Managing your credit cards, scores and reports The do s and don ts

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2 Credit cards the do s and don t Introduction I am not a financial advisor and nothing written in this mini-ebook is to be used as financial advice. This is my understanding of credit cards from playing the game since I have made changes, made mistakes, learned from mistakes (mine and other people s) and spoken to the credit agencies to manage my score more effectively. Some of what is written is just simple common sense, but some of the most simple of ideas are generally overlooked and could save you money, improve your score and give you access to a whole new source of Other People s Money. Playing the lenders at their own game There is a lot of misinformation out there about credit cards and like the discussions about Google and SEO (Search Engine Optimisation) I do believe that the credit card companies like a certain air of mystery, even privacy, about what they do and what they think. There have been dramatic changes in legislation in the later part of 2011 and early 2012 to start getting lenders to be more clear and transparent. Please remember that anything I write is based on my own experience and conversations with other people. This is a volatile time in the market and I believe it will be for many years to come understanding the money markets is again a bit like trying to beat Google at its own SEO game - as soon as you find out the rules they will change them. But that s okay - we need things to change and move, so we just need to listen, read and talk to the right people to keep up. Most people now have credit cards and use them regularly although I still meet a surprising number of people that still hold the old view that credit cards are bad. In this Ebook my aim is to explain how you can use credit cards to your advantage, avoid high interest charges, increase your investment capital and what pitfalls to avoid. Like all lending or rather borrowing, the most important thing before you start is to understand how much it is going to cost you and when you are going to pay it back. Once you know that then a credit card is a flexible and potentially cheap source of money that can be invested for a return and a profit. Credit cards are just a tool it s how you use them I have said this before and will have to keep saying it... let s dispel the myth that credit cards are bad news. What makes them good or bad is how you use them. For example, going on a shopping spree whether it s clothes, electronics or holidays, and not clearing the outstanding balance on your statement in full is not only bad, it is mad. This is because the outstanding balance will accrue interest charges at the high rate that your card company charges, often in excess of 29%. I started by saying that if you were going to borrow money from any lender then you need to know when you are going to pay it back and who is paying the interest in the meantime. If that person is you then any savings made at the point of purchase is not only wiped out, but actually exceeded by the on-going monthly costs charged by the company. However, in its simplest form, a credit card if used properly can give you up to 45 days extra money interest-free. In its most strategic form it can lend you most of the deposit or costs for an investment project at 0% interest for between 9 months and 15 months! Your challenge, as with everything associated with borrowing money, is to understand the money flow of your deal. When you will pay it back, where that money will come from, and who is going to pay the interest on the money while the project is being worked. Start by checking Let s start with the situation that you already have credit cards. At this point, I would suggest that you review all your cards, how you use them, how you clear the balances, and of course, check your credit rating. If you have a good score, and we will discuss this in more detail later, then leave things alone.

3 Alternatively if you have a lot of cards, and a poor score, it could imply that you are not managing your cards well. Your first job is to develop some good habits and systems for managing your cards. I have a simple credit card spread sheet that you can download to record your cards. I will talk more about card management later. Of course, you may be one of a surprisingly large number of people that either do not have a credit card or have only 1 or 2 in their name. This is perfectly fine and please do not rush out and apply for another 6 cards! The same principles apply to you as everyone else. Think about how you currently use your cards (if you have one) and how you clear them. Check your credit rating. I will explain more about how to get started. Getting started with credit cards Again this is not financial advice it is mostly common sense. Why have a credit card? A credit card, when used correctly, can be a source of flexible easy access money that you can invest in a property investment project and then repay once the deal finalises. Again, knowing your deal and where the capital growth will be released is essential if you are to avoid being left with a credit card debt and interest to pay. Let s start with a normal credit card application. Before you start you should check your credit score. Links to the agencies are below. There are two main credit agencies Experien and Equifax, which lenders (banks and credit card companies) refer to to check your credit worthiness. In a sense to check whether based on past experience if these companies think that you are likely to be able to repay a debt if they lend you money. If you have a good score and the credit agencies will tell you, then (providing you are not planning to apply for a mortgage in the next 6 months) you could choose to apply for a credit card. You can search credit card companies online and find out good deals, I always like the MoneySavingExpert site again see links below. The next question to ask yourself is what are you going to do with the card? In fact what should you be doing with any of your credit cards? How to use a credit card effectively In my opinion there are two uses for a credit card; first to build your credit score and prove you can handle money see card management later and second to access cheap flexible cash to invest in cash generating property deals. In order to achieve the second goal you need to master the first, as lenders will not lend to you, or lend you money in sufficient quantity to benefit from the flexible resource that a credit card can provide. To demonstrate that you can handle money, credit and credit cards you need to be systemised. 1. Don t apply for too many too often 2. Use 1-3 cards a month to pay for food, petrol and business expenses and then clear each card in full. You are in effect giving yourself up to 45 days+ of free money by buying on the card and then paying by the statement date. 3. Keep records, if you have more than 3 cards rotate the cards so they are all used and cleared regularly. By using and clearing your credits regularly you are demonstrating to a credit card company that you understand about money and know how to manage it. One thing is to always set up a direct debit either for the full amount or my preferred choice is for the minimum amount allowing me to decide who, when and how the balance is paid.

4 A direct debit means that no mistake can be made, a minimum payment will always be paid on your account and even if the full balance is not paid by mistake there is no consequence to your credit report and score. Again why go to all this hard work? Because the credit companies (credit cards, loans and banks) all record your performance on the credit reports held by the different agencies. They track your credit limit, outstanding balance, payments made, missed payments (the worst thing you can ever do!) and then other details like personal contact information and any searches recorded on your account. If you have a credit record that shows you have a credit limit but only use up to 75% of the possible limit (occasionally going up to %) and the balance is cleared regularly with no payments missed the credit agencies would give you a high score. Why? Because you demonstrated that you could manage your money. When you ask for another loan, a lender would refer to your credit score, derived from your credit and think that you are someone they would want to lend to. Don t apply for too many I just mentioned applying for a new card and now I am saying don t apply for too many. Of course, you can apply for a new credit card but I would suggest that you should have a specific reason or use for applying for it. Only apply for a credit card if you have checked that your credit report and credit score are in good order. And definitely, in my opinion, do not apply for a credit card just before you want to apply for a mortgage as the credit card company will conduct a credit search on you and this will be recorded on your credit report. It may not count against you, but do you want to take the risk? So many of the lenders are linked to one another they can find out so much information! Think about your actions and plan carefully. Some mortgage lenders are even re-conducting credit searches in the period just before exchange or before completion - any change on your credit report will be noted and might mean that they withdraw the offer! Imagine looking at your credit report through the eyes of an underwriter who is considering lending you a lot of money on a mortgage, then make the judgment: is this the sort of behaviour that someone who knows how to manage their finances might carry out? Alternatively if, as an underwriter, you saw a credit report that had a number of applications for credit cards one month and then more the next month, they might consider that this person was desperate to get hold of credit and that maybe they were out of control or a high risk. Don t max out your credit limit This is very similar, in principle, to the point about the number of cards you have. Credit reports record the activity on your credit card, some credit reports more than others. As an underwriter, considering whether to approve a loan, which person would you think was a better risk; the person that had a number of cards all with maximum borrowing that were not cleared monthly or a person that had a number of cards, some cleared in full and others with a modest outstanding balance? All these factors affect your credit score, which in times like these when money flow is tight and lenders can afford to be choosey about their clients, it is vital that you have a good score and it is well managed. Pay back regularly and even over pay It is absolutely vital that you set up a direct debit on all cards, and in fact, all loans that you take out. Make sure that you know exactly how much available cash you need in your bank account to pay the minimum payments. By using direct debits you avoid the fatal error of missing a payment. Missed payments are, in the eyes of underwriters, the sign of a careless borrower or someone whose borrowing is out of control. Your credit score will be affected and now most mortgage lenders will refuse to lend to you once you have demonstrated this behaviour.

5 It can be good practice to occasionally overpay on your cards. If you have a 0% card offer then set up a direct debit and each month make an extra payment to show that you can afford to clear the debt easily if you wanted to. When to apply for a 0% card In my opinion there are two reasons: first because you have an outstanding debt or loan that is accruing a high rate of interest and second (more preferable) because you have a potential deal that you could fund and make enough money to clear the balance leaving either a profit or a regular cashflow from a buy to let property. There is one more advanced reason, if you have a one mortgage account, like Virgin, Halifax or the Woolwich (among others) you could release money off a 0% credit card and offset it against your residential mortgage if you don t understand please drop us an . Clearing an outstanding debt using a 0% card If you are going to do this then you need to know that you can clear the debt or make enough payments over the period to clear the balance, otherwise you may end up paying 25%+ which is probably higher than the original loan. Either calculate the payments you need to clear the debt, by dividing number of months of 0% offer by outstanding balance and make that your monthly payment. Or if that is too high, pay as much as possible and then before your 0% period is over reapply for another 0% offer with another company. This is called tarting or would make you a credit card tart. Credit card tarting This requires a high level of credit card management to actually benefit from the system. I love playing this game, however, if you get your dates wrong or do not apply for another 0% card in time the penalties can be very high as a balance of 10,000 at 29% means a monthly payment of over 240!! On-going until the debt is cleared or the balance is re-transferred beware. The do s and don ts of card credit cards and your credit score Your credit score needs to be managed and monitored carefully. Contact the credit reference agencies like Equifax and Experian and look at your credit score. You should be aiming for an Experian credit score of 999. Make sure that all the information they hold about you is correct and rectify any information that is incorrect or missing so that your credit record is accurate. You need to contact both agencies, because different lenders use different companies and the companies themselves hold slightly different information on you. Experian and Equifax get this information in two ways one from the number of searches on your record and two from the number of applications that actually hit your record. Every time you apply for a credit card there will be a search. Searches can take between 1 and 3 months to show on your credit file depending on how quickly the company you applied to acts. Too many searches will reduce your credit score. Future lenders will be able to see these searches and lenders do not like to see too many as this may make you look as though you are desperate for money. This will make them cautious about lending. This time delay between applications and the information hitting your credit file often catches people out, especially when applying for mortgages, as mortgage lenders like to see a high credit rating and low searches listing. Remember that time delays do not apply to lenders sharing information internally. So an application to Birmingham Midshires for a mortgage and the Halifax for a credit card is effectively the same lender. Time lags, which delay the information appearing on your credit report will not apply to information shared within the HBOS group!

6 Why do credit scores matter? Why is it so important to understand about credit reports and how the companies work? Lenders have to lend a certain amount of money each month (they have budget or target figures). Once they reach this target (or get close to it) they will start to get choosier about who they lend money to and will raise the minimum credit score limit. So in the first few weeks of a month (and again on a quarterly basis) lenders may offer mortgages to people with scores as low as 800 (a good rating normally) but then suddenly anything less that 995 (which is excellent and only 4 points of perfect) would be rejected as not good enough. Also, you may be getting loans with Birmingham Midshires (BMS) no problem and then suddenly be refused by The Mortgage Works (TMW) because they use Equifax. As more mortgage products start to come to the market, it is highly likely that they will only offer the more advantageous products to the better clients with the best credit reports and scores and you want that to be you. What if I have a bad score? Then you need to work at repairing your score and your credit report. First get copies of all your reports and read through to identify the problem. The most common threats to your score is first missing a payment and second over applying for loans. If either of these happen then time is the healer. In about 6 months if you do not apply for any more loans, mobile phones, mortgages, store cards etc. then your score will improve. If you have missed a payment it may take a year unless you can explain why the incident occurred of course set up direct debits immediately. Other reasons can be more complicated to spot us if you need help. Check that your address and name are correct. Check that you appear on the voters register and then just send a query to the credit agency. What is gearing? Gearing is when a lender looks at how much you have actually borrowed, particularly on unsecured lending like credit cards, against how much available credit you have. In my experience you need to get to a position where you are borrowing under 50% of your potential borrowing i.e. have a gearing ratio of less than 50%. How do you work this out? Add up the total debt on all your credit cards and divide it by the total of all your credit limits. I have guessed the figure of 50%. When I first increased my credit cards to cover my training costs my credit rating dropped through the floor. I called the credit agencies and spoke with them they can be very helpful. They explained about gearing and I started to experiment by paying off my 0% credit cards bit by bit as they came to the end of the life of the offers. I noticed my credit rating start to improve as my gearing ratio moved towards 60%. Of course other factors will have been at play like number of searches but I do believe gearing is now a significant decision making factor. Summary Good habits for managing your credit cards effectively a. Get your credit reports and credit scores regularly at least every other month and check your information b. Minimise the number of applications you make to a maximum of 1 every other month and less than 3 in 6 months. c. Don t reapply if you have just got turned down wait until you get your credit reports, repair the problem and then wait again before continuing. d. ALWAYS set up a direct debit payment and then over pay each month as you see fit. e. Keep a spread sheet and track each card, know your credit limit, know when you last asked for an increase, know when your 0% deal runs out and clear that card first f. Aim to bring your gearing ratio down by making focused payments g. Clear any cards that are accruing interest charges as a priority

7 h. Use your cards regularly rotate them i. Have a reason for borrowing the money make the money work for you j. Remember good debt is for purchases that earn you money, for example a property purchase or refurbishment and bad debt is the purchase of goods or services that reduce in value and cost you money. k. And lastly, whatever you are going to invest in when using your credit card, you must know how you will get the money back to repay your cards, and if appropriate who is paying the interest. The Pitfalls Using credit cards is potentially a risky strategy, if you do not know how to use them properly. However, throughout this Ebook I have explained and shown examples of how you can monitor and improve your credit rating, borrow money from credit cards often at 0%, and extend the use of your own personal cash reserves, plus a whole range of techniques to protect you and your credit rating. Now before you actually start using credit cards to invest in property you need to clearly understand your actual investment strategy and how you are going to pay back this loan. The money borrowed from a credit card, if done well, is a loan at 0% for a limited period of time. You must have in place one, if not two, strategies to clear that debt in full before the end of the term otherwise you will be paying close to 29% in interest. This strategy can be used where you know that you can re-mortgage a renovated property or that you can sell or re-mortgage a buy to let property and release funds to clear the debt. Beware, of course, of the six month rule and early redemption penalties. Credit cards are a brilliant way to extend money and if they are used correctly, they can increase your credit profile, which enables more lending. If used properly they are a superb resource of quick and often very cheap funds that can enhance your personal cashflow, making deals more manageable and ultimately more profitable. Remember, always plan what you intend to spend the money on, know how you are going to release the funds back out to repay the borrowing. Wishing you financial freedom What you do today will change what you can do tomorrow forever Vicki Vicki Wusche Vicki@Wusche-Associates.co.uk Enquiries to Hannah@Wusche-Associates.co.uk Resources Experien - Credit card listings - My Call Credit - Equifax -