UNDERSTANDING CREDIT UTILIZATION RATIO

Fortunately, we can maintain a low credit utilization by keeping a credit card balance below 30% of our credit limit. For example, if the credit limit is $1,000 and the balance is $300, then the credit utilization for that credit card is 30%.  To calculate the ratio, simply divide the credit card balance by the credit limit and then multiply by 100. A lower credit utilization ratio influences a better credit rating.
It’s important to note that the amount of credit, the credit limit, isn’t as important in this calculation. A credit card limit of $500 with a $250 balance is no different than a credit card limit of $10,000 with a $5,000 balance. In either case the credit utilization ratio is 50% or 20% above the recommended balance. One of the most important factors in improving a credit score is to keep the total charges below 30% of the total available credit limit.
Having a good credit rating is important, and overlooking it can be detrimental to your financial health. It can save you thousands of dollars in interest charges. For example, consider borrowing money to buy a $200,000 home with a 30-year mortgage. If you qualified for a rate of 4% with a good credit score, the interest would be over $143,000. However, if you received a higher rate of 4.5% due to a lower score, the interest would be over $165,000, costing you $22,000 more. Your monthly payments would also be higher.
When you have a solid credit profile, you get better financial deals and opportunities. It is worth the effort to maintain a good credit history.

CREDIT REPORTS

There are (3) big credit reporting bureaus: Experian, Equifax, and TransUnion, and they track our borrowing history.  Just like our GPA in school, we get a credit score.  Our credit rating helps to determine our credit risk and is affected by many different things.  Our outstanding loan balances, the number of accounts that we have, our payment history, and the types of debt we are using affect our credit rating. The credit scores (FICO) range from 300 to 850, which helps to rate us as a borrower. A higher score means a better risk profile.  Credit scores are very important. They change each time a credit inquiry is made.  Unfortunately, while it’s based on a number of criteria, it doesn’t usually change that much on the positive side. However, negative actions can substantially impact our score, like a bankruptcy or missed payments.  Also, someone with a limited credit history can be more affected by opening a new credit account.
It’s important that we check our credit report every year from the 3 credit rating agencies, and to order a free annual credit report from each one.  Unfortunately, it’s possible to have some potential discrepancies on your reports, such as fraudulent activities, or mistakes.  The agency’s websites will provide information on how to fix any problems.  Just like the importance of keeping a budget, we need to be monitoring our credit.  Additionally, every card has a “terms and conditions” section that lays out the many features, costs, and rules.  Make sure that the cards match your needs, and that you can abide by the rules regarding that card.  Focusing on free miles, cash back, etc., doesn’t mean much if the card is costing a lot of additional monies in fees, interest charges, or penalties.  Also, remember that there is usually a charge for transferring a balance, or that reward cards can have higher annual fees.  For example, consider that American Express platinum has an annual fee of $450, or that a number of cards have a 3% up front transfer cost to get into their 0% interest cards.  If you aren’t going to pay off the transferred balance during the time frame of the 0% interest period, or derive enough benefit from a $450 annual fee, then it doesn’t make sense.  Also, many of the cards require that a certain amount of money be charged in the first few months to even get the rewards–so be careful.  Adding a lot of debt for the sake of some rewards or cash back can have a lot of negative financial consequences. If the temptation to charge is too great, just cancel your cards and don’t worry about effecting your score.  Struggling with continued debt and the financial stress isn’t worth it.   Whether it’s credit cards, student loans, mortgages, or other debts, some additional keys to good debt management include:
1. Know all your debts, the amounts, payment due dates, and how much you are budgeting towards your debt every month. 2. Pay off the highest interest rate debt first, which saves the most interest, and is a psychological win–it feels good to have paid it off! 3. Pay more than the minimum balance every month. Remember that the minimum payment is what is good for the lender’s pocket book, but it’s not good for us.  Try to make biweekly payments, or double up the payments to help pay things off faster and save money in interest. 4. Spend cash or use a debit card, not credit cards. Leave them at home, and cut up credit cards if needed to avoid going into debt. 5. Any raises, bonuses, tax refunds, or extra money should be used to pay off debt aggressively. Also, consider selling anything that you don’t need for more money to pay off debt. 6. Don’t fill out personal information when checking out at the stores to avoid getting on possible credit card lists. 7. Cut back on your spending, and use the extra money to pay down debt.  Think before you charge it: “Do we really need it?” and “What’s it really cost, if I cannot pay it off quickly?” 8. Reward yourself for positive milestones! This encourages us to want to do more. 9. Contact your creditors if you get behind, and work out a plan that fits your budget to make things more manageable.  Don’t wait for a debt collector.  We can also seek out credit counselling or debt relief services, but make sure to do your homework before hiring anyone to help.  There are lots of scams and potential fees, so make sure that you understand everything.  Also ask your CPA, lawyer, or trusted advisor for a referral or advice.
Maybe the biggest step of all: once we are out of debt, stay out of debt!

GOAL SETTING AND SAVING

Many of the topics that we have been discussing play a major role in helping us shape our finances by taking action. However, goal setting and savings are synonymous for various reasons. What we are saving should gel with our financial needs and goals. Goals help set priorities, because most of us don’t know what we are saving for, or how money fits into our life goals.   “Are we trying to build a college fund?” or “Do we want to buy a home?” or “Is planning for our retirement the most important thing?” If we have a sense of what we want to accomplish by saving our money, it helps to focus on what investment ideas can fit with that need (longer term growth or shorter term needs), our time horizons, and how much we need to put away.  Many people may feel that saving money has some value as it relates to happiness. We’ve discussed plenty of examples where having money didn’t equate to happiness.  Balancing priorities, financial goals, savings needs, and life desires, are key ingredients to personal wellbeing. Your life shouldn’t be consumed by the almighty dollar, or lamenting about how things would be better with a higher paying job, or having more money to spend.  One of the acronyms to goal setting involves taking a S-M-A-R-T approach to financial or personal needs.
By setting goals we have focus and a direction– without them we would wander aimlessly.  Imagine trying to throw a dart without a dart board, or building a house without a blueprint.  Some of the many benefits of setting goals include:
1.   Allowing us to stay focused rather than wasting time. 2.  Helping us to measure our progress while we push towards our objective. 3.  Converting dreams and wishes into something that is real. 4.Goals help us to stay motivated; we are excited to accomplish our objective.

CREDIT CARD DEBT

It’s very easy to rely heavily on credit, but remember that the more you charge, the more you owe.  You have to live within your means, and make sure that you are only charging what you can afford to pay back.  Unlike a home mortgage or a car payment, credit cards don’t have a fixed monthly payment that we can plan around.  If you are having to pay a lot of your monthly income to your credit cards, then that should be a warning sign.  Also, the more you charge, the more potential interest you are incurring.  As a rule of thumb, don’t allow your credit card to take up more than 10% of your monthly income.  Additionally, keeping your credit limit low, limiting the number of cards that you have, or using cards that make you pay off the balance every month, like American Express, can help to keep your credit card debt manageable.
Credit scores and credit history are also very important when it comes to debt management.  Our ability to buy a house, get a car loan, qualify for student loans, personal loans, and credit cards are just a few of the many things impacted by credit scores.  The interest rates charged on many things depends on our credit score; the lower the score, the higher the rates.  How we handle our debt has a huge influence on our credit score, so it’s important that we try to follow a few tips:
1. Carrying a lot of debt, especially high credit card debt, hurts our score.  Our level of debt is 30% of our score, so paying the balances quickly or reducing them can help. 2. Late or missed payments hurt your credit scores.  Payment history is 35% of your credit score. 3. Try to keep the revolving debt (credit card, retails cards, gas cards, etc.) below 10% of your total available credit. 4. Taking out loans or keeping credit balances DOES NOT help build credit score. 5. Understand any “enticement” offers, such as charge $5,000 in first 60 days, and we will give you 25,000 reward points.  These cards could be loaded with lots of other costs, such as much higher interest rates, fees for late payments, or rate hikes for over-charging.  Remember, you need to charge to get the offer! 6. Having too many cards creates more temptations to charge more debt, and can become very unmanageable.

DEBT MANAGEMENT

In a Pew Charitable Trust report, roughly 80% of Americans are in debt from mortgages, student loans, car loans, and credit cards.  As a matter of fact, credit card debt is second only to mortgage.  As many as 40% of us have credit card debt, and 65% carry a balance every month (revolving debt).25  The average credit card’s interest rate is 15%, according to CreditCards.com.  Consider this example:  If we had a credit card with an Annual Percentage Rate (APR) of 18%, and a $5,000 outstanding balance,  the minimum payment requirement is around 2.5%, or $125.  You think that this means $125 x 40 payments = $5,000, which means in about 4 years the debt will be paid off.
This is the real shocker: keeping on the minimum payment schedule, that $ 5,000 actually would take 273 payments…over 22 years!
Credit card companies keep the minimum payment schedules low, so that they can collect on that interest for as long as possible.  And as the balance is coming down, the minimum payment becomes even less.  It’s one of the major ways that lenders make money.  Also, by hoping that many of us will only make the minimum payment, it helps people rationalize the debt: “This $5,000 charge is only going to cost $125 per month, so we can afford that!”  Ironically, that $125 payment only reduced the balance by $50, because the other $75 went to paying interest fees.  This means that over the long term, 60 cents of every dollar goes towards interest! We would pay more in interest than what we had originally charged. Consider that the same $5,000 credit card balance, making only the 1.5% minimum payment every month at 14% interest, would take almost 61 years to pay off because the interest would add almost $16,000 more to the debt over that time.
Regardless of the interest rate, we would save a significant amount of money by paying off our debt. Americans should be sprinting to the finish line to get out of debt  We’re trying, we’re pushing, and we’re paying–but it seems like we’re going nowhere.  What’s even more frustrating is that we are doing the right thing by paying down our balances on time, but we aren’t seeing any meaningful results.  The potential problems can only intensify, because many of the credit card companies award us with increased credit limits rather than keeping us at a limit we can afford to pay off.  By increasing our credit limit from $5,000 to $6000 or maybe $6,500 they hope we will charge more.   It’s a psychological boost because we think, “they feel so good about me, that they gave me more credit.”
Unfortunately, according to Time.com, many people will spend this credit increase immediately, adding 10% to our existing credit card debt on average. It’s important to remember that whether it’s a credit limit increase, a pre-approved card in the mail, or some incentive to charge more, we control our credit decisions.  We can ask that our credit limit isn’t increased, rip up those cards and applications that come in the mail, and don’t need to take advantage of any special offer. “NO” can be a great way to stay out of trouble.
Credit cards can be a great convenience, and provide some great perks, but they should be properly managed.  It’s important to remember that card providers are actively looking for customers, because we are a revenue source.  However, you should know some of these key points when using credit cards.
1. Know your credit score. The better your credit score, the better card deals you can get. 2. Using the web to help search for credit cards that fit your needs can be very useful, such as creditkarma.com or creditcards.com.  However, applying for a lot of cards can also hurt your credit score. 3. Beware of annual fees, hidden charges, or additional costs for being late or missing a payment, and cards that offer rewards–the later can be more expensive. 4. If you have trouble making payments on time, steer clear of card offers that give you a low introductory rate, but skyrocket if you make a late payment. 5. Don’t max out your accounts, as using too much credit can be a negative. 6. Cancelling cards that you no longer use can actually hurt your credit score if closed too soon. 7. Avoiding credit altogether doesn’t allow card companies to view your credit history. 8. Don’t lie on applications, Not only is it illegal, but also qualifying for a larger credit limit than you can handle could cause additional problems. 9. Co-signing credit cards or loans for someone else can hurt you.  In 2016 CreditCards.com reported that 4 in 10 co-signers ended up losing money, or it hurt their credit.