on February 19 | in Issue 14, Money | by Linda Hicks | with No Comments

Financial Checkpoint – How Much Do You Know?

Answer the following questions with either ‘true’ or ‘false’ to test your knowledge, and then read the answers below:

1. I was told I needed to increase my credit score of 550 to qualify for a loan. So I paid off my credit cards and closed them all. This action improved my credit score.
2. I can check my credit score on a daily basis without it costing me a dime.
3. I can pull my credit history more than once a year without it costing me anything.
4. Credit cards are safer to use than debit cards.
5. My friend and I are buying a $300,000 house next to each other. We go to the same mortgage broker—my friend’s credit score is 500 and my credit score is 760. I am told I will end up paying approximately $360,000 over the 30-year period. My friend could quite easily pay nearly twice that amount.
6. My son came home from college and said he’d been told that he could retire with one million dollars if he started contributing to a 401k in his 20s.
7. I have debt on multiple credit cards; I should pay off the balance with the highest interest rate first.
8. The only person who will see my credit score/history is a financial institution if I apply for a loan.
9. Once I set a budget, I won’t have to work on my finances any longer.
10. I don’t need to save/invest any money as long as I am paying all my bills on time.

Answers:

1. False – Credit scores are made up from your payment history (35%), capacity (30%), length of credit (15%), accumulation of debt and the mix of credit (10%) and credit searches (10%). A higher available capacity is best, e.g., If your credit card limit is $1000 and you have a balance of $900, there is minimal capacity available. If your credit card is $1000 and the balance is $90, the capacity is much higher. By closing your credit card (line of credit), you are reducing your capacity, which in turn reduces your credit score.
2. True – creditkarma.com states “For the first time, you can get a truly free credit score with no hidden costs or obligations. That’s right, no credit card is required and there are no strings attached. Return as often as you like and use our service to track your credit file and stay informed.”

This service also provides different scenarios where you can see how different actions will affect your score, such as paying off debt, paying off your auto loan, going to collections.

3. True – annualcreditreport.com provides one free credit history (not score) from each of the main credit bureaus (Experian, TransUnion, Equifax) in any 12 month period. This helps you to monitor for identity theft and dispute any transactions.
4. True – Credit card users have more legal protection than debit card users. There is a maximum $50 liability regardless of when theft is reported. Bars, restaurants, and online stores prefer credit cards to debit cards for this reason. Debit card users are not protected as well as credit card users. You may be liable for $50-$500 even if you notify the financial institution within 2-60 days of learning about a theft. If you don’t notify your bank within 60 days after your bank statement is sent to you, you risk larger losses. Also, the cash is gone until the matter is resolved. There is also a high risk with online purchases, bars, and restaurants where it is easy for hackers and unscrupulous people to view your personal information and empty your account.
5. True – The lower your credit score, the higher the interest rate, which means that you pay considerably more than someone with a good credit score. The difference between 500-579 and a 760-850 is $286,920 more paid in interest over the life of the same $300,000 loan.
6. True – The easiest way to save $1 million is to begin saving at your first job. If you start saving at age 25, you could save just $4,682 per year and reach $1 million by age 65, assuming 7 percent annual returns, according to calculations by David Fernandez, a certified financial planner for Wealth Engineering in Scottsdale, AZ.
7. True or False – This depends which way you look at it and also your motivation level. It is true that paying off the balance with the highest rate first will save money faster, but often paying off the smallest balance (regardless of interest rate) provides momentum and incentive to clear the debt faster. It is a personal choice.
8. False – Your credit score is of interest to any lender, your potential employer, landlord, and insurance companies. Your score can make the difference between getting and not getting a loan, job, insurance policy, or apartment.
9. False – Implementing a budget is a task that lasts a lifetime. Life happens and budgets have to be adjusted to accommodate these changes. Unexpected costs, overspending, and life changes may cause hiccups, but just like following a health regimen, it is necessary to get back on it and persevere.
10. False – Although saving may be difficult, always “pay yourself first” even if it is only a small amount. One of the easiest ways to save or invest in your future is to have money taken directly from your paycheck (pretax if possible). You have a greater chance of not missing the funds and accumulating more reserves. Pretax paycheck deductions can include contributions to a 401(K) to set up a retirement fund. Another saving option is to set up a direct debit or standing order to a savings account post tax. The idea in both cases is that you don’t miss what you never had and the funds will grow faster than you think. Always consult your Tax Professional/Financial Advisor to find the best option.

So how did you do?

Don’t feel bad if you didn’t score well—you probably have never been taught financial literacy so why would you be expected to have these skills? Check out my monthly articles to improve your financial literacy and feel free to email me with any financial questions you may have.

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