Credit Repair Guide

Being smart about your taxes involves deciding early how you are going to minimize your tax liability.  Much of this is deciding which deductions will reduce your taxable income.

Medical Expenses

Medical costs are one of the tax deductions you can itemize.  However, many people ignore this deduction since the total medical expenses have to be a minimum of 7.5% of their adjusted gross income.  There are many ways, other than the obvious, that you can contribute to this deduction and perhaps reach the minimum threshold.  For example, insurance payments made from post-tax income can be included.  Also, items like eyeglasses and contact lenses that aren’t covered by insurance can contribute to your medical deductions.

In certain tax brackets, for relatively healthy individuals, it’s very difficult to make this write-off work. If your employer offers a medical savings account, take advantage of it.

State and Local Taxes

If your state requires you to pay income tax, the amount you pay can be used as a deduction.  Other taxes can be deducted as well.  Taxes you pay on personal property, investments, real estate, and some disability can be deducted too.  In addition, sales tax paid can be written-off.

Mortgage Interest

Are you paying on a home loan?  The mortgage interest that you pay on your loan can be deducted.  In addition to your primary home, if you have a second home that you use for personal reasons, you can deduct interest paid on that mortgage as well.  For new loans, points – money paid to the lender to obtain the loan – can be deducted, even if the seller paid the points.  If you take the points deduction, make sure you have paperwork supporting the deduction.

Charitable Contributions

You probably already know that you can deduct the amount of any contributions that you made to a charitable organization.  This includes donations made in cash as well as goods that are donated.  Did you realize that there are some non-cash contributions that you can deduct as well?  If you drove your personal car to do volunteer work, then you can take the standard mileage rate deduction of 14 cents per mile.  You can also deduct the cost and upkeep for any uniform required for your volunteer work.  Remember, if your contribution was over $250, you need a written statement from the organization.

Educational Expenses

If you paid educational expenses related to your work, you can use this as a deduction.  The education must be used to maintain or improve the skills required in your current job or is required to keep your current job, salary, or status.  The limit for educational expense deduction is 2% of your gross income.

Tax laws change regularly. If you aren’t sure about a deduction, consult an accountant.

Developing and maintaining a budget plan can be daunting for many people, especially if you have never done it. Many people are simply not inclined to use spreadsheets, balance checkbooks or lay out a formal budget. Whether by nature, or as a result of a reaction to public school mathematics training, some people don’t consider themselves to be “number people.”

However, everyone will find it in their self-interest to make the effort to outline their expenses against income even if it requires getting someone else to help undertake the task. The budget should include monthly income and outgo, projections of expected increases and decreases and some buffer for unexpected expenses.

If you feel uncomfortable using spreadsheet software – which is available for free these days either through Open Office or Google Docs & Spreadsheets – at least jot down some figures on a legal-sized pad.

Divide the spreadsheet or page into two columns. In one, list income, in the other write down all monthly costs. In the costs column include all major regular bills, groceries, gasoline, etc. After doing that, add at least 10% for unexpected expenses, if you can.

Now, for an important add-on task that many people overlook: project different scenarios. Make another budget (an imaginary one) that shows monthly costs, income and the difference between the two… except:

• Exclude monthly credit card interest amounts.
• Exclude auto loan interest.
• Exclude 25% of any ‘impulse buy’ amounts.

Then sum the total of those three.These three represent the amount you could conceivably avoid paying every month. If the total is even as low as 10% of your monthly expenses (and for some it’s higher), you are paying a substantial amount of your income to charges that could be avoided.

No one but you, being as realistic as possible, can decide whether that 10% overhead you pay is worth what you get in return – having certain items earlier than you would by saving for them. But, consider this: saving that 10% APR paid on $2,000 for one year is:  $110. And many people pay only the minimum monthly payment, which amounts to much more. That’s $110 you are paying solely to have something costing $2,000 a year earlier.

Only you can decide which is worth more to you, but developing a budget will help you make those decisions rationally.

Society tells us that we should live a certain way.  It seems like the media is the scapegoat for many of society’s bad habits, but many people imitate what they see on television whether it’s conscious or unconscious.  If your favorite television star is wearing the latest pair of Manolo Blahniks or driving BMW’s newest addition to the 7 series, you tend to want to do it to.

The problem with imitating what we see on television and in magazines is that most people can’t afford to live that kind of lifestyle.  Instead of realizing they can’t afford it and striving to afford it, the “right now” mentality that many people have causes them to use credit and loans to obtain the lifestyle they desire.  This is where the problem starts.

If you have to use credit to obtain a lifestyle, you will also have to use credit to maintain that lifestyle.  Unless you drastically increase your income, you will not be able to play catch up while continuing to live a luxurious life.  Many people incur a large amount of debt people incur just to purchase consumable goods like clothes, food, shoes, and transportation.

Most of these consumable goods begin to lose value immediately after they’ve been purchased.  You couldn’t even sell them to repay the debt incurred to pay for them.  What’s worse is that in a few years, you might not even use these items, yet you continue to receive a bill for them each month.  Considering interest charges, you could end up paying over a thousand dollars for a hundred dollar purchase.

Debt keeps you from saving money.  Chances are, if you’re using debt to pay for your lifestyle, you aren’t putting any money toward savings.  What’s going to happen in the case of an emergency, if you lose your job tomorrow?  Would you be able to survive?  You can’t depend on your credit cards, especially if they’ve been maxed out on clothes and shoes.  Depending on your debt load, you might not be able to apply for a loan or credit card to help you out of the situation.

A lifestyle supported by debt is not a healthy one.  You can only live beyond your means for a short period of time.  Living a life that’s debt-free doesn’t mean you’ll be completely free of worries, but at least you won’t owe money to anyone.

Credit card companies seldom teach first timers the proper way to use a credit card.  Why would they?  They make more money from people who don’t know exactly how to be responsible with a credit card.  In all the excitement of receiving your first credit card, there are some common mistakes that you can avoid to ensure your credit remains favorable.

One of the most common mistakes that beginners make with credit cards is charging more than they can afford.   At first, a credit card seems magical.  You can purchase almost whatever you wish, without having to spend any of your money.  This mentality is why many beginners max out their credit card within only a few months of receiving it.   The best rule of thumb is to charge only what you can afford to pay.  It may sound contradictory to the theory of a credit card, but it is the best way to keep your head above debt waters.

Another credit mistake that beginners often make is getting too many credit cards during a period of time.  With all the pre-approved offers in the mail and store clerks asking you to get their credit card, it can be tempting to open several credit cards at one time.  Many beginners think the more credit cards they have, the more they will be able to spend.  While this is true, there is another side to that coin.  The more you spend, the more you will have to pay.  Chances are if you have several cards with balances, you will run into some difficulty making the payments.  One or two credit cards are sufficient for someone just starting their credit history.

Paying the minimum payment only gets many beginners into more debt than they expected.  When you make only the minimum payment it usually covers the interest and a small amount of the credit card balance.  It could take years to pay off a balance as low as $300 when you pay the minimum payment.  Although you don’t have to pay the entire credit card balance every month, you should pay a little more than the minimum balance.  This is especially true if you are continuing to accrue new charges.

Many people get in trouble with credit cards because they don’t fully understand how the card works.  Most people only know that they get a piece of plastic in the mail that they can use to swipe in stores and pay the bill later.  Understanding how credit cards work can help you use them responsibly.

Credit card companies make money when you pay interest.  The company determines the amount of interest you pay each month by using the annual percentage rage, or APR.  There are two basic kinds of APRs: fixed and variable.  A fixed APR doesn’t vary much over a period of time.  Should your credit card company change the APR, they must inform you before it is increased.  The variable APR can change from time to time.  You can find out which kind of APR you have by looking at your credit card application.

The grace period is the number of days that you can pay off your credit card balance without receiving a finance charge.  In most cases, the grace period only applies to new purchases that you make.  If you already have a balance on your credit card from a previous month, new purchases will not have a grace period.  Your grace period is usually printed on your monthly credit card statement.

In some situations, your credit card may have certain fees associated.  The annual fee is a yearly fee you must pay for having the credit card.  The late-payment fee is charged when the credit card company receives your payment after the due date.  If you use your card for a cash advance you can be charged a cash advance fee that is either a flat fee or a percentage of your advance.  A balance-transfer fee is incurred when you transfer a balance from another credit card.  Should you go over your credit limit you could be charged an over-the-credit-limit fee.

Many credit card companies offer incentives for the use of their credit card.  The most common type of incentive is a rebate on the purchases you have made.  This rebate is sometimes is made in cash (via check) or as a credit to your credit card account.  Frequent flier miles, car rental insurance, and travel accident insurance are other incentives that are offered.  Another feature offered by many credit cards is insurance that covers payments to your balance should you become disabled or unemployed.

A good credit history is essential in today’s society. Traditionally, you only had to worry about having a good credit history for credit cards and large purchases such as home and automobiles. However, good credit is vital in even the smallest financial transactions, like getting your utilities turned on or establishing cellular phone service. When you don’t have good credit, these service providers require you to pay a deposit to establish service. Start building a good credit history as early as possible to avoid paying hefty deposits.

Paying your bills on time is the easiest thing you can do to build a good credit history. Even bills that aren’t credit cards should be paid on time. While utilities and similar bills aren’t regularly included in your credit history, when unpaid, they can wind up on your credit report as a collection. Collections have a negative impact on your credit.

The timeliness that you pay your bills has the biggest impact on your credit history. When you are current on all your bills, lenders view you as less of a credit risk. This, in turn, will benefit you with lower interest rates than if you had delinquent payments in your credit history.

You don’t have to pay the full amount of your credit card balances each month, but you do need to make at least the minimum payment. Any time you pay less than the minimum payment, the creditor reports your payment as being late for that month.

Always be aware of your credit limit and balance for your credit cards. Be careful that you don’t go over your credit limit. When you exceed your credit limit, your creditor will charge an extra fee, in addition to your regularly scheduled payment. This extra fee can make it harder for you to make your minimum payment. Not only that, going over your credit limit will be included in your credit report. Future creditors will deem credit limit overages as an inability to handle credit.

If you have any credit cards that are not being used, and you don’t anticipate using them, these should be cancelled. Make sure the balance of the card is complete paid off before cancelling the credit card to continue building a good credit history.

Credit scores measure credit risk. Lenders and creditors use the credit score to determine how much of a risk you are as a borrower or a creditor. You’d be surprised at how your actions as a creditor can affect your credit score. For example, did you know that closing out an account that still has a balance lowers your credit score? Indeed, it does. Read on to find out more behaviors that affect your credit score.

Pay your bills on time

The best thing you can do to improve your credit score is to pay your bills on time. Late payments have the biggest impact on your score. If you find that you cannot make a payment, make arrangements with your creditor or lender as soon as possible. In many cases, your creditor or lender can work with you to waive a monthly payment.

Many banks have online bill paying systems that allow you to send payments automatically. If your bank has such system, take advantage of it to avoid falling behind on your monthly bills.

Avoid max-outs

Having your credit account balances at or close to the limit is harmful to your credit score. Maxing out your credit cards makes it seem as if you are taking on too much debt. A good rule of thumb is to keep balances at or below 30% of the limit. That means, if you have a credit card with a $1,000 credit limit, you should keep your balance below $300.

Don’t close out that account just yet

A longer, well-managed credit history has a much better effect on your credit score than a short history, even if you paid all the bills on time. Try keeping your oldest credit account open as long as possible, especially if the relationship continues to be beneficial.

Never close out a credit card that still has a balance. This makes your credit limit drop to zero while your balance still remains. The effect is that it looks as if you have maxed out your credit card, and subsequently decreases your credit score.

Keep credit-based applications to a minimum

Avoid applying for credit cards unnecessarily, even if the store clerk says you can save 10% on your purchase. Each time you make a credit-based application, an inquiry is added to your credit report. Numerous inquiries lower your credit score. Before you fill out that application, ask yourself if you really need the credit card.

A less than favorable credit score won’t haunt you forever. Begin taking the steps to improve your credit score now and enjoy the effects later once your score starts to improve.