Credit scores determine your ability to get a loan and the interest rate that you will be charged.  A good credit score is necessary to obtain a car loan or a mortgage loan.

Contrary to what you may think, a credit score has nothing to do with your income, your savings or your employment history.  There are two scoring systems – FICO and VantageScore.

FICO uses the following primary variables to score your credit:

• On time payment history – 35%
• Amount owed – 30%
• Length of credit history – 15%
• Type of credit used – 10%
• Number of credit cards applied for in short time – 10%
• Scan public records for bankruptcy and court judgments

An excellent FICO score is 720 and above.  A good FICO score is 680 to 719.  More scrutiny is done on credit scores of 620 to 679.  You are usually disqualified from loans if your score is below 620.

The 3 reporting agencies are Experian, Transunion and Equifax.  You are entitled to a free report once a year by visiting annualcreditreport.com or calling 877-322-8228.

A 2013 FTC study found that 1 out of 5 consumers had an error on one of these credit reports.  You have to take the initiative to see if there is an error and then you have to report it.  Good news is that 4 out of 5 consumers who complain win a change to their credit report.

So, how do you improve your credit score?  The most significant way is to pay your bills on time.  Second, is paying off your debt on time.  If your debt is turned over to a debt collector, it harms your credit score.

The scoring companies use a ratio of outstanding debt to your credit limit.  You can take action to change the numerator or denominator of this ratio to improve your score.  The simplest way is increasing your credit limit.

It is important to have a good credit score, but don’t get carried away with manipulating the scoring formula.  Good financial planning and budgeting is a better long-term plan for obtaining a good credit rating.

You need credit for the scoring companies to give you a score. You need to use a credit card to obtain a credit history.

Comment:  If you are enjoying this blog, like it on Facebook.  Follow this blog if you find it useful.  Comment if you have suggestions for the blog.

Other Sources:  Lew Sichelman, Chicago Tribune, “New credit score is more inclusive”, Dec. 8, 2013; Shaila Dewan, “Buying Street Cred”, New York Times, Feb. 16, 2014

 

 

If you have no student loans, please thank yourself, your parents or whoever paid for that expensive education for the wonderful and unique situation that you are in.

More than 70% of students leave school in debt and one of every seven borrowers falls behind within 3 years of graduating or dropping out.  One out of 8 borrowers are defaulting on their loans.  The average loan amount is $29,400.  Nationwide student debt totals $1.2 trillion.  About half of that debt isn’t being repaid.

Most loans are in either standard 10-year repayment programs or in extended programs, which stretch loan payments and interest over longer periods.  Only about 10% of borrowers are enrolled in an income-based repayment program.

A large number of people have not taken advantage of these income-based programs. These programs can help you with repayment of these loans.

If you are having trouble making your loan payments or have fallen behind with your loan payments or have quit paying at all on your student loans, you should find some help.  These loans are not going away doing nothing.

There are programs that allow you to pay 10% of your discretionary income each month as a loan payment and then loans are forgiven after 20 years if you work in the for-profit sector.   The loans are forgiven after 10 years if you work for a non-profit or federal, state or local governments.

If you are having difficulty finding help, you can contact student.ed.gov that provides you with information about these programs.

If you have loans from the bank-based student loan program that ended in 2010, you are also eligible for income-based repayment plans.

If you are having problems getting answers you can contact the Consumer Financial Protection Bureau to make a complaint.  If there are enough complaints about a lender, it will be investigated.

Financial comment:  If you are planning to borrow money to finance higher education, remember two rules of thumb:

1. Borrow no more money than you can pay off in 10 years
2. Borrow no more than what you expect to earn when you achieve your degree.

Kowalczyk comment:  Blogging in Key West is a joy.

 

 

 

 

Most of us use credit cards to buy groceries, gas, pay bills, etc.  Using your credit card makes it easy to track expenses for your budget, but are you managing your credit cards effectively?

So, I have a couple of questions for you.  How many credit cards are in your wallet?  How many credit cards do you really use?  It is easier to track your expenses if you use only a couple of credit cards.   It is also safer if you only carry a couple of cards.

Once a year you should review your cards and determine which ones you use most often.  Is it the one with the best rewards?  Is it the one with the highest credit limit?  Is it the one with the lowest interest rate?

Many of you use a rewards card and many of you use a cash back reward card.  Many of the cash back rewards are capped on an annual basis.  Make sure you are using the card effectively.

Anya Kamenetz wrote an interesting article in  the Chicago Tribune titled “Playing the cash-back credit card game”.

Her suggestions follow:

1. Don’t pay extra for a cash-back card
2. Consider Chase Freedom, American Express Blue Cash Everyday, Capital One Cash Rewards and Discover It Card
3. Don’t apply for too many cards – credit score issues
4. Consider your monthly spending habits before choosing a card
5. People are most satisfied with gas reward cards.

Nerd Wallet is a good resource for researching your credit cards.

Comment:  If you are enjoying this blog, please share it with your friends.

Another MoneyYOYO rule – pay your loan payments on time and in the amount expected.  Being late on loan payments can seriously deteriorate your credit standing.

If you are not comfortable with your debt level on your balance sheet you can make additional loan payments and pay off your loans more quickly.  This means you will have to spend less to afford these additional debt repayments.

What loan do you pay off first?

There are a number of ways that you can approach debt repayment.  The optimal strategy is to pay down the loan with the highest interest rate.  Once that loan is paid off you then pay off the loan with the next highest interest rate.

Depending on how large your loans are, this could take a long time.  Many people like to see more visible progress.

So some people prefer a strategy where you pay off the smallest loan balance.  Then you pay down the next smallest loan.  This strategy gives you a sense of achievement since you are paying off loans and they go away.  Read related articles at these sites:   gkarp@tribune.com, @spendingsmart.

Others use a combination strategy where you pay off the smallest loan and then begin additional payments on the loan with the highest interest rate.

There is no right answer.  The best strategy is the one that gets you to make additional loan payments and meet your goal for debt reduction.

Financial aid:  Use the app Tab to help you split the bill when you’re dining out with friends.

Photo of the day:  My dog, Charlie keeps me focused on cold, windy days.

 

I have written about income, expenses and building savings, but I also need to address the issue of assets, debt and net worth.

You should create a simple balance sheet.  List all your major assets on one side and list all your debts on the other side.  If your assets exceed your debt then you have positive net worth.  If your debts exceed your assets, you have balance sheet problems.

Debt is a personal obligation – remember YOYO – you’re on your own.  How are you going to get your debt level to a manageable level?  It is not something you can achieve in a short time, so back to a YOYO rule – start with small goals.  What can you do this year to help you achieve your debt reduction goals?

A few rules of thumb to help you review your list of debts:

* Your car loan should not exceed 10% of your take home pay

* Your student loans should not exceed what you expect to earn during your first year after getting your degree

* You should be able to pay off your student loans within ten years

Many financial plans include the following three goals:  build savings, reduce debt and invest for the future.  The next few posts will focus on managing your debt.

Financial fact:  As of 2012 43% of 25 year olds have student loans with an average loan balance of $20,326.  Over half of all student debt is held by households whose net worth is under $8,500.  (Bloomberg BusinessWeek, Correlations – Student Debt Explodes, Evan Applegate)

Comment:  I’m blogging in Chicago, so here is a view of the city from North Pond in Lincoln Park.

 

Remember the name of this blog – MoneyYOYO.  You’re on your own.  No one else if going to save money for you.  No one else is going to create a budget or track your spending.

So make sure your goals are clear.  Does your budget include the appropriate amount of spending that allows you to pay down debt and meet your savings goal?  Remember savings involves both large and small sacrifices.

You should track expenses at least once a quarter.  Some people like to review expenses each month.  Once a year is definitely not often enough.  You need to make time to track your spending against your budget.

If you are considering a major expenditure during the year that is not in your budget, review your budget again.  Does this additional spending match up with your goals?

If you are overspending, you will need to figure out a way to adapt your spending to get back on budget.  Some level of sacrifice will be needed.

Financial fact:  In the scramble to get through airport security, U.S. travelers left behind $531,395 worth of pocket change in those plastic tubs in 2012. (Bloomberg BusinessWeek, Justin Bachman)

Comment:  Both Mint.com and Learnvest.com have apps that might help.

Remember the rule – start with small goals.  What changes can you make to your budget now and what changes can you make next year?

Let’s start with housing.  A rule of thumb for housing is no more than 30% of your taxable income should go toward housing. Obviously where you live and the cost of living in that city determine that number.  If you live in New York City that percentage will be higher.  If you live in a smaller city it could be less.  It is usually your largest bucket of spending.

You have a lease or a mortgage, so housing costs can’t be changed immediately.  But if you are uncomfortable with what you are spending, investigate how you can reduce your housing expenditure.  Is it as simple as finding a way to reduce your utility expenditures or taking in a roommate or do you need to totally downsize your living arrangement?

Is where you live very important to you or is it a place to sleep and store your stuff or somewhere in the middle?  These questions may help you decide if your housing choice is appropriate for your lifestyle and your budget.

Financial fact:  In 2011, 28% of renters paid more than half of their incomes for housing.  Rising rents and falling incomes are causes. (Bloomberg Businessweek – “Harvard Study Finds:  The Rent is Way Too High”, Peter Coy, December 9, 2013)

Financial fact:  U.S. stocks measured by DJIA were up 27% in 2013.  The S&P 500 was up 30% and Russell 2000 was up 39.5% in 2013.  (WSJ Dec. 31, 2013)

 

Now that you have tracked your expenses for the past year you need to create a budget for 2014.  Does your budget match up with your planned income?  Does your budget build in the savings you want to build in 2014?  Does your budget pay down your debt, as you would like?

If you answered yes to all those questions, congratulations?  If you answered no, your budget needs further adjustments.

Another rule of thumb is that 50% of your paycheck should go to essential purchases, 30% for whatever you want and 20% for savings.  How does your budget compare against this rule of thumb?

Some expenses are necessities.  You need a place to live, you need to eat, you need transportation, etc.  Just because they are necessities it does not mean that these expenses are untouchable.  Are you spending too much for housing?  Are you eating out too much?  Is your cable bill too high?

Remember the rule – start with small goals.  What changes can you make now and what changes can you make the next year?

Comment:  Today is a great day to make financial New Year’s resolutions.

Comment:  Did you receive money for Xmas or a work bonus?  Think about not spending it and deposit the money into your savings.

 

You have tracked your expenses in 2013 and now you are ready to create a budget for 2014.  If you live alone deciding how you spend money is your call.  If you live with someone and share some or all expenses, the budgeting task is much more challenging.

The next rule for MoneyYOYO is everyone spends money differently.  Some people care about where you live, others just want shelter.  Some people love eating out and other like to eat in.  Some love to go to the movies and others like to watch a movie at home.  The list goes on and on.

If you do share expenses with another person or persons, all of you need to track those shared expenses.  Do you share expenses for housing only or do you share other buckets of spending or all spending?

Now you need to create a budget for those shared expenses. It will be quickly clear if you are in agreement or disagreement.  If you find you are spending money differently, you need to spend an evening or an afternoon or both working out the differences.  Start with the big categories of spending and work you way down.  I am sure compromise will be a necessary tool.

These discussions take on a different vibe if it is your significant other.  Remember there is no right or wrong, it is just a preference for what is more important to you.

Financial fact:  U.S. revised growth was up 4.1% on an annual pace in the third quarter.  It is the strongest advance of growth in nearly two years.  (Commerce Department)

Comment:  For the last 15 years, there has been a downsizing, downscaling and re-evaluation of values and what constitutes the American Dream.  (John Zogby, “The Way We’ll Be:  The Zogby Report on the Transformation of the American Dream”)

Let’s review MoneyYOYO rules.  First, YOYO – you’re on your own when it concerns money.  Second, always save some part of your income.  Third, start with small goals.  Fourth, big and small sacrifices will be necessary to begin saving.

So, how do you get started?  The first step is to determine how you spend your money today.  If you rarely use cash it is simple to track expenses through your credit card, debit card and bank account.  Banks and credit card companies have expense tracking tools you can use on their websites.   PNC Virtual Wallet is one of many bank tools or you can build a spreadsheet of your own.  Review 6-12 months of spending to create a useful record.

If you use cash frequently, tracking past expenses becomes a little more difficult.  Track where your cash is being spent for the next month.  That will give you an estimate for budget purposes.  Going forward It is easy enough to track spending on your phone using a wide variety of apps like Virtual Budget or Spending Tracker.

Are you the kind of person that needs to know every detail of your spending or can you live with less detail?  How many spending buckets do you want to track?  Housing, transportation, food, insurance, entertainment and other are the primary buckets, but you can refine your spending in many more categories.

The end of the year is a perfect time to take on this task to help you create a budget and savings goals for 2014.

Financial fact:  Read about the U.S. Budget deal going through Congress this week.

Comment:   Other sources for financial literacy http://www.moneyunder30.com

http://www.bettermoneyhabits.com