Specifically, we want to talk about an asset that is particularly valuable now. Yet it doesn’t show up on your Balance Sheet. It’s your credit score.

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Target credit

This was highlighted in a recent post over at Mashable about Google ads targeting people with high credit scores. People with good credit are positioned to take advantage of these times. Not just with consumer goods, but also with investment opportunities. There are some great deals out there on real estate and businesses.

In addition, people with good credit will get better rates on the money they borrow. So if you have a good credit score, protect it like any other asset.

FICO

FICO was developed by the Fair Isaac Corporation. They have a great piece that explains how your FICO score is determined [PDF]. We’ll summarize it here, but we highly recommend you read their article if you want to know all the details.

Your FICO score can range from 300 to 850. Obviously, higher scores are better. Anything over 720 is considered SuperPrime according to the Mashable post. These are the people Google is targeting in their new ad program.

We’ll look at the five components of your FICO score (along with the weight given to each one for the general population).

Your payment history (35%)

Pay your bills on time. It’s probably no surprise that this is the single biggest factor in determining your score. If you’re not current, work hard to get current and stay there.

The amounts you owe (30%)

We found it interesting that, even if you pay your credit card balance in full every month, you may still show a balance on your credit report. It shows the balance posted on your most recent statement.

One myth they debunk is that you should close accounts so you don’t have too many credit cards. If you’re in good standing with no balance on an account, it doesn’t affect your FICO score.

However, you are better off having fewer cards with a balance. It’s also better to have a small amount outstanding compared to your available credit line.

Be careful not to have too much credit available. It can actually hurt your FICO score. So don’t get, or keep, credit cards you know you’ll never use.

Length of credit history (15%)

Here they look at the age of your accounts in general as well as how long it’s been since you used your account. One tidbit we found interesting:

If you just established credit for the first time, you’ll hurt your FICO score if you open too many accounts too quickly.

New credit (10%)

Here they look at what’s going on now. What credit have you applied for recently? How are you doing on those payments?

This is good news for people coming out of a period of late payments. Just remember, though, it gets a relatively small weighting.

The types of credit you use (10%)

You want a mix of both revolving credit lines and installment debt. For example, a credit card along with a car loan would include both types of credit.

Your credit rating is an important asset. It affects your credit capacity. Your credit capacity may help you fund your next bigg opportunity!

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Thanks for sharing some of your time with us today. Please join us next time when we talk about a higher level of problem-solving. Until then, here’s to your bigg success!

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Direct link to The Bigg Success Show audio file:
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We’ve seen government at all levels, corporations, and yes, individuals borrow more and more money over the past few years. Many people now have this sinking feeling that they will never get out from under it all.

So today we want to talk about what to do if you have that feeling.

The King and Queen of Personal Finance

Cash is king again and credit score is queen. In the coming years, people with cash and a good credit score will have more options, be able to take advantage of more opportunities, and will experience less stress. Isn’t that a nice place to be?

A Timeless Principle Makes a Comeback

It requires discipline. It’s amazing how we can rationalize our purchasing decisions. If I can’t afford to buy it now without credit, why would I think that I can afford to pay for it later along with an exorbitant interest rate?

So we need to pay cash or don’t buy at all. Eliminate purchases on credit, even ones that promise “no interest, no payments” for some period of time. Of course, if you already have the money, and you’re just using their money, and you need the item … really need it … then go ahead and enjoy!

Two Important Financial Moves

Perhaps more so than at any time in our lives, we need to build up our emergency reserves. Financial planners have been saying it all along, for the most part. Many of us weren’t listening. Keep six to twelve months of living expenses in a readily-accessible reserve account just in case you need it.

Pay off almost all of your debt. You may not pay off your mortgage. You may even keep a car loan for a time. Get rid of all other debt; it’s robbing you of your future.

Then you’ll be ready to start looking for the tremendous opportunities that will be available to anyone with cash to invest.

Drastic Steps to Dispose of Toxic Debt

Drastic times call for drastic measures. These steps will not be easy. In fact, they will be uncomfortable at best. However, if you’re feeling overwhelmed by all of your debt, they are necessary.

Sit down and logically determine how quickly you could get out of debt, given the two exceptions we noted above. If it’s more than five years, even after considering the steps we’re about to outline, it’s probably best to seek professional help. Here are the steps:

Sell assets

Look around for anything that you don’t need, never needed, don’t use, or never used. Get rid of it and use the money to build up your cash reserves and/or pay off debt.

Get a second income

Get a part-time job or find a way to make some spare money. Even if it’s only $300, $400, or $500 a month, plowing this money into paying off high-interest debt will pay you bigg dividends in the future. This doesn’t have to be something to do forever, just do it until you get your financial situation shored up.

Cut back on contributions to your retirement plan

We always hesitate to suggest this because you’re robbing your future. Talk to your financial planner before you take this drastic step. But even with an employee match, it may be better to pay off high-cost debt. You may earn 30% by paying off a credit card, for example, and give yourself more room to maneuver through tough times and unexpected events.

Reduce housing costs

With the price of houses down in many markets and the continued lack of buyer demand, now probably isn’t the time to consider downsizing. However, analyze your specific situation because you might be surprised.

Another option might be to rent part of your home. Or find other ways to cut costs on your existing house. For example, property tax assessments will be going out in January. Check your assessment and the price of houses that have sold nearby to see if you can protest the value you’re being charged for.

Cut transportation costs

Could you get by with one less car? Could you take advantage of public transportation? Could you car pool? All of these ways put money in your pocket that can be used to build up cash and pay off debt. 

Stretch your dollars

We’ve covered the bigg ones, but it’s also important to look at all your other discretionary expenses. Many people have already cut back on dining out. Go even further – buy fewer prepared foods and cook meals yourself. Sure it will take more time, but it will save you money that can be used for stockpiling cash and knocking down debt.

Look for your recurring expenses – cable bills, cell phone bills, and everything else. Is there a way to make cuts?

Strive to stretch every penny you can out of every dollar you bring in so you get back on your feet and on track to being a bigg success!

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Next time, we’ll discuss the “must-haves” for your productivity tool kit. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

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Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00246-102008.mp3

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Bigg Advice
We can’t give you a direct answer, Randy, but we will give you nine questions that will help you determine if you should make the extra payments.

#1 – Do you have any other debt?
Chances are your mortgage is the cheapest debt you’ll ever find, after taxes are considered. So if that’s the case, you should pay off your other debt first.

#2 – Do you have an emergency cash reserve?
The general wisdom among financial planners is that you should have somewhere between three months to a year of living expenses in an account that’s readily available.

#3 – How good is your credit rating?
The better your credit rating, the better chance you have to borrow in the future at a reasonable cost should the need arise. When you make extra payments, you’re essentially investing in an illiquid asset. So if your credit score needs some improvement, work on that first.

#4 – How do you feel about debt?
Some people don’t like having any debt at all. If you’re one of them, and if you’re happy with the answer to the first three questions, then make extra payments!

#5 – What’s your interest rate?
This question gets you ready to determine your best financial move. There are two things you need to know:

• the interest rate on your mortgage

• your tax bracket (i.e. how much you’ll pay in taxes on your next dollar of income, that’s called your marginal tax rate).

Multiply your interest rate by (1 – your marginal tax rate) to get your after-tax cost of interest.

#6 – How disciplined are you?
If you’re likely to just spend the extra money if you don’t make extra mortgage payments, then by all means just make extra payments. If you’re disciplined
(or set it up so you don’t have to be), then you’re ready for the next question.

#7 – When do you plan to retire?
In general, the longer you have until you retire, the more aggressive you can be. So if you plan to retire in a relatively short time, lean toward extra payments. If you have a relatively long time before you retire, you’re probably better off investing.

#8 – What could you earn if you didn’t pay off your mortgage early?
You figured out your after-tax interest cost in Question 5. That’s your cost of money. Now you’re going to look at how much you can make from your investments. That’s your projected return. If the return on your portfolio is greater than your cost of money, that’s a sign you shouldn’t make extra payments on your mortgage.

#9 – Will your current portfolio support your desired lifestyle?
If you already have enough money to keep you happy for the rest of your life, why do anything risky? Just pay off your mortgage and reduce your risk even more.

We’ve offered some general advice here. Find a certified financial planner or CPA to help you with your specific situation. 

Want to read more? Here are the 9 questions you should ask before paying off your mortgage in more detail.

Our bigg quote today comes from Walter Savage Landor:

But you shouldn’t pay down your principal unless it’s in your best interest.

Next time, we’ll share a love story with lessons. Until then, here’s to your bigg success!

Subscribe to The Bigg Success Show in iTunes. 

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