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The 5 Components of Your Credit Rating

credit_cardsBigg success is life on your own terms. Our focus today is on money, one of the five elements of bigg success.

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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Should You and Your Spouse Have Separate Accounts?

games Disagreements about how to handle the family finances is often sited as a leading cause of divorce. There seems to be an increasing number who are separating their finances so they don’t separate! This would have been unheard of just a generation or two ago.

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Opposites attract

In many relationships, there is a spender and a saver. Or sometimes you have two spenders who spend differently – one who frequently buys little incidentals that may add up to a lot of money over the course of the year and another one who can’t resist the major purchases.

Is it wrong?

While some people are finding separate accounts the way to go, others think that it’s just wrong. They believe that it’s a bad sign if a couple doesn’t co-mingle their funds.

Does that stem from a time when you had one wage-earner in the home?
Is it a control issue?
Perhaps it has to do with religious beliefs?
Or maybe it’s a trust issue?

We don’t know the answer, but we do know that many couples are making this work.

Why it works

We think keeping separate finances works for a number of reasons. Among them:

  • The saver isn’t frustrated by money being spent on things they think is unwise.

  • The spender doesn’t have to defer gratification so long that they just can’t stand it anymore. 

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How it works

We’ve seen a number of ways to do this. Here are two examples:

The Allocators. These couples begin by allocating who pays for what. It’s a negotiation process. If you choose this system, determine your respective spending priorities. Then, whenever possible, let each spouse pay for those things they feel are most important. Divvy up the basics however you see fit.

Once you’ve figured out who will pay for what, each spouse then gets to spend, save or invest however they want.

The Allowancers
. Okay, we struggled with a name for this group. That’s the best we could do!

Allowancers may maintain a joint account to pay mutual bills like the mortgage or the utility bills. Then they divvy up the excess as allowances.

But don’t forget to take out the trash or you may lose your allowance!

With their allowance, each spouse can save or spend however they want. One spouse may even save to spend … on that next major purchase.

A final thought

You may have heard us say this before, but our thought on this issue is this:

If it works for you and your family, it works.

It doesn’t matter what other people think or even say. What does matter is that you find a system that helps you keep your finances in order. After all, they are a key component to living out your bigg dreams!

How do you and your partner handle your finances? 

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Direct link to The Bigg Success Show audio file:
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Squirrels, Nuts and Business Cycles

squirrel You might think that our title has something to do with the recent behavior of Wall Street and Washington. It probably could, but in this case, it doesn’t.

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It does refer to seasons. We’re in the Midwestern United States. We’re heading into fall which, of course, means winter is just around the corner. Squirrels are busy hoarding up nuts so they will have the food they need to sustain them through the winter months.

Hot and cold, boom and bust

Like the seasons, our economy moves through times when things are hot and times when they’re cold. We experience booms and busts.

It’s interesting, though, that our friends in the southern hemisphere are just heading into spring. Things are heating up there while they’re cooling down here! It reminds us that most businesses do best during the boom times, but some actually prosper when times are tough.

Almost every business has products or services that will do better when the economy isn’t doing as well. With your offerings, which ones will save your clients money? Those are the items you should promote now as consumers seek to stretch their budget.

Your cash stash

Speaking of stretching our budgets, just like squirrels hoarding nuts for winter, we should all make sure we have an emergency cash reserve. Financial planners recommend keeping between three to six months of living costs stashed safely away for ready access.

In recent times, some have suggested a Home Equity Line-of-Credit could be substituted for this cash reserve. Only you can decide if that’s the right option for you; however, with what’s going on with banks and the credit markets, it may pay not be your best option for your crucial cash stash.

If you own a business, you should also look at your working capital. Is it adequate to take you through a slow season? If not, look for ways to cut your costs so you can shore up your cash hoard.

Purchasing out of season

The seasons also create opportunities for us when we’re purchasing. For example, if you live where we live, you’ll probably get a better deal right now on a lawn mower than a snow blower. Timing your purchase when demand is down on these bigg ticket items can save you money.

Tougher times also create opportunities for us as consumers. Businesses still have bills to pay. They want to keep the doors open. So they may cut deals now that they would never consider in good times.

Purchasing in season

With other items, you’re better off buying in season. Retailers will often lure you to their stores by drastically discounting these items. For example, isn’t turkey cheaper right before Thanksgiving than any other time?

Time Money has a great article about the best time to buy everything. Planning when to buy is just as important as what you buy. Buying on impulse less often will save you BIGG money more often!

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Next time, we ask, “Are you a victim of your own success?” Until then, here’s to your bigg success!

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I Need Money! Should I Cash Out My Retirement Plan?

frustrationThe financial news seems to be all gloom and doom these days. The reports are that we’re not in a recession, but times are tough for a lot of people.

No matter how tight things get, we still have bills to pay. People are responding to this very intelligently. They’re turning to public transportation, eating out less, seeking cheaper forms of entertainment, and cutting back on unneeded items.

But what do you do if that isn’t enough?

Tapping your retirement plan …

It’s tempting to pull money out of your retirement plan, like a 401(k), especially if you change jobs. In fact, about 40 percent of job changers in their twenties and thirties have done just that, according to a recent report by the Financial Industry Regulatory Authority (FINRA).

… could cost you $130,000 …

If you’re under 59½, it’s usually not a good idea to cash out your retirement plan. Let’s look at the example that FINRA used:

You’re 30-years old with $20,000 in your 401(k). If you earn just 6% on that money until you retire at 62, you’ll have nearly $130,000 in your account, without making any additional contributions.

… and then some!

Of course, you can start over. But you lose the power of money compounding on top of money on top of more money, all accumulating tax free until you take it out. So it’s like taking at least two steps backward.

But that’s not all. Here are 4 other steps back:

  • You’ll have to pay income taxes out of this money, since it was invested pre-tax.
  • There’s also a 10 percent penalty for early withdrawal (unless you’re over 59½)
  • Your employer is required to withhold 20 percent toward income taxes.
  • If you owe money, your creditors can’t touch your 401(k) unless you cash it out.

By the time you get a check, that $20,000 will probably be more like $14,000 net of everything. So cashing out of your retirement plan is a short-term solution with long-term consequences. 

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You Can Be Debt Free with These 5 Steps

By Bigg Success Staff
07-03-08

Bigg Success with Money

money

It’s funny how many people loathe the thought of renting because “it’s just throwing money away”. Yet those same people think nothing of paying hundreds or thousands of dollars in interest on debt (i.e. “rent” money). Debt costs you money that could be spent elsewhere for something more important or more fun.

Too much debt can also cost you time – juggling bills, answering collection calls, and the like. But there’s still a higher price for excessive debt. It creates stress and worry. Your health may suffer as well.

So getting out of debt is a worthy goal. Here are five steps to do it:

Step 1: Stop adding to it

As long as you’re adding to your debt, you’ll never be financially free. So make a point to pay for everything you buy. If you can’t pay for it when you buy it, don’t buy it.

Step 2: Find a reserve

Now, you just have to go one step further and things can really start going your way. Spend a little bit less than you make every month. We have a great thought-starter on how to do it called 63 Moves to Stop Living Paycheck to Paycheck.

This little bit of money is like a tiny snowball at the top of the hill. It will start rolling down the hill and get bigger and bigger. That is, this little bit of money you’re saving each month is going to set you free from the burdens of living with a lot of debt. 

Step 3: Pick either your highest cost or your lowest balance liability

Next, look at what you owe. Pick either the debt that’s costing you the most money (i.e. the debt with the highest interest rate) or the outstanding account you have with the smallest balance.

The first one (the highest interest rate) is the best move for you financially, as long as you follow through on your plan to pay off your debt. But the second one may work better for you because it delivers the quickest psychological rewards, so you’re more likely to stick with your plan. The key thing is to pick a strategy and go for it.

Step 4: Use your reserve

Now you’re going to take that reserve from Step 2 and apply it to the account you picked in Step 3, along with your regular payment. Keep going until that account is paid off. The snowball is starting to get bigger now!

Step 5: Double down and repeat

You’ve paid off one account. Now take all the money you were paying on that account, including the reserve from Step 2, and apply it to the regular payment on another account. Keep doing this until you’ve got all your debt paid off!

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Danger: 10 Warning Signs of Trouble Ahead for Your Business

By Bigg Success Staff
03-19-08

Bigg Success in Business

danger

We’re told that diagnosing a medical condition early greatly increases the chances of successful treatment. The same is true for your business – seeing the warning signs early gives you the opportunity to solve minor issues before they become major problems.

Cash to a business is like blood to our bodies. It has to continue flowing or we won’t survive. The bottom line is that you can’t run out of cash. So you have to know how to diagnose and treat the source of the ailment before it spreads.

With that in mind, here are ten signs that your business may be heading for trouble:

#1 – Lost market share
Your sales may be growing, but your share of the market may be falling. Market share is precious – among other things, it provides leverage to raise prices as your costs increase. As competitors enter your market, you have to work even harder to maintain (and hopefully increase) your share or your business may get into trouble.

#2 – Declining customer counts
Your sales may be holding steady, but fewer and fewer people are making purchases. Your remaining customers are spending more, possibly because of price increases. You have to find a way to attract new customers or your business is headed for trouble. 

#3 – Low repeat and referral business
You need a healthy percentage of repeat business because it’s much less expensive to keep a customer happy than to get a new one. It also shows that your product or service is still meeting the needs of a core base of people who will refer other people to you. If your customers aren’t coming back, your business may face trouble.

#4 – Declining sales

If your sales are falling, you’re definitely headed for trouble. It may have nothing to do with you – it may be your industry that is experiencing trouble. Isolate whether it’s a problem with your business or the industry as a whole to know your best strategy.

#5 – Disproportionate sales to a small group of customers
Picture this extreme situation – all of your sales come from one customer. You’re totally at the mercy of that customer. It’s like being an employee without the safeguards that go with employment! Generally speaking, if more than ten percent of your sales are to one customer, you may face trouble at some point.

#6 – High employee turnover

When you lose employees, customers are affected – they deal with less experienced people who don’t know your business or the customer’s needs as well as long-time employees. The costs of training people so they’re fully productive are also significant. If you can’t retain employees, your business will likely face trouble.

#7 – Costs rising faster than sales (declining profit margins)
Costs rise for a number of reasons. As your sales rise, so will your costs. If they don’t, why do you need that cost at all? So rising costs are expected. However, costs that rise faster than sales means you will face trouble at some point because you’ll have less and less profit for each dollar of sales. 

#8 – Disproportionate purchases from one vendor

You don’t want to be dependent on any vendor for purchases in any category. That gives that vendor too much leverage in your business. They’ll be able to pass on costs to you that you may not be able to pass on to your customers. If you don’t have a diverse base of vendors (or at least a back-up plan), your business will probably face trouble sometime.

#9 – Unwarranted increase in receivables
It’s great to make sales, but not if you don’t get paid! That’s worse than not making the sale at all because it costs you money to make a sale. Slow paying customers also create problems because you can’t pay your bills with receivables. If you don’t control your receivables, your business may be headed for trouble.

#10 – Unjustifiable inventory build-up
Depending on your business, inventory may be even less liquid than receivables. First, you have to sell it; then you have to collect on the sale. Inventory that’s not turning over is dead-weight. So if your inventory is building up too fast, your business will likely experience a cash crunch at some point.

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(Image by Craig Rodway, CC 2.0)

How To Get Your Customers To Finance Your Business

By Bigg Success Staff
01-18-08 

Bigg on Small Business

money_rose_jpg

You either treasure your customers or you go out of business. Ultimately, customers pay your bills, one transaction at a time. In addition to that, customers can finance your business.

Of course, all industries have standard protocols within which you must remain. Or do you? What if you thought creatively? What if you could find a way to win customers and get funding for your business at the same time?

Look at related industries for ideas. Do they follow the same practices as yours? Talk to your customers. What would entice them to consider a creative payment arrangement?

It may be that the customer helps finance your business by the strength of their credit and the commitments they have given you. You don’t care where the money comes from … as long as it comes!

4 ways customers can get you money fast, even if you have bad credit.

#1 – Customer deposits
Wouldn’t it be nice if your customers paid you in advance? Many businesses operate under this model, if you think about it! Even if only a portion of your revenue is prepaid, wouldn’t it make a huge difference to your cash flow?

A marina owner we know employs this concept. One of his primary sources of revenue is dock rentals. He offers his customers a huge discount if they pay for their entire year’s rental a year ahead. Most of his customers take advantage of this offer. He never worries about cash flow.

#2 – Purchase order financing
What if the customer isn’t willing to pay in advance? You may still be able to get funded upfront by using their purchase order as collateral. This won’t work for just any customer – they need to be a company with good credit. 

To turn this pre-receivable into funding, your purchase order must pass two tests. First, it must be non-cancelable and verifiable. Second, you need a gross profit margin of at least 20 percent.

This is not cheap financing – expect a discount between four and seven percent of the purchase order amount. However, isn’t 93% of an order better than no order at all?

You’ll need to pay your purchase order financier off once the order turns from a pre-receivable to a receivable. That’s where the next source comes in.

#3 – Factoring
If you accept credit cards, you’re familiar with the concept of factoring. You get paid now by a financier who gets paid by your mutual customer later. Factoring is only slightly different. 

Factoring can work in a number of ways – let’s assume that you want to completely outsource your credit and collection process. This is expensive money, but you don’t have to worry about payment. The factor takes care of it! You’ll need customers with good credit ratings.

Depending on a number of factors, expect a discount between one and fifteen percent of the invoice amount. Sounds expensive, doesn’t it? However, you won’t wait for your money. You don’t need a credit and collections department. You won’t write off any bad debt. Is it starting to sound reasonable?

#4 – Strategic partnering
What if your customer became your partner? This arrangement has worked for a lot of businesses. Be careful because your relationships with other customers may be affected.

We know a man who owned a specialty printing company. His largest customer was a fundraising company – they sold goods through organizations wanting to raise money. His customer wanted to offer a new product that required special equipment. He negotiated for them to pay for the equipment in exchange for a royalty on all sales produced by that equipment.

The customer effectively got a rebate on all their purchases of that product. Plus, a participation in sales from the machine they bought. The owner had a whole new profit center, with no financial risk.

So look to your customers if you need money for your business. You might get paid even before you make the sale!

How have your customers financed your business? Share your bigg ideas with us!

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