Financial literacy is a passion of mine, and I have been given the opportunity to share my passion through a series of posts on financial literacy. So far I’ve talked about tips to get started, and debt and savings strategies. You can catch my first post, “Ask a Mom: A Banker’s Tips to Help You Reach Your Financial Goals–Part One,” by clicking here, and “Part Two,” here.
Some fine print: I am not an attorney, you should always consult a CPA for tax advice, and the opinions I express here are my own and not that of my employer. Still with me? Awesome.
I saved the best for last. OK, maybe not the best but definitely the most popular: credit. I’m wrapping up the series with tips for an annual financial checkup. Let’s dive right in, shall we?
Understanding credit. When applying for a loan, your debt tells a story through your credit report. Duh, right? I know, stay with me. There are three major credit bureaus that provide credit reports and scores to financial institutions. Each has a proprietary scoring method, which means that you can have three different credit scores. When you apply for a loan your bank or credit union will likely pull from only one credit bureau. The exception to this is home loans, when scores from each credit bureau, known as a “tri-merge,” will be used.
Each credit bureau has their own calculation method, which makes figuring out how to improve your score tricky. Generally, however, each uses the following factors to calculate scores: payment history, amounts owed, credit utilization, length of credit history, credit mix, and new credit.
Check for errors. Payment history is extremely important and can have a negative effect on credit quickly. The best way to check for errors is to use annualcreditreport.com. The website allows you to obtain one free credit report from each reporting agency every 12 months. Be careful with your search, as there are other websites with similar names that charge you a fee. (Remember that saying that nothing in life is really free? It applies here too.) While there is no charge to view your report, viewing your score will cost you. Unless you are buying a house in the near future, save your money. Pro tip: your credit card company or online banking platform may display your credit score as a service. Keep in mind that the score is probably stale, but is likely near your current score.
After viewing the report, verify that all the accounts listed are yours and have the correct co-borrowers (if any). In addition to checking the payment history for each account, make sure that accounts are correctly listed as open, closed, or transferred. Transferred is when debt is moved from one account number or company to another—for example, when a credit card is compromised and another number is issued, or when a mortgage is transferred to another mortgage company.
Watch what you owe. The amounts owed on a credit report are considered with your debt-to-income ratio (DTI) and payment history to predict the likelihood a new loan will be paid. If a high percentage of available credit is used, a lender could think that you are overextended. However, if your DTI is acceptable and your payment history is clean, the total amount owed becomes less important.
The length of time an account has been open also affects your score. Maintaining accounts for a long period of time demonstrates the ability to pay as agreed over many years. Be cautious of closing older accounts. Doing so can change your debt-to-available-credit ratio, negatively impacting your score in a way you did not intend.
Break bad habits. Credit utilization uses credit habits to predict future behavior. Is your balance paid in full each month, or is each card maxed out? Credit reporting agencies also consider credit mix, or the types of credit. Do you have several retail store or specialty cards? Only student loans? The types of credit accounts on a report can also potentially predict behavior.
When I was in my twenties, I was a sucker for the classic “apply for a card and get 20% off right now” appeal. In my youthful ignorance, I thought that I could enjoy the discount now and close the account, worry free, later. Wrong. New credit, or number of credit inquiries can bring down your score. Too many credit inquiries may indicate that you are seeking credit because of income issues. In other words: If you had money, you would not need to borrow it.
Take a breath. Congratulations—you’ve made it through a series on financial literacy! Did your eyes glaze over the technical parts? No worries—take a breath. If you’re determined to make some changes this year, hopefully this series was helpful. If you’re well on the path to finding your unique financial balance, consider these last few tips:
- Don’t leave money on the retirement table. If your employer provides a retirement match, try to save enough to get the full match. Did you get a raise? Increase your retirement auto-debit before you get used to the larger check. Finally, if you recently changed jobs remember to take your money with you, via a rollover. It may sound complicated, but it’s just paperwork.
- Review your financial accounts. Consolidating everything to one or two financial institutions could qualify you for a lower loan rate or reduced account fees. Also talk with your banker to verify you are in the best account type for your current needs.
- Call your insurance agent about your coverage. Make sure you have the right amount of insurance for your family and are receiving any discounts for which you qualify. Have any workplace insurance coverage amounts handy to make sure you are not over-insured.
- Jump-start savings with direct deposit of your tax refund. It can be tempting to have some fun with your refund. Mama needs a new pair of shoes—literally. However, your tax withholding is out of sight, out of mind, so you won’t miss it—theoretically, anyway.
Connecting all the financial dots can be a struggle. The key is to stick with your plan and do what works for you. This year my goal is to eat fewer meals out and save the difference; however, I still need my lattes. Nobody wants to be near me without a minimum amount of caffeine in my system. If Mama ain’t happy, nobody is happy! #realtalk
