Personal finance

Practical money matters by Jason Alderman

alderman, Jason

CREDIT SCORING has evolved over the last three decades and this fall, FICO made one more important change. Borrowers who have struggled with medical debt and those with a limited credit history might see better FICO numbers in the future. Even if these situations don’t apply to you, understanding how credit scoring is changing can help you better manage your credit over time.
FICO Score 9, rolled out last fall, is described as a more “nuanced” version of the original FICO Score that the leading credit scoring company introduced in 1989. It is offered by three major credit bureaus – Equifax (equifax.com), Experian (experian.com) and TransUnion. (transunion.com). It now bypasses collection agency accounts and weighs medical debt differently than non-medical debt on a person’s credit record. Borrowers with a median score of 711 whose only negative credit data comes from medical collections will see their credit score go up 25 points under the new system.
As for consumers with limited credit histories – what the industry calls “thin files” – FICO says the new system will better determine the ability of someone in that situation to repay a debt.
What doesn’t FICO 9 address? At this point, the latest credit-scoring model really doesn’t loosen or change requirements for mortgage and refinancing opportunities. Even so, there are many things ordinary borrowers can do to improve their credit scores and overall financial health over time.
The first step is for borrowers to review each of their credit reports once a year. Credit reports and credit scores are two different things. Consider credit scores are a three-digit summary of creditworthiness; credit reports are the detailed record of a borrower’s credit history. Consumers can view each of their credit reports from Equifax, Experian and TransUnion once a year for free (annualcreditreport.com). Stagger receipt of each agency’s credit reports throughout the year to weed out any inconsistencies, inaccuracies, or worse, indications of fraudulent credit applications or identity theft.
Borrowers are seeing something else that’s new – some lenders are making the credit scores they apply to existing borrowers available for free. A few major lenders have taken part in the industry-only FICO Score Open Access Program, which lets current customers see the exact credit scoring data applied to them at no charge. FICO’s site doesn’t offer the names of participating lenders, but a customer should ask their lender if they are offering free scores through that program.
Consumers should know how credit scores are compiled. FICO uses five key ingredients:
Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit (10%)
Type of credit used (10%)
Visit myfico.com for a list of tips for borrowers to improve their scores. Base FICO scores have a 300 to 850 score range, and though FICO doesn’t release what it considers good or bad scores, borrowers with excellent credit typically have scores in the mid-700s and up.
There are ways to preserve and raise existing credit scores. It might be wise for borrowers to ask if they can increase the credit limit on individual accounts while paying down existing balances on those accounts. Smart borrowers generally keep their outstanding balances at 30 per cent or less of their available credit limit.
Bottom line: Smart credit management starts with an understanding of one’s credit reports and credit scores.

Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.

Practical money matters by Jason Alderman

alderman, Jason

CREDIT CARDS offer many advantages. There is the convenience of being able to buy needed items now and the security of not having to carry cash. You also receive fraud protection and in some cases rewards for making purchases.
With these advantages also come responsibilities. You need to manage credit cards wisely by understanding all of the card’s terms and conditions. Stay on top of payments and realize the true cost of purchases made with credit.
Using a credit card is like taking out a loan. If you don’t pay your card balance in full each month, you’ll pay interest on that loan.
Choose wisely. The best way to maximize the benefits of credit cards is to understand your financial lifestyle – your money needs and wants. Once you determine how you’ll use a credit card, it’s important to understand all of the card’s features including:
•Annual percentage rates (APRs) and whether rates are fixed or variable
• Annual, late and over-limit fees
• Credit limit on account
• Grace periods before interest begins accruing
• Rewards including airline miles or cash back
Stay alert. Some credit-card issuers offer free, personalized and automatic alert messages to your phone and e-mail to help you keep track of available credit, balances, payment due dates, payment histories and purchase activity.
Understand your rights. Credit-card holders are entitled to protections.
Zero liability means you are not responsible for fraudulent charges when you report them promptly.
In some cases, you have the right to dispute purchases with merchants for unsatisfactory products or services.
Follow the 20-10 rule. This general “rule of thumb” helps you understand how much credit you can afford.
Credit cards are loans, so avoid borrowing more than 20 per cent of your annual net income on all of your loans – not including a mortgage. And payments on those loans should not exceed 10 per cent of your monthly net income.

Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.

Practical money matters by Jason Alderman

alderman, JasonJason Alderman

TODAY, I’m wrapping up my series on getting a good deal on a new car by explaining another financing choice for you. Do you want to buy or lease your new vehicle? There are pros and cons to both.
When you lease a new car, you’re paying to use the car during its first few years. Here’s how the system works.
When you lease the car, the dealership actually sells the car to a leasing agency, which is sometimes owned by the dealership. This part is transparent to you.
You put some money down on a lease, just like a down payment. Your monthly payment is determined by the total price of the vehicle minus your down payment, minus the amount the dealer expects to be able to sell the car for at the end of your lease.
That number is then divided by the number of months in the term of the lease. Then the dealer adds a finance charge and a profit margin.
That sounds complicated but, in the end, you’re paying for the depreciation of the vehicle while you use it. The lease is actually a loan for the amount of the depreciation.
Leasing has a number of benefits. It offers you a lower monthly payment than if you were buying a vehicle. Plus, a much smaller down payment or trade-in is required.
If you like to get a new car every few years, a lease is probably a good option for you. If you buy a car and sell it every few years, you’ll end up with loads of negative equity, which is bad.
At the end of a lease, you have the option of giving the car back or buying it as a used car. However, if you plan on buying it at the end of the lease, it might be a better idea to just buy it new to start with.
If you lease and then buy, the cost of the lease combined with the purchase price of the used car is often much more than the new price of the car. If it weren’t, the leasing agency would not make any money.
There are also some disadvantages of leasing. For example, because you are paying the difference between the new price and the used price of the vehicle, you will be charged extra at the end of the lease for anything that decreases the resale value of the car.
You will have to pay to fix any abnormal wear and tear on the car, including scratches and dings.
You will also have to pay if your mileage surpasses the limit you have agreed to in your lease contract. At 10 to 15 cents per mile, that can become a major cost.
If you customize the vehicle in any way, even if it seems like added value to you, you will probably have to pay extra at the end of the lease.
You’re also locked into the lease for the specified term. If you decide you want to break a three-year lease after two years, you’ll have to pay the remainder of the lease plus any termination fees specified in the contract.
These are just some of the stipulations likely to be set forth in the lease contract, so make sure you read it in full before signing it.
Also, make sure your contract specifies a closed-end lease. A closed-end lease is standard and sets a specific amount for a depreciation cost for you to pay.
In an open-end lease, on the other hand, the leasing company estimates the depreciation cost and you pay any difference at the end of the lease. That can be a very costly mistake.

Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.

Practical Money by Jason Alderman

alderman, JasonJason Alderman

JUST BECAUSE you’ve figured out what you can afford, lenders won’t necessarily agree. That’s where your credit report comes in. Lenders decide how large a loan you qualify for strictly by looking at your credit report. It’s nothing personal. They don’t care what you look like, what you think about the status of your personal finances or how nice you are to small animals. They only care about the numbers that appear on your credit report.
The credit report will tell them your credit worthiness (how well have you paid past debts?), your financial means (do you have sufficient income to repay a loan?) and your debt load (do you have too much debt to be able to take on more?).
Many lenders will pre-approve a certain loan amount based on your income and credit history. You’ll know exactly how much car you can afford and be able to leverage your financing deal against financing offered by the dealership.
There are several financing options.
Dealer financing – the big advantage of dealer financing is convenience. You buy and finance the car all at once. But if the dealer is just reselling a bank loan to make a profit, the rates won’t be the best. Occasionally dealers offer special rates to get rid of overstock, especially at the end of a model year. So make sure you ask them about financing and compare their offer to your prearranged financing.
Banks – you can usually get a lower interest rate at a bank than a dealership, especially if you are an existing bank customer. They’ll probably require a 10-20% down payment to cover the depreciation of the car in case you default on your loan and they need to repossess your car. Smaller banks offer personal relationships, which are important, but may not be able to compete with rates of bigger banks.
Credit unions – these have lower overhead costs than banks, which allows them to offer lower-cost financing. Sometimes it can be a full percentage point lower.
Home equity loans – you need to own a home to get a home equity loan. You use your home as collateral for the loan – which is a little bit scary. If you can’t pay the loan, they can take your house. But if you’re sure you can afford it, a home equity loan is a great way to go because not only can you get a lower interest rate, your interest is tax deductible!
The internet – as with everything else these days, you can shop for car loans on the Internet. You miss out on any kind of personal relationship, but you can get quick approval and very competitive pricing.
Trade-in – your old vehicle is basically a very large coupon that you can trade for a discount when you buy a new vehicle. If it’s worth enough, you may be able to use it as a down payment. Trade-ins are a convenient way to use the car you already own to help purchase a new one.
The value of a new car drops dramatically as soon as you drive it off the lot. That’s because it then becomes a used car. It doesn’t matter that you have only used it for five minutes – it’s still used and is worth much less because of that fact.
This depreciation is an important concept to understand when dealing with financing because while the value of your car drops immediately, your loan principal drops more gradually. So if you try to sell the car too soon, you may end up owing more on it than you can sell it for. That’s called negative equity.
You can avoid getting into negative equity by following four simple rules.
Keep your car until it is paid off completely. Obviously, no matter how much your car depreciates, you won’t have negative equity if you don’t owe anything.
Don’t buy a car that is too expensive. If you struggle too much to make the payments, you may decide to sell the car earlier than is financially prudent.
Don’t drag out your payments. You might get a slightly better interest rate and your monthly payment will be smaller. But it will staple you to that car for the financing term. Five years later you’ll still be paying for a car that may no longer fit your needs.
Make the biggest down payment you can. This will help offset the effect of depreciation and start giving you some positive equity.
Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.

Practical money matters by Jason Alderman

alderman, Jason

SOME PEOPLE seem to buy a new car every year or so. What happens to all the ones they’ve gotten rid of after just a year? People buy them and sometimes get great deals.
A large part of a car’s depreciation happens as soon as you drive it off the lot. So the main advantage of buying used is that you’re buying after that huge drop in price. That makes a used car less of a long-term investment.
Used-car salesmen have one of the worst reputations of any profession. While most will not live down to this reputation, some will. The term “too good to be true” applies doubly to used cars. That motto will help you avoid some of the car sharks.
Shopping for a used car can be much harder than shopping for a new one. They’re like snowflakes. Each one is unique. That makes comparison shopping more of an art than a science.
And used-car dealers have a little bit of an advantage because you can’t just leave and buy the exact same car at another dealership.
There are three main sources of used cars.
Dealers often offer you a warranty on a used car – which is comforting when a previous owner might have used it to haul chickens down an uneven gravel road every day for the past three years. But you probably won’t get as good a price as you will if you buy from the Average Joe or Jane.
A little negotiation with Average Joe/Jane can really drop the price to something that’s fair to both of you. But you won’t be given a warranty. And, to look at five cars, you’re most likely going to have to visit five different people.
You can get some incredible deals at public auctions. There is no dealer to haggle with and only the active presence of other potential buyers will increase the price. The downside to auctions is that you usually can’t test drive the car and it is extremely rare to get a warranty on an auctioned car.
The point of buying a used car is to save money but, if you don’t research the car you buy, it could end up costing you more than a new car! First, look up the Kelley Blue Book, left, value of the car so you know what price range to start in. Then get the history of the car. Ask the seller what it has been used for. If it has been used just for driving on relaxing tours of the countryside several times a year, no problem. But, if it was used as an off-road race vehicle, you might want to reconsider.
Get the vehicle history report, or VHR, using the car’s vehicle identification number, or VIN. It will cost about $10-$15, but this report will let you know if the car has been in any major accidents that could have weakened its frame.
When it comes time for the test drive, be relentless and thorough. Ask the seller about any strange noise the car makes. Anything. It might just be an odd quirk. But it could be a telltale sign of a much larger problem.
Use everything in the car. Press every button. Open every window. Open and close every door.
Once you are sure there is nothing wrong with the car, get a professional mechanic to do the same. Subtract any small thing wrong from the price you are willing to pay for the car. Realistically, you’ll end up paying that money back to get it fixed.
Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.