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Smart Money Tool Tips

Understanding Your Credit Score


A credit score is a number that is used to predict risk for lenders. To create a credit score, analysts use information in credit reports, account histories or applications. Their goal is to accurately identify the consistency of your timely paid accounts as well as your delinquent accounts. The result of this analysis is a number that becomes your credit score. The higher the number, the better off you’ll be when trying to obtain credit.

How are credit scores used?

  • Lenders use credit scores to help decide whether to issue accounts or loans, whether to change the credit limit on an existing account and what interest rate to charge on a loan.
  • Insurance companies use insurance scores (based on credit information) to help them decide whether to issue new auto or homeowner’s policies, what rate to charge for those policies and whether to renew existing policies.
  • Some employers use consumer scores to help them make hiring decisions.

There are different types of scores and it’s important to understand that your credit score is never a single number. It can vary, depending on which of the three major credit bureaus supplied the credit information used to calculate it, what kind of loan is being considered and what formula the individual lender uses to calculate it.

5 factors go into a credit score, but they are not all weighted the same:

  1. 35%: your payment history 
  2. 30%: amounts you owe relative to your income
  3. 15%: length of credit history
  4. 10%: new credit
  5. 10%: type of credit in use

The two most important factors that go into your credit score are your payment history and how much debt you carry. Together, these categories make up about two-thirds of your credit score. If you're trying to improve your credit score, focus on paying your bills on time and paying down debt.

Review your credit report

You can obtain a free copy of your credit report at An important part of reviewing your credit report is to dispute mistakes. You can do this by contacting the lender or collection agency reporting it and ask it to be investigated, or by contacting the credit bureaus that have the incorrect information and ask to verify the information. When the credit bureau, lender or collection agency receives your dispute, they usually have thirty days to investigate and get back to you with the results. If you disputed the information through the credit bureau, it must provide you with a free credit report showing the updated information, if corrections were made.

You may find that your credit report contains information that is negative, but correct. If this is the case, you’ll want to work on improving your score. You won’t build better credit without positive credit references in your file. It’s not important to carry debt to build better credit, but it is important to maintain good credit accounts. Ideally, your credit report should show three or four active accounts (including credit cards, a car loan and/or a mortgage) paid on time each month. If you use credit cards to rebuild your credit, it’s to your advantage to pay the balance in full each month and avoid interest charges.

While positive or neutral information can be reported indefinitely, negative information can only be reported for a certain length of time, depending on the type of information. As a general rule, adverse information, including late payments, stays on your report for seven years. If you’ve had credit problems in the past, you probably feel frustrated and worried that your damaged credit history will stay with you forever. If you actively work on improving your credit, you'll see results. It may not happen as quickly as you'd like, but in time your efforts will certainly be worth it.





Budgeting Tactics to Help You Stay on Track


Staying on budget isn’t easy. But, that doesn’t mean it can’t be done.

If it’s time for you to adopt some new budget strategies to save money, here are some tips to help you: 

  • Calculate your monthly income. It’s key to your budget, as well as calculating other financial ratios like your debt-to-income and personal savings rate.
  • Pay yourself first. Ideally, you should try to save at least 10% of your monthly take-home pay.
  • Set bills up on auto pay. Make good use of your online and mobile banking tools and set up your monthly bills on an automatic payment schedule. Take a good look at due dates and your pay periods so that payments disburse automatically at the right time. This will ensure you space your bills out strategically around your paychecks, avoiding cash flow problems.
  • Find one unnecessary expense to cut. Discretionary expenses are the “wants” in your budget that you buy regularly but you don’t really need. Find one unnecessary expense—like the gym membership you rarely use—and cut it to increase your cash flow.
  • Set spending targets for three non-bill expenses. Review your transactions over the past couple of months to see how much you spent on food, gas, and entertainment. Then set reasonable limits in each category to prevent overspending.
  • Find one spending leak to close. Spending leaks occur when you’re spending more money than you need to on a necessary expense. For instance, dining out too frequently increases your food budget. Identify one leak and close it to increase your cash flow.
  • Set up savings for one major purchase you want in the next year. Instead of using a credit card or relying on in-store financing options, allocate some of your monthly savings toward this goal. Reward yourself by making that purchase in cash once you have the funds available.



Information compiled from resources provided by Knowledge of Financial Education (KOFE).




Becoming a First-Time Homeowner


Owning a home is one of the main ways that many Americans build wealth. Instead of renting each month, and having nothing to show for it, you can buy a home and build equity.

Know how much home you can afford

Getting a mortgage pre-approval from a trustworthy lender is an important first step in the home buying process. Your home search will be more focused and you'll be more likely to stay within budget. Also, sellers will consider you a "serious buyer", which could give you a competitive edge when making an offer.

Lenders use qualifying ratios to decide how much house you can afford. There are two ratios used here: the housing ratio and the debt ratio. Your housing ratio shows how much of your income will go toward making your house payment. Your debt ratio tells how much of your monthly income is going toward all your debts, including your housing payment. 

Save up for purchase, closing, and other home expenses

When you buy a home, you’ll need money for the down payment and for closing costs. While it used to be that you had to have 20% of the price of a home for a down payment, those days are gone. Now, qualified borrowers can get loans for 100% of the home’s price. Those loans, however, may be more expensive because you may have to pay Private Mortgage Insurance (PMI). It can add anywhere from $25 to $150 or more to your monthly payment.

If you’ve never obtained a mortgage, you might not know to factor closing costs into your home buying budget. Closing costs can usually account for about 3% of the loan amount, sometimes more. If you don’t have a lot of cash, it can be helpful to negotiate to have the seller pay part of your closing costs.

It’s important to remember that your expenses don’t stop once you close on your home. Be sure to keep a savings cushion for repairs, renovations and other expenses that may arise.

Build equity as a homeowner 

The home buying process can seem daunting, but don’t let this dissuade you from becoming a homeowner. Owning a home is extremely rewarding and a smart investment for your financial future—you'll be building equity!

Equity is the difference between what a home is worth and what is owed on it. There are two ways to create equity in your home. First, your home’s value may rise because housing values in your area are rising. Secondly, as you pay off the loan, the difference between what the house is worth and what you owe gets larger. 

Building equity can give you flexibility. You may be able to borrow against it, take it out as cash when you sell the home, or even leave the home to your heirs as an inheritance.




Give Your Kids Their Own Spending Power


Since most of us learn by doing, an allowance gives children the chance to learn about handling money while the stakes are still relatively small. And, it provides your kids the opportunity to learn how to manage money through their own successes and failures with your parental input to guide them along the way.

Allowances can still be a tricky subject: how much, how often, and for what? Ultimately those decisions are yours, but these guidelines may help:

  • What age should an allowance begin? Most experts agree kids can handle an allowance by age seven, though some children start receiving an allowance in kindergarten. Only you can really determine whether your child is ready for an allowance and it’s best to sit down with them and explain what that responsibility means.
  • How much allowance is appropriate to give? A general rule is to give your child $1 for every year of age. For example, a 10-year-old would get $10 per week.
  • Should chores determine your child’s allowance? This again is a personal choice. Some parents won’t pay an allowance unless the weekly chores are done. Others view chores as something kids should do as a part of a family and not something for which they should be paid. Whatever you decide, make sure you’re consistent and have realistic expectations about what they can handle.

Once you decide that your child is ready for an allowance and how much he or she should receive, follow these tips to help set them up for success:

  • Be reliable and pay the allowance at a set time each week.
  • Ask them to get in the savings habit by having them set aside a portion of their weekly allowance for savings, charity or gifts.
  • Don’t withhold allowance as punishment. Find other ways to discipline your children.
  • When they’re older, consider paying interest on their savings, to teach them the value of compound interest.
  • Explain that they should spend their money for some of their “needs” as well as their “wants”.
  • Give them a safe place to store their allowance, whether it’s a piggy bank, cash box with a key, or a youth club account.



Information compiled from resources provided by Knowledge of Financial Education (KOFE).




5 Smart Habits for Credit Cardholders 


Whether you just received your first credit card or already have plastic in your wallet, it pays to know how to use them to your advantage. Credit card accounts can help you build credit, improve your credit score and get out of jam when you’re short on cash.

If you’re not careful, however, you could become too dependent on credit cards and experience financial struggles as a result.

Here are some tips on how to enjoy the benefits of carrying a credit card without the potential financial downsides:

  1. Choose the right card for you. There are different types of credit cards to choose from, so be sure to ask yourself how you’re planning on using it. For example: Am I planning to carry a balance from month to month? Choose a credit card with a low interest rate and longer grace period. Will I use it for everyday purchases? Do I travel frequently? Choose a rewards or a cash back credit card to reap those benefits. Am I trying to consolidate existing credit card debt into one monthly payment? Look for balance transfer offers with low introductory rates to save on finance charges.
  2. Use credit wisely. Be a smart spender and a responsible credit cardholder. Only borrow what you can repay and avoid impulse buying — don’t let your credit limit make you lose sight of your budget.
  3. Track your credit card spending. There’s no need to wait until your monthly credit card statement arrives to check your account balance. Take advantage of online banking to track your credit card expenses on a regular basis to ensure you’re staying within your budget and not overspending. Viewing your credit card account transactions frequently will also help you to identify any fraudulent charges and act quickly to resolve them.  
  4. Always pay on time. Consistently paying your bills by their due date will help you build your credit score and avoid late payment fees which are typically $25-$40, according to personal finance site Bankrate.
  5. Pay more than the minimum due. While paying only the minimum payment amount might seem like an OK move, it’s not in your best financial interests. The only way to avoid paying interest rate on purchases and falling into too much credit card debt is to use your card wisely for only the items you can afford to pay off in full each month. If you’re unable to make the full payment in any given month, still try to pay more than just the minimum amount due.



Information compiled from resources provided by Knowledge of Financial Education (KOFE).