Invest

WalletPop:

Filed under: Borrowing, Cards, Debt

Lita Epstein is WalletPop’s resident credit score expert. Write to her in the comments box below.

Many of the questions I receive relate to credit scores and how to improve them. There are many myths out there which I debunk below, but first let’s take a look at what a credit is and who creates it. Actually there isn’t just one type of credit score. The primary driving force behind most of them though is the Fair Isaac Corporation, known by most as FICO.

Each of the three credit reporting agencies has a score developed by FICO. Equifax’s is called BEACON, TransUnion’s is called FICO Risk Score and Experian’s is called FICO II. Each one is tweaked slightly differently, so you’ll find your credit score is not exactly the same at each agency, but scores are usually within 20 points of each other. If you find a greater difference, one or more of the credit agencies probably have inaccurate information in your credit file.

In addition to these three types of scores, there are new scores from Fair Isaac called NextGen. The names given to these new scores are Pinnacle (Equifax), FICO Risk Score (Experian) and Risk Score Next Gen (TransUnion).

That’s not all. In addition to these scores there is scoring done for insurance companies and others designed for different types of businesses that set up a different set of parameters they want monitored. Insurance companies believe that people with a low credit score tend to…

WalletPop:

Filed under: Debt

Since I wrote the column on paying off credit cards using the snowball effect, I’ve received numerous questions asking whether it’s better to pay off the cards with the lowest balance first or pay off the cards with the highest interest rate first. Personally, I think it’s best to pay off the highest rate cards first, no matter what the balance is on the cards. I know others believe it’s best to pay off the cards with the lowest balances and then work up to the ones with the highest balances no matter what the interest rate, getting rid of payments to build up that snowball as quickly as possible.

Actually the best way to get started using the snowball effect is to transfer all your high interest rate credit card balances to cards with the lower interest rates, if that is an option for you. For example, suppose you have $5000 on a credit card that charges19.99% interest and you have $2,000 on a credit card that charges 9.99% interest. If you can reverse that and transfer $3,000 to the 9.99% interest card, do that before you start working on your payoff. Many cards even allow you 0% interest on the first six months after transfer, which helps even more.

But even if you can’t transfer those balances, you’re still better off paying off that higher interest credit card first. If you have $5,000 on a card charging 19.99% interest you are probably paying about $84 in interest…

WalletPop:

Filed under: Debt

This is the first of a new weekly column by WalletPop’s resident debt expert, Lita Epstein.

Two readers wrote in recently about situations where they tried to help out relatives. One was a mother who co-signed a student loan so her son could go to college. The second was a woman who took out an equity line for a relative so he could start a business.

In both cases the people who wanted the loan balked on making the payments and the women who thought they were doing a good deed are now screwed. They will have to pay off the debt if they want to keep their good credit rating and in one case, her home.

I hear this story over and over again from people thinking they are trying to help a friend or relative and instead end up with a mound of debt and often destroyed credit history. Don’t co-sign on a loan or agree to take a loan for someone else who isn’t able to qualify for that loan on their own. Often the reason is that they’ve already got a low credit score because they haven’t been paying their bills.

There is one exception to that rule. If parents want to help their child get a start in life and assist them with getting their first loan, whether it be a car loan, a student loan or a credit card, then they should do so. But if you do decide to help, be sure that your…