Let's Talk Personal Finances

Boosting your credit rating

The lower the interest rates on your loans, the more income you’ll have available for other uses, including saving for retirement. Your credit score is the key to getting loans approved and determining the interest rate you pay. Here are four simple ways to improve your rating on the credit scoring system that most financial institutions and mortgage lenders use. Remember, as a consumer, you are entitled to a free copy of your credit report once a year from each of the three credit bureaus, (Equifax, Experian and TransUnion) at www.annualcreditreport.com.

Pay on time. Your payment history makes up about 35 percent of your total credit score. So if you’re never late with your loan and credit card payments, you may be well on your way toward a stronger credit score. If a payment is late, your lender will tack on a late fee and you could end up paying interest on that, as well. Late payments also can lower your credit score.

Reduce your current debt. The amount you owe to all your lenders makes up about 30 percent of your score. The less outstanding credit you have, especially on credit cards, the better your score. But a history of good debt management is better than having no debt at all. If possible, consider paying additional amounts to reduce the balance. Even making an extra monthly payment of $25.00 will help to eliminate debt faster.

If you’re new to credit and have no credit history, consider opening up a credit card with a low limit. Remember, having no debt can actually hurt you because lenders have no way to tell if you are responsible with credit. Credit cards are a quick and effective way to build credit. However, if used irresponsibly, a credit card can damage your score. Be sure you never miss a payment and when possible, pay the balance in full every month. Making only the minimum payment due on your balance each month will extend your payments and significantly increase the amount you ultimately pay out.

Stick with your lenders. The length of your credit history accounts for about 15 percent of your score, so it pays to maintain your credit relationships. Canceling unused credit cards to reduce your overall credit may work against you because your score considers both the average age of all your accounts and the age of your oldest account.

Limit applications. The rest of your credit score (20 percent) rates your debt mix, the number of accounts you have, and whether you have recently applied for a loan or credit card. Limiting the number of applications you fill out should help increase your score.

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Building an emergency fund

A break in employment, a leaking roof, car problems, or plumbing issues—when you need cash for an unexpected expense, where will it come from? If you are unemployed or don’t have money to pay for repairs, you might have to rely on a high interest credit card to see you through. A better idea is to make sure you always have a cash cushion. Enter your emergency fund.

Generally, you want to have three to six months’ worth of living expenses set aside. That may seem like an impossible goal, but by setting aside a specific amount from each paycheck, you can work toward your goal a little at a time.

If you have no savings in place, it may take a while to accumulate your fund but don’t be discouraged. It may be easier to save if you arrange to have direct payroll deposits. If you receive a tax refund this year, consider putting part or all of it toward your emergency fund. Remember to try to use the money for true emergencies only.

You can build your emergency fund even faster by depositing any bonuses you receive into your account. And if you get a raise, increase the amount you’re contributing. If you have to use the money in your emergency fund, make sure to replenish the account as quickly as possible.

Your money should be accessible in an emergency, so a Share account, Money Market account or Short-term Certificates are all good options. It may even help to set up direct deposit so the money is taken out of your paycheck before it ever hits your checking account.

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Curbing credit card debt

You’re certainly not alone if you’re carrying more credit card debt from month to month than you’d like. Breaking the cycle is rarely easy, but the benefits of wiping burdensome debt off your personal balance sheet can be huge. Here’s how to get started.

First, list your cards in interest-rate order, starting with the card that has the highest interest rate, along with the amount you owe on each.

Budget for more than the minimums. Review your expenses and figure out the maximum amount you can put toward repaying your credit card debts each month. You may need to cut corners, but keeping your goal in mind will help motivate you to find the extra money you need to pay more than the minimum amounts due.

In general, it’s best to put any additional money toward the card with the highest interest rate until it is paid off, then move on to the card that’s next on your list, etc. All the while, you should avoid using your credit cards for new charges and continue to pay the minimum amounts due on your other cards. As inspiration, consider an example of how paying an extra $25.00 a month compares to paying only the minimums (four percent of outstanding balances):

  Balance Rate
Card 1 $3,000 17.5%
Card 2 $4,000 15%

Payoff time with only making minimum monthly payments: 10 years, 10 months
Payoff time with an extra payment of $25.00 a month: two years, four months

For more information about debt reduction, contact the Financial Planning Team at 877.367.5428 or financialplanning@lgfcu.org.

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Everyone needs a budget

Creating a budget is not just for people who are trying to make ends meet. Everyone should know where his or her hard-earned money is going.

Know where your money needs to go

Determining where your money needs to go is a matter of priorities. Depending on your goals, your money should be put in the best position to help you. If you have debt or other obligations (insurances, taxes, loans, etc.), consider focusing your money here as a good place to start.

Start tracking

Tracking your spending can be eye opening! You can't control your expenses and improve your situation if you don't know where your money is going in the first place. Tracking your expenses can help you identify where you might be able to cut back without feeling it too much. For example, while you might be able to afford going out for a $10.00 lunch once a week, by tracking your expenses you will see that $520 a year is a lot of money. In fact, that same $10.00 a week put into an IRA can be worth more than $13,000 in 25 years. Maybe a brownbag lunch with your friends is a better idea!

Create a budget

Once you know where your money needs to go and where you money is actually going, decide where you can make improvements. Small changes can make a big difference. It could let you retire a bit earlier or pay back a school loan faster!

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Foundations of managing personal finances

Managing your finances isn’t always easy. You probably know folks who appear to have it together in managing their money. How do they do it? Here are some foundations of managing your personal finances.

Set goals. Setting realistic goals is important. Make your goals specific and achievable. You may have a series of goals you want to accomplish. For instance, maybe you want to pay off your debt, increase your savings or put more money in your 401(k) plan. You also might want to consider a plan to save for college or your next vacation.

Create a budget. Understanding where your money goes and managing your spending is the most important action you can take to improve your money management. It is difficult to make immediate changes to fixed expenses like rent, mortgage or a car payment, but you can make changes to your variable expenses. Variable expenses involve spending costs that vary month to month like groceries, gas and eating out. Creating a budget, monitoring your spending, and comparing actual spending to budgeted spending will open your eyes and create better awareness of your spending habits. Keep your goals in mind when creating and sticking to a budget.

Use tools. Managing your finances is easier than ever with so many software applications available including Quicken, Microsoft Money and Excel. LGFCU provides Compass free of charge to help you keep track of all of your applicable account balances, create a robust budget, set achievable goals and much more.

Track expenses. Hold on to all receipts, log your check register manually or through Compass and reconcile actual spending with what is in your budget. Check account balances often and monitor your transactions. Set aside time once or twice a month to make adjustments to budgets or lifestyle as needed.

Anticipate emergencies. Goals and budgets can be instantly sidetracked by the unexpected. Create an emergency savings fund based on three to six months of your fixed expenses by putting aside money every month.

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Preparing to buy a home

When your goal is to buy a home, having your financial life in order is key. Your financial situation will influence lenders when they consider your loan application. With this in mind, here are some things you can do to help you reach your goal:

Pay down debt. The smaller the amount of your income used to pay off debt each month, the better you will look to lenders. Generally, the less debt payments you make each month toward credit card minimums, auto loans and student loans, the more mortgage payment you can afford. If you have outstanding balances on high-interest credit cards, pay them down. And whatever you do, avoid applying for more credit or adding to balances. By paying off your debt, you will your buying power.

Save for a down payment. If you do not have a down payment saved yet, begin a savings plan. Every time you receive a paycheck, put money into a savings account for your down payment. Better yet, you can make this automatic by setting up a payroll deduction to ensure you always save toward your goal. Your down payment is as important as any other factor in getting a loan.

Monitor and manage your credit report and credit score. Your credit history directly impacts your ability to get a loan, the rate of interest you will pay and may influence how much down payment you will need. Your credit report is an inventory of your borrowing and payment history. Your credit score is a numbered rating based on the information on your credit report. Your credit score is hurt by high balances, liens, late payments, and unpaid debts. Eliminate or improve these factors to improve your score.

By fine tuning your finances before shopping for a home, saving for a down payment and aggressively managing credit and debt, you will be able to engage lenders and real estate agents with confidence.

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Protect yourself from identity theft

Identity theft happens to thousands of people every year. Even if you’re careful with your personal information, there is a chance that it could happen to you. Identity theft is scary, but by being attentive to the signs, you can act quickly to recognize when a theft occurs and hopefully minimize the damage.

Pay attention to incorrect or unusual information on your credit report. As a consumer, you are entitled to a free copy of your credit report once a year from each of the three credit bureaus (Equifax, Experian and TransUnion) at www.annualcreditreport.com. Check your credit report and immediately report anything you don’t recognize. If your credit report has an incorrect address listed for you or credit inquiries from companies you haven’t heard of, it could mean that a thief is trying to use your personal information.

Know where your credit cards are.
You think you’d notice if your credit card is missing, but if you don’t use daily it could be gone for a few days before you realize it. Because it’s important to alert the credit card company as soon as possible if a theft occurs, make sure you’re aware of the location of your credit cards at all times.  

Pay attention if your child is suddenly getting mail, phone calls or bills from credit card companies. What may seem like a silly mix-up could mean a thief is taking advantage of your son or daughter’s unused credit file. If your child has been the victim of identity theft, you can contact the three credit reporting agencies to freeze his or her credit file. If you opt out of firm credit offers via mail, make sure to add your kids’ names as well at optoutprescreen.com.

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Using consumer credit with discipline and purpose

Consumer credit is largely made up of two forms of credit: installment loans and revolving credit.

Installment loans include automobile loans, recreational vehicle loans, student loans, and many types of personal loans. All installment loans have a set timeframe in which to pay off the loan, and can have a fixed or variable interest rate.

Revolving credit includes home equity loans, credit cards, lines of credit (including home equity lines of credit), and store charge cards. With revolving credit, each time you make a purchase, it’s like taking a small loan against your credit limit. Also, the interest rate you start with may be subject to change, and there is no set timeframe to pay off the accumulated debt.

Too much installment debt and credit card debt can lower your credit score. A low credit score can impact your ability to get hired, purchase affordable insurance or perhaps even qualify for a mortgage or car loan at a reasonable rate.

Strategies to deal with credit card debt

Shop around. If you are going to make an installment loan purchase like a car, do yourself a favor and check around for good rates. This doesn’t mean to apply for multiple loans, but just look around. If you find interest rates seem a bit high, perhaps you should consider postponing your purchase and instead save money to apply toward a purchase.

The same goes for adding a credit card to your purse or wallet. Make your best effort to understand the costs of credit and choose a credit card that offers a good interest rate, and if reward benefits are offered, make sure that they are applicable to you.                           

Develop a spending plan. Keep track of where you’re spending your money, and look for places to cut back. Even small changes in your credit history can impact your ability to borrow money, and an effective spending plan keeps your payments up to date and on schedule. A good spending plan will address your fixed expenses, and at the same time reduce any unnecessary expenses. If you’re an LGFCU member, use tools available to you such as our personal financial management tool, Compass.

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