This Week in Your Wallet: Your FICO Score is Due for a Checkup
In last week’s newsletter we covered some credit basics (your credit report versus your credit score, what to look out for, etc.). It happened to be good timing, because a few days later, FICO – which produces the credit scores on which most lending decisions are based – announced that it’s new scoring system, FICO Score 9, would incorporate some major revisions.
Specifically, the new version (out this fall) will no longer weigh unpaid medical debts when calculating your score. (Medical debts account for roughly half of all unpaid collections in consumer credit reports.) Version 9 scores will also disregard any debts that have gone to collections that have been paid off or settled. Currently, FICO incorporates both paid and unpaid collections equally.
Overall, how many more points should you expect to see? According to reporting in The New York Times, if you have a score of 711, and a clean credit history aside from unpaid medical debts, then you could see your score jump by 25 points. If your score is lower, because it’s been dragged down by medical debts or collections that you’ve since satisfied, you could see it rise by significantly more. That could translate into hundreds, if not thousands of dollars in savings as you qualify for better rates on any money you borrow. And note: Even in cases where you have no unpaid medical debts or collections this will not hurt your score. It will either help, or as credit expert John Ulzheimer told CNN, “be neutral.”
If this sounds vaguely familiar, it’s because VantageScore beat FICO to the punch by adopting this model last year. VantageScore was launched in early 2006 by the three major credit bureaus – Experian, TransUnion and Equifax – in an attempt to compete with FICO, long the category leader. This FICO update is a signal that the king of the category is clearly feeling the heat from its competition. Frankly, we think the fact that they’re moving closer together is a good thing for consumers. It means that whichever score you pull (sometimes it’s hard to tell what you’re looking at) you’re going to get information that more accurately reflects what lenders see. As for the other financial headlines….
Another week, another breach
By now, the news of Russian cyber criminals obtaining 1.2 billion usernames and passwords and more than 500 million email addresses (originally reported by The New York Times) has been sliced, diced and regurgitated. The upshot is that many of those pieces of data seem to have been obtained in prior hacks. And the whole incident is somewhat suspect, because the company that discovered it, Hold Security, is looking to make a buck by charging $120 a pop to tell companies whether they were among the injured parties.
My question to all of you who have yet to change your passwords – if not for every site you regularly sign into than at least for the banks, brokerages and social networks – is: What is it going to take to spur you into action? I reported on this for Fortune.com. Doing the right thing isn’t difficult to do — it just takes a little bit of time. And, if you’re inclined to do even more? Take a look at Ron Lieber’s piece on “multifactor authentication,” and how you can use it to keep you even safer. Note: As he discovered, not all financial services companies are able to offer you this level of protection – yet. Kudos to Bank of America, Charles Schwab, Fidelity, JPMorgan Chase, Vanguard and Wells Fargo for taking steps in the right direction.
No retirement savings? No excuses.
We know that many Americans aren’t saving enough for retirement, but a new survey from the Federal Reserve Board says 31% have no savings (or pension) in place whatsoever, according to CNNMoney. And 19% of these people are near retirement age (55-64). Considering this, more than half of these respondents plan to work well into their golden years, and roughly 25% said: I don’t know how I’m going to afford it. If this is you – or someone you know – consider this your wake-up call.
First, face the figures by consulting a retirement calculator to get an idea of how much money you’ll need. (Note: If you’re near retirement age, and haven’t started saving, then the numbers might be alarming. Don’t let them discourage you. Not knowing will do you more harm.) Next, start looking into your options: Does your employer offer a retirement plan? If so, opt in and think maximum. Most employees can contribute up to $17,500 to a 401(k), 403(b) or a Thrift Savings Plan this year. If your employer doesn’t offer anything, look into opening up an IRA and funding it with automatic contributions. And if you can’t get close to the maximum funding levels, do what you can. This is one arena where a glass half-full is not so bad.
TIME Money recently offered nine steps to a successful retirement. One – which I always like to see – is tracking your spending. By tracking your monthly spending by categorizing it into major spending buckets (i.e. mortgage, utilities, cars, insurance, etc.), you’ll not only see why you need to take your retirement savings seriously, but also where you can make spending cuts to save more. Be honest with yourself and make note of the required spending versus the discretionary. And once you get your savings going and have a better picture of your guaranteed retirement payments, then you can compare that number with your required spending needs via your tracking. Aim for the two numbers – at the very least – to match. For more, head here.
How much is your hobby costing you?
I generally say pay for experiences – not things – but your hobby can sometimes fall into both categories. Take my hobby, running, for example. Right now I’m training for the NYC Marathon, which is an experience, but I also have to budget for training-related costs. I’m talking multiple pairs of shoes, running gear and a variety of audio books and music. (The books are crucial for when my mileage gets to double digits.) But here’s the thing with hobbies – we tend to “mix-up,” “overlook” or underestimate just how much we’re spending on them. The “why” is easy: they’re fun and they quickly become a part of who we are.
With that said, you still need to account for them in your monthly budget. As DailyFinance reports, failing to do so can turn a healthy hobby into an unhealthy (financial) habit. So how much is too much to spend on your hobbies? Or rather, how much should you spend? Some experts suggest the 50/30/20 formula, in which you spend 50 percent of your income on the essentials (bills, mortgage, car), 20 percent for savings and 30 percent for the fun stuff. Others have a more restrictive rule of thumb, and tell you to limit your spending on entertainment and hobbies to 10 percent of your take-home pay. Personally, as long as you’re saving as much as you need to be saving (see the last bullet) I don’t really care where the rest of your money is going. If you want to drive a clunker and spend your money on a fabulous bike, that’s your prerogative. And if you’re interested in monetizing your hobbies and using them as springboards into retirement, head here.
Have a great week,
Jean
