Bad credit is expensive

Financial Literacy 2007 - Credit scores

Part 6 of 18

MONEY MAKEOVER

Poor credit is expensive

Angel is about to be married and she wants a fresh start on her credit life as soon as possible.

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Credit scoring, demystified

Profile:Angel Smith

The problem:

Low credit score limits mortgage-financing choices.

The plan:

Boost score with auto bill pay and by zapping card balances.

Profile

	Angel Smith Angel Smith, 27, of North Carolina, is engaged to be married in October 2007 to the love of her life, Tyree. She has recently started a new position with a large supermarket chain and is looking forward to her new career. Angel's dream is to own her own home, and she is happily looking for something that she can afford. She has marginal credit, high credit card debt and little in the way of personal savings and retirement accounts. She wonders if she will be able to get her finances in order, achieve her goals and start her married life out on the right financial footing.

The problem

Overview

Angel has a problem common to many young professionals. She is in the market to buy her first home, but her low credit score has been a big hindrance in obtaining conventional financing. Not only that but Angel has relatively little personal savings, and she has a problem with budgeting for her expenses. "I tend to spend whatever I have at the moment," she says.

Angel believes that she will continue to earn a good living and she has planned to pay for her wedding with cash. She believes she can look forward to substantial earnings gains over her career. But right now she is pinched in her finances, and a few issues after college have damaged her credit score.

While she is not sure how she got in this position, what she does know is that just starting out in her new life, she has $12,000 of high-interest credit card debt spread out over four credit cards. This debt is about 75 percent of her credit limit. She is currently paying high rates because her credit score has not qualified her for preferred rates. In fact, three of the cards have rates of over 25 percent. This is her only current debt, as she does not have a car loan.

	This report was prepared by Chartered Financial Analyst William Z. Suplee, CFP, CASL, ChFC.

Key issues

		A low credit score limits her mortgage-financing options.

		No emergency savings.

		Does not live on a written budget. Spends as she wants.

		$12,000 in credit card debt over four cards.

		Paying penalty-type interest rates of more than 25 percent on three cards.

		Credit card debt balance is already at 75 percent of her limit.

		Several recent late payments on credit cards.

Jump these money hurdles