This Week In Your Wallet: A New Credit Score
In the movie High Fidelity, John Cusack can’t resist a good Top 5 list: Top 5 Favorite Films. Top 5 Memorable Breakups. Top 5 Things He Misses About Laura. (What? You haven’t seen it? Netflix. Now.)
I keep a few Top 5 lists of my own, including Top 5 Questions I’m Asked:
#5: Do I need long term care insurance?
#4: How do I find a financial advisor?
#3: How much do I need to save?
#2: Pay off debt or save for tomorrow?
And the consistent #1: How do I improve my credit score?
Well, we need to address that again this week because the answer is shifting slightly. I’ve long said your credit score is, like a balance sheet, a snapshot of how your credit looks right at this moment. This fall, VantageScore will introduce a new formula that approaches your borrowing history as more of a timeline or continuum rather than a freeze frame, reports CNBC. (What’s VantageScore, you ask? A competitor to FICO that’s been gaining steam over recent years. It’s not used for mortgages, but it was used eight billion other times in just the last year. When you pull a score from one of the three major credit bureaus, you get a VantageScore.)
Here’s what the change means for you: If your trend line shows that you’re paying down debt, or even better, paying off monthly balances in full, it’ll help. If you’ve been accumulating rising credit card debt over the years — and/or opening new credit card accounts relatively frequently — it’ll hurt. As always: Maintaining a high credit limit but using comparatively little of it can boost your score. A good goal is to get your utilization under 30 percent (ideally 10 percent) of your available credit.
On that note, CNN Money has five mistakes to avoid that can tank your credit score fast — including, yes, using too much of your available credit and opening too many credit cards or accounts too quickly. Another is missing a payment, which, according to Credit.com, can take a 780+ FICO score down 100 points if it’s a first 30-day delinquency. Yikes. The very first step is knowing what you’re working with, and you can check your credit score free here.
Spending In Retirement
Some Money Rules are drilled into us — save for retirement, don’t raid your 401(k). They’re important, which is why they’re not guidelines or suggestions but Rules. However, The Wall Street Journal reports that many retirees spend much less than they can afford to because fear of breaking these rules can mean being afraid to spend the money they’ve saved — even though that’s the point of saving it in the first place. One reason might be that while young people underestimate how long they’ll live, older people overestimate their longevity. So, how do you get yourself past this hurdle? Just like automating your savings during your accumulation phase helps you stick to the goals you set, look for similar solutions during withdrawal.
One fix is something called a “managed payout” fund that allows spending a percentage of the fund’s money in installments. Another is adhering to the guidelines of sort set by required minimum distributions (RMDs) — government-mandated withdrawals that increase by percentage as you age (for example, 3.65 percent at age 70½, 5.35 percent at age 80, 8.77 percent at age 90 and 15.87 percent at age 100). Finally, the transition from the saving phase to the spending one is — like many transitions — a really good time to sit down with a financial advisor. Sometimes just talking through what’s okay to spend over the long term can give you the boost of confidence you need to actually do it.
Two Thousand Greenbacks
Feeling lost about how much to save for your kid’s college education? Fidelity Investments has a new savings guideline for parents: Multiplying their child’s age by $2,000. This $2,000 plan should keep you on track to cover half the average cost of a four-year, public university, reports CNBC, and it means you’d have around $36,000 by the time your kid turns 18 — the rest of tuition could come from financial aid, student loans and family earnings. This is just a benchmark, so it’s important for families to modify it according to their own unique financial situations. If you’ve got ground to make up, don’t panic — remember to put your retirement first (there isn’t any financial aid for that), and if you can, aim to start automatic transfers to a 529 college savings account. You can compare different states’ 529 plans here.
Have a great week,
Jean
