Sunday, March 23, 2008

Ten Things You Can Do to Save Money This Year: One

1. Don't apply for new credit. Every time a creditor checks your credit, it damages your credit score. It's an ignorant, unfair system that doesn't allow for sensible choices on your part, but since this IS the system, you must choose wisely and act accordingly.

Why shouldn't you apply for new credit? Because it damages your credit score, which means that you'll wind up paying higher interest rates on car loans, mortgages, credit cards--or any other form of loan--which means, in the end, you lose money. The difference between a half a percentage point (or more) on a mortgage, for instance, can result in tens of thousands of dollars lost over the course of the loan--or hundreds of dollars each month. Think I'm exaggerating? Check out these numbers:

If your credit score is in the top range (720+) you'll qualify for the best interest rates. On a three-year car loan, for instance, let's say you got 7%. If you had a credit score in the lowest range (500-579) you're looking at a rate of something closer to 15%. Think that's not so bad? Think again. You'd lose an extra $75 or so each month for three years, which means you'd lose $2700 over the course of the loan. (Numbers from Suze Orman's The Money Book for the Young, Fabulous, & Broke, p.24)

Think this is just a scare tactic? Unfortunately, I know of what I speak. My credit score dropped with one (major) credit reporting agency by 40 points in one year. I had reduced my debt by 20%, paid all my bills on time, and earned another year of perfect credit post-bankruptcy and yet my score really dropped! The reason? I had applied for too much new credit. Each time had a good explanation and if evaluated on its own by a human being wouldn't affect my credit poorly, but for the algorithm that creates our scores, it is only seen as bad.

In my case, one credit inquiry was for my new car. My old car died and I had no choice. I chose a car that was in my budget, that is reliable, under warranty, and saved me two hundred dollars a year in insurance, and yet, FICO dinged me for this. Another credit inquiry was from Macy's. I was spending several hundred dollars on interview clothes for a high-paying job I eventually got. When the salesgirl offered me the chance to save 20% by opening a Macy's card, I said, "yes," thinking only of the immediate savings. Another credit score ding.

Another inquiry came because I applied for an LL Bean VISA. I order from LL Bean frequently and with their VISA, I can earn useful points toward future purchases, get free monogramming, and most importantly, get free shipping. Also the rate being offered was lower than the average rate on my other cards. The annual savings would be substantial, so it's a sound financial choice to apply for the card--but to FICO, it makes me seem unstable. Another ding.

The other two credit inquiries were when I applied for low-interest cards so that I could transfer my balances and pay off the cards more quickly (and lose less money to interest payments). Again, a sound financial choice. But to FICO...not so much.

So, even though I made responsible choices in all of these credit situations, my credit score dropped by 40 whole points. To make matters worse, because my score had dropped, after my car loan was approved, I wasn't approved for any of the money-saving cards I applied for, so my score dropped and there was no upside.

This year, I am shopping for houses, so its especially important for me to have the highest credit score possible. Imagine my dismay when I discovered that even despite reducing my debt by 20% and paying all my bills on time in the last twelve months, my score had not risen--it had dropped--by a lot.

In a nutshell: always say "no" when the cashier asks you if you want to "save" by opening a store credit card. The interest rates are always high, and the inquiry on your credit isn't worth the damage. Don't apply for more than one new card per year. You are probably better off living with whatever rate you have than applying for lower-rate cards and watching your credit drop.

The good news: Your credit is not damaged when non-lenders check it. If you check your score, or if a landlord or employer checks your score, you shouldn't experience a hit. There is also a special exception (I think) for mortgage shopping. I believe you get a two-week grace period. So, if you are ready to buy a home, do all your mortgage shopping within a two-week period and all of those hits will only count as one, no matter how many lenders check your credit. (Please double-check this before acting on it...just in case the rules have changed since I researched this.)

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Saturday, March 8, 2008

Ten Things You Can Do to Save Money This Year: Two

2. Shop with a list. (And don't shop hungry.)
  • This also falls under the heading of #3, Plan Ahead.
  • Peter and I keep a notepad on the fridge. It cost 79 cents and comes with a magnet that holds it up. One pad lasts almost a year. Whenever we run out of something or think of something we want, we put it on the list. Then, when we go grocery shopping, we bring the list, cross things off as we find them. This saves time and it saves money, because we buy fewer impulse items. It also helps to ensure that we have all of the ingredients for our planned meals.
  • Last week, I sat down with the sales circular from our local Big Y grocery store. I made a list of items we needed that were on sale. We drove three miles to the store, bought the items on our list, plus a few others, and saved over $50.

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Ten Things You Can Do to Save Money This Year: Three

3. Plan ahead.
  • Hallowe'en is my favorite day of the year. It's one holiday I feel is really worst investing in. So, I am constantly on the lookout for costume-related items and decorations. I've found almost all of the parts of my best costumes in May or February or some other time of the year when the last thing on most people's minds is Hallowe'en. I find them at yard sales, thrift stores, curb sides, or other free or cheap locations.
  • My stepmother decided that this year would be the last one in which she purchased a "real" tree for Christmas. Instead of going out and buying an artificial tree right away, though, she waited until after Christmas and saved 75%.
  • Every year, on November 1st, I go shopping for half-priced (or better) Hallowe'en decorations. I set a specific budget--say, $5 or $10--and I can usually find plenty of things. I have a plastic bin in the attic where I keep all of my Hallowe'en items, and these things go in there, until the next year. Over the years, I've acquired a great collection, almost all of it at 50% off the retail price (or more).
  • My college class has a reunion every five years. My friends and I always go. One of the important traditions is Ivy Day, when we all dress in white and march in a parade. Rather than scramble for something white to wear, I planned ahead and purchased a white dress at a thrift store for $2--two years before my next reunion. So long as it still fits then, I've made a good investment.
  • Planning ahead works for purchases, as in the examples above, but it also works for saving. If you check the weather and bring along a rain coat or umbrella, you won't be caught buying a cheap poncho for $10 at Disney World or Fenway. If you bring a snack or fill-up a bottle of water, etc. with you when you go out to run errands--or even commute--you'll save the money you would have spent on grabbing a snack or a drink at a store.
  • Sometimes planning ahead means accepting hand-me-downs that might not immediately be useful. I accepted a cake tray, for instance, that was beautiful and would have been expensive to purchase on my own. I almost threw it out once, but was glad I saved it when it was exactly what I needed to present cupcakes during a surprise party, or to hold a crucial item during a solstice ritual, etc.
  • Other plan-ahead items can be things like purchasing gifts ahead of time, when things are on sale, remembering to bring coupons when you go shopping, booking travel in advance, or checking the air in your tires before a long trip, or keeping a bottle of windshield wiper fluid in your car. You get the gist.

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