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How to Take Care of Your Personal Finance Needs.

July 5th, 2019 · Budgeting, Debt Management, Saving

In order to be successful in life, one needs to take care of his or her personal finance.  This doesn’t mean you need to be rich, just at a comfortable place where money issues aren’t a constant source of stress.  

What is personal finance?

Personal finance is such a generic and broad term these days that it seems to encompass almost everything when it comes to money.  Wikipedia defines personal finance as “the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.” However, in my opinion, personal finance can be more simply be divided up into specific categories: 

  • Credit management and debt
  • Income
  • Budgets and Saving
  • Financial accounts and banks
  • Retirement and Investment

As you may suspect, each of these categories touches on the other in some form of interdependency.  For example, credit management touches on budgets and income. Retirement and investments depend largely on income and budgeting as well as banks.  

Credit and Debt Management

While some people say they can live without credit, in today’s environment, it is virtually impossible to escape the influences of credit on your life.  Even if you pay for everything in cash, you can’t rent a car, buy insurance, or open a bank account without having your credit run. The state of your credit is going to determine what kind of deal you get on financial products – this will have a direct effect on other aspects of your personal financial picture like savings, the type of accounts you have and where you bank.  

Much has been written, here and elsewhere, on how you can take care of your credit.  I invite you to read our articles on credit repair and credit management.  In general, a simple but effective strategy for improving your credit situation is to is pull your credit report, make sure everything is accurate and pay down your credit card balances.  

The root of all credit problems is simply too much debt.   The old adage “neither a borrower or a lender be” is always good advice, though it is the rare person who can get through life without borrowing money.  The trick is to know what you can afford as far as payments go and if taking out a loan is going to advance your personal financial position. For instance, if you need to commute to get to a well-paying job, getting a car loan is a perfectly reasonable thing to do.  Mortgage guidelines generally specify that a person’s debts should make up no more than 36-42% of their income. This seems to be the sweet spot in which it is possible to carry debt and still have money left over for emergencies, utilities, groceries and the all-important savings.  

Income

At the heart of all money management is your source of income.  Making sure you have enough money for day to day expenses could determine your career choices – should you be a corporate climber or strike out into your own business?  Should you be a temp worker, work contract or drive for Lyft? When you retire, you’ll probably need more than social security to keep you going and your head above the financial waters.   Making sure you have enough money to live plus a lifelong habit of investing and saving is going to guarantee income after you decide you are no longer part of the workforce. If you’re not earning enough, what can you do to improve yourself, go to school, take on a second job?

If you have gone or are going to college, how you handle student loans is going to have a large effect on your future earnings, savings, budgets, credit management and debt.  Unless you’ve been living under a rock you could not have failed to hear about the student debt problem in this country – it’s such a problem that presidential candidates have made it part of their platform to confront the crisis.  U.S. students owe more than a trillion dollars in combined debt, the rates of default on student loans go up each year and student loan debt is not something that students can escape: there is no statute of limitations on this debt and it cannot be discharged in bankruptcy.  Making smart decisions about taking on student loan debt is going to have a noticeable effect on your income, credit and debt burdens.  

Budgets and Savings

If you spend every penny that you earn, you will most likely find yourself in lot of debt and no retirement savings when you are older, making the possibility of your never being able to retire very real. Budgets have a really bad name – just like diets.  No one likes to deprive themselves of things and both budgets and diets do just that. People seem even more reluctant to budget than diet – I don’t know about you, but I’m more likely to pay more attention to my diet than my budget. Fortunately, budgets are not that difficult to write or maintain.  

The internet is full of resources to help you understand and develop a budget to make sure that your hard-earned cash goes into the right financial bucket. (Check out the ones on our site.)  In a nutshell: Find out what you are actually spending now and on what by keeping track of your expenses for one month and see where your money goes.  It can be eye-opening. You may only have to go this far in your budget planning to know that you don’t want to spend $700 on groceries every month or take expensive vacations.  Knowledge such as this may make you be more conscious of what you spend each month and be willing to cut back. Once you know where your money is going you may want to write out a formal plan, even if you don’t you might try to reduce expenses.  One painless budgeting tool is Mint.com – it can help you budget and keep track of expenses. It connects to your bank accounts and can automatically put your expenditures into categories and give you reports on where your money is going.  

Having a budget (even an informal one in your head) will ensure you have savings.  Savings are so important to your personal financial health. Without them, you will not be able to cover emergency expenses (which could force you to take out a fast high-interest loan) nor have enough to purchase a home or prevent yourself from going into debt to buy some niceties for yourself.  Debt is very costly, both to your saving plan but also to your credit.  

Financial Accounts and Banks

Where you keep your money can have a big impact on your personal finance picture.  If you are spending $35/month on a checking account, you may want to check out a credit union or visit your bank to see if they can offer you a better deal.  Some accounts offer free checking merely by having direct deposit of your paycheck – others may offer you free checking if you keep your account above a certain minimum balance each month.  Even small savings like this can be important to your budget.  

Where you keep your investments obviously is very important, but you may not have a choice if you are participating in your company’s 401K.  If you DO have a choice, it’s worth checking out the fees involved with your IRA account or your Roth. You may be surprised at the fees you are being charged.  

If you have credit cards, picking the right ones is obviously something you want to consider carefully.  It’s not unusual to have credit card interest rates at 13.9% (vs. high interest rates in the 20-percentile range), even if you have bad credit, so it’s worth shopping around.  

It’s also important for you to pay your credit cards on time, not just to maintain your credit rating, but also, if you have missed payments, your relatively low interest rate card could jump up to more than 29% (yes, this is legal and is standard in most credit cards).  Keeping a tight rein on your budget is important to make sure you have the money to make the payments. And while we’re speaking of payments – making the minimum payments is a way to make sure your credit cards are as expensive as possible and to have the bank love you. Paying the minimum may mean that it will take you years to pay off a $1000 balance.  

Carrying a balance every month is one of the worst things you can do, not only does it cost a fortune, but you could be damaging your credit as well if the balances get high enough.  The optimal percentage of your credit limit is 10%, but you will probably suffer no ill effects if you go as high as 30%.  

Retirement and investments

With interest rates below 2% (sometimes lower than 1%), keeping your money in a savings account can be a not-so-smart decision.  For myself, I have my investments in an investment account that pays market returns (compared to the stock market average). However, I do have one smaller saving account that I use for emergency funds.  The advice given earlier in this article about checking fees in any investment account you open should be followed. Should you get a financial advisor? I have one and I am happy with him. If you don’t have one, you can still go it alone.  One low cost option is to account in an online account like Vanguard will charge you the minimal amount of fees and invest in an index fund. An index fund follows the market closely, so if the stock markets sees large gains, your fund will also (of course, the reverse is also true).  With the historical average going 8-10% increases, this is an easy way to put your money in something relatively safe. The stock market is very volatile in the short term, with large swings, so you want to think long term.  

One of the most important decisions that needs to be made is exactly when to retire.  Should you take Social Security at 62 or wait until 70?  Will you have enough to live off of long term, or will you be forced to cut back dramatically on your income expectations and therefore make drastic changes to your budget?  The average life expectancy is 78.7 years (2018 estimates) – will your money last that long? What about health care? Even with Medicare at age 65, if you want to cover the cost of prescriptions, your out of pocket cost is still $200-$300 a month.  Did you budget for that amount? It’s really worth the time and effort to come up with a plan.  

Conclusion

We’ve only scratched the surface here on personal finance, but the overall message should be that personal finance fitness is a lifestyle choice, much like a wellness plan.  With a little investment of time to research and plan, your life could be a lot more stress-free.

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8 Actionable Tips on Raising Your FICO Credit Score

May 21st, 2019 · Credit Rebuild, Credit Repair, Credit Scores

There are no two ways about it; raising your FICO credit score is hard. It can actually seem like an insurmountable task for the many unfortunate individuals saddled with a history of poor financial decisions.

There’s no way to game the system. There are no fancy tricks that make the process easier. But there is good news: It is possible to raise your credit score. It’s possible to shave away the impact of poor past financial decisions bit by bit, until you’ve proven to creditors you’re no longer a liability.

It’s also worth noting that you aren’t alone. The average credit score in the United States is 695, meaning that half of the people within the United States have a credit score below that. It’s estimated that 30 percent of Americans have what would be considered “bad” credit. This means that you aren’t a mere anomaly in a sea full of financially sound folk.

What it does mean is that you have a lot of work to do to demonstrate you’re financially responsible, like many other Americans.

Help Creditors Believe You’re Financially Reliable

Here are eight steps you can take to raise your FICO credit score.

1. Check for Mistakes

It’s wise to check to ensure there isn’t incorrect information on your credit report. Incorrect information can be detrimental enough to impact your score and limit your financial options. And unfortunately, it’s not uncommon.

A study by the Federal Trade Commission showed that 1 in 4 Americans have identified mistakes on their credit report. Furthermore, 1 in 5 was able to get these mistakes corrected by disputing them.

Common mistakes include wrongly attributed or duplicate accounts, incorrect information regarding late or missing payments, and erroneous personal information. There may also be outdated information regarding your credit utilization or balance. 

There are several steps to follow when trying to dispute information on your credit report. The first step is to get a copy of your credit report.

Next, you should contact any one of the major credit bureaus: Equifax, TransUnion or Experian. You will need to explain the error, include information that supports or validates your claim and send the letter to one of the bureaus. Sample letters available online can help you do so.

2. Pay on Time, Every Time

It might seem obvious, but it bears repeating: pay your bills on time. It’s not something that will transform your credit report overnight. What it is, however, is something that has the greatest impact on your credit score overall. Your payment history is 35% of your score.  

You can demonstrate a shift toward financial responsibility by proving you can consistently pay your bills on time. Various things can help you achieve this. This includes things like payment reminders and automatic billing. Give them a try if you have a tendency to miss your payments from time to time.  

3. Avoid Late Payments, Especially Beyond 30 Days

Again, late payments are very bad. Even paying a few days late can be bad, but it won’t be nearly as bad as paying beyond 30 days late. This is because a lot of creditors don’t report late payments if they are under 30 days old. Still, creditors will report debts of at least 60 days old.

The way credit scores are calculated make 90-day late payments appear as much worse than 30-day late payments. This is especially true if those 30-day late payments are infrequent.

Many credit card companies now allow you to pick a due date that works better for you. This is another way to avoid failing to make your payment on time. 

4. Aim for a Higher Limit Instead of a New Card

Your credit utilization is a number that indicates how much of your available credit you are currently using. Creditors like to see this number kept below 30 percent, and ideally below 10%. If you are worried about your credit utilization, you might think it best to apply for a new credit card. The problem with this is that attempting to open a new credit card will generate a hard inquiry that will impact your credit score negatively.

Therefore, it is better to ask for a credit limit increase as opposed to opening a new card for the sole purpose of raising your credit score.

5. Keep Your Oldest Accounts

When deciding to close a credit card account it makes sense to close your newest rather than your oldest account first. An older, well-managed account is a better indicator of financial responsibility than a newer account you’ve barely used. The age of your credit history factors into your credit score. This is the average of your newest and oldest accounts. The idea is that an older credit history means you have accumulated more experience with using credit. This is seen by creditors as a good thing. 

6. Pay Down Your Credit Cards and Revolving Debt

Credit utilization makes up 30% of your credit score.  There are some accounts that don’t factor in credit utilization.  These accounts are installment loans like mortgages or auto loans.  It would be unfair to ding a consumer for having a mortgage that covers 80% of the value, for instance.  Only revolving debt, typically credit cards, have their credit utilization count towards this part of your credit score.  If you have a maxed out card, this can drop you up to 45 points (if you have a good score). If you have an average score, you can lose up to 30 points.  

Not only do you save on paying interest each month (at usurious rates of up to 29%) , but paying down your cards to an optimum rate of 7%.  Another little known fact is that having an equity line of credit on your home counts toward your credit utilization. Surprised? Well, an equity line of credit is a revolving loan, despite the fact that it is secured by your home.  If you have one of these, and your balance is high, you might consider refinancing your equity line of credit into your first mortgage.

7. Take Advantage of Score Boosting Programs.  

In general, things like rent, utilities and phone bills do not appear on your credit report, which is unfortunate if you make the payments religiously on time.  If you have a limited credit history, there are two programs, Experian Boost, and UltraFICO, that can help you build a meager credit report with helpful payment records.  

Experian Boost allows you to get credit for phone and utility bills, putting the payment information directly on your credit report.  

UltraFICO allow you to add banking information to your credit score, things like savings rates and evidence that you do not bounce checks or have other negative balances.  

8. Time Your Applications Carefully

Every time someone pulls your credit report, an inquiry is recorded on your credit history.  There are two types of credit inquiries, soft and hard. A soft inquiry happens when an existing creditor or you pulls your credit report.  These do not have any negative consequences. However, if you apply for new credit with a bank, credit card company or auto financing, you receive a hard inquiry on your credit report.  In general, the effects of a hard inquiry last between 6 and 12 months.

In Conclusion

The thing to remember is that these aren’t “hacks” that will improve your score overnight. Rather, they involve learning more about how your credit score is determined and then changing your behavior to secure a higher score. If you have a low credit score, time truly heals all, as long as you practice financially sound behavior that will reflect that you’re a safe bet for creditors.

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A Guide to Rebuilding Bad Credit with Secured Credit Cards

March 13th, 2019 · Credit Cards, Credit Rebuild, Credit Repair, Prepaid Cards

Having a good credit score is not only crucial for making large purchases for things such as homes, vehicles, and high-end appliances, but it’s also necessary to obtain low-interest loans, employment at specific companies, and some residential renting approvals. Essentially, secured credit cards offer a way for individuals with unestablished or poor credit scores to use deposited cash as collateral for credit card purchases. 

Does this mean that secured credit cards don’t come with certain caveats? Of course not, but if you’re someone who’s run into a low credit score setback, they may be an excellent way for you to get on the road to rebuilding it.

Here are a few of the pros and cons of secured credit cards.

Pros

  • They offer the opportunity to slowly rebuild your credit score by making timely monthly payments (emphasis on the word “timely”).
  • Your credit score will show more credit lines and increase your borrower credit-worthiness in the eyes of lenders.
  • Secured credit cards give you the opportunity to set your credit limit, according to your comfort level.
  • You can qualify for one even if you have a low credit score and unpaid debts.

Cons

  • There are a few credit issuers who report secured cards as “secured” instead of just listing them as credit lines. Make sure to ask about reporting before applying.
  •  Secured credit cards will usually have higher interest rates.
  • Unlike unsecured credit cards, secured credit cards require a deposit.
  • The amount of your deposit determines the amount of your credit line.
  • Some secured credit cards can come with exorbitant fees, which can whittle away the amount you have available to spend.

The bottom line:  how getting a secured credit card helps your credit.  

Not convinced yet?  Here’s the nitty gritty on how getting a secured card will help you.  Your credit score is based on 5 things:

  1. Your payment history (35%)
  2. Your total use of your credit limits. (30%)
  3. The length of your credit history (15%)
  4. The amount of new credit you have (10%)
  5. The “mix” of your credit.  (10%)

We’ll go over how each of these factors can be helped with a secured credit card.  

Payment history. Once you receive a new secured credit card, as we’ve mentioned several times in this article, it is important to make your payments on time.  As you can see, your payment history is the most important part of your credit score.

Credit utilization.  We mentioned that you should keep your balances at 25% of your total limit.  With secured cards, your credit limit is going to be quite low compared to unsecured cards, especially if you can’t afford to make large deposits to open an account.  Many people have $500 limits to start with. (Just so you know, 25% of $500 is $125.) Some experts say that 10% is the limit you really need to stay under, but you should be ok around 25%.  Really, you are using the secured cards to rebuild your credit and they should be looked at as a tool rather than the way an unsecured card is to be used (as a convenience for shopping). You shouldn’t be charging a lot on your secured cards.  

Length of credit history. The total length of your credit history will not change when you get a secured card, unless you have no credit history at all.  However, the older an account is on your credit report, the better your score (if your payment history and credit utilization are good).  Having “seasoned” good credit lines on your credit report will indicate to future lenders that you are now a responsible consumer. There is no time like the present to begin building your credit report.  

New credit. The ability to apply for and receive new credit is an indication of your credit worthiness.  Getting new credit lines looks good to lenders and is reflected positively on your credit score.  

Mix of credit.  Lenders like to see that you have both installment (auto loans and mortgages) and revolving (credit cards, equity lines of credit) on your credit report.  If you only have installment loans on your credit report, applying for a revolving line of credit (a secured card) will help improve your score. If you have no installment loans (you don’t have a mortgage or auto loan), getting a secured card will help you obtain an auto loan or mortgage in the future.   

Helpful Guidelines When Using Secured Cards

Secured credit cards provide a practical way to build purchasing habits that can keep you reined in from impulse or frivolous spending. Ensuring that you use your card wisely is of the utmost importance. Here are some ways to do this.

  • Make EVERY payment on time.  That may seem like a no-brainer, but it’s important to emphasize. After all, this is the foundation of building good credit: paying back what you owe. If you can make payments before your due dates, even better. Payments that are 30 days or more past the due date can get listed on your credit report, which means another setback to the improvement of your score.
  • Keep your balance at a reasonable level. Try not to make massive purchases on a secured card and aim to keep the balance no more than 25 percent of your limit. You’ll want to want to minimize the amount of debt shown on your credit report while you work to rebuild your credit.
  • Use one secured card a time. Establishing several secured credit cards can be a big red flag to issuers. Remember that the more you apply for credit, of any form, the more hits on your credit score, which can have a negative impact. Work on making steady payments on your credit card anywhere from six to eight months before applying for new credit lines. 
  • Ask about reporting. Find a card that reports to all three of the major credit bureaus, so that your credit history will be consistent for each bureau.
  • Set up a monthly autopay. Many issuers offer an autopay option to make payments easier for cardholders. If your card doesn’t provide this, consider setting it up through your banking institution. Auto-payments help you to avoid late payments and may even make you eligible for specific discounts.
  • Go with established card issuers. Apply for secured credit cards with well-known, reputable credit institutions and be leery of unestablished card issuers.

Breaking Down Secured Credit Card Fees

It’s important to understand the fees associated with your card before accepting the terms. If you’re looking to rebuild your credit, the last thing that you need is a new credit card with month-to-month fees that you can’t afford to pay.

  • Application Fees — Some issuers charge an initial fee to apply for a secured credit card, which can be upwards of $50. While most do not, you should always read the application terms before signing up.
  • Annual Fees — Annual fees are deducted from your deposit every year, though the best-secured cards will come with no or low annual fees.
  • Interest Rates — Also referred to as APRs, these fees get deducted from your deposit on a yearly basis, and the percentage amount will vary with each card issuer. While secured cards typically have higher APRs, it’s always best to shop for the best deals.  APR stands for annual percentage rate and is a calculation that is based on the total cost of owning the card.
  • Transaction Fees — Some secured cards come with a small fee attached to every purchase you make, and this small fee can quickly add up to a significant cost at the end of your billing cycle. Remember that the small purchases count, too.

How to Find the Right Secured Credit Card for You

Spend some time checking out the numerous card options that may be available to you, because it’s worth it. Here are a few takeaways that you’ll want to use when making your decision. 

Is the company reputable?

Be wary of unknown or new card-issuing companies. Unfortunately, the financial industry is fraught with scammers and sub-par lenders who thrive on taking advantage of unsuspecting borrowers. Check online reviews, the company’s history (and time in business), Better Business Bureau feedback, and any other sources where you can gather information about their lending practices.  

What deposit is required?

Similar to vehicle purchases, the amount of your deposit will go towards your card balance, but remember that your deposit will determine your limit. It can be as low as $200 or as high as $9,000. 

What interest rates (APR) and fees come with it?

Have a clear understanding of all fees associated with opening and maintaining your account. Saying it’s important to “read the fine print” when it comes to applying for credit cards, secured or not, is an understatement. Trying making a list of at least 10 top card picks and compare their rates to see which offers the best benefits for you.

How do they report your credit? Is it to all three Major Bureaus?

Inquire about your potential cardholder’s reporting details. Remember, it’s essential to choose an issuer that not only reports to all three credit bureaus (Experian, Trans Union, and Equifax), but also reports secured cards simply as “credit” and not “secured credit.” 

Applying for a Secured Credit Card

You can apply for a secured credit card online or at your banking institution or credit union. When you do, you should be ready to supply the following documentation:

  • Name, contact details, and social security number (must be 18 years or older, of course)
  • All income documentation and verifiable employment details
  • Bank or credit union details including history, balance, date opened, and additional account holders

Secured credit cards can be the answer to rebuilding your credit if used in the right way. Make sure to keep a close eye on your credit reports from all three bureaus to ensure consistency and inaccuracy as you work to build your credit scores. And while rebuilding your credit isn’t an overnight process, it’s one that is worth the effort.

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