To enhance credit scores, pay bills on time and more than minimum
On Jan. 23, Fair Isaac Corp., the creator of FICO scores, changed the formula for calculating your credit score.
This will affect an estimated 110 million consumers, about half of whom will see their score increase while half will see a reduction. The new procedure will look more closely at personal loans. There are many apps where you can quickly borrow money.
Americans are borrowing heavily, according to the Federal Reserve Bank of New York. Household debt increased by $92 billion in the third quarter of 2019 and now is $13.95 trillion. People with high debt on credit cards, or those who have recently missed payments, could see a drop in their FICO scores.
Expectations are that those who pay off their credit card balances monthly will not be penalized as much as consumers who make one-time large purchases or have an occasional high balance. There is concern that people are taking out personal loans to pay off high-interest credit cards, then continuing to use the cards. This can get a consumer caught in a credit squeeze.
When I meet with clients, it is amazing how many continue making minimum payments. This is like borrowing from a legal loan shark. Interest rates of 18% or higher are not normal in most financial channels. Miss a payment and you might go to 29%!
The same rules apply to managing your credit score. Pay your bills on time. Do not open too many new accounts. Opening one will ding your credit score about five points for a few months. Also, use only a portion of your credit limit. This is known as utilization percentage. For the highest score, you should be around 30%.
As with all matters dealing with personal finance, you must be concerned about details. Know your monthly cash flow, your sources of income each month and your required payments. The difference is what you have to spend. Then prioritize your expenditures. There is a difference between what we need and what we want.
You can maximize your budget by taking advantage of sales and other opportunities to save. If cash flow is tight, use a shopping list and stick to it. It is easy to pick up a lot of impulse items or something we would like. Maybe do your shopping when you do not have the children with you.
Remember to pay yourself first. Each month, set aside money for emergencies. If you are carrying a balance on credit cards, pay more than the minimum. If you have more than one card with a balance, pay off the one with the smallest balance first if the interest rates are the same on all of your cards. Then, when you can put away money for retirement or some other goal, have a plan and stick to it.
You can do this.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.