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Does FICO’s new scoring model affect student loans or mortgages?

You will soon see a change in your credit scores. Expect these changes to go into effect summer 2020. For some, scores will take a dive, while others will rise. The new scoring model does not target people with existing mortgages or student loans. It instead targets your payment habits, with credit cards in particular. When the time comes you may see around 20 point change in either direction.

Who will see an increase?

Obviously, the short answer is, it depends. However, here is a great yardstick to get a better gauge. If you have student loans, mortgages, and auto loans with high balances but credit card balances fairly low, you may see an increase.

Why? The new model is geared to curb spending. It is an attempt to strong arm you into managing your revolving debt, and start targeting your loans. They want us to pay down our credit cards to an “appropriate level”.

As a general rule of thumb, people with excellent credit keep their balances on revolving accounts under 10% utilization. People with good credit keep their utilization under 29%.

How is my score calculated?

We do look at overall balances, but we look at it in the context of everything else that’s going on that account, and that includes what your credit card balances look like and how aggressively you’re seeking new credit.

Dave Shellenberger, FICO vice president of product management, tells CNBC Make It.

Here’s a quick break down of where your older loans fit into this picture.

Amounts owed

Mortgages, student loans, auto loans balances will typically be on your report the longest. So what the new model is concerned with in that regard is ontime payments, however small they may be.

Payment history

On time payments is and probably always will be a heavier weight in the scoring model. this is literally how credibility(aka trust) is defined. Next, we have the amount overall amount owed at around 1/3 the weight of your score.

Length Of History

The magic number here is 7 years. Fico takes the average age of all your open accounts to calculate the length of credit history. That means, if your oldest accounts are well over 7 years, you might want to thinks twice before closing them.

Personal experience: I have an old fingerhut account I never use, I won’t close it until my average age of other accounts reaches 7 years. That way it won’t have a negative affect on my overall score.

New Credit

Ok this will be the first thing that the new scoring model will curb. If you are carrying high balances on your revolving accounts, you will have a tougher time opening new credit cards.

FICO is encouraging repayment of revolving accounts. Allowing you to continue racking up debt is not the way to go. Credit in the U.S. has grown to an obnoxious $50 trillion, while actual cash in circulation is just $3 trillion. Yeah, that’s the current state of our economy.

The Bigger Picture

In an economic down turn, consumer spending has to be brought back under control. Credit, is a promise to pay the bank back at a later date. If we the consumer, keep making more promises by the millions, the economy will begin to tighten. We are already at that point. It happens in cycles. The new scoring model can be seen as FICO’s way of preventing or slowing an economic bubble thats ready to burst.

I found a great video that explains exactly where we are financially, and where we might be headed. I wish this was available back when I was in school..

Take a look, and take notes.

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5 Lucrative Ways to Spend Your Tax Return

DETERMINING YOUR REALISTIC NET WORTH

Before we get started on our strategy for maximize the use of our tax returns, let’s get a baseline understanding of net worth.

In a nutshell, your net worth is really everything you own of significance (your assets) minus what you owe in debts (your liabilities). Assets include cash and investments, your home and other real estate, cars or anything else of value you own. www.thesimpledollar.com › Financial Wellness

Be what we are concerned with here is liquid assets aka cash. That means what you have in your savings / checking accounts, not your IRA or 401k. Also, we are not considering your available balances on your credit cards either, because that’s not your money, sorry! Take your available liquid funds and subtract your debts and liabilities excluding your mortgage. Just like that you can clearly see that what your realistic net worth and what you think your net worth is are severely different.

So with that established, let’s explore ways to utilize your tax return with the sole purpose of planning actionable items that bring you closer to a positive net worth.

[1] UPSIDE DOWN CAR LOANS

Upside down or “underwater on your auto loan is when what you currently owe on your principal balance is higher than the current value of the vehicle. In the case of a new car, you are immediately underwater the minute you drive off the lot. Imagine that some brands and models tank in value within the first 1-3 years down to 50% depreciation. Yikes!

Your best bet to float your way back up is to refinance your loan. Assuming your credit isn’t shot, shop around for a credit union that offers better interest rates. Lowering your payment without increasing the term period is the key here. DO NOT INCREASE THE TERM unless you are absolutely committed to paying off the debt early. You stand to save thousands overall, and possibly hundreds a month. Those extra dollars you are saving each month should be applied to the principal.

Take a portion of your tax return and apply it directly to the principal. Your first goal is to bring your principal balance as close as possible to 120% of the cars value. This effectively makes it worthwhile to lenders to offer you a refinance loan. If you are already there, then you are only applying enough money from your returns to bring your principal balance under the cars worth.

Note: You can find your cars value on the NADA site, banks don’t always use KBB.

[2] DEROGATORY ACCOUNTS

Think of all the thing you would have the flexibility to do if your derogatory accounts were not weighing down your financial vehicle.

  • Public records that prevent you from leasing an apt or home on your own without a cosigner
  • Collections that prevent you from getting a home or auto loan if you needed it.
  • Student loans and medical bills that don’t just disappear on day after 7 years of ignoring them
  • vehicle repossessions & back child support payments etc

Part of making money is getting rid of debts and liabilities first. You stand to do so much better the very day you debts are cleared or brought under control. You may not need credit now, or ever want it, but its alway good to have. Why? Employers outside of the financial sector are now checking potential employees credit! Medical expenses may come up and exceed the limits of your insurance and HSA. Natural disasters happen and insurance companies may be slow to pay, just to name a few.

[3] HIGH INTEREST CREDIT CARDS

Wow, I wonder what the U.S. economy would look like if every single person paid off all of their high interest loans and credits cards. Interest rates on credit cards will always be high, that just the nature of the business. That doesn’t mean we have to give them our money so willingly.

Absolutely attack your outstanding credit card balances with accruing high interest. Balance transfer is king in the credit world. So many companies offer introductory rates at 0% for 12, or even 18 months in some cases. Please shop around, do your research, and read customer reviews of people who have owned the card for 6mo or more.

You may not immediately qualify for some balance transfers so spending some of that tax money to lower your balance in order to get approved is you first step. If you already qualify, just transfer your balance first then attack that principal with your tax money while under the introductory period. You will effectively be saving hundreds in interest of the same time span.

[4] DIVIDEND INVESTMENT ACCOUNTS

This is the equivalent of a money tree. How so? Stocks that pay dividends typically pay out quarterly. the month that they make their payouts varies from different companies. So, imagine that you have a set of stocks that pay a dividend January, April, July, October, and then another set that pays out February, May, August, November. You would be receiving a monthly payout on autopilot. Those payouts can be reinvested or “rolled” back into your account month after month. You really don’t have to lift a finger. Also there are cool services out there such a M1 Finance that make your portfolio match the same investment choices as Warren Buffet’s. In fact, we’ll do a review over this service soon so stick around.

[5] EDUCATION FOR A SKILL/TRADE

Going back to a school for a Masters degree that may cost you $60k for the opportunity to work in field that pays you $40K, is well, not very masterful. However, spending $500 -$1500 for a mentorship style training in a skill that you can immediately use to make money is a fantastic! I mean, come on, what are we talking about here, trading in a money for valuable and actionable education. Imagine your a coal miner, the mine closes, the whole town is out of a job, and you decide to invest a little money to learn how to be welder. You take up a lucrative welding job in the oil industry, or even open your own business. All because you used your money on knowledge rather than a cheap vacation that you decided on because your feeling down in the dumps. Bravo, to any effective education available.

Wrap up

Look, let’s be real. Spending your tax return on a used luxury car that will break down on you in 4 months is not the best use of your returns. This year is a great time to make those financial goals come into fruition. Take inventory of your pennys, your debts, your goals, and start hacking away at it. We can save ourselves from any financial woes if we stay focused on better spending!

What are you planning to spend you refund on?

Do you agree or disagree with any in the list?

Comment your experience below and any advice is appreciated.

Featured

Financial Landscape Changes Starts With The Individual

We have the ability to reshape the Economy in our wallets..

“Do not spend all your strength to make money.”

— Lailah Gifty Akita

The financial crisis in regards to consumer spending that the U.S. and much of the first world nations face can be mitigated at some level. First, lets point out the fact that the there is a huge difference in spending between generations. Second lets identify the main characters in consumer spending.

What Millennials(Gen-Y) and Gen-Z are spending on essentials items such as housing, transportation, education is statistically proven to be much higher than that of their predecessors Gen-x and Baby boomers. Studies show that the rate of pay for younger generations has all but flat lined over time while inflation as taken a sharp upward curve just before Gen-Y became adults.

Look, we all know that these issues cannot be solved over night. Especially since there is yet another economic bubble that is about to burst in the hands of both Gen-Y and Gen-Z adults: Student Loan Debt. What we can do, however, is stop this never ending cycle in it’s tracks. This, we now have the power to do as power wealth and influence falls in the hands of younger generations. Financial revolution starts at the individual level.

Welcome to yet another community that is ready and geared towards making smarter financial choices daily. We will share our experiences, financial education, and also financial upsets. All with the purpose of forming flexible financial strategies.

We Are In A Recession, Now What?

So the Feds are about one emergency meeting away from calling our current state of things an official recession. They announced Sunday March 15, 2020 that rates will be dropping to near zero.

The Federal Open Market Committee (FOMC) lowered the federal funds rate to a target range between 0-0.25 percent. It’s the largest emergency reduction in the Fed’s more than 100-year history, and it’s the first time the U.S. central bank has reduced rates at an unscheduled meeting within 13 days of each other.

On top of that, the reserve requirement has been set to zero. This means that if a bank wants to loan you money(mortgage,auto loan, etc), the bank no longer need to keep 10% of that amount on hand before issuing a federal backed loan.

Corona Virus Outbreak + Recession

The virus outbreak will affect every industry, some much worse than others. What to expect:

  • Food and entertainment industries will be limited even after a vaccine is developed.
  • Vaccines take at least 18 months to develop and even longer to administer.
  • Vaccines are not profitable to pharma companies, as we have seen over the past 20 years. They are in no rush.
  • Schools will not be able to adapt as fast as other industries. Long after the vaccine is created there will be a catch up period. Parents of grade school kids will have to adapt, it will be costly.
  • Public transportation will be affected in some cities.

All of these things and more mean that it could take at least 2 years to recover from.

What are your financial priorities?

  1. Emergency fund! Absolutely need $1000 just sitting your savings account as of yesterday. Get to it.
  2. Again..Emergency fund! Once you have $1000 sitting, start saving 3-6 months worth of income. any thing over your initial $1000 needs to go into a very liquid account. Better-spending recommends a high-yielding online savings account with no fees or minimums.
  3. Tax Returns – Save every single penny of it. Do not invest it, not yet. Do not apply any of it to debt either.
  4. High Interest Debt– Honestly, consider paying minimums until you 1st have $1000 saved and also for the next 90-days, until you have a better idea of how the outbreak affects your local economy. That way you don’t resort to using credit and digging a deeper hole.
  5. Investments– If you already contribute before taxes to a retirement account, no need to make any changes. do not take money out either, right now that will do more damage than good.
  6. Buying a house– We get it, interest rates are low. Better-spending recommends only buying real estate if you were already on the market for one before the outbreak. Don’t chase low rates, they will not skyrocket all of a sudden. Prices in many area are on the rise because of low rates, and you may be overpaying.
  7. Refinance your home? – If you recently bought a home within the past 5 years this may be a good idea if you rate is lower and the term is not extended. Why? You don’t want to restart the clock on a loan, it will mean more of your monthly payment goes to interest rather than the principal balance. Better-spending recommends refinancing a 30 year mortgage into a 15 year mortgage if you payment winds up being close to the same, without extending the period.
  8. Refinance Your car? – We despise car payments here. If you can land a lower rate, and a lower payment without extending the term, great. Also if you can lower the rate but your payment is the same, and without extending the term, do it. The goal is to get rid of the payment asap, it is a burden of your finances. Car payments have no benefit whatsoever, no equity, and depreciation comes to all.
  9. Student Loans– Pay the minimum for the next 90 days. We hope the feds can ease things for those of us paying them, with maybe some sort of suspension or grace period. That’s what we wish they would do to help breath life into the economy short term; but let’s be real, probably won’t happen.
  10. HSA– By all means toss some funds into your health savings account, but only after number 1 listed above. Make your first benchmark $500- $1000. If you have kids, you’ll want to at least double that. We have a feeling this will be used entirely this year, just a hunch.

4 Tips on Prioritizing Debt Payoff and Savings

We all want to be more responsible with our money. While that sounds great in theory, it can get confusing once you start to break things down. Emergency funds, savings funds and debt all need to be addressed regularly, but trying to figure out a consistent method leaves some paralyzed with indecision.

One of the problems that tends to trip people up is prioritization. Allocating your finances to the right place is crucial, but how do you decide how much to put towards any one purpose? How can you cut through the confusion and get your finances on the right track?

We have a few suggestions that may help.

Tackle The Small Emergency Fund

You need to save at least a partial emergency fund first. If you don’t have one and have to face a crisis, you’ll probably need to borrow the money. By borrow we mean using those credit cards that got you in trouble in the first place. That means you’ll end up in more debt – whether you owe a family member or a credit card company.

A basic emergency fund should be around $1,000. That will cover minor emergencies like new tires after your car has a blowout on the highway, last-minute plane tickets to a funeral, or a brief ER visit.

Each time you deplete your emergency fund, halt any other debt-reducing or saving until you build it back up. Once you’re debt free, you can focus on building a more substantial emergency fund, covering between three to six month’s worth of expenses.

Refinance Debt

Before you start paying off your debt, you should find other ways to reduce it. If you have high-interest credit card debt, do a balance transfer onto an account with a 0% offer. See if you can refinance to get a lower interest rate for your other debt, including car loans, mortgages and student loans.

When you refinance, make sure that your new loan doesn’t extend your terms. The longer your loan, the more you’ll pay in interest. You should use the refinance as an opportunity to save money, not spend more of it.

After you refinance, keep making the same payments you were previously. Doing so will shorten how quickly you pay off your debt without forcing you to make any changes to your lifestyle.

Create A Debt Payoff Plan

Once you’ve weighed your options of refinancing, you should focus on becoming debt free and creating more money to throw at that debt. There are two ways to do this – lower your living expenses or increase your income.

You can increase your income by asking for a raise, finding a new job or starting a side gig. Working an extra 10 hours a week at $10 an hour will yield about $400 a month before taxes for instance. We live in an era of gig economy so finding a easy gig hat works for your local area will not be too hard (uber, fiverr, upwork, doordash, etc,.)

To decrease how much you need to live on, you should find areas of your budget that you can cut. Do you eat out too often or have a yoga studio membership that goes unused? Are you paying too much for car insurance or internet/cable? Take the money that you cut from your budget and apply that to your debt payments.

You can pay off your debt with one of two strategies – the snowball or the avalanche method. The snowball method definitely keeps you motivated, as you will see faster results. The avalanche method saves you the most money and makes more sense mathematically.

Once you’ve paid off your debt, put the money you were spending on monthly payments and beef up your emergency fund. Now you’ll be saving for yourself and your future instead of paying off old debt. Again, the idea here is 3-6 months worth if you a not self employed and single. At least 6 months if you are married and or have kids or illness. 6-9 months if you are self-employed.

Focus On Saving For Retirement

The general rule of thumb is that you should put between 10-15% of your income towards retirement. While some people advocate for focusing all your efforts on debt payoff, putting money toward retirement now can save you money later.

Why? Because saving for retirement is designed to be a long-term approach, and the most important aspect of saving for retirement is time. The more time you spend saving, the more you’ll have – simple as that. That’s why putting a little bit away for 40 years is better than putting a lot away for 20.

“A 28 year-old that saves $5,000 a year into a retirement account – if they average 8% and retire at age 68 – should earn approximately $1,295,000,” said CFP Peter Creedon of Crystal Brook Advisors. “To match the $1,295,000, a 40 year old would have to contribute $13,583 a year until retirement if we use the above parameters.

Wrap Up

Better-spending has a few things to say despite popular opinion.

  • Millennials will most likely need to have $1.8 million or more by retirement age(66-70). Please adjust your contributions to reach this goal.
  • We also recommend considering IRA along with your 401-K from age 30 onward.(taxes suck)
  • Take advantage of high yield online saving accounts.
  • Never ever finance a car. If you absolutely have to, go with 36 mo term or less and use a down payment. If you cant afford the payment at 36 mo, you definitely cannot afford the car.
  • Lastly, a great start to your savings is 3 months worth of net expenses, then increase to 3 months worth of net income, until you get to 3 months worth of gross income.

Home Buyer’s Guide: What to expect at closing

What to Bring With You

“Closing” is the final step in buying your new home and you may feel some anxiety in not knowing what to expect.

You may worry that somehow, someone is now unexpectedly going to tell you “no.” The truth is, the closing meeting wouldn’t be scheduled at all unless the decisions were already “yes” on your mortgage loan, purchase agreement and other factors.

So try to relax a bit. At closing, you’re going to provide identification, sign some documents and hand over certified checks for your down payment and closing costs. Oh, and then get the keys to your new place!

The Rundown

  • Closing will usually take place at the title company’s office.
  • It will be a small meeting — usually just you, your buyer agent and an officer from the title company.
  • The seller and seller agent rarely attend closings with the buyer.
  • You can bring a trusted adviser with you, if you wish.
  • Please note that everyone whose name will appear on the property title needs to attend and bring a valid government-issued photo identification (for example, a driver license).
  • The entire meeting will take about an hour.
  • The title company officer will have everything prepared in advance and walk you through everything you need to sign.
  • You’ll be signing your final mortgage papers, title forms, tax forms, affidavits, a deed of trust and various disclosure statements.
  • For your down payment and closing costs, you’ll need a check or wire transfer.
  • It’s a good idea to bring a personal check, too, to cover any last-minute corrections or changes.

Wrap up

When everything’s done, you’ll get the keys to your new home! That’s a special moment and well worth all the effort you’ve put into saving, preparing and house hunting. Once you walk into your new home, you’ll know you made the right decision. There’s nothing quite like owning your own home.

Home Buyer’s Guide: Understanding your Mortgage payment

The Five Key Parts

Making your mortgage payment is a lot like paying your rent. It provides you with a place to live and is probably the biggest check you write every month. However, your mortgage payment is very different. It feels like one lump sum, but is made up of five key elements:

  • Principal
  • Interest
  • Property taxes
  • Homeowners insurance
  • Private mortgage insurance (PMI)

Principal

This is the amount you borrowed for your mortgage loan. If you borrowed $100,000, then your outstanding principal is $100,000. A portion of each monthly mortgage payment goes toward paying off your outstanding principal. During the early years of your loan, the portion that goes toward your principal is small. But this portion grows with each payment and helps you build equity.

Interest

This is the amount your lender is charging you for the money you borrowed. During the early years of your loan, the portion that goes toward paying interest is large — but it is also tax deductible, meaning you will get a percentage of this money back. Plus, the portion of your mortgage payment that goes toward interest shrinks every month.

Keep in mind, just because the portion that goes toward interest shrinks every month, doesn’t mean your total mortgage payment goes down. As the portion that goes toward interest shrinks, the portion that goes toward principal grows by the same amount.

Property Taxes

A portion of your monthly mortgage payment will be placed in an escrow account, which your lender will use to pay your property taxes on your behalf. Property taxes are also tax deductible, so you can look forward to getting a percentage of this money back.

Homeowners Insurance

A portion of your monthly mortgage payment will be placed in an escrow account, which your lender will use to pay your homeowners insurance premium on your behalf. Homeowners insurance protects against things such as storm damage, fire, theft and accidents that may occur on your property.

Private Mortgage Insurance (PMI)

If your down payment is 20% or more of the purchase price, the need for PMI is eliminated altogether.

Until you have 20% equity in your home, though, a small portion of your mortgage payment will go toward paying for PMI, which protects your lender in case you default on your loan.

Keep in mind there are a couple of ways for you to build equity. With each mortgage payment, the portion that goes toward principal builds your equity. Any increase in property value will also increase the equity you have in your home.

Once you’ve achieved 20% equity in your home, ask your lender to eliminate PMI from your mortgage payment and you’ll save hundreds of dollars a year.

Wrap up

What about HOA fees? While its true some properties require you to pay an HOA fee either yearly or monthly, you don’t have to choose a property with an HOA. Better-Spending does not recommend choosing a first-time property that has these type of fees. Honestly, this subject requires a separate article as an explanation why we don’t recommend them. We’d have to change our name from better-spending to so-so spending. Plus, there are much better uses for your hard earned dollars.

Stick around for our next segment where we cover the last and Puzzle piece:

What to expect at closing?

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