Myth-Busting Your Credit Score
By · CommentsConsumer credit scoring is commonly misunderstood, but it’s important to understand. Your credit score is a key consideration in loan applications and helps determine the interest rate you’ll pay on those loans. The lower the interest rates on your loans, the more income you’ll have available for retirement savings and other uses. So let’s shed some light on five common misconceptions.
“All credit scores are FICO scores.”
The most widely-used credit score model is FICO (Fair Isaac Corporation). Most lenders do use FICO, but you have three different FICO scores from the three major credit bureaus—Experian, TransUnion, and Equifax. Many lenders use their own credit scoring system, which often includes the FICO score as well as other information. A good place to learn more about credit scoring in general is www.myfico.com.
“Carrying a big balance helps my credit score.”
Not so. It’s true that a history of good debt management gains you a higher score than having no debt at all, but the less outstanding credit you have, especially on credit cards, the better. And paying on time is critical. In fact, if you run up an especially-big credit card bill in any given month, try to pay it off a few days early, because outstanding debt is reported to the credit bureaus at the end of the month.
“Wiping out a delinquent debt will immediately fix my score.”
Unfortunately, negative information on your credit report is slow to disappear—seven years for credit delinquencies and ten years for bankruptcy information. It’s far better to avoid credit trouble in the first place.
“I should close my accounts as I pay each one off.”
Closing accounts can actually hurt your score, because credit bureaus look at your “utilization ratio” of credit used vs. credit available. A closed account has zero dollars available, so it’s better to keep your accounts open and only charge (then pay off) one or two small amounts each year. Another reason to keep accounts open is that your score considers both the average age of all your accounts and the age of the oldest one. If you do want to eliminate a line of credit, call or write the lender to ask that your account be closed “at the cardholder’s request,” with written confirmation.
“I only use cash so my score must be great.”
Unfortunately, no. You must use credit to build credit and demonstrate that you pay your debts. Living on cash only doesn’t establish a payment history, and that could be a problem when you want to buy a house or car.
This One’s No Myth
To maintain a good credit score, pay your bills on time, keep your total debt low in proportion to your available credit, and review your credit report regularly to look for errors. Also remember that it’s not only the number of your credit score that’s important, but also the information contained in your report. Be sure to review your credit report from all three reporting agencies annually at AnnualCreditReport.com.
Surviving the Death of a Breadwinner
By · CommentsIf you were to die tomorrow, how would your family carry on financially?
Financial preparedness is especially important if you (or your spouse) are the sole breadwinner. According to the Bureau of Labor Statistics, in 2007 there were 58 million “married-couple families” in the U.S. In just over half of them, both husband and wife worked. That percentage has been falling ever since. The Center for American Progress found that in 2010 alone, more than 1 million two-earner married couples were reduced to one earner.
With more American families now relying on one income, it’s important to plan for the unlikely and unexpected death of the sole breadwinner. The last thing you want to do while grieving the loss of your spouse is sell the family home, get a second job, or impoverish yourself to pay for medical bills and living expenses. Here are some steps you can take now to help avoid a financial crisis during an emotional tragedy.
The Truth About Life Insurance
Most people have life insurance, and most life insurance policyholders believe they have an adequate amount of coverage. Unfortunately, many policyholders are wrong. Only a minority of surviving spouses describe their life insurance payouts as adequate.
The problem is one of perception. Many people have life insurance through their employer. Because these families know they have at least some insurance, they believe they’re prepared. But employer-sponsored life insurance is rarely enough to help a family maintain its standard of living. Once the life insurance proceeds are gone, most families with only employer-sponsored coverage have to start making serious changes in how they live and work.
Assess Your Needs
You can begin with an objective look at what your family needs right now to get by. Do you have dependents, such as young children, a non-working spouse, or parents? How much money do you need to pay the bills and send your kids to college?
When planning for a tragedy such as the premature death of a spouse, it’s particularly important to establish this baseline because a terminal illness could drastically increase your expenses. The death of your spouse also means the loss of that spouse’s health care coverage.
When considering how much life insurance you need, you should also factor in lifestyle changes you anticipate in the near future. Do you plan to have a baby or buy a larger home? Are your aging parents becoming increasingly dependent? Are you considering sending a child to private school? Perhaps you anticipate a more sophisticated lifestyle in the future as your income increases.
You can’t anticipate every future lifestyle change, but you can provide your family with life insurance coverage sufficient to meet their needs. You can review your policy riders, options, and beneficiary designations at regular intervals and purchase additional coverage or make changes as needed.
Evaluate Your Resources
Life insurance may not be your only source of support. Take stock of other assets that may be available to you:
- Investment accounts that can be accessed to meet the family’s changed circumstances
- Retirement accounts that can be earmarked for the surviving spouse’s retirement years
- College savings accounts
- Social Security Survivors Insurance (based on your spouse’s work history)
- Family resources (wealthy relatives who would be willing to release part of an inheritance early)
Understand Your Finances
Ideally, both partners should know where their money comes from, where it goes, how to pay the bills, and have an understanding of investment accounts. You should also understand your spouse’s employer-provided benefits. If you or your spouse has taken a backseat in the management of the family finances, it’s time to take a more active role. It’s better to learn your cash-flow picture now, instead of when you’re forced to understand at a time when it will be much more difficult.
Preparation is Best
A surviving spouse will have a lot of financial issues to address. It’s best to address them well in advance. A financial professional can guide you through the difficult questions you should ask to prepare for an event that, hopefully, will never occur.
Balancing Safety & Growth
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Special Planning for Special Needs
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The History and Future of the Euro
By · CommentsFinancial Planning for Disasters and Emergencies
By · CommentsNews stories about floods, earthquakes and other calamities may make you wonder if you are prepared to keep your home and family physically safe. But here’s another question to consider. What about your financial safety? Advance planning can offer peace of mind, so use this checklist to help you sleep better.
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Planned Giving to Benefit Both You and Charity
By · CommentsCharitable giving is worthwhile for many intangible reasons. But why not give in a manner that also brings tangible benefits to you and your family? An outright gift usually yields an income-tax deduction and nothing more. But planned gifts can offer tax advantages while letting you continue to benefit from the donation.
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Tame Your RMDs to Help Lower Taxes
By · CommentsThe year you turn 70½, you reach a milestone in your retirement. At that age, Required Minimum Distributions (RMDs) kick in, which is when you must begin making mandatory withdrawals, or distributions, from your IRA accounts (and employer-sponsored plans). These distributions are required even if you don’t need the money to pay your expenses.
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College or Retirement? A Savings Dilemma
By · CommentsIf you’re a parent with less-than-deep pockets, you’ve probably wondered which savings goal is more important—your children’s education or your own retirement. After all, good parents put their kids’ needs above their own, right?
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Are HSAs for You?
By · CommentsRegardless of one’s age, most people I talk to are concerned about the cost of health care. The rising cost of health care has contributed to the growing popularity of health savings accounts (HSAs). An HSA is a tax-favored account you can use to pay out-of-pocket medical expenses.
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