My credit score: A love/hate relationship

Screen shot 2009-12-09 at Dec 9, 2009, 10.37.26 PMWhat’s that saying? Oh that’s right, “Damned if you do and damned if you don’t.” I’ve never really had a reason to use this phrase before, but when it comes to my FICO score, it is the first thing that comes to mind. The only way to have a high FICO score is to continually be borrowing money. This causes a problem when your blogs name is Punch Debt In The Face. How can I possibly strive to have a high FICO score, but swear off virtually all debt? Unfortunately, I’m not sure I can answer that question, but I’m gonna give it my best shot.

For those that don’t know, your FICO score is basically a measure of how likely you are to repay your debts. A high FICO score, means you will probably make most payments on time, with few (if any) hiccups. A low FICO score, indicates a high probability you will make late or no payments rather frequently.

There are five main categories that make up each individuals FICO score…

* Payment History (timliness of repayment)
* Amounts Owed (available credit compared to credit used)
* Length of Credit (length of time you’ve had the account)
* New Credit (how frequently are you opening new accounts)
* Type of Credit (student loans, car loans, credit cards, etc)

Now that you know the components of your FICO score, lets talk about why it’s important. I assume most of my 20 something readers are like myself and  hope to one day purchase a home. I would also assume most of us plan to take out a loan to purchase said home (if you are planning on paying 100% cash, you need not continue reading).

Did you know your FICO score plays a huge factor in your ability to purchase the home of your dreams. Let’s run through a little hypothetical situation…

Johnny has a terrible credit score and walks in to his local bank to apply for a $200,000 mortgage on his dream home. Ninja also walks in to the same bank to apply for a $200,000 mortgage, but Ninja has a very high credit score. There is a good chance the bank is going to reject Johnny’s application, therefore crushing his dreams of being a homeowner. But let’s say they don’t. Let’s pretend they decide to qualify Johnny for that loan. The bank gives Ninja a low interest rate of 4.75% because he is not a risky person to loan money to. With Johnny however, the bank has taken on some risk by giving him a loan, so they decide to charge him an interest rate of 6%. Ninja’s total interest paid over 30 years is going to be $175K, meanwhile Johnny’s going to have paid over $230K in interest. That’s a $55K difference for taking out the same loan from the same bank. High credit scores generally result in better financing options.

Here’s the problem. The only way to have a high credit score is to be continually borrow money. You’ll notice all five components of the credit score require you to have credit available to you (aka you have to be in debt). What if you are like me and have sworn off incurring future debt, except for a mortgage, and are aggressively working to get rid of all current debt? Fortunately there is at least one way to continually be “borrowing” money, without actually being in debt.

I use my credit card for every purchase I make. By the end of each month, my balance is usually around $1,500. I then pay off this balance in full, so I incur no interest charges. My CC company will then report this information to the credit agencies. Since I made my payment on time, my credit score is going to continue to increase. It’s a simple, yet effective way, to raise your credit score, without having to pay for it.

This is the only free way to raise your credit score I know of. Does anyone else know of other ways to raise your credit score without going in to debt? Let me know ’cause I’d be very curious to hear them! At the end of the day I really wish credit scores didn’t exist, but the reality is they do, and they are frustratingly important.

Don’t call your girlfriend a muffin top…

Screen shot 2009-12-09 at Dec 9, 2009, 7.47.12 AMIf you follow me on twitter you know exactly what I’m talking about. If you don’t follow me on twitter then you’re dumb let me fill you in. Last night I was kickin’ it with the cutest girl I know, Girl Ninja. She was looking mighty fine so I thought I needed to pay her a little compliment. I put out my arms (hoping for a hug) and said “Come here, you cute little muffin top.” Whoa, hold the phone. What just came out of my mouth? Did I really just call my girlfriend a muffin top? I’m sure it is no surprise she was less than excited to hug me.*For those that don’t know, muffin top is often used as a way to describe a females love handles*

Looking back I have concluded there are two reasons I called her ‘muffin top’.

1) We went to Costco together on Sunday and I bought a dozen blueberry muffins (costco muffins are the bomb dot com!). I figure my brain had subconsciously formed a symbiotic relationship between my girlfriend and muffins.

2) The top of the muffin is the best part. Seriously, who doesn’t love a muffin’s top? What I must have meant is Girl Ninja is my favorite person in the world, much like the top of a muffin is the best food in the world.

One thing is darn sure. I was in no way implying Girl Ninja has a muffin top. She is in great shape and is seriously disciplined when it comes to eating healthy and exercising. Okay, now that I’ve clarified my stupidity, let’s move on to the purpose of today’s post…

Miscommunication can be deadly and a lack of communication can be even worse.

Wanna know just a few ways banks make the ridiculous profits they do? They intentionally miscommunicate things to you, the borrower. Here are two examples…

1) Bank XYZ offers you a 0% credit card offer. Sweet, can’t beat 0% right? Wrong, you better make sure you read all the fine print. Did you know your 0% offer is only good for a defined length of time, usually 3, 6, or 12 months? Did you know if you are late just one day on a payment, your account will be considered ‘in default’ and your 0% APR will now be 30%? Did you know some banks only offer you 0% interest on a predetermined amount of money, like the first $1,000 charged. Banks hope you will be enticed by the big number zero and they pray you don’t take the time to read the credit card contract to see what you are actually signing up for.

2) Bank of America and I had a huge miscommunication  a few weeks ago. I use to have my online savings account with Countrywide. I could deposit and withdraw money from the account at no cost to me. Earlier in the year, BoA acquired Countrywide and I became BoA’s newest customer. I had no issues with them until I went to make my first withdrawal from my savings. BoA was going to charge me $3 each time I withdrew money from my savings account. WTF? You are gonna charge me to access my own money? Apparently BoA had switched the countrywide policy and was including a $3 fee on all withdrawals. I definitely don’t remember that being communicated to me. I went down to the local BoA branch, took all my money out, and am now a proud customer of ING. I hate you Bank of America.

Here are a couple pictures in which harmless messages became rather hilarious, due to a little miscommunication…



See what a lack of communication can do? I don’t really think the first banner intended to say “Up yours” to the entire community and I definitely don’t think the kids club in the second picture was trying to educate little ninjas on the G-spot (whatever that is ;)). It’s imperative that you make sure you understand the coverage that comes with your renters/homeowners insurance, that you understand the terms and fees associated with your credit card, that you know the history behind the guy that manages your mutual fund.

I was a total unintentional douche to Girl Ninja last night. Has anyone else ever been a victim of miscommunication? Any bank ever tried to screw you? Ever signed up for something and were promised one thing, but ended up getting something completely different? Ever insulted someone, when you meant to give them a compliment? I learned a valuable lesson last night, hopefully my male readers wont make the same mistake I did with their significant others 🙂

Punch Debbie In the Face

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Now I’m not one to support physical violence towards women, but I’ll tell you right now if Debbie Downer ever finds her way around my neck of the woods, I’m gonna knock her out. For those of you that don’t know Debbie, let me introduce you to her. She is the person that points out the one stain on your carpet after you just cleaned your whole house. She’s the girl that that  reminds you of your love handles after you just got back from a run. Debbie is a professional mood killer. Debbie is a downer.

I’m a huge believer in the power of positive psychology. Penn State defines positive psychology as the scientific study of the strengths and virtues that enable individuals and communities to thrive. I define positive psychology as an inherit desire to be AWESOME. I consider myself to be a pretty positive ninja. For example, I’m positive that I hate negative people.

I have a goal to have $6MM in my bank account when I retire. I can’t tell you how many people say “It’s nice that you ‘think’ you’ll have that much, but what if….you lose your job…. your accounts don’t provide the returns you anticipate… you have unforeseen medical issues ” Umm excuse me, don’t be bringing your “what ifs” around here, I don’t need them. Maybe the stock market will crumble, maybe I’ll lose my job, and maybe I will contract gonorrhea of the mouth, but I’m sure as heck not going to live my life waiting to see if those things happen.

Look here Debbie Downer, I have goals and your negativity can’t keep me from reachin’ them. Do you all know someone that seems to be a professional mood killer? Someone that always finds something to complain about?  How do you deal with them? I just don’t have the patience to tolerate it and I just tell them if they want to be negative they need to go do it somewhere else. Life’s too short, don’t be a Debbie Downer.

There’s more to life than a spreadsheet

Screen shot 2009-12-06 at Dec 6, 2009, 9.41.49 PMI was having a conversation with my financial analyst buddy about saving/investing. He’s the person that convinced me to start a Roth IRA and ultimately is responsible for my PF addiction. I wrote a post a couple months back that laid out my retirement game plan. I essentially calculated I should easily be able to have a cool $6,000,000 waiting for me. As my buddy and I were talking, he said something profound: “I’m starting to realize there is more to life than a spreadsheet.”

WTF! More to life than a spreadsheet? Forgive him PF god, for my financial analyst friend has sinned. How could there be life outside of a spreadsheet? Microsoft Excel defines my goals and ambitions in a few simple calculations. Surely my friend had to be under the influence of some mind altering drug. Right?

Wrong. Even though Friend Ninja loves excel much more than I, he is learning that plans change, which means his spreadsheet/retirement/life will also change. In the world of PF we rely on spreadsheets, budgets, and calculators to determine exactly what kind of life we are going to live, and even how to go about getting there. Shoot, I’d be willing to bet most of you also share some type of crush on excel.

But, through my friend’s wisdom, I’m realizing there is more to life than being loaded. Sure, I have a goal to have $6,000,000 at retirement, but would I be bummed about having $2,000,000 waiting for me? Heck no I wouldn’t. Especially if it meant I got to have a higher quality of life for the 40 years preceding retirement.

My spreadsheet was focused on 65 and older. I completely forgot one day I will be 35. You know what happens when you are 35? You have two and a half kids, a mortgage payment, and a dog named Larry (wouldn’t Larry be a funny dog name?). I want to have an awesome life my whole life, not just when it comes time to retire. How am I gonna be able to afford to ‘live the dream’ pre-retirement? You guessed it, live outside of my spreadsheet.

I might have to sacrifice a retirement contribution here and there, so I can take a vacation to Llanfairpwllgwyngyll, Wales (I don’t know how to pronounce it, but it’s a real place). Or maybe I’ll give up a million at retirement, for a 2nd home in the mountains when I’m 40. I get so focused on saving and investing, that I forget to spend. I guess it is a good problem to have, but it IS still a problem. Sometimes my frugal side possesses me and it takes a little common sense from my friends to slap me back in to reality.

Do you live your life according to a spreadsheet? Do you have defined goals for the ‘short term’ (10 yrs from now)? Were you once obsessed with saving for retirement, but now realize you wish you had used some of that cash for other purposes? Do tell, ’cause I’m very curious if you live inside or outside the spreadsheet.

I hate cash

Screen shot 2009-12-03 at Dec 3, 2009, 10.10.43 PMHave you heard people say “Don’t use plastic because you tend to spend more money when you do.”? That is another piece of financial wisdom I have decided to ignore. I never carry cash on me, and when I do get some greenbacks, I take it straight to the bank to deposit. A lot of PFers, Dave Ramsey included, preach the wonders of being on a “cash only” system. Their main argument is this: People tend to spend less when they pay with cash because giving tangible money tends to ‘hurt’ more than swiping a card.

I am absolutely, positively, 102% against the ‘all cash’ plan. It just doesn’t work for me. I’m a pretty disciplined dude, but dollar bills are my kryptonite. They sit in my wallet, taunting me, whispering from my right butt-cheek “Hey Ninja, why don’t you put me to use and walk over to Rite Aid and buy a tub of  ice cream?” Seriously, cash is evil. If I have it on me, it will most likely be spent on unnecessary, unbudgeted, and unsmart things (I love making up words).

For me, it ‘hurts’ a zillion times more to put it on my credit card. I pay my CC balance in full each month. Do you know what that means? I get to watch the damage accumulate over my 30 day billing cycle. As the balance grows, I become more and more frugal. Paying between $1,000 to $1,500 each due date, totally motivates me to minimize my spending so I have to pay less on my CC balance. Seeing the damage in it’s entirety, as oppposed to incrementally, influences wise spending choices.

I’ll be honest. I don’t have the discipline (or the desire) to work an envelope system. With the envelope system, you put X amount of cash in the “groceries” envelope and use that as your guide for the entire month. If you run out of grocery money, you starve (or borrow from another category envelope). If you have the discipline to stick to your budget ALL OF THE TIME, than the envelope system is definitely something you should consider. But if you haven’t noticed, I’m kind of a bada$$ and I sometimes like to spend outside of my budgeted parameters. Envelope system=good for people who have a lot of discipline. Envelope system=ineffective for 99% of the US population.

What about you all, Do you prefer using cash or a card? How much cash do you keep on you at any given time? Do you think you spend more when you swipe? Anyone out their like-minded and struggle to keep cash in their wallet?

It’s not what you make, it’s what you spend (seriously)

Screen shot 2009-12-02 at Dec 2, 2009, 8.24.22 PMThe proof is in the pudding suckers… whatever that means. I did some hardcore number crunching over the weekend and realized something: I’m totally stoked on my financial progress over the last 12 months. Sometimes I get so focused on what lies ahead, I forget to take a little walk down memory lane and reflect on where it all started. Let’s take that “walk” now, shall we?

Since I posted about my net worth yesterday, it’s only fitting to start there. I currently have a NW of $27,389. Wanna know what my NW was one year ago? I was rockin’ a solid -$10,000 NW. That means in twelve months I have totally turned my financial situation around, to the tune of almost $40k. There are a few factors that have played crucial roles in this awesome change. 1) A big help in this increase is due to the rise in the stock market over the last year. 2) I got an $11,000 raise. I was making $39K this time last year and now I’m sitting pretty at $50k. In February I will be getting another raise to $62K so I can’t wait for that day to come. 3) Supplemental income. I’m obsessed with making money. I have found tutoring/odd-jobs to be quite lucrative. I think I’ve made about $6,000 this year in side work.

If you’ve been reading PDITF for a while, you know I am quite bi-polar when it comes to my student loan. I started the year paying double payments to Sallie Mae each month (about $330). In April, after advice from my readers, I decided to up the payments to $1,000/month. A few months later I got real crazy and decided to throw between $1,500 to $2,000 at it each month. Then, about a month ago, I decided to go back to just double payments. Although my payment strategy has been all over the place, I’ve made some pretty solid progress. In fact, I have reduced my student loan debt by $11,500 over the last year. I have another plan in my head as far as my student loans go, but I think I’ll save that for a future blog entry 🙂

I totally obliterated my 2009 savings goals. If you cruise to the “My Budget” page you will see on 12/31/08 I had these goals for the ’09 calendar year…

Checking: $1,500
Savings: $11,000
Roth IRA: $8,000
401K: $10,000
Total: $30,500

These are what my accounts currently look like…

Checking: $3,060
Roth IRA: $11,877
401K: $10,772
Total: $45,234

As you can see I exceeded my goals by $15,000. Do you know how awesome it feels to set goals, and not only meet them, but completely destroy them! It makes me one happy ninja.

Over the last year, I have improved my financial situation faaaaar more than I would have ever anticipated. The secret to this change is quite simple, and I’d be happy to share it with you: Spend less than you make. Period. End of story. This financial principle is not open to interpretation or debate. If you live on less than you bring home each month, you will have nothing left to do with your money but pay down debt, save, invest, and give it away. There are absolutely no excuses to live outside of your means (aside from medical emergencies). I am living proof that spending less than you make REALLY WORKS! I’m so glad I don’t have to live the paycheck to paycheck lifestyle. At  24 y.o. I’m totally stoked to see where I am ten years from now. Anyone else have any success stories from living within their means? I would love to hear them to motivate me even more.