By Nigel Swaby
For many Americans, tax season is a mandatory reminder to review their financial position. Some people use this time to reflect on their savings, investments and financial success from the previous year. Others see it as a chance to plan where their tax refund goes; towards savings, debts or to splurge on a luxury item.
A January CNN article stated 60 percent of Americans couldn’t come up with $500 for an emergency. Other sources state a strong majority of Americans don’t even have $1,000 in their savings accounts.
This lack of savings affects people in several negative ways. For aspiring home owners, lack of a down payment is the single biggest obstacle to ownership. Other people find surprise expenses result in having to borrow from friends or relatives, adding to their credit card debt or resorting to high cost borrowing from payday lenders or pawn shops. A surprise bill can magnify itself several times over if one has to borrow to pay for it.
Martha Wunderli of AAA Fair Credit Foundation, a national non-profit organization that provides financial coaching, offered some tips on how to save money. She explained the best way to save money is to make it automatic. Whether you have your employer direct a portion of your paycheck to a savings account or have your bank do it, the results are the same. Adjusting your mindset to “pay yourself first” is critical to building savings.
Another part of financial health is maintaining a positive credit profile. At first glance, it seems borrowing money is a negative for financial health. However, credit scoring isn’t just about borrowing any more. Credit scores are used to establish auto insurance rates, apartment rental approvals and even to get hired for a job or security clearances.
Positive credit can be established through student loans, auto loans, mortgage loans, credit cards and personal loans from financial institutions. Many lenders will extend credit for people with no established credit for small credit lines which can grow over time with positive repayment history. Some may require a deposit, known as a secured credit line, which will be refunded after a certain amount of on-time payments.
Negative credit is easier to establish, which isn’t a good thing. If you don’t pay a bill from a doctor, utility or cell phone, the provider can sell it to a collection agency and not only ding your credit but harass you by phone or mail until you do pay. They may even take you to court, get a judgment and garnish your wages or bank account. Unpaid child support or court fines can end up on your credit as well. Paid collections can remain on your credit report for seven years. Unpaid rent, broken leases and evictions can be just as damaging to your credit. Tax judgments from the state or IRS can report on your credit for 10 years.
This is where the picture of financial health and credit health starts to come together. If you’ve got savings, you’ll likely avoid the negative effects of a utility or cell phone going to collections. That will prevent your credit score from going down but how do you get it to go up?
Two key factors make up 65 percent of your credit score; paying your bills on time and not maxing out your credit cards. The remaining portion is made up of things like how long you’ve had credit, how many accounts you have and how many times you’ve applied for credit.
Assuming you’re paying your regular bills on time, how do you establish positive credit? Sam Milner, a local mortgage loan officer, says a mix of credit account types is preferred and “three to five accounts yield the best score.”
Installment loans are credit accounts requiring the same monthly payment for a fixed amount of time. These include car loans, mortgage loans, student loans and certain personal loans and business loans.
Revolving loan accounts are typically thought of as credit cards and include store cards, gas cards and home equity lines. Their monthly payments change depending on the unpaid balance. For a good score it is important to keep revolving account balances below 30 percent of the credit limit. The highest credit scores are generated when balances are 10 percent or lower.
Nigel Swaby is a Fairpark resident and real estate agent with Aubrey and Associates Realty.