Part 13 (1/2)

TipFor more info, download the PDF ”Understanding Your FICO Score” from myFICO.com: tinyurl.com/FICO-pdf.

How to Get Your Credit Score While it's easy to get your credit report for free, learning your credit score takes a bit more work. Sometimes banks or lenders will let you see your score when you apply for credit, but you generally have to pay to get that info. Here are a few sites that can help you get a sense of your score: - myFICO () is the official site of the company that developed FICO scores. It's jam-packed with useful info and offers several different services that let you monitor your credit score (for a fee). You can get free trials of some of these services, so you can check your score once and then cancel before you get billed anything. You can also pay a one-time fee of $16 to see your score.

- Credit Karma () lets you see your TransUnion credit score for free. Using the data in your credit report, Credit Karma anonymously compares you to other folks who use the site and offers tips on how to improve your credit rating.

- Quizzle () gives you free access to your Experian credit score. This site doesn't have Credit Karma's cool credit-comparison features, but it offers a variety of other financial tools and tips.

- Credit Report Card (tinyurl.com/CRCtool) gives you a quick, free snapshot of your credit health. It doesn't provide an actual credit score, but instead gives you a grade (A+, C, F, or whatever) based on how the different parts of your credit score (described on The Anatomy of a Credit Score The Anatomy of a Credit Score) compare to the general public.

Keep in mind that there's no such thing as a single, absolute credit score. Your score will vary depending on where you get it. For example, a FICO score based on your TransUnion credit record may be 755, while your Equifax score is 787. That's because each credit bureau has different info about you and score providers may tweak the formulas to emphasize different things.

Boosting Your Score Simply knowing your credit score doesn't do you a lot of good. But if you're not happy with your score, you can take steps to improve it: - Pay off your debt. According to credit expert Liz Pulliam Weston, ”The most powerful thing you can do to improve your credit score is to reduce your credit utilization.” FICO reports that about one in seven people who carry credit cards are using over 80% of their credit limit. ”Below 30% is good,” says Weston. ”Below 10% is better.” Repaying your debt helps your pocketbook and your credit score. (See Chapter4 Chapter4 for more on reducing debt.) for more on reducing debt.) - Pay on time. According to Weston, if your FICO score is 780, a single late payment can drop it 100 points. If your score is 680, a late payment can cut it 70 points. (For more info, see tinyurl.com/kill-scores.) If you miss a payment, don't panic: Do what you can to get current and stay current.

- Only open new accounts you need. Don't open a store charge account just for kicks. New accounts are only a small part of your total score, but they do have an effect. So keep new accounts to a minimum, especially if you're planning a big purchase like buying a house.

- Don't close old accounts. It's okay to cut up your cards or to freeze them in a block of ice, but to maximize your score, keep the accounts open. If you have to close an account or two, close newer accounts before older ones. For more on the pros and cons of canceling credit cards, see How and When to Cancel a Card How and When to Cancel a Card.TipIf you don't use a credit card for several months, your card issuer can close your account, which can ding your credit score. To avoid this, make an occasional purchase with the card so the account seems active. One way to do this without risking temptation is to autopay your utility bills (see The electric company The electric company).

- Keep tabs on your credit report. Even if you do everything right, your credit score can take a hit from ident.i.ty theft and other forms of fraud. Even simple errors can hurt your score. So check your credit report regularly (Getting a Free Credit Report) and correct any problems you find.

A word of advice: Don't obsess over your credit score. Sure, it's important, but ultimately it's a number for lenders, not for you. A less-than-perfect credit score isn't the end of the world. If you struggle with compulsive spending, it's far better to cancel your accounts and take the hit to your credit score than to risk getting buried deeper in debt. The bottom line: Be smart with money and your score will be fine.

Final Thoughts on Credit The credit card industry earns billions of dollars every year because they've made it easy for folks to spend more than they should and because people don't understand the rules of the game. Remember: Your credit card company is not your friend; they're hoping you screw up-that's how they make their money! In fact, the industry's term for somebody who pays bills on time is ”deadbeat.” (Nice, huh?) But millions of people have found that if they play by the rules, credit cards make their lives a little easier. Your cards will never make you rich, but used wisely they can free you to focus on the things that matter most in your life, and earn you a few rewards in the process.

Here are the things to take away from this chapter: Use your credit card as a tool, not a toy; keep tabs on your credit report; and don't obsess over your credit score. And remember: If using credit cards gives you a negative cash flow (The Power of Positive Cash Flow), they're hurting you, not helping you.

Chapter9.Sweating the Big Stuff.

”Count the dollars, not the pennies.”-Elizabeth Warren While it's important to save money on everyday stuff (see Chapter5 Chapter5), it's even more important to save on big purchases. By making smart choices on big-ticket items, you can save thousands of dollars in one blow.

In the next few chapters, you'll learn how to save on big stuff like insurance, housing, and transportation. This chapter gets you started by looking at money-saving tactics for buying a new or used car and booking vacations.

Counting the Dollars In Chapter1 Chapter1, you learned that to be happy, you should focus on the most important things in your life before you worry about the little stuff (see the box on Living a Rich Life Living a Rich Life). Turns out the same is true of your finances.

In All Your Worth, Elizabeth Warren and Amelia Tyagi write, ”Savvy money managers don't spend a lot of time looking for ways to save a few pennies. They charge right ahead to the big-ticket items, looking to make high-impact changes in the shortest period of time. They don't sweat the small stuff.”

As I mentioned in Chapter5 Chapter5, by making a few small changes to my daily habits, I reduced my spending-and boosted my cash flow-by almost $200 a month. But as powerful as frugality can be, it's saving on the big stuff that'll really improve your cash flow.

You want to make sure you don't negate your daily scrimping and saving by making silly choices on big things that'll burden you for years. It's great that you fuel up at the cheapest gas station in town, say-but if you're driving a $63,000 Hummer H2 that gets 10 miles to the gallon, that small economy doesn't make much of a difference.

Obviously, you only get a few chances in life to save big on stuff like a home or a car. Because you so rarely make financial decisions involving tens (or hundreds) of thousands of dollars, it's extra important to be smart when these choices come along. The next chapter looks at ways to save money on housing. In this chapter, we'll focus on other big-ticket items like cars and travel.

TipTo learn ways to save money on furniture and appliances, head to this book's Missing CD page at .

Buying a Car First things first: A car is not an investment. In fact, it may be one of the dumbest purchases you'll ever make. Many financial experts say this, but almost n.o.body listens because Americans love their cars.

The average new car loses 20% of its value in the first year you own it, 15% in the second year, 13% in the third year, and 12% in the fourth. So a brand-new $30,000 Ford Mustang will only be worth $24,000 next year-and in 5 years, it'll be worth just $10,500. By the fifth year, the average car has lost a whopping 65% of its value. Can you think of anything else you'd buy new for $30,000 that loses value that quickly?

TipTo see how much your car is likely to lose in value, check out this vehicle depreciation calculator: tinyurl.com/depreciation-calc.

Financially, the best car-buying decision is almost always not to buy one. If you made your decision purely based on depreciation, it'd make more sense to walk, take the bus, or try to coax a little more life out of your current car than buying a new one. Basically, you're better off doing whatever you can to put off buying a new car. (As you'll see on Sell your old car separately Sell your old car separately, buying a decent used car can take some of the bite out of depreciation.) But even knowing all that, most of us aren't ready to give up our vehicles. For better or worse, we live in a car-centric culture: We want to be able to drive where we want, when we want. If you can't shake the new-car itch, you can at least save money at the dealers.h.i.+p by being smart.

TipIn Stop Acting Rich (Wiley, 2009), Thomas Stanley writes, ”There is no significant correlation between the make of motor vehicle you drive and your level of happiness with life.” So buy a car for transportation-not as a status symbol.

While many honest, hard-working car salespeople do their best to provide their customers with great service at a fair price, there are also plenty who use slimy high-pressure tactics to make you part with as much money as possible. The next few pages will arm you with the info you need to resist such tactics and get yourself a great deal on your new ride.

The Wrong Way to Buy a Car Recently, I saw that a local dealer had a used Mini Cooper on the lot, so I stopped to take a look. I took a test drive and told the salesman how much I liked the car's sportiness and handling. I admitted that I'd been saving for 2 years to buy a Mini, and now had enough to pay this car's sticker price ($17,000).

When we got back to the showroom, we negotiated. I talked the salesman down to $15,000. I was patting myself on the back when the ”closer”-a more experienced, higher-pressure salesman-sat down at the table. Armed with the info I'd told the first guy-that I had $17,000 to spend, was willing to pay at least $15,000, and really liked the car-he spent an hour talking me up to $15,600. I could (and should) have walked away, but I'd become emotionally invested: I wanted to drive that car home.

In the end, I paid $15,600-and I traded in my old car for much less than it was worth. That's exactly the wrong way to buy a car, yet nearly everyone does the same thing. We get emotionally attached to a vehicle and convince ourselves we have to buy today, so the dealer gets to call the shots. Fortunately, there are smarter ways to buy.

TipIt's important to keep your emotions out of a negotiation. In his book You Can Negotiate Anything (Bantam, 1982), Herb Cohen writes, ”When you feel you have to have something, you always pay top dollar. You put yourself in a position where the other party can manipulate you with ease.”

The Right Way to Buy a Car Over a decade ago, my wife decided to buy a new car. She wanted a Honda Civic but didn't care much about anything else. Together, we drafted a letter that read something like this: Dear Car Dealer: We're in the market for a new Honda Civic. We don't care what color it is, but it needs to have features X, Y, and Z. We have $5,000 for a down payment and would like to drive the car home on Sat.u.r.day afternoon. We're sending this letter to all the Honda dealers in the area. If you give us the lowest price, we'll buy from you.

We faxed the letter to a dozen Honda dealers in nearby cities. Half of them didn't bother to reply, and three tried to convince us to visit them today because they couldn't quote a price over the phone. But three of the dealers gave us prices, and two actually bid for our business.

TipSee the box on Take delivery Take delivery for more on compet.i.tive bidding. for more on compet.i.tive bidding.

In the end, my wife got the car she wanted for a little more than dealer invoice (how much the dealer paid for the car-in theory, anyway). Rather than trade in her old car, we sold it ourselves for a bit more than we thought it was worth. Nearly 15 years later, my wife is still driving that Civic, which she paid off long ago.

That was smart car shopping. Even if a fax blitz isn't your style, the next few sections are chock full of advice that can help you stay in control of the car-buying process, whether you're in the market for a new or used vehicle.

NoteThere's nothing in this book about leasing a car because, financially, leasing is almost always a bad idea. You're probably better off buying a new car than leasing-and that's saying something! The only advantage to a lease is lower monthly payments, but your overall long-term costs are greater-and you have nothing to show for it at the end of the lease. For more on leasing vs. buying, check out tinyurl.com/buy-vs-lease.

Buying New Most people dread buying a new car: They hate the games, the high-pressure sales tactics, and the confusing pricing. But with a little bit of research and a whole lot of patience, you can put yourself in the driver's seat during negotiations.

Money matters The first step in buying a car is to figure out the finances. It's best to pay cash if you can. If you can afford to do that, have the money in your bank account ready to go before you head to the dealers.h.i.+p.

Most people, however, have to take out a loan. If you're one of these folks, be smart about how much you borrow. When you know how much room you have in your budget for a car payment (see Chapter3 Chapter3), it's easier to manage your expectations so you don't drive off with a car you can't afford. If you need to take out a loan, take care of that in advance through your bank or credit union so you don't put yourself at the mercy of dealer financing, which is almost never a good deal.

On The Money: Saying Goodbye to Car PaymentsDespite what you might think, you're not doomed to have a car payment for the rest of your life. In Chapter7 Chapter7, you learned the importance of paying yourself first to save for retirement (Get in the game). You can apply the same principle to saving for a car.According to the National Automobile Dealers a.s.sociation, the average price of a new car is just over $28,000. Let's say you put $8,000 down to buy a car at that price, and you finance the remaining $20,000 for 4 years at 9% interest, meaning your payments will be just under $500 per month. At the end of those 4 years, you'll have paid almost $32,000 for a car that's now worth $14,000. That's $18,000 vanished into thin air!There is is a better way, one recommended by financial gurus like Dave Ramsey and Suze Orman. Instead of financing a new car, take that $8,000 and use it to buy a high-quality used car. Then, instead of paying $500 a month to the finance company, set the money aside in a named bank account specifically for your next car (see a better way, one recommended by financial gurus like Dave Ramsey and Suze Orman. Instead of financing a new car, take that $8,000 and use it to buy a high-quality used car. Then, instead of paying $500 a month to the finance company, set the money aside in a named bank account specifically for your next car (see Targeted Savings Accounts Targeted Savings Accounts). That way you're paying yourself rather than the car company.At the end of a year, your used car will have lost 15% or so of its value, making it worth around $6,800. You can keep driving it and saving for a new car, or take the $6,000 you now have in the bank, combine it with the used car's value, and trade in for a car worth $12,800. And if you keep saving, the next year you can trade in that second car for one worth $17,000. In theory, after 4 years of this you'll have paid out $32,000-just as if you'd bought that new car at 9% interest-but you'll be driving a car worth $23,000 instead of $14,000.Pretty cool, yeah? Instead of paying interest to a finance company for a vehicle that's losing value, you're paying yourself and gradually upgrading your car every year. For more about this clever way of budgeting your way to a new vehicle without a car payment, watch Dave Ramsey's ”Drive Free, Retire Rich” presentation: tinyurl.com/drivefree.

Do your homework Before you set foot on a car lot, figure out which makes and models you're interested in. It's best to give yourself at least three options, because if you set your heart on just one vehicle, you're more likely to become emotionally involved with the deal, which puts you at a huge disadvantage.

TipOnce you've narrowed your choices down to a handful of models, you can thin the field further by using Edmunds.com's true-cost-to-own calculator: tinyurl.com/edmundsTCO. It lets you compare the owners.h.i.+p costs of new and used vehicles. Enter a car's make, model, year, and trim style, and it tells you how much it costs to run that vehicle for a year.

Know exactly which cars you're considering and why, and be familiar with the packages and options. The more info you have, the more bargaining leverage you've got. (And doing your homework may reveal that buying used is a better option for you. If that's the case, flip to Sell your old car separately Sell your old car separately.) Take your time The more time you have to shop, the better deal you can get. If you need a car today, the dealer has no reason to lower the price. A whole weekend is good; two weekends are better. And with an entire month, you should be able to get a great deal.

If you feel rushed at any time, the best thing you can do is stop. Leave the lot. Go home. Take a breather. When you feel hurried, the dealer gains the advantage.

Go for a test drive Okay, so this tip is a no-brainer. But it's easy to get excited when you're shopping for a new car and forget that the point of a test drive is to do more than just find out whether you feel cool behind the wheel of a particular model. You want to see how the car does under normal conditions. If you do mostly freeway driving, be sure to take the car on the interstate. If you live in a hilly area, take it up some hills.

Here are some other things to keep in mind: How does the car handle? Is it comfortable? Do you feel safe? Trust your gut. If something bugs you about the car in the first few minutes, it'll just get worse with time. And ask the salesperson any questions that come up during the drive.