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Posts by joshuazibanez

Financial First Steps: Cautions on Credit Card Use

Credit cards can be great. Their convenience and ease of use, combined with the ability to extend your budget, makes them almost a necessity in today’s world. However, credit cards are not all good; in fact, they actually lead many people into crippling debt, bankruptcy, and financial ruin. While many of my previous posts have discussed why credit is important, this post will exclusively provide caution to people just beginning their use of credit cards.

Many of us, thanks to student loans, are already in debt. Credit cards can make this situation even worse. Credit card debt Read more

Financial First Steps: How to Establish Credit

CheckbookIn today’s world, nearly everyone is going to need access to credit at one point or another. This is because a lot of things, such as new cars and homes, cost much more money than most people could reasonably pay up front.

If you are a student, credit card companies target you due to the belief that you have the potential to be a high earner and a long-term customer, and that your parents will help pay if you fall  behind on your balance.

For those who aren’t students and are attempting to build credit, however, there is a hurdle to overcome, because lenders abide by the unwritten law, “you must have credit to get credit.” Fortunately, there are a number of ways to overcome this hurdle:

  • Open a checking and savings account
  • Find a cosigner, such as a parent, other relative, or friend
  • Apply for a secured credit card (a credit card where you make a security deposit, and credit line is percentage of deposit)
  • Apply for a retail credit card, but make sure the retailer will report your payment history to the three major credit bureaus: Experian, Equifax, and Transunion. These bureaus collect and record credit information so that your credit score can be determined.
  • Check with your employer about getting a reference for a loan
  • Check with your local credit union: They may have a program that helps members secure credit

Once you build your credit, the types and amount of credit you can receive will increase, and at better rates (as long as you stay on top of your payments and maintain good credit standing!).

For more information on building credit and choosing credit cards, as well as a variety of other topics, check out AIER’s How to Use Credit Wisely Digest. Dedicated to helping people understand credit, the How to Use Credit Wisely digest is a great resource for anyone interested in getting their financial lives on track. Best of all, it’s free!

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Financial First Steps: Why Use Credit?

credit cardsCredit lets people make purchases and get what they want today, even if they don’t necessarily have the money today, as long as they promise to pay the creditor back at some point in the future. This is an extremely useful purchasing tool, as you may not always have the cash to buy the things you need or want. Furthermore, even if you do have the cash, paying in the future in smaller payments could still allow you to have some cash in the present, which could be invested or put into a savings account and grow.

This is huge for buying houses and cars. Most people in their early 20’s, like me, do not have anywhere near the amount of money we would need to purchase a house or a new car. That is why we use loans. Loans are essentially a line of credit extended from a bank or lender, with the amount and interest rate they are willing to offer depending on your credit score.

Home loans are called mortgages, and allow people to buy a house now instead of after years of saving- much of which would otherwise go to paying rent for other housing. The interest rate on mortgages is often very low, because the value of the property acts as a security (in other words the bank can repossess the house if you don’t make your payments). However, even though the payments are low, because the payments are usually made over a period of around 30 years, you end up paying twice or even three times the value of the house.

Credit cards, as discussed in a previous post, are another form of credit. But credit cards are seen as luxury, so the interest rates and annual fees are often higher than other forms of credit.

Buying now and paying later with credit is a useful and necessary tool in the world today, and a big part of responsible use of credit is understanding just what the heck it is and why it is used. This knowledge can go a long way in helping you decide when you should use credit and how to avoid falling into debt- the biggest risk of using credit.

For more information on setting financial goals, as well as a variety of other topics, check out AIER’s Start Here digest. Dedicated to helping young people set their “life strategy,” the Start Here digest is a great resource for high school and college students interested in getting their financial lives on track. Best of all, it’s free!

Sign up for the Daily Economy weekly digest… Send an email to info@aier.org.

Financial First Steps: Managing Your Credit Score

credit scoreNow that you know what goes into your FICO score and what it means, we can now discuss how you can build and raise your score, as well as how and where you can access your score for free.

Many young adults have extremely limited credit histories. This means that we need to build our credit scores by starting to think about different credit cards and loans. For those of us in college, student loans are actually beneficial in that they provide a great start to building credit history. The same principle goes for taking out a loan to get a car. Your credit history will grow, and, if you make the payments on time, your credit score will rise.

If you don’t have one already, think about different credit cards for which you could sign up. Again, for college students, many card companies offer great rates. Do not get more than one or two cards, though. Having too many cards actually hurts your credit score, and the more cards you have, the more likely you are to rack up debt (or use one card to pay off another, starting a circle of debt that can be extremely hard to end). Just remember that, if you are just starting to build your credit, each and every payment is crucial. Beginning your credit history with a series of late payments is a recipe for disaster.

Unhappy with your score? Have no fear. While you may be in a bad place now, the good thing about credit scores is that they only take into account late payments for the past seven years. This means that, if you get your finances together now and turn around your history of late payments, in a few years your credit score will be much improved. It is never too late to turn yourself around. No matter how low your credit score is right now, the sooner you decide to make a change, the sooner your score will rise.

Lastly, it is always a good idea to know what your credit standing is. Fortunately, you can get three free credit reports a year, one from each of the three national bureaus: Equifax, Experian, and Transunion. This can be done by visiting www.annualcreditreport.com. You should only use this site, as the other sites you may see advertised usually require you to purchase or sign up for some product. It is does not affect your credit score at all, and is actually recommended that you get one credit report every four months to continually be up to date with your credit status and to spot any potential fraud (a topic that will be discussed in a later post).

If you work on building a maintaining good credit standing, and even if you have poor credit and are trying to fix it, keeping tabs on your credit score can be an invaluable tool. You will be able to see what has negatively impacted your credit score and work on fixing the problems. Checking your credit score will also allow you to see any potential red flags for identity theft, which will be discussed further in subsequent posts.

For more information on setting financial goals, as well as a variety of other topics, check out AIER’s Start Here digest. Dedicated to helping young people set their “life strategy,” the Start Here digest is a great resource for high school and college students interested in getting their financial lives on track. Best of all, it’s free!

Sign up for the Daily Economy weekly digest… Send an email to info@aier.org.

Financial First Steps: You and Your Credit Score

shutterstock_221636809You’ve probably heard about it a hundred times, and you know it’s important, but what exactly is a FICO score? Understanding what factors go into to calculating your credit score is extremely important to your financial success. Imagine going to school and not knowing what factors contribute to your grade. It would probably be hard to get an A.

Your FICO, or credit score, is your financial identity. FICO stands for Fair Isaac Corporation, the company that collects and processes all the information on your credit history. FICO scores range from 300-900. You can think of your FICO score as a grade, and the higher your grade the more you will be able to borrow and at better rates.

FICO

So what goes into determining your FICO score? Well, there are five factors, each weighted according to their impact on your score:

Credit payment history (35 percent of FICO score), the most important factor in determining your credit score, includes all of your late payments on credit cards and loans. Different types of late payments affect your credit score differently. For instance, a 30-day delinquency is not as bad as a 90-day delinquency. But several 30-day delinquencies are worse than one 90-day delinquency. Bottom line? PAY YOUR BILLS ON TIME! For tips on how to do so, check out my first blog post.

Level of debt utilization (30 percent) refers to how much of your credit card limit you use. If you are consistently at or near the limit, statistically you pose more of a risk to lenders. This should be motivation enough to not max out your cards and to stay on top of paying off your debt.

Length of credit history (15 percent) is simple: The more years of credit experience you have the better you will score in this category. Unfortunately for young adults, this category hurts a little, but is reason enough to start building a credit history now.

The category for number of new credit applications (10 percent) is based on how many times you apply for credit. Each time you apply, it gets posted to a credit report as an “inquiry.” More than four credit inquiries in a six-month period will negatively affect your credit score.

Finally, a mix of credit experience (10 percent), refers to your number of credit cards and loans, including student and car loans. Having a little of everything is favorable to your credit, as the fact that numerous different sources are willing to provide you credit show you are a reliable borrower. However, this doesn’t mean you should try to get a million different cards, as many creditors now give fewer points for having five or more credit cards.

Now that you know what goes into your credit score, you can start to think about how you can build, raise, and access your credit score. I will be discussing these topics in my next blog post.

For more information on setting financial goals, as well as a variety of other topics, check out AIER’s Start Here digest. Dedicated to helping young people set their “life strategy,” the Start Here digest is a great resource for high school and college students interested in getting their financial lives on track. Best of all, it’s free!

Sign up for the Daily Economy weekly digest… Send an email to info@aier.org.

Financial First Steps: Paying Your Bills On Time

In order to be in a position to pursue your dreams, you need to have your financial basics down. The most important of these is your ability to pay bills on time. The key to accomplishing this is to stay organized.

The importance of paying your bills on time cannot be overstated. Late payments negatively affect your credit score, which determines how much and at what interest rate you can borrow.

There are many different ways to pay on time, and different tactics work for different people. My favorite way is to set up automatic payments. This can usually be done online and with your credit or debit card. However, sometimes this isn’t an option or is not the best tactic, but there are other methods. One is to pay a bill, either online or in the mail, as soon as it is received. Another is to pick a time– once a week, twice a month, whatever works– and pay your bills then. You can even set a reminder on your phone if that will help you. If you choose this tactic, make sure you put your bills in a designated place, such as a shoebox, a drawer, or a bag.

Another key to being able to pay your bills on time is budgeting. If you spend too much and you can’t afford your bills, you are in trouble. The key to avoiding this is getting a sense of how much you are paying per month, and making sure you always have that available to you. However, if you are just getting ready to pay your first set of bills, be liberal in your estimation of what the bills will cost you. Worst case scenario, you have a bunch of extra spending money left over.

Some people prefer to set up a detailed monthly budget, and that is great, but for those of us who don’t the bare minimum you need to do is have a general budget where you make sure you always have enough money left over for your bills and to put toward your savings. A nice simple budget is the 50/20/30 rule. Where 50 percent of your income is reserved for your bills and living expenses, 20 percent is put away toward your savings for your various financial goals, and 30 percent is your flexible spending money.

In my next posts, I will discuss more AIER pointers that will help you with other financial basics, including managing your checking account and knowing what papers to save or toss, as well as a little more about credit scores. Remember, financially, organization=success.

For more information on setting financial goals, as well as a variety of other topics, check out AIER’s Start Here digest. Dedicated to helping young people set their “life strategy,” the Start Here digest is a great resource for high school and college students interested in getting their financial lives on track. Best of all, it’s free!

Sign up for the Daily Economy weekly digest… Send an email to info@aier.org.

Financial First Steps: Set Your Goals Now

“Income twenty shillings —
expenditures nineteen shillings and sixpence —
result, HAPPINESS.
Income twenty shillings —
expenditures twenty shillings and sixpence —
result, MISERY.”
WILKINS MICAWBER (DICKENS)

Many of us in our late teens and early 20’s have never really thought about our financial aspirations. No, I am not talking about having enough spending money for your next semester at college. I am talking about your long-term financial goals. These include if you want to buy a house, at what age you wish to retire, how many kids you want to put through college, how much you want to earn, and many more.

You may say, “Hey, I’m just trying to figure things out, I’ll take it as it comes.” Well, the truth is that the sooner you set goals, the sooner you will be able to figure out how these goals can go from a nice dream to a reality. The same goes for any goal you set. If you want to run a marathon one day, you can’t just run it; you have to set that as your goal, develop or find a training plan, and stick to that plan.

The first step in the process of setting your long-term financial goals is simple: write them down. Whether it’s on a piece of paper, a sticky-note, or the notes application on your phone, writing down your goals is a crucial step. A sample list of goals could be to own a house by the time you turn 25; pay off your student loans within five years of graduating, earn six figures by your mid 30’s; and to retire at 60.

This is where your goals begin to transition from a thought to a plan, as they are now physically there for you to see, instead of floating around in your head. Once written out, take the time to read them over every once in a while. If it’s once a week or every day, reviewing your goals will allow you to stay on track and motivated, as well as give you the opportunity to add to or edit your list.

While coming up with your long-term financial goals may only be the first act of a long process, it is nonetheless a crucial point that will allow you to visualize and begin to plan for how you will accomplish your dreams. To quote the Chinese proverb, “A journey of a thousand miles begins with a single step.” The next step in your journey is learning strategies to stay on top of your finances so you can stick to your goals, which I will discuss in an upcoming blog post.

For more information on setting financial goals, as well as a variety of other topics, check out AIER’s Start Here digest. Dedicated to helping young people set their “life strategy,” the Start Here digest is a great resource for high school and college students interested in getting their financial lives on track. Best of all, it’s free!

Sign up for the Daily Economy weekly digest… Send an email to info@aier.org.