RateLadder made a guest post on LazyMan’s blog on a strategy he is using to fund his Simplified Employee Pension Plan (SEP-IRA). A SEP-IRA is a retirement plan for individuals that are self-employed, and thus do not have an employer sponsored plan (such as a 401k or 403b). Basically, he is taking out a loan in order to fund his retirement plan. The thing that I really like about the idea is that the tax benefit will more than pay the interest on the loan (even though it is a 36-month loan)!

Of course, the best way to fund your retirement is to make regular contributions towards a retirement account, such as a Roth IRA or traditional IRA. For 2007, the contribution limit for an IRA is $4,000. If you made regular monthly contributions, that would be $333.33 per month (plus an additional $0.04 somewhere in there). Although it is now 2008, it is still possible to contribute towards the 2007 limit until April 15 (individual tax return deadline). If you would like to max out your 2007 contribution before the deadline, do not currently have the money to do so, and you are capable of contributing $800 or so over the next 12 months, you may want to consider a strategy similar to RateLadder’s.

If you are considering a similar strategy, I would recommend you take the loan for a year. That way your payments will approximate those for the annual contribution limits and you will pay less interest. Let’s do an example with a few assumptions (similar to RateLadder’s):

• Your current tax bracket is 25%
• You have at least $800 in discretionary income to contribute towards retirement
• You are funding a traditional IRA (although a Roth IRA is better for the long term, it does not have the immediate tax advantage that will be discussed below)
• A $4,000 loan will be taken to fund the retirement account
• The interest rate on the loan is 10%
• You will be making the 2007 maximum contribution of $4,000 with the proceeds of your loan
• The loan will be paid within 1 year

The monthly payments on a $4,000 loan that will be paid in 12 months will be $351.66. The total interest paid will be $219.96. The tax benefit from the traditional IRA will be $1,000. The net benefit from the strategy will be $760.04. If the monthly payments are only $351.66, why did I say you needed at least $800 in discretionary income to contribute towards retirement?

The strategy really only makes sense if you intend to max out your IRA contributions every year. So that means you will need to contribute an additional $416.66 per month if you are to max out the 2008 contribution limit of $5,000. Otherwise, you would have to take out another loan next year to max out the 2008 contribution, and you would be playing catch up each and every year. If you’re going to be taking out a loan every year, you may as well just start making regular contributions now until retirement instead of using the strategy I’ve described.

If you or your spouse already contribute towards an employer-sponsored plan (401k or 403b), there are limits to the amount that can be deducted on contributions made to a traditional IRA depending on your adjusted gross income (AGI). This will limit the amount of tax benefit for your contribution, but you can still contribute the maximum annual amount of $4,000. You can refer to IRS publication 590 for more information. The strategy could also be used to max out a Roth IRA, but you will not have the tax deduction benefit to help cover the interest expense of the loan.

Prosper.com is definitely a good place to get a loan. Although Prosper loans are 36-month loans, it is easy enough to make over-payments to pay the loan within 12 months. You could also use a home equity loan to fund the retirement account, and take advantage of the deductible interest as well! Whatever strategy you use to fund your retirement, it is important that you do it as soon as possible. The more time your money has to grow, the more comfortable your retirement will be.

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Revolving Debt and the Economy

On Tuesday the Federal Open Market Committee (FOMC) dropped the federal funds rate by 0.75% in an emergency meeting. What does this mean for mortgages? The federal funds rate does not actually directly impact fixed mortgages. Because fixed-rate mortgages are long term loans, they tend to more closely follow long-term paper such as the 10-year treasury note and 30-year treasury bond. The 10-year treasury note and 30-year treasury bond have been on a steady decline since July, as have 30-year and 15-year fixed mortgage rates.

Treasury yields have dropped quite a bit in the past two days since the FOMC announcement which is good news for anyone looking to buy a home. The yields aren’t dropping so much as a direct result of the federal funds rate drop, but more because of the message the FOMC has sent as a result of the action they have taken. I read a good article this morning that describes the situation well:

Mortgage rates often dip when investors fearing an economic slowdown grow more conservative and buy up Treasuries and bonds. This causes long-term rates — and by extension, mortgage rates — to fall, creating an opportunity to get better terms on a loan.

Although normally this would be good news for borrowers with adjustable rate mortgages that wish to lock into long-term fixed-rate mortgages, they may still find themselves unable to refinance. During the housing boom many people used adjustable rate mortgages with small down payments to purchase their homes. They did this in anticipation that home prices would continue to climb, and the market value would allow them to build equity in the home. Unfortunately when the real estate market topped out, these individuals were left with very little home equity or even worse, negative equity in their homes.

With little or no equity in a home, it will be very difficult to refinance into a fixed-rate mortgage. Without at least 20% equity in a home, a homeowner will have to pay Private Mortgage Insurance (PMI). This helps lenders to recover losses from defaults and provides no benefit to the borrower. I have no doubt that PMI premiums have increased ever since the subprime lending issues began. This means a higher monthly payment which may not make it worth refinancing since it could possibly push a homeowner into negative cash flow. On top of having higher payments with PMI, payments on a fixed-rate mortgage will include principal as well as interest. Once again, the higher payment could force a negative cash flow situation. Even given all that, with lenders tightening borrower requirements, it may only be possible for those with excellent credit to refinance if they have very little or no home equity.

So what is a homeowner with an adjustable rate mortgage and very little equity to do? Well, one good thing about the reduction in the federal funds rate is that it could possibly lower the monthly interest payments. This would allow a homeowner with an adjustable rate to increase the amount of principal paid, hence build some equity. Hopefully the decrease in short-term rates will help homeowners with adjustable rates to build sufficient equity and allow them to refinance before fixed-rate mortgage rates begin to increase once more.

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Is the Worst Behind Us in the Stock Markets?

What does it mean to invest? Investing is the process of providing capital for the receipt of future income, appreciation in the capital, or both. In providing the capital, the investor assumes some risk: the possibility of losing some or all of the invested sum. Typically speaking, when there is higher possibility of loss there also needs to be greater gains in terms of capital appreciation and income in order to offset the risk. The best investors are those that are able to best understand and manage risk, as well as analyze and understand the potential of future income.

Warren Buffett is no doubt one of the best investors of all time. Not only is he an excellent judge of risk and profits, but he has the uncanny ability to properly assess the value of an investment. Even if a company experiences excellent growth and profits, if it is overvalued there is some risk that eventually the valuation of the company may drop to a more reasonable level. Buffett will only invest in a company if he believes it to be fairly valued, or even better undervalued.

So how do you determine the value of a company? There are many methods, but fundamentally speaking I like using discounted cash flows (DCF). With DCF, you discount estimated future earnings by the sum of the risk-free rate (federal government bonds) and a risk premium. The Business Plan Store has a good example here. Robert G. Hagstrom wrote an excellent book called The Warren Buffett Way, in which he provides some insight into how Buffett performs some DCF analysis to value business he has invested in. Later this week, I’ll provide you with an overview of Hagstrom’s calculations along with some examples.

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I remember ages ago when Google Fight went viral (even before the term viral went viral). Just for grins, I performed a Google Fight between Prosper.com and LendingClub.com:

Prosper wins by a score of 135,000 to 13,700!!!

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Building and Rebuilding Good Credit

If you are a recent college graduate that has just entered the workforce, you have an excellent chance for a comfortable retirement if you begin contributing to your retirement as soon as possible. If you are 24 years of age or younger, you have at least 35 years until you reach age 59 1/2 (minimum age to begin withdrawing from a retirement account without penalty). That’s at least 35 years to let the magic of compound interest work for you. What exactly does that mean? Let’s look at some numbers as an example with a few basic assumptions:

• There are 35 years between now and your retirement
• Your retirement investments average a 10% annual return (fairly reasonable long-term return estimate)
• Inflation over the next 35 years is 4%
• You invest $50 a paycheck and you are paid biweekly (26 paychecks a year)

By investing just $50 every two weeks at a 10% annual return, in 35 years you will have $414,620.36! However, accounting for inflation, it would only be worth $154,839.47 in today’s dollars. That’s not bad pile of cash, but it won’t be enough to get you through retirement. That means you’re going to need more than just $50 a paycheck. If your employer has a 401k plan in which they provide matching contributions, it can help be a source of the extra money you will need.

A 401k is an employer-sponsored plan, where employees can make pre-tax contributions into a retirement account. The contributions made in the account grow tax-deferred, meaning they are not taxed until withdrawn during retirement. More often than not, as an added benefit employers will contribute matching funds for employee contributions. For example, my employer will match 100% of the first 3% of salary contributed, and 50% of the next 2% of my salary. Confused? Basically, it means if I contribute 5% of my salary my employer will match with 4% of my salary.

Let’s continue the example with the 4% match on 5% of salary. To keep things simple, let’s say that $50 biweekly is 5% of your salary and is your contribution in your 401k. That means for every $50 you put in, your employer will contribute $40 more. With $90 in biweekly contributions, in 35 years you will have $746,316.65 or $278,711.04 in today’s dollars. Of course, if you as me, you should try to contribute more than just 5% of your salary.

So what’s the catch with the employer matching? In order to become fully vested (be allowed to keep the match), you have to remain an employee with the company for a specified amount of time. Your employer may allow you to keep all or nothing after a certain period of tenure (cliff-vesting schedule) or they may allow you to keep certain percentages after reaching certain tenure milestones (graded-vesting schedule). Regardless of your tenure, if you leave the company all of your contributions will remain yours.

If your employer doesn’t have a 401k plan, there are other types of retirement accounts you can open on your own behalf. One of the best is a Roth IRA (Individual Retirement Account). With a Roth IRA, you make after-tax contributions into a retirement account that grows tax-free. That means when you withdraw during retirement, you won’t pay taxes on it. There are some income limitations, so if your income is too high (six-figure range) you won’t be able to contribute to a Roth IRA, but you can still contribute to a traditional IRA. With a traditional IRA, your contributions grow tax-deferred. That means you will have to pay taxes when you begin making withdrawals during retirement. So you can see, the Roth IRA is more advantageous if you qualify for it. There are annual contribution limits for both types of accounts.

When you first begin contributing to a retirement account, if you are young and a long way away from retirement, you should put your money into aggressive growth investments. The value of the account may move up and down considerably with aggressive investments, but in the long run it should increase. As you near retirement, investments should become less aggressive in order to preserve the earnings made over the years. That means that it may be possible you may not even reach the $278,711.04 in today’s dollars mentioned in the example. However, there is some good news that will help you accumulate more wealth for retirement. As you continue working, your salary should increase as you receive merit increases, cost of living increases, and advance into positions with a higher salary. This means that your contributions will not remain constant, but should gradually increase year-after-year.

How much money you will need for retirement depends on your life expectancy, how much you will need to withdraw each year, and what kind of return you are receiving while you are withdrawing. Maybe $1,000,000 sounds like a good number. Let’s see… Here are the assumptions:

• You have accumulated $1,000,000 for retirement
• You withdraw $70,000 per year
• During your retirement, your $1,000,000 is earning 3% interest
• During your retirement, inflation is growing at 4%, giving you effectively -1% interest

$1,000,000 would last you about 14 years. If you start withdrawing at age 59 1/2, that means it would last you until age 73. Hmm, that’s probably not long enough. But wait, it gets worse! Although we did account for inflation during the retirement period, we forgot to adjust the $70,000 annual withdrawal for inflation. The equivalent of $70,000 in todays dollars will be nearly $300,000 in 35 years (with 4% inflation)! If you want to withdraw $300,000, your nest egg is only going to last you about three years. Yikes!

If you need $300,000 year for 30 years in retirement, that means you will need to accumulate over $10 million! Although that may seem like an impossible task, it can be accomplished. The earlier you start, the better your chances of achieving a comfortable retirement. It gives you more time for compound interest and your increasing salary to work for you. The more you contribute each paycheck, the better your chances are as well. So what are you waiting for?!?

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My First Post on the Official Prosper Blog

Building and Rebuilding Good Credit

I was reading cyncurry’s article Personal Debt - Is excessive shopping due to peer pressure? the other day, and she asks a thought-provoking question:

is it our moral duty to carry on building debt to keep the economy alive?

I don’t know about it being our moral duty to carry on building debt, but it is definitely a part of the economy that is here to stay. The practice of financing spending isn’t limited to consumers. Year after year, the U.S. Federal Government operates with a budget deficit, and on very rare occasion ends the year with a surplus. The amount of consumer revolving debt pales in comparison to the federal government’s. Of course, being the analytical type that I am, I decided to take a look at the numbers.

U.S. consumer revolving debt increased from $850 Billion in December of 2005 to $902.3 Billion in December of 2006. An increase of $52 Billion or 6.15% (Source: Federal Reserve Board G.19 Release - Consumer Credit). By comparison, the U.S. federal debt increased from $8.17 Trillion in December of 2005 to $8.68 Trillion in December of 2006. An increase of $510 Billion or 6.24% (Source: U.S. Department of the Treasury, Bureau of the Public Debt’s Debt to the Penny History Search). The U.S. consumer does have an appetite for credit, but it’s not nearly as big as Uncle Sam’s!

U.S. consumers do love their credit cards, but credit card spending is actually quite minimal in terms of its contribution to the economy. In 2006, personal consumption expenditures were $9.2 Trillion (Source: U.S. Department of Commerce, Bureau of Economic Analysis). That means that credit cards only contributed about 0.57% towards the gross domestic product (GDP) in 2006. The federal government contributed $2.5 Billion to the GDP in 2006, so the increase in federal debt from 2005 to 2006 represents 20% of the government’s contribution to GDP in 2006.

As demonstrated by the huge amount of debt it has taken on, the federal government has supreme confidence in the sustained growth of the U.S. economy. The debt of the federal government represents a huge portion of its spending, but contributes less to the U.S. economy than consumers do. Although consumer revolving debt does seem like a huge problem, I think we are just fine as it relates to the overall economy. However, I didn’t mention non-revolving consumer debt. As you would expect (since it includes mortgages), it is much higher than revolving debt. At the end of 2006, it stood at about $1.5 Trillion. If there is any trouble with the economic outlook it lies therein, as many Americans have adjustable rate mortgages that are adjusting. But that is another story for another time.

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My first post on the official Prosper Blog was published today! Many thanks to Rate Ladder, Editor-in-Chief of the Prosper Blog, for affording me the opportunity to contribute to the Prosper community. I hope it is the first of many articles to come.

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About

The 2008 Prosper Days Blogger Panel

The WealthBoy Strict ROI for Prosper Lenders

If you ask me, properly determining the value of an investment is the single most important aspect of investing. Many investors may argue that diversification is most important, but diversification will not help if the majority of investments are overvalued. In theory, the risk of loss along with the reward (expected increase in value or expected cash flow) should be what determines the value of an investment. However, in reality there is a third component that determines value: the law of supply and demand. According to the law of supply and demand, when demand increases (demand curve shifts to the right) the price will increase accordingly.

All to often, would-be investors use demand to determine the value of an investment rather than arriving to a price by properly assessing risk and reward. This mob mentality leads to an unjustified increase in the value of an investment. Ultimately the market will realize the investment has been overpriced, a lot of selling takes place, and the price falls to a more reasonable level. On occasion, the free market will underestimate the value of an investment. The price remains below the intrinsic value until either the market slowly comes to realize its underestimation, or some event takes place that exposes the market has underestimated the value of the investment. This would lead one to the conclusion that it is better to underestimate the value of an investment than to overestimate it.

If you can’t already tell, I’m a big fan of value investing. Value investing is “the strategy of selecting stocks that trade for less than their intrinsic value.” Of course, the real challenge lies in properly determining the intrinsic value of an investment. I believe you should never let demand be a part of the equation. Some investors actually do the opposite, allowing trends in investment volume to determine their investments. However, I would label such individuals speculators rather than investors. If you are unable to determine the intrinsic value (or a conservative estimate) of an investment, you probably should not invest in it.

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If you have credit cards with balances and are only making the minimum payments, you should look into consolidating your debt. Otherwise, it will take you a very long time to pay off the balances and you will pay a lot of interest in the process. Look into taking advantage of any balance transfer offers you may receive in the mail, but be sure to look them over carefully. Here are a few things you should consider when performing balance transfers with credit cards:

1. Try to pay off highest interest balances first.
   This just makes logical sense. You are paying more interest each month and compounding at higher rates. Paying these off first will help improve your cash flow quicker.
2. Do not perform a balance transfer on a card that already has a balance.
   Say you have a card with a $3,000 balance at 24% interest and a total credit limit of $10,000. You receive a promotional offer in the mail for a 2.99% fixed for life and decide to put $7,000 more on the card at the promotional rate. Sure you may have a great rate for the $7,000 you’ve refinanced. However, when you make payments on the new balance, it is very likely that payments will go towards the lowest interest rate first. That means that you will still paying 24% interest on a $3,000 balance.

   That means in the first month, you will add $60 to the $3,000 balance. If that wasn’t bad enough, the interest is compounding each month and the additional amount added increases each month! $60 will be added in the first month (balance = $3,060), $61.2 will be added in the second month (balance = $3,121.2), $62.42 will be added in the third month (balance = $3,183.62), etc.

3. Open new credit cards sparingly.
   More than likely you don’t have a lot of $0 balance credit cards lying around for taking advantage of promotional balance transfers. You may need to use a balance transfer offer for a new credit card in order to get the ball rolling. If you do open a new credit card, see if you can get a credit limit for at least the balance on your highest interest card. If you can get a credit limit that will cover the balances on multiple cards, even better.

   Once you have paid off one ore more of your balances with the new card, don’t cancel your old credit cards!!!! Not only could this potentially bring down your credit score (see my article on building and rebuilding credit), but you can now take advantage of balance transfer offers on your old credit cards. If you contact your old credit card companies, it is very probable that they have balance transfer offers you can use.

   If you still have high-interest balances to pay off, use the balance transfer offers on your old cards that you paid down to a $0 balance. It is better to use balance transfers on your existing cards as much as possible without opening new credit cards (and without conflicting with rule #2). This will keep the number of inquiries on your credit report to a minimum, and will make it easier to keep track of your balances and rates.

4. Fixed rates vs. introductory rates
   Be very careful when using introductory rates. These typically have an introductory period (12 months, 18 months, etc.). You can expect to pay a very high rate once the introductory period expires. Use balance transfer offers with introductory periods only if you will have enough time to pay it in full before the introductory period expires. As a rule of thumb, it is probably better to use balance transfers with introductory periods for smaller balances. The payments to pay the balance in full before the period expires will be lower and more manageable. If you have very high balances, you might want to use fixed rate for life offers instead of those with introductory periods. Otherwise, you will need to play the credit card shuffle once more, before the introductory period expires.
5. Be aware of the transfer fees
   More often than not, balance transfer offers come with transfer fees. Typically, the fee is a percentage of the balance transfer amount with a minimum and maximum fee that will be charged. If the fee is very high, it may take some time before you actually begin to realize any savings by performing the balance transfer. You should be very careful when performing a balance transfer with a high fee and an introductory period. If the fee is too high and the introductory period is too short, it may be more expensive than just simply not refinancing and maintaining the balance on your old card.

If all of this sounds cumbersome (and it is), you can always take the easy way out and get a 36-month fixed rate loan with Prosper. Prosper is a lending community where people can lend money to other people. Rather than borrowing from a bank, you’re borrowing from multiple individuals that compete to fund your loan. This often results in a much lower interest rate than you might pay with a bank or credit card.

If you do decide to play the credit card shuffle, please check out my Credit Card Refinance Calculator. It’s a nice little tool I put together that can help you figure out whether or not it is worth taking advantage of a balance transfer offer. It performs a comparison between your current credit card and refinancing with a balance transfer offer.

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Building and Rebuilding Good Credit

When I was in college, I was often solicited around campus to sign up for credit cards to get free t-shirts and other goodies. I always avoided the temptation and never signed up for any credit cards. In my mind, credit cards were a bad thing to be avoided at all costs. Unfortunately, I didn’t realize by turning down those offers that I was also turning down the opportunity to begin building my credit history. Building credit is extremely important, especially if you plan on becoming a homeowner some day.

I remember the trouble I had of having no credit as I entered the workforce and how frustrating it was. I would often receive junk mail offers for credit cards with annual fees, but never signed up for any of them. I think it is rather ridiculous to pay an annual fee for the privilege of spending your own money. So what alternative is there to getting a credit card with an annual fee? I began building my credit history by opening a secured credit card with Bank of America.

Secured Credit Card
With a secured credit card, you give a deposit to the lender and they hold it for a certain period of time (I think mine was a year). The deposit held will earn a nominal amount of interest and is held as collateral for the credit line. The credit limit for the card is equal to the amount of the deposit made. Although it seems that Bank of America now charges an annual fee for their secured credit cards, I’m certain there must be others out there that will not charge an annual fee.

Automatic Payments
It may seem like stating the obvious, but you should always make your payments on time. It may also seem like an easy task, but it isn’t so easy for lazy people such as myself that don’t like to pay bills. The best thing you can do in regards to making your payments is to set up automatic payments. I know this was the best thing I ever did to build a good credit history and maintain my credit rating as high as possible.

A lot of credit card companies will allow you to set automatic payments online with their website. You can set up automatic payments to pay the balance in full or make the minimum payment. Also, you can probably use your bank’s online bill pay to automatically make your payments on credit cards as well. Check your banking online bill pay to see if your credit card company offers e-bills. Then you can set up your bill pay to either pay the balance in full or make the minimum payment.

I highly recommend you pay your entire credit card balance(s) each month if possible. Contrary to popular belief, carrying a balance DOES NOT help you to build credit. It only results in paying unnecessary interest and finances charges. The important thing is to make sure that you make the payments, not that you “are actually borrowing money.” Do not pay for anything you do not have the money to pay for. If you wish to buy something you can’t pay for now, save for it and then buy it when you’ve saved up enough money to do so.

I would also suggest setting up automatic payments for everything, such as credit cards, utilities, phone bills, insurance, auto loans, mortgages, etc. Although the payment history for non-credit accounts do not appear on your credit history, nonpayment of accounts do. So make sure to always pay your bills on time no matter what they are! If you’re ever really strapped for cash and you need to make a late payment on something, DO NOT pay any of your credit accounts late.

Making Late Payments
Delay a payment on a water bill, electricity bill, or phone bill before you ever make late payments on a loan or credit card. Late payments on non-credit accounts will not hit your credit report until they have been sent to a collection agency. Companies will attempt to collect late payments themselves before sending them to collection agencies. I would guess that most companies do not send their receivables to a collection agency until they are at least three months late, so being late a month or two on your phone bill probably won’t hurt your credit.

Another important tip if you ever have to pay any of your bills late: do not be late with insurance payments. Nonpayment of insurance premiums can result in cancellation of your policy. Heaven forbid you decide to pay your insurance premiums late and you need to file a claim. If the policy was canceled due to nonpayment, you will be SOL and will have to pay everything out of pocket. You could also have problems reinstating your policy, getting a new policy, and may end up paying higher premiums.

Buy a Car
Buying a car (if you need it) is another good way to build credit. Of course, if you can get a 0% financing deal, it’s the best way to pay for a car. If you have limited credit history, it may not be possible to get a 0% auto loan. It may not also be possible to get 0% if you decide to buy a premium model such as an S2000 (like I did). If you get a high rate on your auto loan, you could always refinance it on Prosper or some other lender. Be sure to set up automatic payments for your auto loan to keep your credit history pristine.

Credit Inquiries
Try to keep your credit inquiries to a minimum. If you have a lot of inquires, they will bring down your credit score. If you are trying to get a loan, ask for quotes based on your current credit score and income. Do not allow anyone to run a credit check until you’ve decided on what lender you will use. In other words, don’t give them your social security number until you know for sure that you will be borrowing from them.

It takes two years for an inquiry to be removed from your credit history. More recent inquiries (within the past 6 months) will have more impact on your credit score than older inquiries. If you have had very few inquires within the past two years and have held a credit card for some time, be sure to contact your credit card company and request an increase. It will help to improve your overall score, as it will lower your credit card utilization percentage.

Low Utilization
It is important you try to maintain a low balance in terms of your overall available credit. Of course, when you first start building your credit this may be difficult to do if you have low credit limits. Slowly but surely, your credit card limits will be raised. If you feel your credit limits are too low, you can always request credit line increases. I have even been able to request a couple of credit line increases on my Bank of America credit card without credit inquiries! They gave me the increases based on my excellent payment history.

A while back, I received a 0% offer on one of my cards with no balance transfer fee. I thought I would be clever and take out the maximum ($13,000), put it into a high interest account, and pay it back before the introductory period expired (6 months). Although I did make about $200 or so by doing so, it did come at a price. I saw my credit score drop from around 800 to around 730.

My score has gone up to around 750 since then, but it has taken some time to recover (over a year). I think a few credit line increases on some of my accounts have helped to bring it back up. It is important for me to note that I paid the entire balance in full and paid it on time. Therefore, the high balance must be affecting my score as well my current credit card utilization. Otherwise, as soon as I had paid off the balance, I would have seen my score jump back up to 800. Although I lowered my own credit score, I learned a valuable lesson: don’t max out your credit cards.

Keep Lines Open
Although canceling unused credit cards may sound like a good idea, it is actually more likely to lower your score. This goes along the same lines of maintaining low credit card utilization. Creditors like to see a credit card utilization ratio of around 30%-35%. If you cancel an unused credit card, your overall credit limit on all of your credit lines will go down. This will result in raising your credit card utilization and lowering your credit score.

So how many credit cards should you have? It is probably a good idea to have at least one credit card with each of the major credit card companies: Visa, Mastercard, Discover, and American Express. If you do get an American Express credit card, I’d recommend getting one with no annual fee (such as their Blue Cash card). You really shouldn’t need any more than one credit card with each of these companies. To increase your overall credit limit, rather than open new credit cards, ask for increases on your existing cards.

Once you’ve begun establishing/restablishing your credit history, if you make your payments on time, keep credit inquiries to a minimum, and keep your credit card utilization relatively low, you should be well on your way to building a good credit score.

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