Real Estate Infomercials Exposed Part 3

It's a good idea to start a relationship with a bank as soon as possible. Though it is key to be sure that you are financially mature enough (see previous articles). The bank market is very competitive, but it is also very sneaky. Competition is a double-edged sword. On one hand, it's great for bring cost for products or interest rates down. On the other hand, it brings out the creativity in the greedy businessman. The result comes in the form of extra 'required' charges or hidden charges. These usually come in the form of setup fees (such as those in the telecommunication arena). Setup fees in some companies can range from $25 to $150+. Now, you might be wondering how much work is worth that much to setup an account. You may be surprised to know that it's usually a 30 second to 5 minute job typing the required information into a computer database (something they are already paying someone else to do along with their regular work). In short, it's just another way for a company can make money off of you with the 'illusion' of competition. To my knowledge, there are no laws preventing the creation of such fees. Since the also force you into a contract that basically says that it's 'OK', there's little you can do about it either. So, at least for now, it's something you need to watch out for before you sign your name to the dotted line. Keep in mind that, the company that has the lowest rate (or introductory rate) may have the highest fees. So be careful and research thoroughly before making a decision.

We can apply this same careful research to finding a good bank. Fortunately, most banks these days do not charge anything to open an account. But look out, they may recoup their 'loss' by limiting your debit card access, charging you a few dollars for an extra bank statement print-off, high NSF (Non-Sufficient Funds) charges, or higher interest rates on loans. One thing to point out here also, is that with some loan companies and even banks, will sometimes charge you for 'insurance' on a loan. Of course, they won't tell you about it until you're half way through signing the contract. These can sometimes equal half the amount of the loan or more. In some states, it's how they get around percentage caps on interest rates. I'll cover loans more in depth in the next article. You want to find the bank that's going to offer the highest interest rate return on savings accounts, interest rates on loans, and who's not going to slap you with hidden charges. In general, Credit Unions are the best way to go. In the past, you had to belong to a particular workers union, work at a particular place, or know someone who did. Times have changed, however, and now they're usually open to pretty much anybody.

Checking Account...

If you've been following along in my previous articles, you should have $225 in extra funds available. Most any bank you go to will have several different types of checking accounts. Some checking accounts are even interest bearing. For now, you want to just open a basic account. Preferably it would come with an ATM/Debit card and checks. The only requirement is usually $100 deposit to open the account. Make sure you tell them now that you do not want to be issued any checks. You won't need them and they can only get you in trouble, especially if they come up missing or you have some other mishap with your account. NFS charges can be as much as $30 or more. This is on top of the $25 you'll be charged at the place the check bounced at. Don't even open yourself up to the possibility as it can quickly become a major set back. In general, you can turn around and withdraw almost all of this $100, but make sure you ask about minimum balances because they can also generate fees. Generally, they'll mail out your debit card to you (if your account comes with one). If that's the case, keep in mind that they rarely send the PIN with the card. When you do receive the PIN, make sure you have it changed IMIDIATELY. It also wouldn't be a bad idea to change your PIN number every 3-6 months. It generally cost about $5 to have your card replaced. However, it's not a totally bad idea to cancel your card and have it replaced once a year.

Savings Account...

Next, open a savings account. Here again, it typically only requires an opening deposit of $100. However, most all banks have a savings account minimum of $25. This is usually subtracted from your available balance. So, since we want have the $100 we place in the savings account freely available, open the account with $125. Note that these two accounts will be sub-accounts and as such can generally be accessed via the same ATM/Debit card. Regardless, you should keep in mind that this account will earn interest on every penny you have in it. So the more money you put into your savings account, the more money will be paid the account in dividends. Check with your bank to see when these payments are made (usually daily).

Learning the Bank Ropes...

Now that you have your accounts setup, make some deposits into your savings account while you are waiting for you Debit Card to come in. Try to go inside to make transaction if you have the time. Meet the tellers and get to know them a little. Ask one of them to transfer unused money from your checking account to your savings account. Remember, every penny in your savings account is earning you more money the more you add and the longer you let it sit in there. Granted at his point it will be negligible, but the point is to learn how the system works. Also start keeping up with your pay stubs (which you should be doing anyways). This will be important in the next step.

Starting your Credit...

The process of starting your credit will be different depending on the type of bank you have. You may or may not be able to start your credit with your bank. You may have to get some "Revolving-Credit" (aka Department Store credit) to establish your credit before the bank will give you a loan. Ideally, you want to start with your bank first. Bank credit comes in two fold. You have Reported Credit that is reported to the Credit Bureau and then you have Signature Credit. In the beginning a loan officer will rely mostly on your Reported Credit. Over time, however, the loan officer will disregard your Reported Credit in favor of your Signature Credit. Initially, however, the loan officer has neither to go on. Your goal here is to get some kind of loan. Don't go in expecting $1000. In fact, don't go in expecting $500. When the loan officer asks how much you were looking to borrow, tell them $100. This, however, may be where you run into some problems as some banks don't offer loans that small. If this is the case, I'll explain an alternative below. Sometimes, even if they have a policy against such small loans, you can try your hand at negotiating because loan officers tend to be able to 'bend' the policy more then they let on. To help ensure you get the lawn, you have a few bargaining chips. For one, you are prepared looking presentable & respectable AND you've brought along your last several pay stubs. In addition to this, you should still have at least $100 available balance in your savings account to use as collateral to cover the loan (keep in mind that even though your Credit Score and Signature Status will replace the need for collateral in small loans, you can always fall back on using collateral to 'up' the amount or increase your chances of getting what you request). If all goes well, they'll most likely deposit the loan into your checking account which you then need to transfer to savings. The loan will probably be at a fairly high interest rate (expect 18% or so), but it'll probably just be over a couple weeks or maybe a month period. The $100 collateral in savings plus the $100 loan will be enough to cover the entire loan when it comes due. Keep in mind that this is a very slow way to start your credit, but it's a safe way. The alternative (if you can't get a loan at the bank) will help build your credit faster, but it's not quite as economically efficient.

INVESTER SECRET:

There are a couple tricks that investors use as the gain the ability to acquire higher loans. For instance, if you get a loan for $1000 at 6% APR for 6 months, you can take the loan and acquire a 6 month $1000 CD at about 4% APR. You'll still have to make the payments for the 6 month period, but at the end of the 6 months when the CD matures, you'll get the majority of what you paid in back. This dramatically reduces your 'cost of building credit'.

Starting your Credit Continued...

One alternative to using a bank to start your credit is to go to a department store. Personally, I prefer Jewelry stores because you can always turn around and sell the jewelry for at or near what you paid for it. Try to stay under $300 and make a little over the minimum payments. You want to make sure you stretch it out at least 6 months because most stores won't report the credit unless you've been paying on it for at least that long. In fact, the longer you can stretch it out, the better. Just remember that if you're only paying the minimum, you won't be making very much progress on the principle (again, I'll cover this in more detail in the next article). The good thing here is that you should have a problem going to a bank after you've paid it off and ask for at least $500.

A quicker way to establish some credit (some credit is better then no credit...in fact, bad credit is better then no credit), is to find a local 'Investment & Loan' shop. It'll be a small loan around $200-$300 and you'll have to pay a really high interest rate, but you'll start establishing credit within the first month. For these types of loans, it's very beneficial to try and pay one and half times what the loan payment is. This will help reduce the total interest you'll end up having to pay. Be very careful with these loans and make sure you read the fine print. Most of these places require you to put up collateral such as electronics, so make sure you have a detailed list handy when you walk in along with your last several pay stubs.

STOP!!!

AT ALL COST avoid Payday and Cash Advance type places (both local store and online). These companies charge extremely high interest rates (often times higher then what local laws allow). Additionally, they pre-calculate the interest and will not recalculate it if you pay it off early. You will quickly become trapped in a vicious circle of rewriting checks (which is one of the reasons why I told you to tell your bank not to issue you any checks). Worst of all, they DO NOT report your credit. So you gain nothing from going to them and often times the maximum you can get is around $500 (unless you go to a title place...but that's not worth loosing your vehicle over). You'll do better with a bank then you will with these type places. The people who run these places are taking advantage of the ignorance of uneducated individuals who don't know any better. That's the last warning I'll give on that subject. Don't flood my email box when you get trapped in one of those situations and ask me for advice on how to get out. I'm just going to tell you 'I told you so'!*

*Just kidding, I'll give you advice on how to get out of it...but only once.

Article IV will cover Loans in more detail...