Understanding how credit works
Credit is a part of everyone’s financial life.
Whether it is to make a major purchase or just pay monthly bills, we all depend on receiving credit. Using credit requires that we act responsibly. We see the government spends trillions of dollars that they don’t have.
Unfortunately too many citizens do the same thing. This puts a large amount of stress in people’s lives. In fact, financial issues are the number one cause of divorce in America.
A disturbing trend is the growing amount of debt being carried by seniors as they enter retirement. Most people see a reduction in income when they retire, and having to make mortgage payments or carrying a large amount of credit card debt can really negatively impact retirement. Seniors used to have mortgage burning parties to celebrate that great accomplishment. Today, too many people have an “I want it, and I want it now mentality.” Contrary to some people thinking, “He, who has the most toys, does not always win.” There is a difference between a need and a want.
When making purchases on credit, there are steps you can take to keep your interest rate as low as possible. People with higher credit scores usually pay lower interest rates.
Credit scores are calculated by using a different formula applied to your credit report. There are three major credit bureaus. Your history could be a little different in some of them because not all creditors report to all three. Sometimes there are mistakes which you can have corrected; however, you cannot have true negative information deleted to try and improve your score.
Probably the top factor in credit scores is paying bills on time. Once you start showing more than 30 days past due, it starts to become a problem. Credit scores also look at utilization ratios. For instance, if you have a $10,000 credit line and are only using $2,000, your utilization is 20%. People utilizing 30% or less often have the highest credit scores. Because of this, you may get a higher score by not canceling a credit card you are no longer using. How long you have had account and types are some other factors. If your score is lower than you like, you can improve it over time.
Every year you are entitled to a free credit report from all three major credit unions. It is www.annualcreditreport.com. If you do not need to apply for additional credit now, consider freezing your credit. This will keep anyone else from being able to open an account in your name. You can always unlock it later if you do need to apply.
Make smart credit choices. If you have a high rate mortgage, rates may never be this low again in our lifetime. Try to pay credit cards in full each month to avoid their high interest charges. If you do, you will pay no interest on those purchases.
Do not roll credit card purchases into a new mortgage unless you have the discipline to keep from running up balances again. Set a budget and save a set amount each month for things like vacations. It will make life less stressful and you may actually enjoy that vacation even more knowing it is already paid for.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.