Credit & Debt

Topic 1: Credit Reports and Credit Scores

You should check your credit reports and scores at least once per year.

Your credit report is a detailed history on all of your credit transactions. Each of the three credit reporting agencies — Experian, Equifax and TransUnion — maintain this report.

However, your personal credit history may vary per report. So it’s imperative that you check all three credit reports for accuracy because any discrepancies can affect your credit score, which is the single number that aims to summarize your credit history.

Credit scores range from 300 to 850, and the average credit score is 678. If your score is above 700, it means you’re considered a person with very good credit history and in good financial standing. But if your score is below 600, it has the opposite implication.

According to the FDIC, credit scores take into account the following conditions that can both negatively and positively affect your score:

• Amount of time credit has been established
• Length of time at your present residence
• Type of employment
• Length of time in current employment
• Late payments
• Bankruptcies

Your FICO score, developed by Fair Isaac & Co in the late 1950s, is available in three different versions from the three agencies. Most lenders look at all three and use the middle score. To obtain all three credit reports for free simply go to www.AnnualCreditReport.com, or call 877-322-8228.

Plus, to learn more about the three credit report agencies call or visit their websites using the following contact information:

1. Experian
   1-866-200-6020
   www.experian.com
2. Equifax
   1-800-685-1111
   www.equifax.com
3. TransUnion
   1-800-888-4213
   www.transunion.com

Here are a few tips on increasing your credit score:

1. Pay your bills on time.
2. Do not apply for credit frequently.
3. Reduce your credit card balances.
4. Have some credit (having no or limited credit history will result in a lower score).
5. Use old credit cards with no balances intermittently. These older cards have a history, a good history if they were used and paid off regularly with no late charges. These older cards help increase your credit score. So make sure to use them to buy small purchases once a year to keep your credit score up. Also closing an older account prevents you access to a credit line, and that will raise your debt-to-available credit ratio.

Credit reports can seem long and daunting — don’t try to review all in one day. Make note of anything that seems odd and make phone calls to the credit report agencies to dispute the incorrect information. You may be able to change it; if not, at least there will be a note that you’re disputing it. Also, if you write a letter disputing any discrepancies, it will be permanently appended to your credit report explaining your side of the dispute.

Four Strategies to Reduce Credit Card Debt

1. Make the call. Call every one of your credit card companies and request a lower interest rate. Did you know nearly 60% of consumers who call to request a lower rate actually receive it?
2. Seek low not high. If you’re known to carry a balance month after month, find a credit card with a low APR.
3. Shop around. Look for a new card with a favorable rate that will allow you to transfer your balances. But make sure you pay off the balance before the introductory rate expires. And always look for rates that have a 0-2% introductory rate that’s good for at least 6 months to 1 year.
4. Plan of attack. Attack your higher interest rate balances first and in the interim pay the minimum balance on your lower rate cards, but send double, triple … even quadruple the minimum payments to the higher rate card.

Topic 2: Calculating Your Debt-to-Income Ratio

This may sound obscure, but it’s very important. Your debt-to-income ratio reveals your financial soundness. Monitoring your ratio also helps to avoid “creeping indebtedness.” If you’re seeking to obtain a loan for a home, vehicle or business, lenders look at this ratio when they’re considering extending a line of credit.

To calculate your ratio, just follow these three steps:

Step 1. Add up your total monthly gross income. That could include your income from an employer, bonuses, tips, commissions, government benefits, child support, alimony and interest and dividends accruals.

Step 2. Add up your total monthly debt payments. Needless to say, that includes your mortgage payments, your car payments and any minimum payments you make on your credit cards. It does NOT include your taxes or utilities.

Step 3. Divide your debt payments by your monthly income.
So the formula is:

Total Monthly Debt Payments
÷ Monthly Gross Income
= Debt-to-Income Ratio

Below see a sample debt-to-income table based on a person earning a gross income of $66,000 per year:

Debt	Monthly Payments	Monthly Income (Gross)*
Mortgage	$1,200	$5,500
Car Note	$450
Credit Card #1	$40
Credit Card #2	$35
Personal Loan	$150
TOTALS:	$1,875	$5,500
Debt-to-Income Ratio:	34%
* Monthly Gross Income: Income before taxes and other deductions

This person has a debt-to-income ratio of 34 percent, and according to the University Credit Union, a debt-to-income ratio of 36 percent or less is what most individuals should aim for. It’s an indication to lenders that you have disciplined spending habits and are credit-worthy. Here are the other percentage categories according to the University Credit Union:

37 to 42 percent: Your debts appear manageable. But they can get out of control. Start paying them down now. You may still be able to obtain credit cards, but acquiring loans may prove difficult.

43 to 49 percent: Your debt ratio is too high. Financial difficulties may be likely unless you take immediate action.

50 percent or more: Seek professional help promptly to make plans for drastically reducing debt before it’s too late.

Important: Be sure to recalculate your ratio once each year or whenever you face a significant life event, such as a death in the family, a divorce, a change in jobs, etc.

So now you know if you’re on sound financial footing or if your ship is likely to be sinking. (You probably had a good guess anyway, but the Debt-to-Income Ratio confirms it.)

Topic 3: Know Your Personal Assets & Liabilities

Your first step is to know in detail what personal assets and liabilities you have. Preparing the list may take some time at first, but the peace of mind it provides to you and your family is priceless.

Your assets fall into two categories — financial and physical. Financial assets are assets that can be converted to cash easily in a short period of time. Physical assets consist of tangible items you own that have monetary value.

Your liabilities are obligations or debts you’re responsible for repaying.

Here’s a quick summary of financial assets:

• Bank accounts
• Stocks, bonds, and mutual funds
• Life insurance policies
• Company pension plans
• Annuities

Plus, here are the most likely physical assets:

• Your home
• Rental properties you own
• Cars and recreational vehicles
• Home furnishings
• Jewelry
• Antiques
• Artwork
• Other Collectibles

Financial liabilities are as follows:

• Automobile loans
• Credit card balances and other charge accounts
• Mortgages and other real estate loans
• Student loans
• Personal and business loans

Yes, preparing a list of your personal assets and liabilities can be a tedious process. However, once you do it, your list can be used in innumerable ways.

You can use it to help you settle insurance claims in case of a natural disaster or theft.

You can use it in the settlement of your estate.

And even if you never have to deal with any of these, it will be a very handy tool for you to plan your life!

Please use the table provided below to begin the process. Once you’ve made your list, keep it in a safe and accessible place so you can update it at will.

	ASSETS	Value ($)	LIABILITIES	Value ($)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

Tip for busy people: Write down all your assets and liabilities. If you don’t know the worth of something, just write the name down and skip the value.

Pull this list out at a later date and spend more time on it. Now, you should have time to look up something you couldn’t value the week before. Maybe you’ll remember something else that needs to go on the list. In a short time, you should be done.