Financial Poise
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Money Basics Series – Part 1: How to Read Your Credit Report and Choose Bank Services

Personal Finance Fundamentals Every Adult Should Know

Am I cheap? No. Have I had to learn the hard way how to respect my money? Yes. Would it have been better to learn the basic financial lessons sooner? Yes.

Trial and error is a good way to learn. But, if you had the rulebook in advance, wouldn’t you prefer to avoid the errors and make the correct decisions the first time?

This six-part series walks you through the fundamentals of building healthy habits and saving your money. Regardless of what stage you’re at, you’ll learn the basics of personal financial planning, bank services, how to read your credit score, and tips for building your wealth, reducing your debt and navigating your finances through marriage, divorce and even retirement. 

We’ll cover three main topics in six parts: 

  • Everyday finances (credit, banking and budgeting)
  • Eliminating debt
  • Protecting and growing wealth 

But before you can take your first financial planning steps, you need to evaluate where you stand today. 

Wake Up and Face Your Financial Reality

Your failure to face reality is costing you, and it doesn’t have to. Is tracking your money easy? No. Can it change your whole perception of your life and the meaning you attach to it? Yes.

Every “silly” dollar you spend doesn’t just result in the loss of that dollar; it results in the lost opportunity that “silly” dollar could have made you. The idea should be to increase your net worth every year. You need to be working toward that goal.

When you owe money for past choices and indulgences, you lose that freedom and become beholden to your creditors. You may lose hope and feel isolated and depressed because you made mistakes. It doesn’t have to be that way, and sometimes it helps to look at things from a fresh perspective to actually gain awareness of the obvious.

To help you gain perspective on your financial reality, ask yourself these questions:

  • What is my first money memory?
  • How has that shaped my views about money?
  • What are my life goals?
  • What are my money goals?
  • What are my plans in the short and long term?

Pick Your Bank Services Wisely

Are your current checking or savings accounts the best choice for your money and financial goals?

You may pick a banking institution because it is the bank your parents have used for years, or it’s the one you started with in college. Perhaps you chose a bank that is geographically located by your home or office (I like that reason, because I do not want you wasting money on ATMs out of your network). 

Banks are in business to make money. Your money. If they are willing to loan you money, at any rate, they are confident (based on their analysis of your credit history) that collection on the principal and the interest they assigned to your loan is a good bet. 

Like any game, you need to know the rules. The penalties for not reading the rules and understanding the consequences of your money moves can have long-term effects that could cost you thousands of dollars and years of hard work. Read the fine print. Make money decisions cautiously and with knowledge. You work too hard for your money to give it away.

Here are a few tips for choosing your accounts:

  • Consider the penalties. Is there a minimum account balance that you must maintain?
  • Are ATMs readily available in your area, and does your bank charge a fee for using another bank’s ATM?
  • Know how often you take money out of your savings account to pay for today’s expenses. Some types of savings accounts, such as CDs (certificates of deposit), pay more interest than others, but you may need to pay a penalty if you take money out early. MMAs (money market accounts) also have higher interest rates, but you may need to start off with a larger amount in your savings. 
  • Does your bank offer an app or an easy way of depositing money and managing your account? 

The way that we look at bank services is changing. Alternative or online banking is a trend that is not going away any time soon. Look into these options, as well as the bank’s online security, when choosing your services. 

What is Your Credit Score? 

First things first. Everyone is entitled to receive a free credit report annually from each of the three credit bureaus: Equifax, Experian and TransUnion.   

I suggest you literally schedule obtaining your annual report from each as you do your annual health exams. For example, I check my Experian report every January, my TransUnion report every May, and my Equifax report every September. Use your smartphone and set a reminder to order each report annually. There is no “penalty” for checking your own credit report. On the other hand, there are huge potential penalties for not checking your own report.

Look for Errors in Your Credit Report

When you think about your credit report, think about Mary Beth. Mary Beth thought she had perfect credit, and although she carries small balances on some of her credit cards, she felt confident that with her salary and work history, approval for a $300 store credit would be a no-brainer.

“I was so embarrassed,” Mary Beth says, “There I was with a pair of jeans, a few tops and a stunning pair of pointed-toe heels, which total retailed at $300, with the understanding that I was going to get 30% off the total by signing up for the store’s credit card. All I had to do was show identification and give my social security number, and I would be set. My jaw dropped and my heart fell into my stomach when my application was denied. It was as if I got smacked in my head. I said, ‘oh there must be some mistake,’ and basically ran out of the store.”

So, what happened with Mary Beth?  Basically, she had never seen her credit report and, likewise, she had no idea how to read a credit score or how one is compiled. In fact, she had never even given it a second thought. Mary Beth has been working steadily for years, and has never before been denied credit, so the whole idea of credit reports and credit scores was foreign to her.

Looking at your credit report tells you a lot of information, and it is the record that others (potential lenders, employers and landlords) use when judging you. So, this is a priority, not an option.

Your credit report will alert you to identity theft. Your credit report may also have mistakes. When Mary Beth ordered her credit report, she found that there is another Mary Beth with her same last name who had defaulted on a credit card bill for $70,000. She was relieved to know this was the reason for the store’s credit denial, but the error required immediate action. Had Mary Beth not encountered the miserable credit denial, she may have continued to unknowingly carry this negative information on her record.

If you don’t know that there are errors on your report, you are likely paying higher percentage points for interest on credit cards, revolving loans and mortgages, resulting in the loss of hundreds, if not thousands, of your hard-earned dollars.

If you do identify mistakes on your credit report there are easy instructions to file a dispute on the website of each credit reporting company.  You can take care of these errors yourself. You do not need to hire a lawyer.

Mary Beth learned a lot from her credit card application debacle. In addition to finding that alarming error on her credit report, she also learned that her salary was not part of the calculation of her credit score and was not part of her credit report. While your employer will appear on your credit report, your income, while relevant and requested on loan applications, is not disclosed. Other items that may be important to lenders but are not reported on your credit report are assets (money, property and investments), marital status and dependents.

How to Read Your Credit Report

Your credit report does disclose age, employment, payment history, debt-to-credit utilization, credit history, new accounts and mix of loans. If you know how to read your credit report, then you can figure out what needs to be improved. 

Here is how your credit score is broken down, as well as tips to improve and build your credit:

  • Payment History: Although the formula used to create your credit score is complex, the most important criteria used to generate your score is your payment history, which accounts for 35% of your credit score. This means pay your bills, and do so on time. 
  • Amount Owed: Amounts owed on credit account for 30% of your credit score. Also having more credit, and using less of it, is best. The rule of thumb to generate a high score is to not use more than 30% of your available credit. 
  • Credit History: The length of your credit history accounts for approximately 15% of your score, so while you may not use all of your cards, you are well served to keep accounts open. New cards account for 10% of your score. (There is consideration for how you are going to manage additional debt.) Finally, the types of credit used (mix of revolving and installment loans) accounts for 10% of your score.

The total of the above factors results in your credit score, which is used to predict the likelihood of your debt repayment and credit worthiness.

Borrowing money is a very costly endeavor. When you apply for credit, you want to put yourself in the best position possible. Knowing how to read a credit report and what it says about you before your intended creditor does puts you in the pole position. Order your credit report today.

Time to Be Proactive

Now that you can critically evaluate your current bank services, and you know the importance of your credit report, you’re ready to start being proactive with your money. In the next part of the series, we will discuss an easy way to begin budgeting and tracking your finances.

Read More ‘Money Basics’

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Alpha, Beta & Other Key Concepts and Goal Based Investing – Planning for Key Life Events.]

About Michelle Gershfeld

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