Wednesday, April 26, 2017

Awesome credit-- you must have it!

You've probably heard this line a hundred times at the cash register before, "Would you like to apply for a store credit card? You'll save 10 percent on today's purchase".

That was the offer that I accepted from a BestBuy store clerk sometime in the late 90s, just a few months after I started working here in the states. I remember walking out of the store smiling. It was the first time I've ever brought something out of a store without having to pay in cash.

I probably saved about $4 as the purchase was less than 50 bucks. But since the item was not of significant value, I totally forgot about the purchase; more so, paying the credit card bill. It was a bizarre case of amnesia, reminiscent of Jason Bourne but minus the fast-paced action and bone-breaking stunts.

What turned out to be thrilling was the part where I eye-balled my credit report, one year later. By then, it was too late. My FICO score plummeted to the 500-600 range, which was poor by any standard-- all due to that single transaction.

Fortunately, I wasn't really in need of any loan at the time. I already took out a loan for my car and was years away from buying a house. Otherwise, I would have been hit by a significantly higher than average interest rates that could have amounted to tens of thousands of dollars.

I was young, fresh off the boat, and stupid.

If you're a 20 something millionaire-wanna-be who wants to avoid the costly mistakes that I've made about money; give your future-self a favor--- subscribe to this blog by entering your email above.

Thank goodness, we have FICO scores

FICO stands for Fair Isaac Corporation-- the company that buddies Bill Fair and Earl Isaac founded in 1956. Now, it is the most widely accepted measure of creditworthiness.

The score range from 300 to 850. A score of 760 or higher usually gets you the best deal on interest rates. Conversely, a lower score will make it harder for you to get a loan, land a job or qualify for the best terms on a wide variety of consumer contracts.

American creditors and consumers have no idea how lucky (or unlucky) they are that they have no less than 3 credit bureaus keeping a tally of credit scores: TransUnion, Equifax, and Experian. Each of these agencies is required by law to provide consumers with a free copy of their credit report at least once a year.

Where I grew up, credit investigations go something like this.  First, you apply for a loan in person at a local bank. The next day, the bank sends a 6' tall hulking guy with 17" arms (intimidating by Filipino standards) in a motorcycle to your neighborhood. He knocks on your door, all smiles, so you don't have any choice but to send him in. You engage in small talk, as he scans the surroundings of your home for potential collateral targets (ala Ah'nold 'The Terminator' style). If you don't happen to be there that day, he'll talk to your next door neighbor. The next thing your know, everybody in the neighborhood knows that you're trying to finance a brand-new Toyota Corolla.

What affects your credit score

According to Equifax, here are the factors that affect your scores. Some will affect your score much seriously than others.

High impact

Credit Card Usage shows how much you spend on your credit cards as a percentage of your total available balances (your credit limits) for all of your credit cards. A high percentage could indicate that you don’t have your spending under control and could be a greater risk for defaulting on your payments. Try to keep your credit card usage under 30%.

Payment History plays a critical part in determining your score. Making your payments on time shows potential lenders how reliable you are in paying back what you owe. Be sure to make all of your payments on time (even if it’s just the minimum payment due), and remember that other types of credit payments such as those for student loans and auto loans affect your score.

Derogatory Marks are indications of poor behavior in the past when it comes to being responsible about credit. These include accounts in collection, liens, and bankruptcies—things potential creditors are definitely wary about. Sometimes things like this happen and they’re beyond your control but if you can, by all means do your best to keep these things from happening. No matter the reason, these negative marks will likely stay on your credit report for seven years or more.

Medium impact

Age of Credit is the average amount of time you’ve had all of your open credit accounts. It measures the longevity of your credit history. Opening several accounts in a short period of time may indicate a great level of risk, so avoid opening lots of credit accounts unless you really need them. Be sure, also, to keep your old accounts open with a good payment history for each.

Low impact

Total Accounts is the number of accounts you have, which may be an indicator of how credit worthy lenders think you are. Don’t go crazy and open a lot of accounts, though, because the average age of credit is more significant than number of accounts when calculating your credit score.

Credit Inquiries is a count of all hard credit inquiries placed on your credit report. What makes an inquiry “hard” is when you authorize a lender to get your credit report for their benefit, so they can evaluate you when you apply for a credit card, a loan, or other form of credit. If you get your credit report yourself or go through an agent such as Turbo to get it for you on your behalf, it’s called a soft inquiry and it does not affect your credit score.

How I repaired my credit

First, I contacted the collection agency in the report and paid off the balance. I wish I could dispute it, but I really owed the money. I had to pay Caesar what is due Caesar. That's what my bible tells me.

Secondly, I took out a secured credit card with First Premier Bank. With secured credit cards, I had to put up a $500 security deposit in order to open an account. The amount served as a collateral for my credit limit. I used the card regularly and paid it off  in full. I used it solely for my gasoline purchases because the cost is very predictable. In this way, the credit is not fully utilized.

Once my credit improved, I've applied for a real credit card--- it was a Bank of America credit card with no annual fee. I've been using the same card ever since.

Five years later, I opened 2 additional cards. It was with American Express and Chase. I used both regularly but I never exceeded more than 30% of the limit.

I paid my bills on time. I paid my bills in full every time.

Now, I have exceptional credit scores. The results can speak for themselves:


Readers, what is your FICO score?
Write your comment below.

Friday, April 14, 2017

What if you didn't have to pay taxes?

"None of us want to pay taxes again, ever."-- this was last of the many demands Harry Stamper (played by Bruce Willis) and the rest of his oil-drilling crew had against the U.S. federal government in the movie Armageddon.


The 1998 science-fiction film was about a giant asteroid whose collision course will crash the Earth. The scientists at NASA plan to detonate a nuclear bomb, which must be buried 800 feet under the asteroid's surface in order to break it apart, causing it to miss the collision with the Earth.

The government officials had no choice but to agree to their demands. He's the best oil driller on the planet. They simply don't want to take any chances.

As incredibly risky the job is, it's nevertheless one of the sweetest deal one could ever wish for: a chance to ride a shuttle to get into space, become an international hero by saving the planet, and if they happen to survive, not pay any taxes for the rest of their lives!!!

Be careful what you wish for

Do you find yourself constantly daydreaming of not paying taxes? Be careful what you wish for when you rub that magic lamp.

Or you might end up like the 60 year old husband who instantly turned 90 after wishing for a much younger wife!

According to the Tax Policy Center (TPC), a D.C.-based firm that provides tax research and estimates, 44.5% of American households will pay zero or negative federal income tax --- roughly 76.6 million households -- for the 2016 calendar year.

Roughly half of this number pay no income tax because they have no taxable income. The not so recent news about Trump's tax returns or billionaire practice of paying themselves $1 probably comes into your mind, but they are just a drop in the bucket.

They are mostly comprised of low-income households that do not pay federal income taxes. Their incomes are lower than the combination of their allowed standard deduction and exemptions, or because they receive tax credits.

Worst comes to worst, the genie might end up magically causing your present and prospective employers lay you off permanently. In this way, you don't have to pay taxes again, ever (not even sales tax because you'd be dirt poor).

Aim to minimize taxes instead

When I say aim to minimize taxes, I didn't mean that you should aim to get a bigger tax refund. A sizable tax refund only means that you're loaning the government money for free.

If so, file a new W-4 form with your employer. Try this IRS withholding calculator directly from the agency itself.

15 years ago, I started preparing my own taxes. That was the last time that I aimed for a big tax refund. I got audited by the IRS instead. I was young, dumb and stupid. Now I use TurboTax and you should too. Always, I'll say it again, always use reliable software when filing your taxes.

Be honest with your taxes. You need to obey the taxing authority. Don't be a crook. Crooks don't get rich. Maybe sometimes they do, but they don't stay wealthy. People eventually discover that they are crooks and start not to trust 'em. That's the start of their downfall.

Minimize income taxes

Your most powerful wealth-building arsenal is your income. I know he's our uncle, but don't let Sam grab a bigger slice of your earnings pie.

The following are very basic general information but I couldn't emphasize more, tax planning is very important to conserve wealth. You need to avoid unnecessary taxes.

Lower your taxable income

Money contributed to an employer-sponsored retirement plan, such as a traditional 401(K) or Canadian RRSP is not included in your taxable income. For the former, you can contribute up to $18,000 or $24,000 if you're 50 years old or older.

If you don't have an employer-sponsored plan, you can open a traditional IRA account and contribute up to a maximum of $5,500 this year ($6,500 if you're 50 or older).

ROTH 401K or ROTH IRAs don't have this upfront tax break because withdrawals are tax-free in retirement.

Maximize your deductions

Many of your everyday expenses can be itemized as deductions on your income tax return, saving you lots of money at tax time. However, unless you have a large amount of qualifying expenses, you might be better off taking the standard deduction, as most taxpayers do. Since you can decide every year whether you want to take the standard deduction or not, careful tax planning can help you maximize your deductions in years you itemize.

Should you decide to itemize here's some information on how to maximize them, courtesy of TurboTax

Be charitable

It also pays to be charitable. Donations to charity are tax deductible expenses and can reduce your taxable income. Here you can find information about charitable contribution deductions.

Minimize investment taxes

Choose the right bucket to hold your investments

Use tax-sheltered accounts such as IRAs and workplace retirement plans for individual stocks you plan to hold for less than one year or actively managed funds that generate short-term capital gains. Taxable bonds and funds that invest in these types of bonds.

Taxable brokerage accounts are suitable for tax-free municipal bonds for obvious reasons. I'd also hold non-dividend paying speculative stocks in it. In this way, you can take advantage of tax-loss harvesting strategy, which you simply cannot do on a tax-sheltered account.

Avoid high-turnover funds or stick to index funds

Turnover means transactions, and transactions are taxable events. Unlike actively managed funds, index funds only turn over their portfolios when the companies that comprise their indexes change.

In the case of the S&P 500, a very small percentage of the companies that belong to the index changes each year. This results in a very low turnover rate that translates to almost no capital gains tax.

Invest for the long haul, get long-term capital gains rate

A long-term capital gain or loss applies to certain investments that were owned for longer than 12 months before it was sold. Long-term capital gains are assigned a lower tax rate than short-term capital gains.

I don't consider my home as an investment, but if you recently sold your home, be aware that you may exclude up to $250,000 gain ($500,000 if married filing jointly) if you stayed in it for at least 2 of the last 5 years before the date of sale. In most cases, that's zero capital gains tax!

Tax-loss harvesting

Do you have an investment that is losing capital? Selling these securities at a loss can offset capital gains tax liability. Of course, I prefer that you do not lose investment capital at all. Hold speculative individual stock investments in a taxable brokerage account.