Your Money: Credit Scores

Credit Scores:  Most of you are aware of FICO Scores (there are other credit scores but FICO is the most commonly used), which are used by lenders to determine credit risk, and the interest rate you will qualify for.  Lenders can purchase FICO scores from all three credit reporting agencies (Equifax, Experian, and Trans Union).   FICO was founded in 1956, and they sell credit reports and scores to lenders.  Your credit score is made up of:

New Credit / Recent Searches	10%
Types of Credit in use	10%
Payment history	35%
Amounts Owed	30%
Length of Credit History	15%
	100%

The higher your credit score, the better the rates you can get on new loans.  Credit scores are typically rated as follows, but keep in mind that these ranges vary by lender, as each lender has their own standards for what they consider excellent, good, fair, etc.

Excellent Credit	781 – 850
Good Credit	661 – 780
Fair Credit	601 – 660
Poor Credit	501 – 600
Bad Credit	Below 500

In general, a credit score of 740 or higher will give you the lowest mortgage rates.  If your score is lower than 740, you may be charged extra fees in addition to paying a higher rate.  Also be aware that if you max out a credit card, it will cause your credit score to decrease.  If you co-sign for a loan, and the person you co-signed for does not make the payments timely, your credit score will go down, and it may even prevent you from getting approved for a loan yourself.

If you do not want to use one or more of your credit cards anymore, cut them up, but do not close the accounts as that will lower your credit score.

How can you find out your credit score?  If you have a Discover credit card, your credit score will be on your bill each month.  You can also get your credit score for free (without having to give your credit card information), from www.creditkarma.com.  You do have to give some personal information but you only give the last 4 numbers of your social security number.  While Credit Karma is a safe website to get your free score, you could receive a phishing email following your request.  Be careful not to click on any links. See information below from US News & World Reports article, about what to watch for.

In an article by US News & World Reports on October 3, 2014, called Watch Out For These Credit Score Scams, their article included the following:

“Shortly after signing up to get my free credit score at one of the popular websites that offers the service, I received an email alerting me that my score had recently changed and that I should log into the site provided to check on it. Since I had recently signed up for my free score, I almost fell for the scam and followed the link, which could have compromised my personal information. (I originally signed up for my score as part of my reporting for an article that explored whether those “free scores” are really free.)

“The experience reminded me how easy it is to fall for a so-called phishing scam, where a fraudulent email masquerades as a legitimate one and leads you to a website that asks for your personal information. As soon as you enter it, the fraudster behind the scam has your information and can use it to steal your identity or money.

“With more people getting their free credit scores online from legitimate companies such as CreditKarma.com, CreditSesame.com and Mint.com, these kinds of credit score phishing emails are also becoming more prevalent. The information technology team at U.S. News reports that our company received about 140 spam messages in the last week with the words “score changes” in the subject line.

“One particularly confusing aspect of these emails is that the legitimate companies offering free credit scores to consumers often do so in addition to sending out promotional emails, in the hopes that consumers will sign up for other premium services, like credit monitoring. CreditSesame.com credit expert John Ulzheimer says companies are increasingly using free credit scores as a “loss leader” to attract consumers, and that the only cost of accessing your free score is receiving promotional emails – a trade-off he calls a good deal.

“After I signed up for my free credit score at Credit Karma, for example, I received a follow-up email from the company welcoming me to my free credit report and introducing me to a variety of other tools available through the website. Christina Ra, spokeswoman for Credit Karma, says I don’t need to worry about receiving many more. “We make it a core practice to very, very rarely email. We want our members’ experiences to be exceptional, and being bombarded with email is not,” she says.”

Reduce Junk Mail

One way to cut down on your junk mail is to stop all the offers for preapproved credit cards and insurance offers from banks and insurance companies.  By reducing your junk mail, you will save time:  less mail to go through and you won’t have to shred the preapproved credit card offers.  However, if you have credit card debt and want to transfer balances to 0% cards, then don’t opt out of this mail, as you want to receive offers for 0%.

The credit reporting agency’s (Experian, Trans Union, and Equifax) are responsible for this junk mail.   To opt out for 5 years, you can call 1-888-567-8688 (Source: Federal Trade Commission), and this number is open 7 days a week. I called the phone number and it took less than 2 minutes.  It is an automated call, and you have to give your social security number and date of birth.  By using this number, you will stop the preapproved credit applications and insurance applications for 5 years.

Since the phone call only takes 2 minutes, you can make the call every 5 years, but if you want to permanently opt out, send a written request to permanently opt out to each of the major consumer reporting companies (addresses below). Make sure your request includes your home telephone number, name, Social Security number, and date of birth.

Experian
Opt Out
P.O. Box 919
Allen, TX 75013

TransUnion
Name Removal Option
P.O. Box 505
Woodlyn, PA 19094

Equifax, Inc.
Options
P.O. Box 740123
Atlanta, GA 30374

Innovis Consumer Assistance
P.O. Box 495
Pittsburgh, PA 15230

Your Money: Your Total Debt

A few days ago I wrote about Credit Card Debt, and the average amount of credit card debt that American’s carry (see my post from August 26, 2015).  Did you know that credit card debt is only 6% of America’s total household debt?  In 2015, as of the end of the first quarter, total household debt in the US is 11.85 trillion dollars.  Our debt is composed of the following:

Type of Debt	% of total
Mortgage Debt	69%
Student Loan Debt	10%
Auto Loans	8%
Credit Cards	6%
Home Equity Revolving debt	4%
Other	3%
Source:  Federal Reserve Bank of New York

You can see from this next chart, showing from 1952 through 2015, that Consumer Credit, which includes all debt except Mortgages, is increasing at a much higher rate than in the past, now totaling almost 3.5 trillion dollars.  We cannot sustain these levels of debt.  It is important that we reduce our Consumer Credit in order to be financially sound.

Your Money: Your Net Worth

How does your net worth compare to America’s?  The following chart shows the Median net worth of Americans (source:  US Census Bureau).  The number in the blue column shows the total median net worth by age group, which includes the equity in the personal residence (that means that the market value of the home is included in assets and the mortgage amount is included in liabilities).  The red column shows the median net worth without the equity in the home.

 

How does your net worth compare?  See below how to calculate your net worth.

What is Your Net Worth? – Net Worth is just what you own (dollar value) minus what you owe as of a specific date.  To calculate your Net Worth, you need to list what you own and what you owe as of a certain date (for example, as of the last quarter end, or last month end).

What Do You Own (Your Assets)?  What you own includes checking accounts, savings accounts, your home, investments, retirement investments, other real estate, automobiles, boats, and anything else that you own.  You will gather your bank statements, savings statements, investment statements, retirement statements, and any other statements that list how much money you have.  For your home, you will use “Market” value (what your house would sell for).  If you don’t know the approximate selling value, you can go to Zillow.com put in your address and it will give you an estimate (zestimate).  You can use that value if it seems reasonable.  You can also estimate your home by looking at the prices other homes in your neighborhood sold for.  You can go to the website http://www.Zillow.com;  click on homes, then select recent home sales from the drop down screen.  Then type in your street, city and state.  It will bring up comparable sales in your neighborhood.   You will see a map with recent sales (you can click on each of these to see the address), and also a list of the addresses and how much they sold for (to the right of the map).  If you have other real estate property, you will get the Market Value in the same way.  For the value of your automobile, you can use Kelly Blue Book – go to the website http://www.kbb.com and look up your year, make and model.

What Do You Owe (your liabilities)?  What you owe includes mortgages, personal loans, car loans, credit cards, student loan debt, medical debt and any bills that you owed as of the date you have chosen to use for your assets (last quarter end or last month end).  For this step you need to pull out your mortgage statement, all your credit card statements, student loan statements, medical debt and also any bills that were for the month that you are calculating (that means utilities or any other bills that were not paid as of the end of the month but were for that month).  You will make a list of all these debts.  For your credit card debts you will not put the minimum payment, you will list the total balance that you owe. For your mortgage, you won’t put your payment amount, you will put the total balance left on your mortgage.  Make sure that you are using statements from the same period as you used for your assets.

Your Net Worth:  Subtract your liabilities (what you owe) from your assets (what you own), and that is your net worth.  Compare your amount to the chart above.

Your Money: Rule of 72

Interest rate or rate of return is a huge factor in determining how much money you will accumulate.  The best way I can show you this is to introduce you to the “Rule of 72”.    It tells you how fast your money will double.  You simply divide the number 72 by your investment interest rate, and the result is how many years it will take your money to double.  For example, if you are getting 10% return on your investment, you would take 72 and divide it by 10 which gives you 7.2.  That means that it will take 7.2 years to double your money.  If you get 8% return, your years to double would be 9 years. A return of 14% would double in 5.14 years!  See table below.

Rule of 72
Return %	Years to double
7%	10.29
8%	9.00
9%	8.00
10%	7.20
11%	6.55
12%	6.00
13%	5.54
14%	5.14

Your Money: Average Credit Card Debt

Let me introduce myself.  My name is Colleen Shinn and I have been in the accounting and finance field for over 35 years.  My blog will give you useful information concerning your money.

Did you know that the average American’s credit card debt for those that carry a balance is $15,863 (source: Federal Reserve)?  For all households, including those that do not carry a balance, the average balance is $7,400.  How does your credit card debt compare?

	Total Credit Card Debt	Average Household Credit Card Debt	Average Indebted Household Debt
May 2015	$901. billion	$7,400	$15,863
Change from April	0.18%	0.11%	0.11%
Change from May 2014	3.19%	2.37%	2.37%
Change from April, annualized	2.11%	1.31%	1.31%