What the wealthy OVERstand about money that the rest of us may not.
50 things you didn’t know about credit scores, credit reporting, and debt. (Part 1)
2. People often talk about their “credit score” as if they had just one. In fact, there are more than 100 credit scoring models used by banks, lenders, and financial institutions.
3. But FICO is the biggest and most recognizable credit scoring model. FICO is an acronym for the “Fair Isaac Corporation” and is based on the risk-predicting algorithms developed by mathematician Earl Isaac and engineer Bill Fair in 1956, and then rolled out in the 1980s as a credit scoring system.
4. Did you know that these days, credit scores are even influencing people’s dating decisions? It’s true, as surveys show that the majority of people would consider someone’s credit score before dating them or getting in a relationship. There’s even an online dating site called CreditScoreDating.com with the motto, “Credit Scores are Sexy!”
5. Millennials – and especially college kids – are really missing the boat when it comes to keeping good credit scores. In fact, Millennials have the lowest Vantage credit scores of any generation, including Gen X (ages 30-46), Baby Boomers (47-65), and the Greatest Generation (66+).
6. Speaking to that point, surveys show that 85% of U.S. college students don’t even know their own credit score!
7. These days, your credit score impacts far more than just buying a house or getting a good rate on your credit card, as many employers now check the credit reports of their potential applicants. In fact, 1 in 4 Americans looking for a job have been subjected to a credit check, and 1 in 10 has been disqualified from getting hired because of something on their credit report!
8. According to reports by the Department of Labor, occupations that routinely check a job applicant’a credit include: 1) parking booth operator, 2) the military, 3) accounting, 4) mortgage loan originator, 5) Transportation Security Administrator (TSA), 6) law enforcement and 7) temporary service positions and many more.
9. FICO scores are based on a complex (and secretive_ algorithm that factors every nuance of credit behavior from tens of millions of consumers. Their programs then look for patterns that will help them predict future defaults (or on-time payments) for borrowers, which they then translate as a numeric spectrum of risk for lenders, or your credit score.
10. These days, an estimated 33% (one out of every three) of all American adults do not pay their bills on time every month!
11. How much bad credit card debt do the big banks take a loss on every year? Last year, the top 100 banks in the U.S. had an average charge-off rate of 3.87%, which means that nearly 4 out of every 100 people don’t pay,
12. Last year, the average Annual Percentage Rate (APR) for all U.S. credit cards was 13.14% – another great reason to build up your credit score and get out of debt this year!
13. About 19 countries around the world use some form of FICO scores, and many more have their own credit scoring system.
14. Nearly two-thirds of U.S. adults – or 144 million people – haven’t even looked at their credit report within the last 365 days.
15. And one-third of working-age Americans don’t even have a clue what their credit score is!
16. Visa is by far the biggest credit card in the U.S., with 278 million cards at home (that’s about one for every adult in our population!). Mastercard is next with 180 million cards
But while Visa has 522 million cards across the globe, MasterCard just beats them out with 551 million cards abroad.
17. Visa is also the largest credit card in the U.S. by sales volume, with $981 billion in annual charges. MasterCard is second with about $534 billion in yearly debt from cardmembers.
18. The average U.S. consumer has 13 credit accounts listed on their credit report, which includes 9 credit cards and 4 installment loans. (But remember, that doesn’t mean they’re all open and active, just reporting.)
19. In the 1990s, America saw an explosion of personal debt levels that was unprecedented. One of the main causes was the fact that banks, lenders, and financial institutions starting using credit scores en masse to help them gauge risk and make faster, more accurate decisions.
20. In fact, in 1995, the nation’s two largest mortgage financing agencies, Fannie Mae and Freddie Mac, started advising lenders to use FICO scores for their borrowers, allowing the floodgates on lending to tens of millions of Americans.
21. But at first, FICO didn’t want to reveal how they calculated a consumers credit score, opting to keep it a secret. But under intense pressure from financial advocates and governmental influence, in 2003 they released a list of 22 factors that go into their credit scoring model. That same year, the U.S. Congress passed a new law that granted consumers the right to access their credit score.
22. Remember that credit scoring systems weren’t designed to help consumers and the general public, but lenders and companies. Therefore, credit scoring models, reports, and computations weren’t supposed to be easy for the average person to understand!
23. Insurance companies are using credit scores and reporting like never before. In fact, insurance actuarials prove that the lower a customer’s credit score, the more likely they are to file an insurance claim – costing their insurer money.
24. These days, 90% of homeowners and auto insurance companies use credit score as a factor when assigning and rating premiums! Therefore, insurance companies reward customers with good credit scores, and your premiums will be much lower than for those with a low credit score.
25. If you want to improve your credit score (and keep it high), then try to only keep credit cards from well-respected, major banks, like VISA, Mastercard, American Express, etc.). They’ll show that you’re a better steward of your finances and a more responsible debt holder than if you open accounts with lesser known finance companies, retail cards, etc., and your credit score will reflect that.
Look for part 2 of this blog, with 25 more things you didn’t know about credit scores, credit reporting, and debt!
15 Things to stop doing that are making your broke!
Many of us set resolutions every new year, and chief among them is the goal to improve our finances. For some, that may mean saving more; for others, landing a better-paying job; and home ownership is still the American Dream for most families.
But before we can tackle this financial Bucket List and move forward, it’s important that we identity the money mistakes that we’re making that are continuously setting us back. We’ve identified 18 things that are common among the average American consumer, causing them to always be short on money and even hurting their families.
So, if you want 2018 to be the best year yet for your finances, stop doing these 15 things that are making you broke!
- Maxing out credit cards
We’re certainly a nation that loves debt, as we now have more than 1 trillion in credit cards and other revolving debt, an all-time high. Add in mortgages, student loans, car loans and medical debt, etc., and U.S. consumers personally owe more than $12.9 trillion – the GDP of about half the countries in the world!
In fact, the average adult with debt in the U.S. has 8 credit accounts, $16,000 worth of credit card debt alone, and is paying about $430 a month just in minimum payments.
While there’s nothing at all wrong with having credit cards and using them responsibly (you should keep some revolving debt), the problem comes when we max them out – with no plan to pay them off.
Paying only minimum payments means that the average $10,000 balance at 15% interest will take 15 years and about $22,000 to pay off completely.
Maxing out cards also impacts your credit score, since about 30% of your FICO is calculated by the amount of debt you hold compared to your total available credit (called credit utilization.)
So stop maxing out those cards and make more than just the minimum payment this year!
- Not saving
We understand that money is tight and there’s usually more month than paycheck; not the other way around. But one of the principal ways you can ensure that money isn’t always this tight in the future is to start saving. And there’s no better way to put away funds for a rainy day than automatically saving out of every paycheck (or tax refund).
In fact, the majority of Americans couldn’t even come up with $600 today without borrowing or selling something, and sudden financial setbacks like a job loss, medical problem, broken car or other unexpected expense can send about 40% of families into dire financial circumstances.
The best way to combat that – and make sure that you’re always prepared and won’t make even worse short-term financial decisions – is to save a certain percentage of your paycheck automatically, before you even see that money. To resist the temptation to spend it, keep a savings account without an ATM card so it’s not easy to access. You’ll be amazed how it adds up!
- Using payday loans, check cashing, and rip-off credit accounts
Remember how we just mentioned financial emergencies? When the roof leaks, someone gets sick, or the job starts laying people off, those cash crunches often result in people making panicked, short-term financial decisions just to get by. Frequently, those result in cash advances on credit cards, payday loans, using check cashing establishments, applying for a bunch of new credit cards at once, or looking for other personal loans.
The terms and interest rates on these loans can range from incredibly high and expensive all the way to usurious and illegal, and usually put people in a much worse financial situation than when they started.
- Making impulse purchases
Have you ever noticed that retail, department, and grocery stores line the checkout aisles with certain items? They do that on purpose, of course, because they understand that the majority of consumers will make impulse purchases; buying things they don’t need and didn’t plan on purchasing.
Just how much can you save by skipping the magazines, sodas, electronic knick-knacks, and other impulse purchases every month? Furthermore, do you even know how much you’re spending on coffee, lunches, and meals out? It all adds up.
Try this: For one month, carry around a little notepad (or just use your smart phone – there are great apps that help you track every dollar you spend), and write it down every time you spend a dollar. At the end of each week, add it all up according to categories. You’ll probably be shocked how much you’re spending on things you don’t need or necessarily even want – and that money could be going to savings, paying down your credit cards, or other good use.
- Not checking your credit periodically
Did you know that only 1 in 4 people check their credit report annually, and 60% of Americans don’t even know what their credit score is now? Checking your credit report regularly is so important for a host of reasons:
- 25% of credit reports contain errors, inaccurate or duplicate information.
- ID theft and credit fraud now affects nearly 10% of the population every year, and the recent Equifax Hack saw the personal data of about 167 million Americans compromised.
- These days, your credit score is so more important than just getting a mortgage or applying for a new credit card. Getting an apartment, the insurance rates you pay, your utility and cell phone accounts, and even getting a new job may depend on a clean credit report and a good score.
- Not looking into refinancing your mortgage
If you do own your home already, congratulations! While it may be the best investment you’ll ever make, there’s no denying that you’ll be paying it off for a long time (usually 30 years) and for a huge sum of interest – probably more than the original home price! So every smart homeowner should inquire with their mortgage broker if a refinance is available and something that would help them save.
It’s free to talk to your favorite loan officer and get an idea about your options, and lower-interest mortgages or refinancing into a product like a 15-year loan may save you tens (or even hundreds) of thousands of dollars over the years. You may even be able to save money on your monthly payment AND pay the home off faster, but the worst that can happen is that they tell you that you don’t need to make a change.
By the way, the better your credit score, the lower your interest rates and payments will typically be!
- Not reading the fine print
That 0% credit card offer sure looks great, but what will the rate be after that introductory period? Is that great low mortgage payment fixed, or will it go up as other interest rates rise? What are the fees and charges associated with that new student loan or business loan?
Too often, we’re offered new credit that looks like a no-brainer, but comes with some important stipulations that will make it way more expensive in the future.
Nothing is free in this world (except great credit advice from Nationwide Credit Clearing!), so make sure to read the fine print and know exactly what you’re getting into before you sign on the dotted line. Any loan, investment, or other financial vehicle is sure to come with fees, charges, and interest rate details that are crucial to understand. Read all you can but it’s also a good idea to ask questions – and get the answers in writing!
Look for part two of this blog soon, where we’ll cover the next eight things to stop doing if you don’t want to be broke!
Just how much money will you save with a good credit score? The answer may shock you!
Most people don’t think about their credit score on a daily basis, even as they use their credit cards, make their auto loan payment, or write a sizable check for their monthly mortgage. However, there’s a direct correlation between a good credit score and saving on all of these accounts – and more.
The top credit scorers typically save tens (or even hundreds!) of thousands of dollars over their lives, helping them pay off debt, amass savings, invest to retire comfortably, or achieve their other financial goals.
Meanwhile, consumers with subprime or even average credit scores get charged higher interest rates, fees, and see a lot of doors closed when they apply for new loans.
So how much money will a great credit score actually save you? Let’s take a look:
According to Bankrate.com, if your credit score falls between 600-679, the average U.S. credit card APR (annual percentage rate) is 22.9%
But if your score is in the 680-739 range, your APR drops significantly to 17.99%.
However, for the highest credit scores in the 740-850 range, the average APR is only 12.99%.
So how much can those lower credit card interest rates save you?
Looking at a popular tiered credit card with a $10,000 balance as an illustration, we see that with the lower 12.99 percent APR for high-score consumers, the monthly payment would be $297 for over five years to pay it off. But if you had that that higher 22.9% rate because your credit score was mediocre, that monthly payment would jump up to an astronomical $715…and for more than 7 years!
Therefore, keeping a great credit score could be the difference between paying $18,414 total to pay off this card or $44,330 – a whopping $25,000+ savings!
When it’s time to purchase a car and apply for auto financing, your rates and terms can vary widely. But one thing is for sure: a great credit score will save you a lot of money when you’re paying off that shiny new auto month-after-month.
According to VantageScore, which is the main purveyor of credit scoring for auto lenders, a typical $25,000 auto loan for a 5-year term:
- Below 550 Vantage Score (poor credit): 18.9% with $13,828 interest paid
- Below 620 score (subprime credit): 17.9% with $13,009 interest paid
- 620 to 680 credit score (average): 11% with $7,614 interest paid
- 680-740 credit score (good): 6.5% with $4,350 interest paid
- 740-850 credit score (excellent): 5.1% with only $3,375 interest paid
While a 760 is considered a top-notch credit score for mortgage lending, you’ll probably qualify for the best auto financing with a 720 or higher score. In fact, consumers with excellent credit scores may even qualify for 0% financing on new car purchases.
One of the biggest ways your credit score will save you huge bucks is when it’s time to buy a home. And unless you’re paying cash for that home, you’ll be applying for a home loan, with rates and pricing based heavily on credit score.
Assuming that the average sales price of a house is $343,300, with a mortgage of $274,640 (20% down payment) and a 30-year fixed mortgage:
Let’s start with a 5% interest rate just for illustration purposes (historically, that’s low, but right now it could be a little high):
Your monthly payment will be $1,474
Total payoff over 30 years is $530,758 (interest and principal payments)
But if you have a better-than-average credit score and qualify for a 4.5% interest rate on that same loan, your monthly payment will be $1,392 with a total payoff of $500,962.
And if you have a great credit score that grants you a 4% interest rate, that means you’ll only pay $1,311 per month with a $471,960 payoff
So how much will a good credit score save you when it comes to this typical mortgage illustration?
-Savings in 1 year (compared to a 5% rate)
-Savings in 5 years
-Savings in 10 years
-Savings in 30 years
And for a $500,000 home, the difference between a 760 and a 620 credit score could cost you about $150,000 or more in additional interest payments due to higher rates!
In fact, according to Michelle Chmelar, the vice president of mortgage lending with Guaranteed Rate, every 20-point step down from a 760 credit score could cost the borrower 25 basis points when it comes to pricing, as well as higher fees and closing costs.
Other ways a good credit score will save you money:
Qualify for the best credit cards:
With a top score, you’ll have the best credit cards jockeying for your business, offering the lowest interest rates (sometimes even 0% for a period), options for low or no annual fees, and great perks and rewards. The credit card companies will also gladly extend you higher balances. Together, this can save you hundreds of dollars every year.
Better car insurance deals:
You may not have known that car insurers also rate and apply coverage based on credit scores. While some states, like California, Hawaii, and Massachusetts, don’t allow car insurance companies to look at credit, in most states, you’ll see much lower premiums with a better credit score – saving you money.
Cheaper cell phone plans:
If you’ve walked into a store recently to buy a new cell phone, you were probably asked to authorize a credit score check. In fact, cell companies will require a hefty security deposit and might even charge you higher rates – or outright deny you a contract – if you have enough blemishes on your credit report.
Get approved for rental housing and apartments:
Most landlords include an authorization for a credit check when you submit an application, and your payment history is a pivotal factor in approving you for a lease. Likewise, if you have judgments from past landlords or collections from utility companies on your credit history, you can probably kiss your chances of getting that nice apartment goodbye.
Utility bill savings:
When it’s time to sign up for a new electricity, heating, water, or trash account, a bad credit score can cause some serious problems, In fact, most utility companies will charge increased security deposits – sometimes hundreds of dollars – for bad credit consumers.
Make the grade with student loans:
The average college graduate now leaves school with $37,172 in student loan debt, an increase of 6% (or +$2,200) over just last year. You better believe that a great credit score will help you qualify for lower-interest student loans!
Don’t miss out on your dream job:
A bad credit score can hurt you in ways that have nothing to do with taking out a loan. In fact, employers are screening their potential employees for credit score, especially with government jobs or those in the financial sector. It’s estimated that 1 in 4 Americans have been subjected to a credit score check when applying for a job, and 1 in 10 have actually been denied a job because of a bad score or something on their credit report!
Are you ready to start saving money? Let’s start with your credit score! Contact us for a free consultation and credit report.