Posts Tagged ‘credit score’

Financial Advice for the Ages

October 12, 2010

There are some personal finance rules of thumb that are set in stone across the board, no matter who you are, how much money you have or what your financial goals are. For example, whether you make $1,000 per month or are worth $10 million, you should have an emergency fund that equals a minimum of three months expenses.

But then there are also rules and suggestions that change as you age and (hopefully) earn more money. Depending on your situation, here are a few age-based tips to maximize your financial well-being.

Mid-twenties
At this age you’re probably still single, no kids, making pretty decent money, traveling a bit, pretty career-focused and not thinking too much about retirement. What essential steps should you be taking?

  1. Get debt-free and stay that way. Pay off your credit cards, student loans and car loan to get your credit score in tip-top shape for when you will inevitably want to qualify for the best mortgage rates.
  2. Take advantage of your employer’s 401k benefit. If you’re offered a match, put at LEAST the amount in there to maximize the match. Aim to defer at least 6% of your salary, 10% if you can afford it.
  3. Get your emergency fund in place ASAP. Start with only $25 per paycheck if you have to, but make it automatic, and once the money is in there it stays. You’ll be glad you have it if you lose your job or have an accident.

Mid-thirties
If you’re a typical American, by this time you own a home, have 2.3 kids and are settled into a career that provides a solid income. You probably spend a lot of time at your kids’ events and have a couple of nice cars in the garage. Make sure you’re staying financial healthy by also doing the following:

  1. Keep socking that money into your 401k. Do NOT sacrifice retirement savings to pay for your kids’ education. They don’t give retirement scholarships or loans.
  2. But you should be saving for college if you can. Decide how much you do want to help (some people want their kids to pay for some to make sure they value the opportunity) then open a 529 account for each child with monthly automatic contributions. Also, make sure you’re matching any expensive extracurricular activity costs with college savings. If you can’t afford to save for college AND pay for select soccer or elite gymnastics, reconsider the high-end program. Chances are your child won’t be making a career out of it and while it might be a tough pill to swallow to drop down to a more affordable league, it will be a lesson in sacrifices and choices that won’t be forgotten.
  3. Make sure your emergency fund balance has been adjusted to cover increases in your expenses over time. Once you’ve reached the goal, keep up with the automatic monthly savings into a Roth IRA or money market savings account.

Mid-fifties
You survived toddlers and are now enjoying the final teen years with your kids, who are hopefully college-bound overachievers. You may be considering a second act career or wondering what the heck you’re going to do with your time once the last of your brood flies the nest. What else should you be thinking about?

  1. It’s probably time to really think about what retirement means to you, then putting that story into numbers. Most people these days aren’t really planning to live out their days on a golf course, but would like the flexibility to hit the links when they like while also staying engaged and active. Think about how the cost of your lifestyle will change and make sure you can weather that.
  2. Take a look at how your 401k (you’re still contributing, right?) is allocated. At this point you should only have about 50% of your funds in stocks, so make any updates to put the other 50% in solid bond funds or other fixed income instruments.
  3. Try to get your house paid off sooner rather than later. Your goal should be to retire completely debt-free.

As with all personal finance tips, these are simply general ideas based on what the “average” American deals with through life. Of course your situation is going to be different and you’ll make adjustments as needed according to what’s important to you. Above all, remember that the purpose of all of this is to simply allow you to enjoy life without having money as a barrier to pursuing your calling.

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Myth-busters: No such things as “healthy” debt

June 21, 2010

Clients often ask me to recommend a “healthy” credit card balance that they should carry in order to boost their credit score. Contrary to popular belief (a belief created out of confusion and no doubt encouraged by the credit card industry), the answer is $0. You do not need to carry a credit card balance in order to demonstrate good credit history.

That’s not to say that you shouldn’t have credit cards or that you shouldn’t use them. Having them and using them responsibly are what helps keep your credit score high, and while carrying a low balance doesn’t always hurt your score, it doesn’t help it either. In fact carrying a balance that is too close to your limit can hurt and with high interest rates and fees it is certainly not the best way to maintain financial health. Let me explain.

When a lender, like a mortgage company or auto finance department, looks at your credit report, they are looking for the likelihood that you will pay them back if they give you a loan. Other parties also use them to protect against making a bad deal, like landlords who use them to judge whether you will pay rent or cell phone companies that want to determine whether you will actually pay for the airtime you use.

Even employers will sometimes request your credit history for insight into whether you are a responsible person. For example, if you consistently pay your electric bill late or have a history of running over your credit limit, chances are you may also be chronically late for work or distracted by personal financial issues on the job.

The reason that it is important to have a couple credit cards (two cards issued by major financial institutions like VISA or American Express will suffice) and to use them occasionally is to demonstrate what credit examiners are seeking: that you can be trusted with credit and that you will pay it back on time. Just make sure you pay your balance off each month and you will enjoy life debt-free!

Another way to ensure that you maintain the best credit score possible is to review your credit report at least annually, which you can do for free. Go to www.annualcreditreport.com to print your credit report from all three credit-reporting agencies and review each agency’s report for accuracy. If you find any errors, take the proper steps to correct them. Each agency tells you how to do this on their respective websites.

Things that could bring your score down include credit card accounts that are at or near their credit limit, unpaid bills from your past or too many examinations into your history in the recent future. If you have these items on your report and they are legitimate, you should take action to fix them. Pay down the high-balance cards (and stop using them until they are paid off), pay off any overdue bills and stop applying for credit at every opportunity. It will take time (up to seven years for some items), but eventually your score will improve.