Credit Score Update

Both credit score predictors were wrong.  One predicted a small drop (about 3 points) the other a small gain (again, about 3 points).  Instead my score dropped from 735 to 724 — 11 points.  However, two months later, it bounced back to 733, roughly what I expected.

I anticipate, that with continued paying of my full balance due every month, except on my one zero-interest, balance-transfer card, that my scores will gradually increase.  I will provide occasional updates as developments occur.

 

Experiment: Improve my Credit Score to 769 or Higher

I have added my latest and last credit card this year. According to the handy credit simulator at Credit Karma this new card should increase my credit score by 3 points, from 735 to 738. According to another credit simulator this new card will lower my credit score by 3 points to 732. What I take away from this is that this should be my last new card for a while.

I’ve learned that stopping getting new cards and letting them grow is called “gardening”… FICOforums Guarden Club.  I intend to start “gardening” for at least a year and let my “average age of open cards” grow.

It take a surprisingly long time of 4-6 weeks for a new cards to show up on ones credit report.  So I’ve have to wait to see which credit simulator is more correct.  The question… will my credit score go up, down, or stay the same when my newest card is reported? Let’s see how I’m doing in terms of goals:

Credit Score and Credit Card Goals and Results

Achieved:

  • ✓ Get 3 new cards without hurting my score much. (Score is down only 6 points)
  • ✓ Get new cards with complementary and useful features.
    • Slate (Chase): 15-months zero interest, zero cost to transfer balances (during intro period). [No annual fee]
    • Quicksilver (Capital One): 1.5% Cash-back on any and all purchases. $100 “signing” bonus. [No annual fee]
    • Chase Freedom (Chase): 5% Cash-back on rotating categories. $200 “signing” bonus. [No annual fee]
  • ✓ Secure total limits greater than $50K.  Current limits total $61,700.

Close to Reaching:

  • Part I of Utilization (ratio of debt to total credit limit).  Get below 20%.
    • Currently at 20%, but not below
    • Since newest card has not been included in credit report, TransUnion still thinks my utilization is at 24%
  • Part I of “Delinquency”/Payment History:  Go from 2 “30-days late” entries down to 1.
    • Currently at 98% payments on time
    • 2 months until oldest delinquency expires
    • On-time payments will increase to 99%

     Will likely take over 6-months to achieve:

  • Part II of Utilization.  Get below 10%.
    • My Slate card has about $12K of debt, but the APR is 0% until September 2015.  I will likely make minimum payments until August when I will pay in full.
  • Part II of “Deliquency”/Payment History: Have zero late entries.
    • Will take time.  Last negative entry should expire in April.
  • Part I: High Credit Scores: Earn a score of 769 or higher.
    • I’m at 735
    • One estimator says, if I follow my plan, I will hit 745 in about one month… still a ways to go

      Will likely take a year or more to achieve:

  • Part II: High Credit Scores: Earn a score of 785+
  • Beat my wife’s credit score (currently 783, but will probably go up!)
  • Secure total limits greater than $100,000
    • Preferably by requesting/earning higher limits on existing cards

The first credit goals, which I’ve achieved, show that my initial credit plan was achievable given my starting circumstances of good credit. The second and third groups of credit goals are reasonable goals for attaining excellent credit. Finally, the last group of credit goals constitute vanity goals.

The vanity credit goals are will have virtually no practical use since any credit score above 769 is unlikely to make any difference in getting the best rates, best cards, best mortgages, etc.  The only practical consideration is that a 785+ score may provide a small margin of safety against falling below 769 — however that margin would likely evaporate for even one 30+ day late payment.  So, really, the vanity goals are there just for fun.  And I maintain that having fun is a perfectly good goal!

The Credit Score Game Continues

In the last post I wrote about how my wife’s credit score (783) was significantly higher than mine (747).  That just won’t do — I embarked on a credit-score-improvement quest that includes research and experimentation.

The experiment is already paying off in unexpected ways.  I got a $100 bonus and began using a 1.5% cash-back Quicksilver card as my day-to-day card.  This a small upgrade from my 1% cash-back card.  I also convinced my wife to get a Citi Double Cash Back card for most of our recurring monthly expenses that ends up saving us 2%.

I learned more taking with my brother about his credit card management techniques.  It turns out that he and his wife are pretty expert at credit-card savings.  He has various 5% cash-back category cards he uses to buy groceries and gas.  They also have 2% cash-back cards for non-category purchases.  He also uses a neat trick to stretch the 5% grocery purchases further… buying pre-paid gift cards at grocery stores for, say,  Home Depot or Target — effectively getting 5% off of purchases there too!  Financial savvy definitely runs in the family.

Let’s not forget mileage cards too.  My United MileagePlus Explorer Card is the only card I have with an annual fee ($95).  I fly often enough on United that it is worth it to me.  And recently between my wife and I we recently bought 5 tickets with United miles for myself and some family members  (Tip:  if you want to help someone buy a ticket with your miles, don’t pay to transfer your miles to them… instead simply buy the ticket for them with your miles!)

The Credit-Card/Credit-Score Experiment

As expected, getting two new cards temporarily lowered my credit score — from 747 to 728. However, it recovered a bit… to 735. So what did I do… get one last new card… The Chase Freedom Card with a $200 (20,000 point) bonus.

I decided to get a %5 cash-back “rotating-category card.”  It was the $200 bonus that caused me to chose this this particular one. The criteria for collecting the bonus is pretty simple: charge $500 of purchases in the first 3 months.  I view this as purchasing $500 worth of stuff that I would have bought anyhow — Christmas gifts and such — for only $300.

This third new card will probably cause another temporary downward blip on my credit score. What’s important about this last card is that it brings my total credit card limit (amongst all active credit cards) to $61,700.  This means that the debt (see previous post) of approximately $12,000 will get below the critical level of 20% of utilization of available total credit… which should help my credit score in the mid to long term.  In the meantime I am “floating” $12,000 in debt for free at 0% interest for 15 months.

What Next: A Credit-Score Challenge?

My personal challenge is “no more new cards until 2016.”  I’ve had my fun getting 3 new cards that I believe will 1) help my improve my credit score in the long-run, and 2) help me save money (via cash-back programs) on purchases.

Onc challenge will be in keeping some activity on all of my open cards, and earning maximum cash-back while resisting the temptation to overspend just because there is a small reward.  I hope to have a zero balance before the teaser 0% APR rises to some ridiculous level (of, say, 19%).  I will keep you updated here.

The Finance of Self-Employment

I have been self-employed as a consultant since 2008. I opted to go independent for a variety of reasons, primarily to afford myself more freedom in choosing  what work I do, and how I do it. I felt too restricted by corporate policies at my previous job. I worked for 11 years at a tech company on their Online Marketing department.

There were a number of financial things I had to learn after deciding to become an independent consultant. Going independent was initially daunting – this was my first venture into working independently. Thankfully I had some friends who were also working as independent consultants, who were able to share some of their experience with me. The first thing I did was to obtain an LLC in order to separate my business and personal finances. By “doing business as” my LLC instead of as myself, I reduce the likelihood of a client being able to sue me for all my personal assets; limiting the liability to just business assets.

Another financial consideration taxes – not only did I now have to think about the so-called “self-employment tax” (having to pay the full amount of the FICA / payroll tax, which previously my employer paid half of), but I also had to plan to pay quarterly estimated tax payments. Previously all my taxes were withheld from my paychecks by my employer. As an independent consultant, I now work as a 1099-contractor and my clients do not withhold taxes from what they pay me. I have to set that money aside each quarter or worry about paying a penalty during my annual tax return.

Between the federal income tax, state income tax, and FICA/payroll tax, I generally have to set aside 40% of my income to cover my quarterly estimated income tax payments.

Now after having to consider all that, the next thing I had to figure out was how much was I actually going to charge for my services, how I was going to invoice my clients and how quickly was I going to expect to receive payments. I have had to refine all these over the years  and finally have a good pricing model that all my clients seem comfortable with, along with a consistent payment model. For shorter one-time projects, I send an invoice upon completion of the project, with a net-30 payment expectation (which I’ve built into my consulting agreements with my clients). For longer-term / ongoing projects, I invoice on a regular basis – either weekly or monthly, depending on the client’s preference, with the same net-30 expectation. I prefer to have a relatively flexible invoicing model and not stick to a single, rigid model.

Finally, as I grow my business, I need to take into account how I am going to pay other people for their services. I have opted for a subcontractor model over an employee model for my business. My work and income is still too volatile to even consider hiring employees, and working with subcontractors on a per-project basis works far better with the current way my business works. I have also opted for a revenue sharing model, instead of a set hourly rate with my subcontractors. Since my current rates are still considered somewhat low for my industry, I am paying a higher revenue share (80/20) in order to get better quality subcontractors. Over time I plan to increase my rates and decrease my revenue share until I reach a revenue share that’s 60/40, but still guarantees a fair income to my subcontractors.

So as you can see, there are a lot of financial considerations with becoming self-employed. My recommendation is to find a good CPA (accountant) to help, especially with the tax side of things. If you can afford to also hire a bookkeeper (or find good software to help you keep your accounts receivable and accounts payable in order), do so. These can be critical to your success.

Financial Toolkit: The Rule of 72

The rule of 72 is an easy way to make fast financial calculations in your head (or on a sheet of paper)… no calculator is necessary.  The idea is that you can determine how fast money will double based on an interest rate or rate of return.  Divide 72 by the interest rate and that is the number of years it will take for the investment to double.

For example if a CD (Certificate of Deposit) is paying 6% it will double in 12 years because 72/6 = 12.

The rule of 72 can be used for decreases in value, such as inflation.  If inflation is 4%, money under a mattress loses 4% per year in value.  Because 72/4 = 18, that money’s value will be cut in half in 18 years.   So positive returns divided into 72 tell how long it will take your investment to double and negative returns how long to lose half its value.

The rule of 72 provides convenient illustration of how fees can effect an investment.  Let’s say you are considering two investments in your IRA managed by your brother-in-law Sam.  Option A is to buy and hold SPY, an index fund that has an expense ratio of virtually 0% (0.09% actually) or option B tracking the same index  but managed by the Sam’s company with a 2% expense ratio.  Sam says “Hey buy my index and I get a commission and a chance to win a boat.” Using the rule of 72 you see that 72/2 is 36, meaning Sam’s index will only be worth half of SPY in 36 years.  If you are 29 years old and want to retire at 65 (in 36 years) that’s half of your retirement money!  Tell Sam to find some other sucker to win his stupid boat.

Rule of 72
Cost of 2% based on the Rule of 72

Finally you can use the rule of 72 together with inflation and expected return to plan your financial future.  If you expect a 7% (nominal) return on your retirement portfolio and 3% inflation, that’s a 4% annual return, so your money will double — in inflation-adjusted terms — in 18 years.  Now if inflation is 4% your real return is 3% and your real investment value will double in 24 years; that’s a whole 6 years longer.  Possibly 6 more years until you retire.  Add a 1% management fee and your real return drops to 2% and doubling time is now a whopping 36 years.  Yes, even a 1% fee can cost you 12 more years until you retire!

The example above shows the destructive power of inflation and why even a 1% annual inflation underestimation can be a big deal.  For tax payers that means tax brackets (based on the government’s CPI-U) gradually form an increasingly tight straight-jacket around your take-home pay.  For Social Security recipients this means cost of living adjustments that simply don’t keep up with real world expenses.

The rule of 72 is a powerful tool for financial estimation.  The rule of 72 is not perfectly accurate, but it is generally pretty close to the target.  It is, however, easy to use and can be used to explain financial concepts to people that aren’t that “mathy”.  It is a great way to start explaining finance to kids; while being a tool powerful enough that is also used by Wall Street pros.

Is Investment Real Estate Right for you? (So you want to be a landlord?)

Rental House Income
Investing in Rental Property

I have been a rental property manager (landlord) for just over two years now.   I’ve learned many things; two stand out:

  1. Residential real estate can be a great investment.  Rental real estate can provide steady cash flow, excellent asset diversification, favorable tax treatment… all with modest capital gains potential.
  2. Rental real estate can be a real pain to manage at times.  Both tenants and repairs cause headaches.

I currently own one rental property through my LLC.  Because of item #2 above, I’ve recently turned over the property management to property management company.  This choice will probably reduce net revenue about 10-12%, but will help take much of the stress out of finding and screening new tenants and dealing with repairs and tenant issues.  If things work out well, I will consider purchasing a second rental property.

In my local real-estate market it is reasonable to expect about 5-6% net income on a fully-owned rental property.  And over a 30-year period I conservatively estimate 1.5% appreciation.  Further since real-estate prices are a large competent of cost-of-living and inflation, real estate makes a good hedge against real inflation.  Finally, just as property values tend to go up, so do rental rates.  Simply put, residential real estate is the best long-term inflation hedge I’ve found.

The flip side of rental property is the eventual likelihood of landlord/tenant issues ranging from breaking the lease, to late or unpaid rent, to property damage, to eviction — just to name a few. Vacancies without rent can really take a bite out of your cash flow.  Properties can drop in value, and marketable rental rates can fall dramatically.

Somewhat of a wild card is the tax treatment of rental properties.  In the “pro” side are depreciation of the structure which can be deducted, and the fact that “passive income” like other investment income is not subject to Social Security tax.  On the “con” side is that fact that nothing can offset “passive income” except passive losses (and vise versa).  Owner’s of rental real estate (or at least their accountants) will become very familiar with IRS Schedule E of their income taxes.

Rental real estate is not for every investor.  Personally I wouldn’t recommend buying rental real estate until you have a minimum of $250,000 net worth.  Managing a rental property can be time-consuming and challenging.  Alternately, finding a good property management company is also a real challenge.  And unlike infomercials and “Rich Dad Poor Dad” author Robert Kiyosaki suggest, real estate is not a financial panacea.  However, for some higher net-worth individuals, rental residential real estate is worth considering as part of their investment portfolio.

Dumb Phone, Smart Money

My two-year contract expired, and I traded in my smart (HTC Android) phone for a “dumb” phone.  The main reason was to save money: I will save $25/month by being able to drop the data plan.  That’s a savings of about $340/year including tax.  I enjoyed my Android phone, but I also have an Android Tablet with wifi only (and a 10.1″ screen) so that satisfies my Android needs.  Of course my laptop has wifi which allows me to write this very blog in a coffee shop.   I just don’t need a smart phone, and $340/year in savings is not insignificant.

I will divulge that I have been much less vigilant with my spending habits this year.  Since my girlfriend and I have stable, high-quality jobs and our financial strategies have been reasonably successful, it has been easy to indulge a bit.  One indulgence has been adopting two wonderful rescue dogs.  We spoil them, and they eat a lot.  I figure they collectively cost $4000/year.  We enjoy their company greatly so the price, while steep, is worth it to us.

I used to be a master of savings.  Now I am merely pretty good living below my means.  I still have the extreme saver know-how, but I am no longer living the extreme-saver lifestyle.  I am living the disciplined saver lifestyle.  I say this because I am sensative to the fact that my finance blog readers are in a wide variety of financial positions.  I am a strong believer in living below your means, especially in your accumulation (savings) years.

Jobs, Jobs, Jobs: an Entrepreneur’s Perspective

It’s hard, but I believe that if you can’t find a job then make a job.  I have been working or in school (or both) since age 11 or 12.  I had a shared a paper route with another paperboy (delivering alternate weeks) for a couple years.  I worked odd jobs while in junior high and high school including painting fences, mowing lawns and babysitting.  In late high school I had summer jobs doing things like HVAC maintenance (as an assistant/gopher), a surveying assistant, and installing Ethernet cable.  I even did freelance work for a small/medium-sized publishing company, producing graphics and slides and sent in over a 2400-baud modem.

I always found a job, because a) I needed the money for college, b) I was willing to take what I could find.

Now that I am a professional I have steady work.   I’ve also continued to be an entrepreneur as I worked.  If I was laid off and couldn’t find work I’d like to believe that I would continue to pursue my entrepreneurial effort.  I’d take part-time work (like I did during my school years) to pay for the basics.

I write this after having returned from an internet entrepreneurial group meetup.  I get to meet and reacquaint with other entrepreneurs at varies levels in the entrepreneurial process, from “haven’t a clue, just getting started” to “been self-employed for 20+ years”.

If your are unemployed, I’d encourage you to consider what job you would like to create for yourself.  Sure, keep applying for “regular” jobs to, and if a good-enough one comes around, take it.  In the mean time apply yourself to developing your own small business.  I recommend something with low start-up costs, and something that you have a passion for.  You may find yourself developing new and valuable skills in the processes…  Discover talents you didn’t know you had.

You may, just may succeed in creating a wonderful business.  Even if you don’t, you will learn more about yourself, your talents and what you really like (and don’t like).  So when you do land that cushy corporate job, you will have a better idea of how to shape your career.  Even after landing that job, you might find yourself dabbling in entrepreneurial enterprises.