Burning a Hole in your Credit Score
Posted by John Draper | Filed under Bad Habits!, Credit Wise, Money Management
Some people are of the opinion that if they have a dollar in their pocket they should spend it. In the old days, people talked about money “burning a hole in their pockets.” So this isn’t a new problem. But as we’ve become more financially sophisticated introducing new products and services, we’ve made it easier and easier to people to put a dollar in their pockets to burn a hole.
I’m just finishing up the paperwork for a fam who have, at the ripe old age of 20-something, run up $100,000 in consumer debt. Yup. You read right. They’ve spent and spent and spent. And their various suppliers of credit have helped them by giving them access to over $130,000 in credit on a income that doesn’t come close to that. Whazzup with that?
They have no idea where their money is going. And I can only tell them a part of the story since they’re withdrawing gobs of cash and keeping no records. Bank machines may be convenient, but they’re also deadly.
Once upon a time there were a few, then we demanded more. Banks discovered that bank machines were way cheaper than bodies, and that they could eliminate the bodies completely in some places. Branches closed and were replaced by machines. According to the Canadian Bankers Association, we did over 667,000,000 cash withdrawals from banking machines in 2007. Wow!
Did you know that the world’s first banking machine was installed in a branch of Barclays in Enfield, north London, in 1967? In a little over 40 years, they’ve become synonymous with “convenience.” In fact, the CBA says, “ABMs are the primary means of banking for 34 per cent of Canadians.”
The USA was the country with the most cash machines — 405,000 — in use at the end of 2006. By comparison, Canada had 16,190 machines spitting out cash in 2006.
Since we don’t have to wait for the branch to open to get our money, and since we don’t even have to go to our own bank machine – we can get at our money everywhere from our local corner store to the gas station to the casino — we’re putting more money into our pockets to burn that proverbial hole.
As if that’s not bad enough, the money in our accounts isn’t the only money we’re spending. Nope. We’re also spending money on our credit cards (and other forms of credit), sometimes even taking cash advances – more cash in our pockets – so we can do whatever we want whenever we want. And when one card fills up, we just sign up for another, and run that card to the limit.
We’re committing financial suicide and we don’t even realize it.
As if it isn’t bad enough that we’re spending money we haven’t yet earned – yes, when you use credit, you’re spending money you’re going to earn in the future… if you’re lucky – we’re also ruining our credit scores, making it more difficult and expensive to borrow for something important like, let’s say, a home.
Whenever you use all the credit you’ve been given on a credit card, the credit scoring agencies shake their heads and say, “tut tut”, and then adjust your credit score DOWN. And the closer you get to your limit, the more they shake and tut and subtract from your score. In fact, you’d do well to type up the following and stick it to the back of your card: Danger: Your credit limit is $___________ (half of what your statement says it is) and you have $_________ (how much) ROOM LEFT!
Of course, as far as I’m concerned, you shouldn’t be carrying any balance on your credit card. If you do have a balance, put your card away so you can’t use it until the balance is completely paid off. Once you get back to zero, here’s how you manage your credit use so you don’t run into trouble again.
First, get yourself a notebook or a chequebook register (available at your bank).
- Write the current balance in your bank account at the top of the page.
- Each time you use your credit or debit card, write a cheque, or take a cash withdrawal, enter the amount you have spent and minus it from your balance.
- Every time you make a deposit, add it to your balance.
There now, you have a real-time balance that shows how much money you really have to spend, and you can’t spend money you’ve already used elsewhere (like on a cheque that hasn’t cleared, or on a credit card that hasn’t come due).
Don’t forget to debit the automatic withdrawals that come out of your account: your mortgage or rent payments, car loan, pay-yourself-first-savings, retirement account deposit, utilities, car insurance, and the like.
Finally, when your credit card bill comes in, check the transactions against your list in your notebook. If there’s something on your statement that’s not your doing, call the credit card company right away and identify the wayward transaction.
There now. You have the means to stay in the black.
The question is this: Do you have the will?
May 26, 2008 at 4:03 pm
Gail- I have been keeping miticulous records of all payments going out and what is being spent (even if it’s just $1)! It’s been extremely helpful but I can’t imagine not doing it!
Your last line asks if we have the will? That’s a good question b/c it’s a lot of work but very necessary. My friend was shocked at how my records are kept.
May 26, 2008 at 4:06 pm
I finally figured out that in order to keep a credit score in good standing, I should never have a balance on my credit card even close to my limit and heaven help me when I went over the amount available to me (yes, I could go over my limit by about 10% and it is a VERY BAD thing to do! Also, I would try to keep my credit card limit low and so if I had a $500 limit then in theory, I should not have spent more than approximately $300 to make my score look healthy. It really does pay to read up on credit scores as there may be things you are doing that you think are good for your credit score that really aren’t. However, I still keep my credit limit fairly low and my balance even lower…Gail, I do hear you when you say never carry a balance and I am working on that!
May 26, 2008 at 5:59 pm
I don’t keep notebook for the purpose you say. However, I do make a point of checking my bank accounts…. yes, all of them, chequing and a few saving accounts…. every day, even on the days I know there should be no transactions taken place. I also have an excel spreadsheet that I’m working on for my expenses. So, I think I’m pretty much on top of how my money comes and goes. But I know where the notebook idea comes from…. Some people do need that.
May 26, 2008 at 7:53 pm
I’m horrible, always have been. I keep an agonizingly accurate mental tally of the funds going in and out of my chequing account, and I spend every cent that’s not otherwise allocated. Bills are always paid, but there was never anything left the day before payday.
That is until I started treating my savings like a bill that needed to be paid. Now on top of paying my credit cards off every month I have a little bit of money whisked out of my primary account into secondary high-interest (no-fee) accounts (ING and Citizens Bank to be specific) every payday.
While my “emergency fund” is in the savings account at my primary institution I divert funds into my RRSP account, “projected acquisitions” account and finally my “fun money” account. As the money is checked off my “mental tally” I spend what I have left (after bills).
I won’t be able to retire tommorow at this rate, but it’s certainly better than before when any sort of emergency required using the credit cards and there were NO savings of any kind.
May 26, 2008 at 9:57 pm
This reminds me of highschool. I used to cringe when my friends whined “I hate math, what are we going to use it for in the REAL world anyways” (!!!) umm…. how about EVERYTHING!!!! From adjusting a recipe to buying groceries to BALANCING YOUR CHECKING ACCOUNT! Figuring out your wage (and taxes) Comparative shopping, calculating the tax or the sale price on the purchase before getting to the till, negotiating bills, figuring out payments, budgeting……. the list goes on and on for every day life….. incidentally some of these friends don’t do that great with their finances, just stumbling along on blindly.
Gail, you are asking us to do elementary math… addition, subtraction… not rocket science.
Too bad it is so hard for most to see it’s a simple solution.
May 27, 2008 at 2:36 am
Can someone answer this? I had a city parking ticket go to collections (lost the letter to pay it before it got to that point)…I paid it right away when the collections called – how will that affect my credit score?