Category Archives: Credit

More Than One in Four Americans Say Their Debt is Unmanageable

Posted on by

Nearly one in five Americans are feeling bad or very bad about their financial circumstances. ~ OppFi’s 2022 Personal Finance Study

The FinTech company, OppFi, surveyed nearly 1,100 Americans to learn more about Americans’ financial situations,.

Respondents had mixed and uncertain feelings about where they stood financially, with nearly one in five feeling bad or very bad about their circumstances.

Key takeaways

  • Half of respondents to the survey are currently in debt, and 52% of those in debt say their debt is not manageable.
  • Just over 1 in 3 respondents have frequently experienced stress or anxiety about their finances since the COVID-19 pandemic started.
  • 1 in 4 took out a personal loan during the COVID-19 pandemic, most often to cover basic necessities such as food, clothing, and housing and credit card debt.

Americans’ financial health is often measured by benchmarks such as debt, savings, spending habits, and the ability to pay their monthly bills, writes Ashley Altus, CFC, a personal finance writer for OppU. OppFi survey respondents reported having difficulty with many of these things. Half said they’re in debt, and nearly half said they can’t pay their bills on time. Almost 2 in 5 live paycheck to paycheck, and 1 in 5 said they spend more than what they earn.

Budgeting is widely considered an important aspect of personal finance, but 1 in 10 said they didn’t have a budget at all.

Fewer than half (47%) said they have a savings account or emergency fund. Of those who did, nearly 1 in 5 said they could live off it for three weeks at the most.

How COVID-19 impacted Americans’ financial situations

The COVID-19 pandemic threw the American economy into chaos, with numerous businesses closing. In April 2020, the unemployment rate reached a level not seen since the 1930s. Near the end of 2021, 10 million households were behind on rent despite three rounds of stimulus checks.

More than half the people we surveyed said the pandemic worsened their financial situation. The biggest reason? Employment – more than 1 in 5 were working fewer hours and 15% lost their job. Others cited their own illness (17%), and 15% said their credit score decreased.

Financial stressors

One result of financial difficulty may be stress. Just over 1 in 3 respondents said they have frequently experienced stress or anxiety related to their finances since COVID started, with the most common stressor being paying bills other than mortgage or rent (cited by 35%). Debt was identified as a source of stress by 28% and 26% were stressed about not having enough savings.

Other stressors included basics like having enough food, high energy or gasoline prices, and paying mortgage or rent. Financial anxieties also reach as far as retirement, with more than 1 in 10 saying they’re worried they won’t have enough to retire on.

References:

  1. https://www.opploans.com/oppu/articles/personal-finance-study-2022/

Credit Score

Posted on by

Credit scores are mathematical formulas that help lenders determine how likely you are to pay back a loan. Credit scores:

  • Range from 300 to 850.
  • Are not based on your income.

Here’s a breakdown of all the factors that affect your scores, according to Nerd Wallet:

Payment history. Your credit reports reveal your payment history, or whether you’ve consistently paid bills and other obligations on time. FICO says payment history accounts for 35% of your score. Paying bills late by 30 days or more can dent your scores — and the later you pay, the greater the damage.

Credit utilization The amount of your credit limit you use, expressed as a percentage, is called credit utilization. FICO says the amount of available credit you use counts for 30% of your score.

Other credit score factors you should know about

Other credit factors that also affect your scores include:

  • The length of time you’ve had credit: Longer is better, so keep old accounts open unless there is a compelling reason to close them, such as an annual fee on a card you no longer use.
  • The kinds of credit you have, or credit mix: It’s best to have a mix of installment accounts — those with a set number of equal payments, such as car payments or mortgages — and credit card accounts.
  • The length of time since you’ve applied for new credit: Each application that causes a hard inquiry on your credit may take a few points off your score.
  • Total balances and debt: It’s best if you’re making progress in paying off your debt.

Factors that don’t affect your credit score

  • Checking your own score: If you get your own score through your bank or a free credit score service, it does not affect your score. That’s because checking your own score is considered a soft pull on your credit. You can check it as many times as you want with no impact to your score.
  • Rent and utility payments: In most cases, your rent payments and your utility payments are not reported to the credit bureaus, so they do not count toward your score.
  • Income and bank balances: Credit reports do include some employer information, but it’s used only to match account data to the right person. Getting a raise won’t bump up your score, and it is possible to build credit on a small income. And since reports list only credit accounts — not savings, checking or investment accounts — your balances in those also won’t help your score.

Want to raise your credit score? Here are some tips!

  • Start by checking your score (for free).
  • Tackle your debt, even when you can’t pay very much.
  • Avoid asking for more credit.

It’s an often repeated myth that keeping a balance when using credit cards will raise your credit score. The truth is that paying on time, every time, is what’s good for your credit — and paying in full is the most economical, because it lets you avoid interest, explains Nerd Wallet.

It’s important to put at least some of your spending on a credit card from time to time, but spending more will not benefit your score. Aim to use no more than 30% of your credit limit on any of your cards, and less is better. That’s because the second-biggest influence on credit scores is credit utilization — the portion of your credit limits you use.

To keep your credit utilization low, you can:

  • Sign up for balance alerts via text or email from your credit card issuer so you can stop using a card if the balance gets close to 30% of the limit.
  • Consider making several payments throughout the month to keep balances low.
  • If your credit is good or your income is up since you applied, ask for a higher credit limit. This will lower your credit utilization by bumping up your total credit limit, as long as your spending stays the same.
  • Think twice about closing old or little-used cards, because they contribute to your overall credit limit. Your credit utilization could shoot up due to the loss of available credit from a canceled card.
  • You could also increase your available credit by opening a new credit card, but it’s important to research the best credit card for your financial needs before applying.

Checking your credit score

There are several ways that you can check your credit score for free. A great place to start is to check if your bank or credit union offer this service for its customers. Additionally, each of the three credit reporting agencies (Experian, Equifax and Transunion) allows you to check your credit score for free.

Everyone is entitled to one free credit report a year from the three agencies at annualcreditreport.com, according to the federal government.

References:

  1. https://www.nerdwallet.com/article/finance/credit-score-does-carrying-a-balance-help
  2. https://apnews.com/article/business-0a536993ce494fc8d6fe2c5d637da5b5

More Americans are Living Paycheck to Paycheck

Posted on by

58% of Americans are living paycheck to paycheck after inflation spike — including 30% of those earning $250,000 or more. CNBC

With inflation at 40-year highs, workers across all income levels are having a harder time making ends meet. As one CNBC financial guru once commented, “Too many Americans are left with more month than money.”

As of May 2022, with inflation driving up costs everywhere for consumers in all income brackets, 58% of Americans — roughly 150 million adults — live paycheck to paycheck, according to a new LendingClub report. That’s down slightly from 61% who reported living paycheck to paycheck in April but up from 54% in May 2021.

Consumers are struggling to afford their day-to-day lifestyle and tend to rely more on credit cards and carry higher monthly balances making them financially vulnerable.

This increase means approximately three in five U.S. consumers devote nearly all their salaries to expenses with little to nothing left over at the end of the month.

Those struggling to afford their day-to-day lifestyle tend to rely more on credit cards and carry a higher monthly balance, making them financially vulnerable, the survey said.

Overall, credit card balances rose year over year, reaching $841 billion in the first three months of 2022, according to a separate report from the Federal Reserve Bank of New York.

References:

  1. Jessica Dickler, “58% of Americans are living paycheck to paycheck after inflation spike — including 30% of those earning $250,000 or more”, CNBC Personal Finance, June 27, 2022, https://www.cnbc.com/2022/06/27/more-than-half-of-americans-live-paycheck-to-paycheck-amid-inflation.html
  2. https://www.pymnts.com/consumer-finance/2022/report-36-of-consumers-earning-250k-now-live-paycheck-to-paycheck/

How the Economy Works by Ray Dalio

Posted on by

“Credit is important because it means borrowers can increase their spending. This is fundamental because one person’s spending is another person’s income.” Ray Dalio

Ray Dalio is one of most successful hedge fund managers and founder of Bridgewater Associates. He credits much of his success to guiding principles that he has used to make decisions both in his professional and in his personal life.

How the Economic Machine Works – “The economy is like a machine. At the most fundamental level it is a relatively simple machine, yet it is not well understood,” explains Ray Dalio.

Economic principles discussed:

  • Economy – The economy is simply the sum of all transactions repeated again and again over a long period of time. Money and credit account for the total spending in an economy.
  • Transactions – the exchange of money or credit between a buyer and seller for goods, services or financial assets.
  • Markets – “All buyers and sellers making transactions represent the market. For example, we have wheat markets, stock markets, steel markets, oil markets and so on.The combination of all of these sub-markets is the entire market, or the entire economy.” Ray Dalio
  • Governments – the biggest buyer and seller of goods, services and financial assets. The government consists of two parts: the central government that collect taxes and spend money; and, the central bank which controls the amount of money flowing through the economy. It does this by influencing interest rates and printing more money.
  • Central Bank – The Central Bank can only buy financial assets, not goods and services. To support the economy, the Central Bank buys Government bonds which gives the Central Government the ability to buy goods and service.
  • Price – the result of total spending / quantity sold.
  • Credit – Credit “is the most important part of the economy because it is the biggest and most volatile part”. Credit can be created out of thin air — in fact, in 2016, the US$50 trillion of the US$53 trillion in the economy was credit, as opposed to ‘real’ money. Credit is important because it means borrowers can increase their spending. This is fundamental because one person’s spending is another person’s income. Credit is bad when it finances over-consumption and borrowers are unable to pay the debt back.
  • Lenders – lend money to make more of it. When lenders believe borrowers will repay, credit is created.
  • Borrowers – borrowing is pulling spending forward which relates to borrowing money to buy something you can’t afford, such as a house, a car, a business or stocks. Borrowers promise to repay the amount borrowed (the principal) with interest. Borrowing creates cycles.
  • Debt – Debt allows you to consume more than you produce when it is acquired, and forces you to consume less when you have to pay it back. “When credit is issued it becomes debt. It’s a liability for the borrower, and an asset for the lender. It disappears when the transaction is settled.
  • Interest Rates – When interest rates are high, borrowing is low. When interest rates are low, borrowing is high.
  • Spending – one person’s spending is another person’s income. Total spending is the sum of money spent plus of credit spent.
  • Income – one person’s spending is another person’s income
  • Monetary Cycles – economy expansion and recession cycles.
  • Inflation – inflation is when prices rise. When spending is faster than the production of goods, it means that we have more demand than supply, which results in inflation.
  • Deflation – when spending decreases, prices tend to decline.
  • Expansion – growing markets and increasing transactions
  • Recession – Economic activity decreases, and if unchecked this can lead to a recession.
  • Bubbles – when the price of assets far exceed the value of the assets
  • Debt Burden – When incomes grow in relation to debt, things are kept in balance. But a debt burden emerges when debt growth exceeds income growth. This debt to income ratio is the debt burden.
  • Productivity – innovation and hard working raises productivity, which equates to the amount of goods and services produced.

Three rules of thumb for life

Source: Ray Dalio

According to Dalio, there are “three rules of thumb” with which to navigate the economy, be it in your own businesses, organisations you work at or your personal finances.

  1. Don’t have debt rise faster than income (because debt burdens will eventually crush you).
  2. Don’t have income rise faster than productivity — it will eventually render you uncompetitive.
  3. Do all you can to raise productivity — in the long run that’s what matters most.

References:

  1. https://www.nofilter.media/posts/ray-dalios-economic-machine-12-minute-summary
  2. https://www.amazon.com/gp/product/1501124021/ref=as_li_qf_asin_il_tl_nodl?

Wells Fargo rejected nearly half of their Black homeowners refinancing applications

Posted on by

Only 47% of Black homeowners who submitted home mortgage loan refinance applications in 2020 were approved by Wells Fargo as opposed to 72% of white homeowners, according to a Bloomberg News analysis

While home mortgage rates in the U.S. hit an all-time low during the pandemic, African American homeowners did not have the same level of access to refinance and ultimately lower their long term interest costs as other homeowners.

“Only 47% of the Black homeowners who submitted refinance applications in 2020 were approved by Wells Fargo as opposed to 72% of white homeowners”, according to a Bloomberg News.

Wells Fargo rejected more Black homeowners refinance applications than it accepted.

While Black applicants had lower approval rates than White applicants at all major lenders, the data show, Wells Fargo lagged behind other major lenders in their approval rates for minority applicants and had the biggest disparity and was alone in rejecting more Black homeowners than it accepted. Overall, 71% of Black refinancing applicants in the country were approved in 2020, according to Bloomberg’s analysis.

Wells Fargo, the third largest bank in the United States by assets, was the sole lender that rejected more Black applicants than it accepted. Black homeowners faced more refinancing denials than other minority applicants such as Hispanic homeowners and Asian homeowners,

This remarkable wealth event has seen U.S. homeowners refinance almost $5 trillion in mortgages over the past two years. This refinancing has allowed White homeowners to save an estimated $3.8 billion annually by refinancing their mortgages in 2020, according to researchers at the U.S Federal Reserve. But it’s a door that barely opened for Black Americans, who make up 9% of all homeowners and locked in just $198 million a year, less than 4% of the savings.

Bias in Wells Fargo’s approvals for refinancing home mortgage loans

Wells Fargo approved a greater share of applications from low-income White homeowners than all but the highest-income Black applicants, who had an approval rate about the same as White borrowers in the lowest-income bracket.

The U.S. Justice Department has censored banks for lending practices that tend to elevate costs for minority borrowers. After the 2008 housing crisis revealed discriminatory treatment, authorities unleashed a wave of penalties against U.S. lending giants. Wells Fargo agreed in 2012 to pay more than $184 million to settle federal claims that it unfairly steered Black and Hispanic homeowners into subprime mortgages and charged them higher fees and interest rates.

References:

  1. https://www.bloomberg.com/graphics/2022-wells-fargo-black-home-loan-refinancing/
  2. https://www.msn.com/en-us/money/news/wells-fargo-rejected-nearly-half-of-their-black-homeowners-refinancing-applications/ar-AAVa7tL

Credit Report Information 101

Posted on by

Your credit history is one of the factors that lenders use to assess your creditworthiness so it is important to understand what information has been reported to your credit file. 

Ancient Greek playwright Sophocles wrote, “Wisdom outweighs any wealth.” While this statement certainly rings true, it’s also true that wisdom can play a major role in building wealth—particularly when it comes to effectively managing your finances and credit.

Consumers with excellent credit scores  tend to pay less for major purchases. In short, your credit is your financial calling card, it can both open and close doors. Credit reports have also become essential tools beyond the financial world. Nowadays, your housing or employment status could be decided by your credit history; and maybe even your love life.

Thus, it is important to be prepared for anything on your horizon by understanding how your credit and credit score can impact financial progress and wealth building. The three major credit reporting bureaus — TransUnion, Equifax and Experian — maintain credit reports. The reporting companies issue credit reports to creditors, insurers and others as permitted under law for the purposes of evaluating your financial responsibility.

Tablet - 3 Bureau Reports & Scores

Here is an example of how the system works:

Apply for a Credit Card – When you apply for a new credit card, the creditor requests a copy of your financial history, or credit report, from one or more of the credit reporting companies.

The Creditor’s Assessment – The creditor may use your credit report, a score, and other information you provide (such as income or debt information) to determine whether to approve your application and what rates to offer.

The Creditor’s Decision – If you are issued a card, the creditor reports that account to the credit reporting companies, and then updates it, including your balance and payment activity, about every 30 days.

Your Credit Profile Updated – The credit reporting companies update your credit report as they receive new information from creditors and lenders. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.

Managing Your Credit Report

Your report is divided into six main sections. When you open a new account, miss a payment or move, these sections are updated with new information. These sections are:

  • Identifying Information (name, address, birth date and Social Security number)
  • Employment
  • Consumer Statement
  • Account Information
  • Public Records
  • Inquiries

Negative records – Late payments create a negative record. Generally, negative records will stay on your report for up to 7 years (up to 10 years for certain bankruptcy information). Positive records can remain on your credit report longer.

Your Credit Report is updated in most cases every 30 days – Your credit report is updated with new information reported by your creditors. Most creditors report new information approximately every 30 days, to reflect your account balances and payments you make.

Check every 6-12 months – Not all creditors report to all three companies; the companies obtain their data independently, so your credit reports from TransUnion, Equifax and Experian could substantially differ. That’s why it’s important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.

Check Your Credit Report regualarly…checking your own credit will NOT harm it.

Correcting inaccuracies – Under the Fair Credit Reporting Act, consumers are protected if there is inaccurate information on their credit reports. If you find inaccurate information on your credit reports, you can contact the associated creditor or lender directly. You can also dispute the inaccuracy with the credit reporting companies.

Know the system – Managing your credit and maintaining a good credit history can lead to better rates on major purchases. It’s recommend that you check your credit reports every 6-12 months, or at least 3 months before a major purchase, in order to identify potential inaccuracies and any signs of identity theft.

Routine check-ups, along with paying your bills on time, keeping your credit card balances below 35% of their limits, and correcting any inaccuracies will help ensure your credit reports are viewed in the most favorable light.

Finally, if you believe you’re a victim of fraud, you can activate automatic fraud alerts and the credit bureaus will place an initial alert on your credit report. This alert encourages lenders to take extra steps to verify your identity before extending credit.

References:

  1. https://www.creditonebank.com/articles/10-famous-quotes-about-finances-credit

The Three C’s of Credit

Posted on by

Borrowing (using credit) allows people to purchase goods and services that they can use today and pay for those goods and services in the future with interest.

Credit can be a powerful tool that helps you improve your finances, get access to better financial products, save money on interest, and can even save you from putting down a deposit. The benefits of a positive credit report and good credit score are extensive.

The biggest benefit of good to excellent credit is saving money. When buying a home, for example, good credit can easily save you tens or even hundreds of thousands of dollars in interest on a 30 year mortgage. Essentially, a lower interest rate means you pay less money. A higher interest rate means you pay more money.

Conversely, credit can be detrimental which entraps and burdens people financially. Access to credit may make it easier to pay for basic needs and cover emergency expenses, but it also simplifies buying expensive products you might want but not need. Psychologists have found that people often use credit unwisely due to natural human impulses.

Additionally, the interest rates on consumer credit are often staggeringly high and can force consumers to pay back several times the initial value of their purchases. The average annual interest rate on credit cards can be as high as 21 percent– more than five to eight times higher than the typical interest rate on a 30-year mortgage, which hovers around 2.5 to 4 percent.

Interest is what you pay for using credit or “someone else’s money”.

As you can see, using credit has both financial benefits and costs. At times, it can be a means to purchase assets with borrowed capital, but it can be also an indication that something has gone wrong with your money management and financial planning (spending too much and/or saving too little relative to your income). There are ways to use debt or credit sparingly and manage the use of credit.

People choose among different credit options that have different costs. Lenders approve or deny applications for loans based on an evaluation of the borrower’s past credit history and expected ability to pay in the future. Higher-risk borrowers are charged higher interest rates; lower- risk borrowers are charged lower interest rates.

Credit or loan providers may include banks, credit unions, car dealers, credit-card companies, or department stores. And, some things people often use credit or a loan to purchase vary but may include a house, car, college or travel.

The three C’s of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these character- istics, and then decide whether or not to approve or deny the loan request.

Lenders expect all the money they lend to be fully repaid with interest. Thus, when deciding whether to make a loan or offer credit, lenders want to know the likelihood that the individual will repay the money. Thus, lenders want financial information about a person before lending that person money.

The three questions lenders generally want answered before granting a loan are factors known as the “Three C’s of Credit”: Capacity, Character, and Collateral:

  • Capacity: What is the individual’s ability to repay the loan?
  • Character: What is the individual’s reliability to repay the loan?
  • Collateral: What assets does the individual own that could be sold to repay the loan?

Each “Three C’s of Credit” factor attempts to provide a measure to help a lender answer each question about a borrower. The results vary from person to person, with a wide range of possibilities.

  • Capacity: The amount of debt a borrower has relative to his or her income is an indication of “capacity,” that is, that person’s ability to repay debt. For example, an individual with debt payments that are a large percentage of his or her monthly income would be less able to take on more debt than someone with debt payments that are a smaller percentage of his or her income.
  • Character: A credit score is an indication of “character” because it indicates a person’s reputation for paying bills and debts based on past behavior. A credit score is a number based on information in a credit report, which indicates a person’s credit risk. Credit scores are often called FICO scores. FICO is an abbreviation for Fair Isaacs Company—the first company to develop credit scores. Credit scores generally range from 350 to 850, with 350 indicating low reliability and 850 indicating high reliability. A low credit score indicates that a person has not been responsible with credit in the past.
  • Collateral: Collateral is property required by a lender and offered by a borrower as a guarantee of payment on a loan. Also, it can be a borrower’s savings, investments, or the value of the asset purchased that can be seized if the borrower fails to repay a debt. For example, a borrower who owns many other assets such as stocks, bonds, or real estate would be able to sell some of those assets to repay a loan if necessary. As such, lenders will see the loan as less risky than a loan to someone with few or no assets.

The three C’s affect each other by having a favorable rating on one C may help you have favorable ratings on others; for example, capacity may make collateral more likely. Lenders use this type of background information to make some lending decisions.

Borrowers who repay loans as promised show that they are worthy of getting credit in the future. A reputation for not repaying a loan as promised can result in higher interest charges on future loans, if loans are available at all.

Loans can be unsecured or secured with collateral. Collateral is a piece of property that can be sold by the lender to recover all or part of a loan if the borrower fails to repay. Because secured loans are viewed as having less risk, lenders charge a lower interest rate than they charge for unsecured loans.

Lenders make credit decisions based in part on consumer payment history. Credit bureaus record borrowers’ credit and payment histories and provide that information to lenders in credit reports.

Lenders can pay to receive a borrower’s credit score from a credit bureau. A credit score is a number based on information in a credit report and assesses a person’s credit risk.

“Debt is a trap, especially student debt, which is enormous, far larger than credit card debt. It’s a trap for the rest of your life because the laws are designed so that you can’t get out of it. If a business, say, gets in too much debt, it can declare bankruptcy, but individuals can almost never be relieved of student debt through bankruptcy.” Noam Chomsky

References:

  1. https://www.stlouisfed.org/~/media/education/curriculum/pdf/making-personal-finance-decisions-complete-unit.pdf
  2. https://www.self.inc/blog/benefits-of-credit

Managing Credit

Posted on by

Credit is the cornerstone of financial life in the United States, and if you’re starting from scratch, your first step will be establishing your credit history. This means opening or getting added to an account, often a loan or credit card.

As you start building credit, your financial goals may go beyond simply building credit or getting a credit score. Good or excellent scores can help you qualify for the best offers and not get held back by a lack of credit.

  • Understanding what helps—and hurts—your credit score is important when deciding how to use credit and how much debt to take on.
  • The best way to maintain good credit is to borrow responsibly and always make payments on time.

Credit and debt are right at the top of the list of money management concerns and building wealth. Here are 10 common credit facts that can lead to financial well-being:

1)  A credit score is important when you need to borrow money and other areas.

Your credit score is a big part of your financial identity. It can be the most important factor in determining whether you can get a loan and how much it’ll cost you. Your credit score impacts your ability to borrow, and it can affect many other areas of your life, including:

  • Interest rates—Whether you’re looking to finance a home, a car or a washer and dryer, the better your credit score, the lower the interest rate you may be offered.
  • Renting a new home—A prospective landlord can run a credit check to see if you’re a good risk. Things like late payments and collections not only lower your score, they can be a deal breaker when it comes to renting.
  • Insurance premiums—In some states, insurance companies use credit-based insurance scores to determine your premiums. A poor credit score can increase your costs for home and auto insurance.
  • Job prospects—More and more companies use your credit history when screening for jobs. This can impact your ability to get—and keep—a job, as well as your eligibility for a promotion.
  • Security clearance or military deployment—For federal workers in national security positions including members of the military, late payments, collections, bounced checks, large debts or credit report errors can upend your career, jeopardizing deployment or a promotion.

2) Carrying a high balance does not helps build credit faster.

The only thing carrying a credit card balance builds is your interest payment—and the total cost of what you financed. To build credit, it’s much better to pay off what you charge each month and never carry a balance.

3) As long as you don’t go over your credit card limit you’re fine.

To improve your credit score it’s best to use less than 30 percent of your credit line to keep your “debt utilization” rate low. Debt utilization is the amount you borrow relative to the amount you’re able to borrow. A high utilization rate—or even an increase in the amount of credit you’re using—can flag you as a higher risk, lower your credit score and raise your interest rate.

4) Closing out credit cards will not improve your score.

Closing cards decreases your available credit and increases your debt utilization ratio, making it look like you’re borrowing at a higher percentage. Second, closing cards can reduce the average age of your accounts, making you seem like a newer borrower, which can lower your score.

However, closing a credit card can help you manage spending and protect you from identity theft if you’re not using the account. If you decide to close a card, you may want to adjust your spending or pay down existing balances at the same time to keep your debt utilization ratio steady.

5) Getting married does not merges your credit history.

Your credit histories always remain separate, unless there’s a joint account or authorized user. In that case, there’s a shared history, and you’re jointly liable for any charges. If you’re divorced or separated, a joint account still means joint liability, and any new or unpaid debts can affect your credit score. I suggest every couple openly discuss their attitudes toward credit and debt early in their relationship.

6) You can pay a company to quickly remove bad credit marks from your history. 

Accurate negative credit information can stay on your credit report for up to seven years. Bankruptcies can stay on your report for up to ten years. In fact, no one can remove negative information such as late payments from a credit report if it’s accurate, no matter what a credit “repair” company promises you. Use caution before signing up with any company that offers credit repair or counseling services.

7) Checking your credit report will negatively impact your score.

Absolutely not. You’re entitled to receive a free credit report annually from each of the three major credit rating bureaus (Equifax, Experian, Transunion), and I highly recommend getting them. Just go to annualcreditreport.com.

8) There are multiple credit scores.

There are quite a few credit scores, and different rating agencies often have more than one. You can even have different credit scores from the same agency because scores are calculated at different times and according to different criteria. For instance, FICO recently made changes to its criteria, which I discussed in a previous column. 

The important thing for consumers to understand is what basic factors go into a credit score: payment history, unpaid debts, age of accounts, debt utilization ratio, new credit applications and types of credit.

9) Shopping for credit will not hurt your credit score.

It depends on how you shop, the type of credit you’re shopping for and your timeline. For instance, applying for multiple credit cards within a short time can have a bigger negative impact on your credit score than shopping for a home or auto loan. In general, comparison-shopping within 14 to 45 days for an auto loan or mortgage is considered a single inquiry. But trying for a mortgage and a car loan at the same time could have a negative impact.

That said, it makes sense to shop around. To minimize any negative impact, pull your credit report in advance to check for errors, and concentrate your rate shopping into a short amount of time.

10) Having more credit cards does not improve your credit score.

Having multiple credit cards can improve your credit history. But it can also tempt you to spend more and be late on payments, which would lower your score.

Ultimately, the best way to improve your credit is to borrow responsibly. Understand these myths and you won’t be fooled into taking on too much debt—a financial prank to avoid any time of year.

Reference:

  1. https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch
  2. https://www.schwab.com/resource-center/insights/content/money-myths-10-ways-we-fool-ourselves-about-managing-credit
  3. https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch#Next-steps-build-excellent-credit
  4. https://bettermoneyhabits.bankofamerica.com/en/taxes-income/understanding-tax-terms

Emergency Funds: How to Build and Use Them

Posted on by

An emergency fund can help you manage unexpected expenses without using a credit card or incurring personal debt.

“None of us, no matter our job, is immune to financial impacts,” Mikel Van Cleve, USAA advice director and CFP professional said. “Under the pandemic, we’ve seen major corporations close their doors, and small businesses that once were thriving fail.” Millions of Americans, who believed they were in secure recession proof positions, found themselves with jobs and regular paychecks.

Thus, Americans from every realm have witnessed firsthand the impact of unexpected black swan events can have on their livelihoods, hopes and dreams for the future.

“Emergencies—from a broken bone to a layoff—are a fact of life. When you’re faced with life’s unexpected events, you can be ready.”  Vanguard Investments

Even in the best of times, it might make sense to have a little extra money put aside for emergencies. A financial buffer can help if your car breaks down, you experience a loss of income, or you’re hit with a big medical bill. And having an emergency fund might also help you avoid tapping into savings and investments when an unexpected cost pops up.

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.

Saving money isn’t always easy, but it’s likely to be less painful than the alternatives. A 2012 FINRA Investor Education Foundation National Financial Capability Study found that many of the people surveyed currently or recently:

  • Had unpaid medical bills: 26%.
  • Overdrew their checking account: 22%.
  • Took a loan from their retirement account: 14%.
  • Took a hardship withdrawal from their retirement account: 10%.
  • Had more than one late mortgage payment: 13%.
  • Filed for bankruptcy: 3.5%.

Furthermore, if you don’t have an emergency fund, you’re not alone. A 2019 Federal Reserve report found that 27% of Americans in 2018 would have a hard time covering an unexpected $400 expense. And 12% wouldn’t be able to pay for it at all.

How to Build an Emergency Fund

You might think that emergency funds are only for people who can set aside lots of extra cash each month. But even if money is tight, an emergency fund could help you feel more secure. Here are a few suggestions for building yours.

  • Keep it separate. The Consumer Financial Protection Bureau (CFPB) recommends setting up a separate savings account for your emergency fund. This makes it accessible, but not so accessible that you’ll be tempted to dip into it.
  • Start small if you need to. The Federal Trade Commission recommends saving even if you can only manage $10 each week or month. You might find it useful to set a regular schedule for your contributions and stick to it. It can be motivating and satisfying to watch the deposits add up, however small they start off.
  • Pay yourself first. If you can, you might want to consider setting aside some of your income for savings before you spend it on anything else. You could even automatically transfer your chosen amount into a savings account each payday.
  • Bank any extras. A tax refund, cash gift or raise at work could provide a good opportunity to kick-start an emergency fund or give it a big boost. Immediately setting that money aside can be a great way to grow your savings without dipping into your wallet.
  • Say “yes” to the 52-Week Savings Step-Up Challenge. The premise is simple: This week, save $1; next week, save $2; in week 3, save $3. Continue adding a dollar a week for 52 weeks. A year from now, you’ll have saved $1,378 — and surpassed your first goal of $1,000.
  • Schedule a monthly automatic draft that transfers money from your checking account to your savings account. This is the perfect solution if you look at your budget and know how much you can save. Just set it and forget it.

When to Use an Emergency Fund

After building an emergency fund, here are a few common situations when you might need to tap into your emergency savings.

  • To protect your income. A financial buffer could help if anything threatens your ability to do your job—for example, if your car breaks down and you can’t get to work any other way, or you need a new piece of equipment.
  • To replace your income. If your job is downsized or cut, your emergency fund could help you pay rent, buy food and cover other necessary expenses until you can find another source of income.
  • To cover medical expenses. Using your emergency fund is a no-brainer if your doctor recommends treatment or medication for a health issue.
  • To maintain a habitable living environment. Damage to your home, like a leaky roof, could cause more costly issues down the line if it’s not taken care of as soon as possible.

Remember, everyone’s situation is different, and you might have multiple ways to respond to a financial emergency. If you’ve been laid off and you’re struggling to pay bills, the CFPB recommends reaching out to your lenders directly. And it might be a good idea to seek the advice of a qualified financial adviser.

Bottomline

Whether you’re considering putting your money in a savings account, checking account, certificate of deposit, money market deposit account, money market mutual fund, bond or equity investment, real estate, or some other form of investment, weigh the following pros and cons:

  • How liquid are the funds? In other words, can you immediately withdraw your money if you need it?
  • Are there any fees or limitations to accessing the funds?
  • If you access your funds, is there a risk of loss of principal?

In many cases, FDIC-insured savings accounts or money market deposit accounts are preferable options because your money is more easily accessible. Plus, it’s not subject to market fluctuations.

References:

  1. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm
  2. https://www.consumerfinance.gov/start-small-save-up/start-saving/an-essential-guide-to-building-an-emergency-fund/
  3. https://www.consumer.ftc.gov/articles/0498-its-never-too-early-or-too-late-save
  4. https://www.usaa.com/inet/wc/advice-finances-emergencyfund

Understanding Your Credit

Posted on by

Building credit is an important part of your financial life.

Credit is effectively your reputation as a borrower, made up of information about your borrowing and repayment history. Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.

Stack of credit cards and american dollars, close-up view. Horizontal financial business background.

Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower.

Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future.

Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate.

In addition to helping you get a loan, credit can affect other aspects of your life, from renting an apartment to getting hired for a job. Why? Just like lenders, if landlords or employers see a low credit score, they may perceive you to be financially irresponsible and too risky to take on.

Credit: Histories, Reports & Scores

You need a history of responsible credit use to establish a solid credit history and credit score.

For many, the terms “credit history,” “credit report” and “credit score” may appear interchangeable. In fact, they are three separate entities that are directly related to one another.

  • Credit History: an unofficial record of your debts and repayments
  • Credit Report: an official record of your credit history collected from sources like lenders, utility companies, landlords and collection agencies, and compiled by the three credit bureaus, Equifax®, Experian® and TransUnion®
  • Credit Score: a statistically calculated numeric value indicating your creditworthiness based on the information contained in your credit report. While there are several credit-scoring formulas, FICO® (the acronym for Fair Isaac Corporation, the company that provides this model to financial institutions) is the most widely recognized. Scores range from 300 to 850, with under 400 typically indicating very poor credit and above 670 demonstrating you’re a responsible borrower.

Scores are available for lenders, landlords and others to use in assessing if you’re a good financial risk to take on. Ranges of scores are often translated into quality ratings, such as good, fair and poor. While ranges may vary by lender, here is an example of how scores may be broken up:

Score Range Rating
800+ Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
580 and less Poor

*Scores are based on the Understanding FICO® Scores Booklet. Lenders may use other qualifying ratios and factors when approving loans. Speak to your lender for more information.

Credit Card Limit

Credit cards are a form of borrowing, like a short-term loan

It’s important to know what the credit limits are on your credit cards and where you stand, because the percentage of credit you have available can impact your credit score, for better or worse.

When you’re approved for a credit card, you’ll be given a pre-set limit of how much money you can put on the card. Keep in mind that you’ll be charged interest on your purchases if you don’t pay your bill in full each month. If that balance creeps up, the interest can push you above your limit.

Credit Utilization and Your Overall Credit Health

It’s easy, purposely, for you to pull out your credit card to buy items you want or need. If you pay that debt off each month, it won’t negatively affect your credit. However, if you keep a balance on one or more cards, it can start to reduce your credit score due to a high credit utilization.

Credit utilization is the sum of the debt you have on all your revolving credit—essentially, your credit cards and lines of credit—divided by your limit. Many experts recommend to keep credit utilization below 30%, but lower is always better since it’s an influential part of figuring your credit score.

Understanding Credit Facts

  • Income has nothing to do with your credit score and isn’t even reported to the credit bureaus, so it’s not listed on your report.
  • Bankruptcy does not erase bad credit history. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain there between 7 and 10 years.
  • Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
  • Paying cash for everything isn’t better than using credit responsibly. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won’t be as good as someone with a long history of responsible credit use.
  • You can’t hide debt. Having many credit cards affects your credit, as does the amount of debt you carry. You can opt for a balance transfer to help you save money and pay off your loan faster by moving debt from a high-rate card (or cards) to a low-rate card. Balance Transfer is the balance of money owed on one credit card transferred to another credit card, generally to take advantage of lower interest rates.

Effect on Credit

“Most American’s spending habits are based on the amount of available credit they have, and not on their pay check, cash flow or checking account balance.”

Credit cards are known for their convenience, safety and dependability, but did you know they also offer excellent financial benefits that cash just can’t beat? When used responsibly, credit cardholders can maximize their financial opportunities now while making a positive impact on their financial future.

How you use a credit card affects your credit history and can effect one aspect of your credit report. So it’s really important to create a credit history that reflects responsible and intelligent financial habits.  You can take positive steps to build a positive credit history:

  • Use your card regularly
  • Make your payments on time
  • Keep your balance below your limit
  • Continue to use your credit card over an extended period of time
  • Regularly read your credit report to make sure it’s error-free

When you practice these tips and responsibly use your credit card, you’ll improve your credit and may even get a higher credit limit. With a higher credit limit and the same responsible practices, you can maintain a low debt-to-credit-limit ratio and further improve your credit standing—which will give you the opportunity to finance large purchases, such as a home, at lower interest rates.

Why Would I Want to Increase My Limit?

There are several reasons you may want to consider asking your creditor for an increase, including:

  • When your credit has improved. If you got a credit card at a time when your credit was on the low side or just starting out, chances are your limit is small. If you feel your credit has improved, now may be an appropriate time for an increase.
  • When you want your credit to improve. As mentioned before, a high credit utilization can hurt your credit. Increasing your credit limit would reduce the utilization numbers and possibly increase your credit score, provided you don’t increase your balance as well.
  • When you need to buy a big-ticket item. Should you need to cover a larger expense that you’d like to budget for and pay off over time, such as a new water heater or vet bills, a credit limit increase can be helpful. If you’ve been diligent in paying your credit card bill, your creditor may approve an increase that can take the stress off your purchase.

Before You Ask

It could cause a temporary drop in your credit score. Although an increase in your credit limit ultimately may help your credit score, it will create a “hard inquiry” on your credit history and could lower your score in the short term. If you continue paying your bills on time and keep your utilization below 30%, it should come back up.

Make sure a higher limit won’t cause too much temptation. Whether you’re asking for a limit to help increase your credit or another similar reason, be careful that you don’t overspend once your credit is increased. Being unable to make payments or keep your utilization level low could cause long-term problems you didn’t intend on facing. Be mindful that those are the two most important factors in credit scores.

Items Taken Into Consideration

When you ask for an increase, the creditor will usually take the following into account before making their decision:

  • Account age and standing
  • Time since last increase request (avoid asking frequently; space out your requests)
  • Annual income
  • Employment status
  • Payment history

In some instances, the company will ask you how much of an increase you’re asking for. Be realistic in order to increase your chances of approval. Once you’ve asked, you’ll usually get an answer quickly—sometimes even instantly if you apply online or through your bank’s mobile app.

Credit is a financial tool, debt is bad.

References:

  1. https://www.navyfederal.org/makingcents/knowledge-center/credit-cards/articles/6-benefits-of-using-a-credit-card.html
  2. https://www.navyfederal.org/makingcents/knowledge-center/credit-cards/how-credit-cards-work/credit-card-basics.html