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An Interview with Patrick Ritchie, Author of “The Credit Roadmap”

An Interview with Patrick Ritchie, Author of “The Credit Roadmap”

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    Patrick Ritchie is the author of The Credit Road Map, an in-depth look into how the credit world works. He is a certified instructor with the Arizona Department of Real Estate. Patrick is a guest lecturer for The Ohio State University and Arizona State University MBA programs. His book is approved by the National Association of REALTORS® and is required reading in finance and real estate classes at major universities. He and the author worked together at Winding Hollow Country Club in New Albany, Ohio in the mid-1990s.

    On Credit

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      1. Why is a good credit rating so important, and how can people improve their credit ratings?

      The main reasons are to borrow money or to seek employment. Obviously lenders look at credit reports and scores in making lending decisions. Employers, more and more, are looking at credit reports as a judge of character in the hiring process. There was a student in the Personal Finance class I guest lecture in at Ohio State who was offered a job and then had it rescinded when HR ran a credit report on him. In a tighter job market it literally can pay to have a better credit report than the next applicant.

      As far as improving one’s credit, the single most important aspect is to understand what is going on in the credit report. Having an understanding of what is contained in the credit report and what is not, FICO® scores consider five factors in calculating a score:

      1. Payment History: 35%
      2. Balances 30%
      3. Inquiries and New Debt: 10%
      4. Types of Credit: 10%
      5. Length of History: 15%

      With these set of factors the ideal account would be a credit card that I have always paid on-time (Payment 35%), with a balance under 50% of my available limit (Balances 30%), it is a major credit card (Types of Credit 10%) and I have had it open for over seven years (Length of History 15%). This is just an example of how the factors apply. There are many things that do not have a role in credit, such as income, assets, down payment amount, interest rates; these items do not influence our credit. Since income and assets play no role, we are all essentially on a level playing field from the standpoint that our credit will be based on our management of our given resources rather than the amount or lack of resources.

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      The best example of this would be two past clients of mine. I like this example because the two clients were the same age, but were in two entirely different worlds when it came to career and finances. The first client played for an NFL team, his income was $2,000,000 annually. The second client was a school teacher; her income was $40,000 annually. Obviously there is no comparison in regards to their resources. However, the credit playing field was completely level and the school teacher excelled, she had close to an 800 score, a fantastic credit score. The wealthy athlete did not manage his financial affairs well; his score was less than 580, an awful credit score. Where did he go wrong? His first mistake was co-signing with friends and family on vehicles, the payments were not made on-time and his credit suffered. Co-signing gives you equal responsibility, and equal demise when the payments are not made on-time, my advice is to never co-sign, ever ( I had a client who co-signed for her son on a house, he stopped making payments and ultimately forced his own mother into bankruptcy, if you can’t trust your own kid who can you trust)? His other issue was the accumulation of about 5 to 8 small collections, most under $200. He had the money to take care of them, but he never knew they existed. Overall, poor management and attention is what caused the low credit scores; it was not for a lack of money.

      What did the school teacher do right to achieve high credit scores? She paid things on-time, never compromised her good record by co-signing with people (Why do people ask you to co-sing? Because they don’t qualify, keep that in mind the next time someone asks you to co-sign), had no collections, had well aged credit cards, did not let mistakes linger on her credit report. She just practiced good management of her credit affairs, and gave her credit some attention to make sure it was in line.

      The first step in making achieving the best credit scores is to give the report an assessment to make sure everything is correct. This is the starting point. Make sure you understand what is on there, why it is on there, and most importantly should it be on there?

      2. What rules do people need to know in the world of credit?

      What people need to know is that there are two main rules, the first being the credit scores and how they are calculated, the second being the Fair Credit Reporting Act, which gives us our rights as consumers in relation to credit reports. These two separate sets of parameters are what shape our credit lives. The Fair Credit Reporting Act, like most statutes is boring to read, so I dissected it into easy to understand language any consumer will understand. I tried to only focus on the points that pertain to consumer rights, the actual aspects that impact credit. If there is one thing that everyone should know about the Fair Credit Reporting Act it is that the consumer must initiate their protections under the Act. If there is something incorrect on my credit report it will not magically fix itself, I must discover it, dispute it, and follow-up to make sure it does not reappear.

      The FICO® credit scoring factors are fairly straight forward. In the book I apply them to numerous examples, similar to how a law book would apply a legal concept to a real court case. By showing how the factors impact people in real life and displaying the potential pitfalls it gives readers a better grasp of how the factors apply to various circumstances. In my classes I always say “there is never a blanket answer to an individual’s credit scenario.” The reason for this is that there are numerous variables in each of our individual credit reports; the same event will impact our credit scores to a different degree. For example, if we have two people who both incur a 30 day late payment in the same month will they be equally impacted? If person A has 10 positive accounts, and person B has only 2 positive accounts, who do you think will suffer a greater drop on their credit scores?

      If I have 10 positives to outweigh a negative versus 2 positives it is apparent the person with more positive accounts is likely to suffer less of a drop to their credit score from a 30 day late payment. Based on this knowledge it shows us that having more, well managed accounts, is better than fewer accounts because in the face of adversity we will have greater protection by being surrounded with positive accounts. However, we always hear that having too many accounts is a bad thing. Based on what? There has to be a test to measure this, so how would I measure if I have too many accounts, or let’s say too many credit cards specifically? Wouldn’t it be based on my income or assets, my ability to repay what I borrow or could potentially borrow? That sounds like the test, but our income and assets play no part in our credit, so it is impossible to test how much is too much. The exception to this is that in applying for a loan the lender would know my income and it would play a role in the decision, but it still plays no role in my credit, since income and assets are absent.

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      In the absence of income, the credit relies on management, how am I managing my obligations? This is the critical item many people miss, it doesn’t matter how much or little income you have, credit is formed by your actions, not your checkbook. Obviously the size of the checkbook can make this easier or more difficult. Reflecting whether or not someone is living above their means and having trouble making payments on-time, or the flip side to that, the person has the funds, but just doesn’t make a great effort to pay debts on-time.

      What if my credit report tells me I have too many open active unsecured lines of credit (i.e. credit cards)? Reason codes tell you why your credit is not perfect, the important thing to realize is that your credit will never be perfect, if you are 740 or higher you have reached the upper echelon, getting to 800 is great, you will never hit 850 on the Classic FICO® model used by banks. Keep in mind there are knockoff credit scores out there being sold to consumers that may give you a higher credit score, but if banks don’t use those credit scores then neither should consumers. I hear all the time about consumers getting a “DisadVantage Score” online and thinking they have a great score, only to find out their FICO® Score is 100 points lower when they go to a lender to apply for a loan. If the real-world uses FICO® so should consumers. Whenever I say credit scores I am referring to FICO®. Back to the reason codes, if you have good credit already, ignore the reason codes. If the reason codes tell me I am not perfect because I have too many credit cards, then I close the credit cards (which I really should never do if I care about my credit scores being the highest they can be), the next time I check my credit report guess what the reason codes are going to tell me? “Too few open active unsecured lines of credit” or “Too many new accounts”, closing the well established accounts results in a lower credit score, ignore the reason codes, they are like the GPS system that tells you driving over the cliff is the quickest route to your destination.

      3. What is the highest credit score you’ve ever seen, and how was it attained?

      The highest I have seen was 841 on the max 850 scale. This score was attained by someone who was 70+ years old, the he had credit cards dating back to the 1960’s that were still open and active. What this illustrates is the importance of keeping credit cards open and active in order to constantly feed positive information into the credit report. Do I need accounts that are 50 years old? No, once a credit card has become 7 years or older it is a well established account. It is common to see people with 800 credit scores when they have credit card accounts over 7 years old. How could an 18 year old accomplish this? Ask mom and dad to add you on as an “authorized user” to their credit cards. In my book it talks about a 22 year who did this, he had no score because he had no credit, nothing good, and nothing bad. His mom added him as an authorized user to an ideal account she had (open for 10 years, balance was 5% of the available credit line, and it had always been paid on-time). Sixty days later when the account appeared on his credit report it generated an 817 credit score, simply because of the positive nature of that account. If he had opened his own account he probably would have a 620-range score for the first 12 months of the account existence. The authorized user account is a very powerful method to boost a credit score, and a great way for relatives to help each other. This came under major scrutiny and public outcry in the summer of 2007, so much so that Fair Isaac, Co. was going to remove it from the scoring model. The outrage has tempered and as it stands, the authorized user account cannot be excluded from the scoring model under the Equal Credit Opportunity Act, so it is a here to stay.

      4. Can you hire someone to fix your credit?

      You can, however, the purpose of my book is to give the reader an overall education about credit so they can fix their credit on their own, if it needs correcting. As far as hiring someone to do it for you, it is like hiring someone to clean your house, you could do it yourself, but maybe you want to have someone else to do it because you think they can do a better job. Consumers just need to keep in mind there really isn’t anything they can’t do themselves, although they may procrastinate and never get around to doing it. There are a lot of rip-offs out there, the Federal Trade Commission warns consumers about this. The best way to test a credit repair service is to ask what it is they will correct. If the service states they can remove everything negative regardless of whether it is correct or not, this is a red flag and they are likely to just take the money and run. Accurate negative information cannot be legally removed. It would compare to a tax preparer telling me they can get me out of paying any taxes whether I owe them or not.

      For people with extremely complex issues they may want to consult a consumer law attorney.

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      5. How badly do late payments hurt?

      Payments account for 35% of the score, so a late payment can be a considerable blow to the credit scores. One late payment is not going to completely wreck the credit score. The impact will be based on how much positive credit the person already has. In my book I wrote about a method called “re-aging” which can remove late payments. It exists in the Uniform Policy manual which is put out by the Federal Financial Institutions Examination Council. “Re-aging” can be a great tool, but its use is at the discretion of the lender.

      6. What about bankruptcies?

      I would call bankruptcy the worst case scenario for credit, but it is necessary sometimes. It is better to get closure and recover than to let a bad situation continue. Many people who go through a bankruptcy will recover in 2 to 3 years. A bankruptcy comes off the credit report entirely after 10 years based on the Fair Credit Reporting Act. The more time that passes the less impact a bankruptcy will have. Bankruptcy is not the end of the world, it is actually a means to get a new start and for some people is their best option. It provides the best closure other than just paying the debt back. If someone doesn’t have the money to repay debt they should consult a bankruptcy attorney.

      7. How can we avoid identity theft?

      For someone who fears identity theft I suggest “freezing” the credit report. To do this, go to each of the three credit bureaus websites (www.experian.com, www.transunion.com, and www.equifax.com) and search for “security freeze”. The instructions are on each site, the cost is minimal, no more than a one-time $10 fee, for victims with a police report it is free. By freezing the credit report it makes the credit report inaccessible and therefore a thief could not gain fraudulent credit from a lender if the lender cannot access the credit report. This is the best method of prevention. Simply monitoring the credit report puts a consumer in the position of responding to the act not preventing it. A fraud alert can be added to the credit report at no cost; however, it is not as efficient as freezing the credit report. With a frozen credit report a consumer can still apply for credit by requesting a pin code so that a specific lender can access the credit report. Identity theft is a lengthy subject and certainly pertains to credit, so I have an entire chapter dedicated to it.

      8. A lot of people are facing foreclosure. Is there an alternative to foreclosure that would be better for credit?

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      A short sale (the lender accepts less than what is owed) may be a better means for some people if the lender is willing to do it. The benefit to a short sale is to reduce the number of months of delinquency versus a foreclosure. If someone wants to keep their home they should request a loan modification from the mortgage company or a temporary forbearance if they are searching for employment. This is a complex issue; I have a three hour class about this specific topic. Individual circumstances vary, but the starting point is to always ask “do you want to stay in this house?” If the answer is no then a short sale, deed-in-lieu of foreclosure, or foreclosure are the likely companions to this. If the answer is yes, they would like to stay, then a loan modification, forbearance, among other options are worth pursuing. A homeowner should call the lender first to see what options are available to them. Any organization approaching them and asking for money to assist in preventing foreclosure is likely to do nothing and just take the money. To find a local HUD approved counseling agency go to www.hud.gov and find your state page, most of the HUD approved housing counseling agencies are top notch people. Like with anything, if you have a gut feeling someone is not looking out for your best interests then walk away.

      Productivity

      1. Describe an average day in the life of Patrick Ritchie.

      My day goes from 7 am until I go to bed, which is generally 11 pm. I am still actively doing loans (mortgages), always writing about something, outlining a new book (just finished the second one), creating a new CE class for professional license renewal, teaching my classes, or consulting with someone about their credit. I teach my classes around Arizona, but I also travel the country when someone wants to bring me in to teach about credit. Some days I may be in Lincoln, NE, other times I might be in Maui, HI, wherever I am hired to speak. Currently I am promoting The Credit Road Map as a useful supplemental text for Personal Finance and Real Estate Finance classes at colleges. In between all of this I am attending Law School at Arizona State University, only 2 more semesters to go. I have a wonderful son who is about to turn 5 years old, so all of my non-work time is spent with him.

      2. How do you keep it all together?

      I have no clue how I keep my sanity, but it involves a lot of coffee, lists of everything I need to complete, and simply moving forward constantly. The speaking and travel schedule requires a carefully planned calendar. My laptop is my most important business tool, it goes almost everywhere I go because then I can work from anywhere. Some of my best writing happens on airplanes.

      3. What are the most important things you’ve learned about productivity in the last few years?

      Write everything down and cross it off when completed. Try not to do the same thing twice, think about your procedures so there is uniformity, like a franchise. Never be afraid to take a 15 minute nap to recharge the brain. Most importantly, enjoy what you do and it won’t seem like work. I truly enjoy what I do, educating people about credit is a worthwhile pursuit.

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      Art Carden

      Art Carden is an Assistant Professor of Economics and Business at Rhodes College in Memphis, Tennessee.

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      Last Updated on July 10, 2020

      The Definitive Guide to Get out of Debt Fast (and Forever)

      The Definitive Guide to Get out of Debt Fast (and Forever)

      Debt can feel crushing, like a weight that is always weighing you down. Looking at those numbers, it can feel as if you’ll never get out from under it. However, if you really want to learn how to get out of debt, it is possible with a great deal of focus and self-control.

      Getting out of debt isn’t impossible. Like any big goal, all that it takes is an action plan to identify where you are and creating a plan to zero out your debt.

      Identifying All of Your Debts

      The first part of paying off your debt is getting a complete picture of what you owe. When you have everything written out in front of you, it makes it much easier to create an action plan. Depending on how much you owe, it might also help you realize it’s not as bad you might have originally thought.

      Here’s how you can get started identifying your debts:

      1. Own Your Debt

      Before you start identifying all of your debts, take a moment to process that you have debt but want to get out of it.

      Forgive yourself for any past mistakes, missed payments, or overspending. It might be painful to accept how much debt you have at first, but you must own it.

      2. Make a Debt Tracker

      It’s astonishing how few people ever created a tracker to understand their total debts. Most likely, it comes from not wanting to accept the guilt of having debt, but, if avoided, it can make it nearly impossible to get out of debt.

      Open up a new Google or Microsoft Excel sheet and list out all of your debts. Start with the name of the creditor, interest rates, total balance, loan term length (if any), and the minimum amount due each payment. This will include student loans, credit cards, and any other type of debt owed.

      3. Get Your Debt Number

      Once you’ve made your debt tracker and taken the other steps, identify your total payoff number. This is crucial, as you will have a starting point and a clear goal that you are trying to achieve.

      Prioritizing Your Debts

      All debt is not created equal. It’s imperative to understand that there are different types of debt.

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      1. Understand Bad and Good Debts

      Bad debts are usually paying for things you want instead of always need. While there might be some emergencies that max out your credit cards, often times it’s excessive spending[1].

      There are three main types of bad debt:

      • Credit Card Debt: The average American household owes over $16,000 in credit card debt!
      • Auto Loan Debt: According to CNBC , the average auto loan in the US is $30,032!
      • Consumer Loan Debt: Consumer loan debt isn’t as common as credit card and auto loan debt, but it’s still considered bad as interest rates are usually between 10-28%.

      Good debt is identified as investments in your future. Here are three common types of good debt:

      • Student Loan Debt
      • Mortgage Loan
      • Business Loans

      2. Decide Which Debt to Pay off First

      Once you know each type of debt and their interest rates, you can begin to pay off debt quickly.

      Focus on paying off bad debt first, regardless of if it is a credit card or auto loan. Start by paying off the loan with the highest interest rate first.

      If you have several credit cards with different interest rates, you want to focus on the one with a higher APR. You will actually save more money by eliminating the card with the highest interest rate.

      3. Don’t Pay the Minimum Amount

      Paying the minimum amount digs you into a hole as interest rates will offset your payment. Even a small amount more than the minimum can help you pay off debt much faster.

      Removing Obstacles to Pay off Debt Quickly

      Creating a debt tracker and prioritizing a plan is simple, but avoiding temptation can be difficult.

      1. Set a Reminder to Track Your Debt

      “If you can’t measure it you can’t manage it.” -Peter Drucker

      It’s so important to track your debt to ensure that you get it paid off quickly. Similar to working out and measuring your results, you need to track your debt constantly. Start with a weekly reminder, where you sign on and log your updated number. Did you increase, decrease, or stay the same?

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      Regularly tracking your student loan balance can be incredibly motivating, as well. You will get a huge confidence boost each time you see your total debt amount decreases.

      Set weekly and monthly goals so you can have short term wins and keep the momentum going.

      2. Hide Your Credit Cards

      If your biggest debt is credit cards, you need to eliminate temptation and remove them from your wallet.

      Some people have gone to extreme measures by freezing their credit cards. Why? This would create an ice block around your card, which would require you to chip away at it slowly. This will give you time to think if it’s the best idea to buy that thing you’re about to buy.

      3. Automate Everything

      Willpower can be a huge downfall to paying off your debt. By automating your bills each month, you will ensure that willpower isn’t involved.

      4. Plan Ahead

      Getting out of debt will require some sacrifices, but with enough planning, you can make it work.

      For example, if you know that you have a friend’s birthday or family dinner coming up, plan ahead for the costs. Whether you need to cut back on spending the week before, pick up a side job, or meet them after dinner, do what is needed.

      5. Live Cheaply

      The only way to get out of debt is to make some sacrifices on your spending habits. Find ways to save money each month so you can apply that amount to your outstanding debts. Here are some ways to save money each month:

      • Live with roommates
      • Cook dinners and prepare lunches for work instead of eating out
      • Cut cable and choose Netflix or Amazon Prime
      • Take public transit or bike to work

      Finding the Lowest Interest Rates

      The higher your interest rates, the harder (and longer) it will take you to pay off any debt.

      If possible, you want to find ways to lower your interest rates to help get out of debt quickly. Here’s how you can get started:

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      1. Maintain a High Credit Score

      Your credit score will have a large impact on your ability to refinance your loans and receive a lower interest rate. If you have a low credit score, it’s unlikely you will be able to refinance your loans. Use these credit tips to increase and maintain an excellent score:

      • Never miss a payment
      • Don’t exceed 30% of your credit limit
      • Don’t sign up for more than one card at once
      • Limit hard inquires, like auto-loans and new credit cards
      • Monitor frequently with free credit-tracking software

      2. Find Balance Transfer Offers

      Start by opening a free account on credit.com. Credit.com offers you the chance to open a free account and see what type of balance transfer offers you can receive. Some of your existing credit cards might already have 0% or lower APR balance transfer offers available.

      Contact each of your credit card providers to ask about lowering your rate for a one-time balance transfer offer[2].

      If you do take advantage of this option, make sure that you use a balance transfer and not a cash advance. Cash advances have a ton of high interest fees (15-25%, depending on your credit card) and will only compound your debt problem.

      How to Get Rid of Debt Forever

      Setting up a plan, removing temptations, and getting the lowest interest rates is the first step to get out of debt.

      1. Keep Monitoring and Adjusting

      Once you have a plan, don’t get comfortable. Track your debt payoff plan and make the necessary adjustments when needed.

      Monitor your credit scores with a free site like CreditKarma. The higher your credit score climbs, the more likely you will be to secure a new, lower-interest loan.

      2. Earn More Money

      There are only so many ways to save money. Instead of clipping another coupon or making sacrifices for your morning coffee, find ways to earn more money!

      Think about it…it is much easier to find ways to earn an extra $1,000 per month than find $1,000 to cut from your budget.

      Here are some examples of ways to earn more money:

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      Talk to Your Boss

      Have a conversation with your boss about current salary and/or commission rates. If you’re not satisfied or want a change, don’t be afraid to look around at other positions. Some of them might even have a student loan debt reimbursement plan!

      Start a Side Hustle

      This could be coaching students on the weekends, driving for Uber, or taking paid online surveys. There are tons of ways to make money outside your 9-5. Now that you have a clear plan to pay off your debts, you’ll be more motivated than ever to figure out creative new ways to earn money.

      Build an Online Business

      There are so many websites and blogs that earn money from ads, affiliates, and other online products. Find your niche and get started.

      3. Celebrate Your Wins

      As you progress in your debt payoff journey, don’t forget to celebrate your wins. You need to always reward yourself for the hard work and discipline that is required to get out of debt.

      While you shouldn’t celebrate so big that it increases debt, make sure to factor in little rewards to keep you motivated.

      4. Set New Financial Goals

      Eventually, with a plan and these steps, you can rid yourself of your debt. Once you do, make sure to celebrate your monumental achievement, but don’t stop there.

      Now, you can focus on acquiring wealth and increasing your net worth. Set new financial goals so you have a new target to aim toward. Here’s how to set financial goals and actually meet them.

      These could be anything now that you are debt free! Think about where you want to travel, buying your first home, or saving for your future retirement. Just like before, make sure that your goals are specific, measurable, and achievable.

      Conclusion

      Congrats, you can now set a plan in motion to finally pay off your debt quickly (and hopefully forever)!

      Remember, if you want to get out of debt quickly, it’s not always easy. Just like any big goal, there will be sacrifices, challenges, and problems to overcome.

      More Tips on Getting out of Debt

      Featured photo credit: Pepi Stojanovski via unsplash.com

      Reference

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