Tackling the Little Things
Getting debt under control and improving savings habits are two big steps to a better financial life, but those actions only are possible if Americans have more specific aspects of their financial lives under control.
While the economy recovers, job stability remains a vast and very valid concern. Without income, saving stops and debt can spiral. Even if they still have a job, Americans need to assess their marketability and increase their professional value by networking and upgrading job skills.
If someone experiences a job loss, it’s important to be proactive. They should negotiate severance pay, file for unemployment benefits and look into alternative insurance plans, because living unprotected will risk their family’s security. Individuals who have lost their jobs also should immediately start looking for work. Most states allow people to work a certain number of hours, and earn up to half their previous income, and still retain unemployment benefits.
Those who are struggling financially also might find it difficult to pay their mortgage. If individuals have missed a payment, they should immediately search through financial records or identify spending habits to find out what caused the missed payment. They also should contact their lender, who is required to examine their client’s financial life before taking any drastic action against the client’s home.
Even without a job loss or mortgage trouble, it’s time for Americans to involve their entire family in assessing the household budget. Tracking spending for a month will reveal some easy places to cut back without causing any significant lifestyle changes. Turning off lights and appliances, cutting down on weekend trips and dinners out and eliminating habits such as smoking all will help reduce household spending. And, it will give the family a head start on saving in case of emergencies.
For Americans to recover, maintain or rebuild their financial lives after this recession, they need to make permanent changes so they’re prepared for any future trouble in the economy. Identifying areas in which they are struggling, scrutinizing bills and spending habits and prioritizing aspects of their financial lives will help individuals create a proactive financial plan to last the whole year, and beyond.
Next Up: Seven Resolutions
This is a guest post from the National Endowment for Financial Education (NEFE), a non-profit dedicated to improving the financial literacy of all Americans.
Control spending: If you spend less you'll have more money available to pay down debt and save for the future. Write down your expenses for a month to see where your money is going. You might be surprised by how easy it is to find places to scale back.
Create a debt repayment plan: If you carry credit card debt, write down everything you owe and make a plan to pay it off. Start with small items you can act on right away–it will make tackling the bigger debt easier. Also, try buying with cash only. It’s a sure-fire way to prevent increases in your credit card debt.
Set up auto-savings plans: Arrange with your bank or another financial institution to have a set amount deducted from your checking account to a savings account each pay period. Of the Americans who have been able to contribute to emergency savings funds, automatic withdrawal is the most popular method, according to the Consumer Federation of America.
Boost retirement savings: If your employer offers a 401(k) plan, increase your contributions. If you don't have an employer plan, open an Individual Retirement Account (IRA) and arrange for contributions to be made automatically from your checking or savings account.
Create a long-term plan: Write a list of your long-term goals, such as buying a home or saving for college or retirement. Visit the Life Events section of Smart About Money for concrete tips on accomplishing those goals.
Protect Yourself: Be prepared for the unexpected by making sure you, your family, your assets and investments are insured and fully covered. If you do not have a will, make 2010 the year you establish a life plan.
Find a financial buddy: Share your financial resolutions with a friend, colleague, or family member, and you’ll be more likely to keep them. Find someone else who wants to turn around their debt or cut their spending, and establish a mutual support system.
NEFE operates the site Smart About Money and have developed a series of articles filled with tips to help you make 2010 the year of financial freedom. You can also find Economic Survival Tips, worksheets and articles focused on financial education related to housing, spending, credit and job change. Follow NEFE on Twitter at @nefe_org.
By Guest Blogger Shon Dellinger
Ah, the holidays. A time for generosity, tidings of joy… and lots of spending. In these last days of holiday shopping, ask yourself if these actions apply to you. If they do, it could be affecting your credit score:
Number One: Use of store credit cards. Store credit cards can be enticing – 20% off here, $100 off there. In fact, the New York Times just wrote a lengthy story detailing the in’s and out’s of store credit cards. But buyer beware – they can have sky-high interest rates, and, opening any new line of credit will almost certainly lower your FICO score immediately. To make matters worse, many of these credit cards have very low credit limits – $500 in some cases. If you spend even as little as $250, this will change your utilization rate – or the ratio of outstanding balances to your credit limit – which should be kept as low as possible (usually 30% utilization is recommended). The lower your utilization, the better your score will be.
Say you open a store card with a credit limit of $500 and you spend $250 on pajamas and t-shirts for Jimmy and Janelle: that card would right away have a 50% utilization rate, which could impact your score. Cardholders can also understand the factors that affect their credit score and learn how to improve it using the FICO simulator tool to make sure they are spending responsibly.
Second issue: closing a card. As we get ready for the New Year, we think more about New Year’s resolutions, and, inevitably, finances. A recent FICO survey found that 40% of Americans see credit card debt as their biggest worry heading into 2010. Although it’s great that we all are being a little more careful this year — the survey also found that three out of four consumers are planning to reduce or not use credit this year to pay for holiday gifts and expenses – we could see a push among consumers to close secondary credit accounts, which is another way to change their proportion of available credit and hurt their credit score. Consider this:
Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:
• Total balances = $2,000 ($500 + $1,500)
• Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
• Credit utilization ratio = 30% (2,000 divided by 6,500)
Now, if you decide to close credit card 2 because it's an old card that you never use, your credit utilization ratio looks like this:
• Total balances = $2,000 ($500 + $1,500)
• Total available credit = $3,500 ($2,000 + $1,500)
• Credit utilization ratio = 57% (2,000 divided by 3,500)
You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card. If you’re paying bills and get your finances in order before the holidays and want to see what will happen to your score if you close that unwanted credit card, FICO’s cheap credit simulator that I mentioned before can help with this, too, that can tell you the estimated range your score will change based on certain actions. Go to www.myfico.com – and better yet – enter MYFICO HOLIDAY and get 30% off.
For additional tips on this topic check out the myFICO forum: http://ficoforums.myfico.com/fico/board/message?board.id=creditcard&thread.id=196197
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Only 43% of consumers will cut back on holiday spending this year, compared to 55% in 2008, according to a Consumer Federation of America survey. While increased consumer optimism spells good news for retailers, for Americans planning to “stretch” the budget, the New Year could bring falling credit scores, and with it, serious consequences.
Here are some fail-safe tips from FICO Credit Guru Shon Dellinger to help enthusiastic shoppers stay financially sound:
1. Be Smart with Credit. Using a credit card is ok – experts agree having 3-5 credit cards helps your credit, if used responsibly. But carrying a balance on your credit card leaves you (1) stuck paying interest that could cost you, in some cases, double or triple the cost of those gifts in the long run and (2) with a much lower credit score, which could jack up interest rates on your credit cards and jeopardize your chance of getting lines of credit elsewhere (buying a house, a car, etc.). Services like FICO Score Watch combat this by providing emails or texts alerting you to any changes in your FICO score (either positive or negative), and notifying you when you’ve qualified for a better interest rate. A credit score increase of 30 points will save the average consumer $105 per year.
For more information on FICO Score Watch, go to: www.myfico.com/Products/
2. Resist “Short Savings.” The salesperson at your favorite department store offers you an instant 20% savings just for opening up a credit card in their name. While that $20 seems tempting at the time, it can quickly put you in debt if you’re not careful. The temptation of the deal is also one reason why the average consumer has a total of 13 credit cards. Opening new lines of credit can also hurt your credit score, so make sure the card meets your overall needs and not just your desire for quick savings.
3. Don’t Wait Till April! Many holiday shoppers use their Tax refund to pay off credit card balances left over from the holidays, which can be incredibly expensive, not to mention detrimental to your credit standing. A credit card balance of $500 dollars from January until April will cost you $237 dollars based on today’s average credit card interest rate.
4. Get Info on Your Credit. Go to the myFICO Forums, where you can connect with thousands of other people all in your same boat. Don’t wait til after the holidays, when the damage is done. FICO is offering 30% off all products on its web site if you enter the discount code MYFICO HOLIDAY.