Tag Archives: finances

How Card Applications Affect Your Credit Score

How Card Applications Affect Your Credit Score

By Jason Steele on Jul 16, 2014 08:08 am

“Today, TPG contributor Jason Steele reviews how new credit card applications impact your FICO score, and reminds us to consider the big financial picture when playing the points and miles game.

There’s no way around the fact that credit card sign-up bonuses are among the quickest and easiest ways to earn points and miles. Even if you received your airline tickets for free, it would still take you around 100 hours in the air to earn 50,000 miles, which is what many credit cards offer after spending 60 seconds completing an application, and then using the card to make everyday purchases.

Yet I find that new points and miles enthusiasts are often reluctant to dive headlong into a card application out of concern for how it might affect their credit. So today I want to answer one of the most common questions I get from folks who are new to the game: “How do new card applications affect my credit score?”

Short answer: Not much

Opening a new line of credit has both positive and negative affects on your score. On the positive side, being extended a new line of credit reduces your debt-to-credit ratio (for a given amount of debt). Remember, your credit history and your credit score consider your “debt” to be the sum of all of your most recent statement balances, regardless of whether you avoid interest by paying them in full. Therefore, having a larger total line of credit minimizes your debt-to-credit ratio and improves your credit score.

As an example, suppose you had one card with a credit line of $5,000, and you maintained a balance of $1,000. Your debt-to-credit ratio would be 20%. If you then opened a second card also with a line of $5,000, your debt would remain the same, but your total line would be $10,000, so your debt-to-credit ratio would fall to 10%. This makes you appear less risky in the eyes of credit bureaus, and increases your score accordingly.

Opening a new card also increases your total credit history (the number of data points available for creditors to gauge your credit-worthiness). In fact, people who try to improve their credit score by avoiding credit cards, or having just one open account, often find that their scores are not nearly as high as they expected.

Image courtesy of Shutterstock.

On the downside, opening a new line of credit can reduce the average length of the accounts in your credit history. It also impacts the portion of your credit score called “new credit,” which penalizes you for opening up too many new lines of credit in a short period. FICO doesn’t do this to discourage people from earning travel rewards, it’s just that their credit scoring formula interprets such behavior as a sign of financial distress, like someone taking out several new loans to pay bills.

On the whole, the positive and negative consequences of opening a new credit account largely cancel each other out. Those who open up a single new credit card account typically find that their scores go up slightly, as the scoring formula doesn’t really penalize them for adding a single new line of credit. Those who open up multiple accounts in a short period of time typically see a modest, temporary drop in their credit scores (although most see overall improvement as time passes and the average length of credit history increases).

Image courtesy of Shutterstock.

This short-term drop is rarely significant enough to move an “excellent” credit score down to just “good,” but those who are about to apply for a new mortgage or other substantial loan would be wise to take a break from new credit applications until they complete the process. Besides, a mortgage application looks beyond your mere credit score and delves into the details of your credit report; applying for many credit cards will raise unneeded questions during that process.

Keeping perspective

I could go on all day about the nuances of debt-to-credit ratios and various theories on how to improve the average length of your credit accounts, but I don’t believe there’s much to be gained by diving too deep into that area. The exact FICO consumer credit scoring formula is a secret, but they disclose that your length of credit history only comprises 15% of your score, and the “new credit”  portion is a mere 10%.

The FICO scoring formula puts an emphasis on your payment history and amounts owed. Other factors are minor by comparison.

In contrast, your payment history makes up a whopping 35% of your credit score, and your amounts owed is another 30%, each of which is greater than the cumulative weight of your length of credit history and your “new credit.” The moral of the story, then, is to always pay your bills on-time and carry very little debt. If you do those two things, your credit score will likely be excellent (unless you go out of your way to avoid having any credit history at all).

The pitfalls of credit card use

There’s one crucial way that credit cards can upset your finances in general: interest. About two-thirds of American credit card users regularly carry a balance on at least one of their accounts, leading to costly interest charges. Many of these credit card users view opening a new line of credit as an invitation to spend more money and incur more debt.

Those who carry a balance that accrues interest on their credit cards should forget about earning travel rewards and instead focus on paying that debt off as soon as possible. Reward credit cards invariably have higher interest rates than non-reward cards, and offer less attractive promotional financing. Earning $25/month in airline miles won’t do you any good if you’re losing $25/month (or more) to interest by carrying a balance.

Furthermore, those who would be tempted to use a new line of credit to make unnecessary purchases, or who have trouble controlling spending, should question their use of credit cards altogether.

If credit cards just enable you to make unnecessary purchases, reconsider whether new applications are a smart move financially. (Image courtesy of Shutterstock)

Bottom line

Credit scores and credit cards are tools, and like many tools, you should learn to wield them correctly or someone will poke an eye out. Credit card applications won’t hurt your credit score in the long run, but make sure your applications and expenditures are sensible in the scope of your own personal finances. Spend responsibly, and pay your balances in full and on time, and both your credit score and your points and miles accounts will prosper.

For more information about credit card applications and FICO scores, check out these posts:

What Is the Best Credit Card for a First Time Applicant?

How to Get a Free FICO Credit Score from Certain Credit Cards

How Can I Save My Credit Score After a Late Payment?

Top 7 Ways for College Students to Build Credit and Rack Up Points and Miles

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Financial lessons from the playground: The importance of modeling good money habits for your children

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May 28, 2014 · 7:35 pm

Millennials Aren’t Millionaires, But We’re Great Philanthropists

millennials, arent, millionaires,, but, were, great, philanthropists,

 

“With no shortage of generation-bashing these days, twentysomethings might be feeling a bit jaded by articles and pundits framing them as “narcissistic,” “materialistic,” and “cheap.” The media and other generations seem to have a lot to say about how millennials spend their time and money, and the intentions behind those actions and purchases.

But the reality is that this generation is redefining the way we think about business. Conscious consumerism is now its own form of philanthropy, and this generation is leading the charge in supporting for-profit models with a moral compass, and looking for more meaningful opportunities to have impact. This carries particular implications for the nonprofit sector as millennials lead the way in increasing the do-gooder appetite and reinventing how we spend our time and money. 

If you have purchased a pair of TOMS shoes or Warby Parker sunglasses, donated to your friends’Kickstarter campaigns, or even went to a concert that benefited charity, then I believe that you are a philanthropist. Etymologically, “philanthropy” means “love for humanity,” and for many that translates into anyone who gives time, money, skills, networking, or even passion toward a cause. This is something the millennial generation inherently weaves into life through our everyday choices. In effect, we are mainstreaming sustainability and purpose into everything from our concert venues to our dining out for a cause. 

For the third year in a row, the Case Foundation partnered with Achieve, a creative fundraising firm and thought leader on nonprofit millennial engagement, to produce the Millennial Impact Report, which surveyed more than 2,500 millennials ages 20 to 35.

We found that 83 percent of respondents gave a financial gift to a cause in 2012. And one of the most interesting findings from the 2013 report is that millennials are cause-driven, preferring to give toward a specific cause that resonates with their interests over writing a check to a specific organization as a whole. Seventy-three percent volunteered for a cause that they were passionate about or felt created impact, and 70 percent of millennials are hitting the (physical and virtual) “pavement,” raising money for their causes both online and offline. Achieve highlights this “supportive activism” as its own heralding cry against the threatening “slacktivist” legacy that many other generations believe millennials are leaving behind.

The report revealed that 80 percent of millennials read nonprofits’ e-mail newsletters, but we like to do it through our smartphones. We will also only read up to five organizations’ newsletters at a given time. This is tough news for nonprofits that need to adjust to the rising demand for quality and ease of information sharing, both through new technology and effective messaging.

Young donors also expressed dislike for being asked for money upfront via social media, newsletters, or through an organization’s website, feeling as though they can offer more to an organization than just money. And as much as millennials want to give, they also need to receive — always searching for professional development opportunities, networking, and skills that can help propel their own successful battle through a tough job market.

Our generation has lived through 9/11, Hurricane Sandy, and the Arab Spring (to name only a few major historical events). The rise of mobile technologies, increased communication, and lighting speed-tweeting prowess has transformed us from standby witnesses to active participants in the world’s current challenges. As a result, we are a socially minded group, tuned in to the issues of our day and primed to give back.

This week, the Millennial Impact Conference will explore these very topics, including the challenges and opportunities nonprofits face to engage and utilize these new “cause evangelists.” Livestreamed for free, the conference will showcase entrepreneurs, philanthropists, corporate leaders, and social activists like Sophia Bush and Jose Antonio Vargas who will weigh in on how and why to connect with the millennial generation. We hope you’ll join us to learn moreon July 18.  

Picture Credit: CNN

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July 23, 2013 · 9:38 pm

How to Worry Less About Money | Brain Pickings

http://www.brainpickings.org/index.php/2013/05/13/how-to-worry-less-about-money/

by 

“What Goethe can teach us about cultivating a healthy relationship with our finances.

The question of how people spend and earn money has been a cultural obsession since the dawn of economic history, but the psychology behind it is sometimes surprising and often riddled with various anxieties. In How to Worry Less about Money (public library) — another great installment in The School of Life’s heartening series reclaiming the traditional self-help genre as intelligent, non-self-helpy, yet immensely helpful guides to modern living, which previously gave us Philippa Perry’s How to Stay Sane, Alain de Botton’s How to Think More About Sex, and Roman Krznaric’s How to Find Fulfilling Work — Melbourne Business School philosopher-in-residenceJohn Armstrong guides us to arriving at our own “big views about money and its role in life,” transcending the narrow and often oppressive conceptions of our monoculture.

He begins with a crucial distinction, the heart of which echoes James Gordon Gilkey’s 1934 advice on how not to worry. Armstrong writes:

This book is about worries. It’s not about money troubles. There’s a crucial difference.

Troubles are urgent. They ask for direct action. … By contrast, worries often say more about the worrier than about the world.

[…]

So, addressing money worries should be quite different from dealing with money troubles. To address our worries we have to give attention to the pattern of thinking (ideology) and to the scheme of values (culture) as these are played out in our won individual, private existences.

While modern money-advice tends to fall into two main categories — how to get more money and how to get by on less — Armstrong points out that this bespeaks our culture’s fixation on troubles rather than worries. He writes:

This is a problem because the theme of money is so deep and pervasive in our lives. One’s relationship with money is lifelong, it colors one’s sense of identity, it shapes one’s attitude to other people, it connects and splits generations; money is the arena in which greed and generosity are played out, in which wisdom is exercised and folly committed. Freedom, desire, power, status, work, possession: these huge ideas that rule life are enacted, almost always, in and around money.

He draws an analogy from the philosophy of teaching, which distinguishes between training and education:

Training teaches how to carry out a specific task more efficiently and reliably. Education, on the other hand, opens and enriches a person’s mind. To train a person, you need know nothing about who they really are, or what they love, or why. Education reaches out to embrace the whole person. Historically, we have treated money as a matter of training, rather than education in its wider and more dignified sense.

Indianapolis Newsboys buying brass checks in a newspaper office, 1908

The U.S. National Archives, public domain

 

Underpinning our money worries, Armstrong argues, are four main questions that have far less to do with our financial standing than with psychoemotional and social factors — questions about why money is important to us, how much money we need to achieve what’s important to us, what the best way to acquire that money is, and what our economic responsibilities to others are in the course of acquiring and using that money. We’ll never overcome our money worries, he argues, unless we first recognize those underlying questions:

Our worries — when it comes to money — are about psychology as much as economics, the soul as much as the bank balance.

Key among Armstrong’s strategies for alleviating such worries is developing a good relationship with money, which parallels human-to-human dynamics:

One thing that’s characteristic of a good relationship is this: you get more accurate at assigning responsibility. When things go wrong you can see how much is your fault and how much is the fault of the other person. And the same holds when things go well. You know that part of it is your doing and part depends on the contribution of your partner.

This model applies to money. When things go well or badly, it’s partly about what you bring to the situation and partly about what money brings. What money brings is a certain level of spending power.

What you bring to this relationship includes imagination, values, emotions, attitudes, ambitious, fears, and memories. So the relationship is absolutely not just a matter of pure economic facts of how much you get and how much you spend.

In discussing research indicating that more money, after a certain threshold, doesn’t mean more happiness, Armstrong offers a necessary definition of happiness:

When we talk about happiness, what do we have in mind? Probably a mixture of buoyancy and serenity; you feel elated but safe.

The relationship money has to these attributes, he argues, is “real but diminishing.” While money can buy the accoutrements of buoyancy — chocolate, weekend getaways, expensive shoes — many people feel unhappy despite having these. His explanation, echoing the philosophy of Alan Watts, leads to the obvious conclusion:

Money can purchase the symbols but not the causes of serenity and buoyancy. In a straightforward way we must agree that money cannot buy happiness.

Market scene, 1922

The Field Museum Library, public domain

 

Since Armstrong’s main argument is premised on the idea that our culture is geared toward addressing troubles rather than amplifying well-being, which parallels the disconnect that Martin Seligman observed in the field of psychology when he founded the positive psychology movement, it comes as no surprise that Armstrong’s key construct in solving the conundrum mirrors Seligman’s philosophy of flourishing over “happiness.” Indeed, Armstrong argues that while serenity and buoyancy are appealing, they fall short of reflecting what people really want out of life:

Most people realize that they really need to do things for other people. There is a deep fear that one’s life will be lived in vain — without making a contribution, or a benign difference, to the lives of others.

[…]

Flourishing means getting on with the things that are important for you to do, exercising your capacities, actively trying to “realize” what you care about and bring it into life. But these activities involve anxiety, fear of failure and setbacks, as well as a sense of satisfaction, occasional triumphs and moments of excitement.

And yet this is in no way a motion to flatten the full dimensionality of the human experience:

A good life is still a life. It must involve a full share of suffering, loneliness, disappointment and coming to terms with one’s own mortality and the deaths of those one loves. To live a life that is good as a life involves all this.

While the things money can secure — like power, influence, and access to resources — may not be shortcuts to serenity and buoyancy, Armstrong argues, they are inextricably linked to flourishing by enabling you to pursue the things that are important to you and, in the process, to contribute to the lives of others. Here, the relationship between amount of money and potential for flourishing doesn’t flatline the way it does in a more narrow conception of happiness:

Armstrong’s key point, however, is that while this correlation of growth might be directly proportional, money isn’t a cause of flourishing but an ingredient in it, a mere resource with which to build the life we want, catalyzed by virtue:

Money brings about good consequences — helps us live valuable lives — only when joined with “virtues.” Virtues are good abilities of mind and character.

Reminiscent of Ben-Franklian virtues like temperance, frugality, and moderation is another essential skill in alleviating our money worries — the ability to distinguish between wants and needs. The need-desire distinction, Armstrong suggests, is useful in warding off mere desires, like the longing for the latest shiny gadget, even if it’s of little utilitarian value, or that sleek new bike, even if the old one works perfectly fine.

If we want to be wise about money we should resist the impulse to follow our desires and concentrate instead on getting what we need.

Need is deeper — bound up with the serious narrative of one’s life. “Do I need this”? is a way of asking: how important is this thing, how central is it to my becoming a good version of myself; what is it actually for in my life? This interrogation is designed to distinguish needs from mere wants. And that’s a good distinction to make.

But it is important to see that this is not the same as the “modest versus grand” distinction. Our needs are not always for the smaller, lesser, cheaper thing.

The ultimate purpose of purchases, he argues, is to help us flourish. His strategy for mastering the needs/wants balance thus rests on not conflating this dichotomy with familiar ones like basic/refined (“a distinction about the level of complexity of an object”) or cheap/luxurious (“a distinction to do with price and demand”). Instead, he recommends a seemingly counter-intuitive approach — to consider our needs first, without taking price into account.

But, ultimately, Armstrong points out that the things most essential to our flourishing — despite what our monoculture might dictate — are often unrelated to material goods:

The crucial developmental step in the economic lives of individuals and societies is their ability to cross from the pursuit of middle-order goods to higher-order goods. Sometimes we need to lessen our attachment to the middle needs like status and glamor in order to concentrate on higher things. This doesn’t take more money; it takes more independence of mind.

Still, the material and the spiritual are inextricably linked:

There are quite profound reasons why we should care simultaneously about having and doing. Both are connected to flourishing.

What we do with our lives is obviously central to who we are. What we expend our mental energy on, what we put our emotional resources into, where we deploy courage or daring or prudence or commitment: these are major parts of existence and are inevitably much connected with work and earning money. And we need these parts of existence in order to find proper application in activities that deserve our best efforts. We don’t’ want to reserve our central capacities for the margins and weekends of life.

Despite certain cultural stereotypes, Armstrong points out that, precisely because of these parallel forces, doing well and doing good don’t have to be mutually exclusive, and there could in fact exist a straight positive correlation between intrinsic worth and extrinsic, material reward:

At an individual level, one is trying to find a way of making this happen in one’s own life. But because intrinsic worth isn not just what is good for me, but what is actually good, this is a public service as well. It’s not greedy to want to make quite a lot of money — if you want to make it as a reward for doing things that are genuinely good for other people.

In considering yet another essential difference — that between price and value — Armstrong makes a key distinction, which most of us intuit but can rarely articulate with such eloquence:

Price is a public matter — a negotiation between supply and demand. A thing’s price is set in competition. So the price of a car is determined by how much some people want it, how much they are willing to pay, and how ready the manufacturer is to sell. It’s a public activity: lots of people are involved in the process, but your voice is almost never important in setting the price.

Value, on the other hand, is a personal, ethical and aesthetic judgment — assigned finally by individuals, and founded on their perceptiveness, wisdom and character.

Armstrong finds a certain artfulness to the issue of managing our money-worries:

Ultimately, one is cultivating an art — one of the minor political arts, the art of domestic finance. By saying that it is an art, one is getting at the idea that there are multiple motives and rewards, which are integrated. There is anaesthetic or order — a physical beauty that is connected to neatness and clarity — like the beauty of the periodic table, or the elegance of a mathematical equation, or the rightness of a note in a sonata. It is a classical beauty.

In a chapter considering the problems of the rich, who are able to use money to fulfill their desires, Armstrong writes, with a wince and a wink at the “hedonic treadmill”:

Money does not liberate people in the way that we assume it must.

[…]

There is a very imperfect relationship between desire and flourishing. Desire aims at pleasure. Whereas the achievement of a good life depends upon the good we create. And the opportunity to follow whatever desire one might happen to have is the enemy of the effort, concentration, devotion, patience and self-sacrifice that are necessary if we are to achieve worthwhile ends.

Armstrong goes on to outline a number of practical strategies for improving our relationship with money and thus mastering our worries, concluding with a wonderful anecdote of a man who epitomized that relationship at its healthiest:Goethe.

‘The civilized ideal: elegance and devotion to work.’

Jonathan Joseph Schmeller, Goethe in His Study Dictating to His Secretary John, 1831

 

From his many writings about his own experiences, we know that he was determined to get well paid for his work. He came from a well-off background but sought independence. He switched careers, from law to government adviser so as to be able to earn more (which made sense then; today the trajectory might be in the opposite direction. He coped with serious setbacks. His first novel was extremely popular but he made no money from it because of inadequate copyright laws. Later, he negotiated better contracts. He was very competent in financial matters and kept meticulous records of his income and expenditure. He liked what money could buy — including … a stylish house-coat (his study has no heating). But for all this, money and money worries did not dominate his inner life. He wrote with astonishing sensitivity about love and beauty. He was completely realistic and pragmatic when it came to money but this did not lead him to neglect the worth of exploring bigger, more important concepts in life.

Complement How to Worry Less about Money with The School of Life’s How to Find Fulfilling Work and How to Stay Sane.

Quoted text excerpted from How to Worry Less about Money by John Armstrong. Copyright © 2012 by The School of Life.”

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