Category: Credit score

What Is The Prime Rate And Why Does It Matter?

On By mutualcuIn Credit score, Financial Lessons, Financial Security, UncategorizedLeave a comment

A bank manager and customer look at interest rates

Q: What is the prime rate and why does it matter?

A: The prime rate, or prime, is the current interest rate that financial institutions in the U.S. charge their best customers.

We have answers for all your questions on the prime rate.

How is the prime rate determined?

First, the Federal Reserve System, which is the central bank of the United States, sets the federal funds target rate, or the interest rate, it thinks is best for financial institutions to use when lending each other money. When financial institutions lend each other money, they base their interest rates on the federal funds target rate. The Wall Street Journal then surveys the country’s largest financial institutions to determine the rate they are using and then publishes it as the prime rate. This number is generally 3 percent higher than the federal funds target rate.

The fed’s target rate, and consequently prime, changes often. The committee who sets the federal funds target rate meets a minimum of eight times a year to discuss possibly changing the rate. You can check out the changes in the prime rate at Federalreserve.gov.

How does the prime rate affect the individual?

First, the interest rate on nearly every loan is affected by the prime rate. Financial institutions and large lenders will base their interest rates on the prime rate, generally establishing their current rates at an amount that is higher than the prime. If the prime rises, the interest rate on your loans and adjustable-rate credit cards rises as well.

Second, the prime rate affects liquidity in the financial markets. When the rate is low, liquidity increases. This means funds are more readily available because loans are less expensive and easier to qualify for. This, in turn, generates a growing economy as businesses expand.

Is the prime rate the only factor used to determine individual interest rates?

While the prime is the starting point used to determine an interest rate on a loan, it is by no means the only factor considered.

Your credit score plays a vital role in the interest rate you’ll be granted for a loan. The higher your score, the lower the interest rate you’ll earn. Keep your score high by using your cards sparingly and paying your credit card bills on time.

Here at Mutual Credit Union, we also consider the general state of your finances when determining your interest rate on a loan. If we see that you’re working toward paying down your debts, we’ll be more likely to grant you a favorable interest rate.

Also, as an institution devoted to your success, we are always striving to help you maintain financial wellness.

Your Turn: How do you keep your credit score high and your interest rates low? Share your best tips with us in the comments.

11 Steps To Improving Your Credit Score

On By mutualcuIn Credit score, Financial Lessons, Security, UncategorizedLeave a comment

BullsEye

 

Your credit score plays an important role in many aspects of your life, from the rate you get on a loan to passing a background check for your dream job. Having bad credit scoring can keep you from achieving your goals. Luckily, improving your credit score isn’t a mystery; it is a simple process that you just need to follow consistently.

Step 1: Check Your Credit Score

Your credit score is determined based on your credit history. Actions like your payment history, types of credit, and amount of credit are reported and recorded. Positive behavior, like making on-time payments, improves your credit score. Negative information, like late payments or bankruptcies, hurt your credit.

Your credit score is a number between 300 and 850 and is built looking at the last seven years of history. The lower the number, the poorer the credit.

The first step to fixing your credit is to know exactly where you stand. Too many people know they have “bad credit,” but don’t know exactly what their credit score is or what negative marks are on their credit report. Every American is entitled to a free copy of their credit report from all three major credit bureaus.

You can request your free credit reports here.

Step 2: Clear Any Mistakes

Now that you have your credit report, look through it to see what is negatively impacting your credit score (also called a derogatory mark). They could be things like late payments, an account in collections, or defaulting on a loan. Some of these might be legitimate, and we will discuss how to deal with those in a moment, but right now we are looking for anything that might be a mistake.

If you find an error, you will need to send a letter to the creditor letting them know of the mistake. The FTC provides a free letter template for filing this dispute.

There are other companies that provide digital tools to help you identify and dispute errors on your report.

Step 3: Settle What You Can

Once we have cleared all the errors from your report, you should focus on resolving what you can. There is a technique called “pay for delete.” Essentially, you call the collection agency holding the debt and ask them to remove the derogatory mark once you settle the debt. Not all agencies will do this as the legality of doing so is somewhat questionable.

Regardless of if you choose to try and negotiate a “pay for delete” deal, you should try and settle whatever debts you can, as that will always help your credit score.

Step 4: Prioritize Card Repayment For Utilization

One of the factors considered in your credit score is something called “credit utilization.” It is the amount of credit you have used in relation to your total combined credit limit. For the sake of simple math, pretend you have a credit line of $1,000. You spend $500 of it. You have utilized 50% of your credit ($500/$1000).

A general rule of thumb is to try to keep your credit utilization under 30%. The lower, the better, as it is a proxy of how well you are handling your debt.

To help improve your credit score, look for the credit card with the highest utilization score and pay that down. That will be a card that is maxed out. A card with a $100 limit and $99 spent will have a credit utilization of 99%. A card with a $1,000 limit and $99 spend will have a credit utilization of 9%. In this step, we’re looking for cheap and quick fix. This is different from a strategy to get out of debt; if that is your goal target the credit account with the highest interest rate.

Step 5: Automate Bill Payment

The single best thing you can do for your credit is to consistently pay bills on time and in full. Sometimes we fail to pay on time, even when we could, simply because we’re human and we forget. Remove the option to forget and enroll in automatic payments.

Bill pay is so valuable, that many institutions will provide a discount just for enrolling. Check your insurance provider, cell carrier, and financial institution to see what discounts might be available.

Step 6: Keep Accounts Open

Another heavily weighted variable in your credit score is the length of an account. Some people will advise cancelling your credit card when it gets paid of in order to remove temptation. If you feel like you need that, then certainly do it, however you will be removing an old line of credit. Consider cutting up the card but keeping the account open.

Step 7: Automate Credit Building

Remember, credit is built by successfully paying off debts on time. A simple way to ensure that it happens is to put small, recurring payments on a card and then have it automatically paid off in full each month. For example, put your water bill on automatic pay. Have that be the only bill on this credit card and set the card up to be paid in full every month.

Step 8: Become An Authorized User

Your score can benefit by becoming an authorized user on an account of someone who already has a great credit score. Since the time an account has been open is a factor, you might want to look to your parents or grandparents. Do not get a physical card or use this line of credit for purchases — you don’t need it. You just want your name on the account so that you can benefit from their good behavior.

Step 9: Get Rent Payments Counted

Not all bills are reported. For example, your rent payments don’t help you build credit, even though that is likely your most expensive monthly bill. There are some services out there that will help make sure you rent helps to build your credit.

These services work by either contacting your landlord, or by serving as a middle-man in making your rent payments (you cut them a check, then they pay your landlord). You’ll probably have to pay a monthly fee for this service, but it could be worth it for the boost in your credit score.

Step 10: Consider New Products

Another product you might want to consider enrolling in is Experian’s “Boost.” This feature helps you to get credit for your phone and utility bills.

Step 11: Don’t Open New Accounts

There are two issues to be aware of when it comes to opening new accounts.

First, applying for the account usually requires a credit inquiry. There are two types of checks (or pulls); hard and soft. Soft pulls are often done for things like a background check and don’t impact your credit score. Hard pulls are done when you apply for a line of credit (like a car loan) and they do lower your credit score anywhere from 5 to 20 points.

Second, opening several new accounts rapidly shows that you are looking to get a lot of credit, which can be interpreted as having financial difficulties.

Conclusion

Fixing your credit score isn’t hard, but it does require you to consistently follow some basic rules: know your scores, pay on time and in full, get credit for everything, and then continue credit monitoring. Repeating these steps raise your credit.

 

SOURCES:

https://blog.kasasa.com/2019/06/11-steps-to-improving-your-credit-score/

https://blog.kasasa.com/2018/07/how-does-my-credit-score-affect-my-car-loan/

https://www.annualcreditreport.com/index.action

https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report

https://www.nerdwallet.com/blog/finance/credit-report-rent-payments-incorporated/

https://www.experian.com/consumer-products/credit-score-boost-a.html

 

6 MISTAKES PEOPLE MAKE IN THEIR 20S AND HOW TO FIX THEM

On By mutualcuIn College Tips, Credit score, Financial Lessons, Uncategorized, Youth SavingsLeave a comment

Like many people, you may have blown through your 20s making financial decisions that served you well in the moment, but may not have been particularly responsible. 20s and 30s Dinner out several times a week, credit card bills you barely looked at and luxury cars way beyond your budget—life was practically a party!   

But now, the party’s over. You’ve woken up in your 30s and realized that all that overspending is going to cost you big—and it’s going to cost for years to come. 

Luckily, there’s hope. It’s not too late to fix the financial mistakes we all make when we’re young and blissfully ignorant. 

Here are six of the most common mistakes people make in their 20s and how to fix them: 

1.) The mistake: Racking up credit card debt 

Maybe you were broke while in college, but desperate for a good time, so you swiped your way through vacations and nights out on the town. Or maybe you knew you were falling into the debt trap to cover student-related needs on a shoestring budget. Unfortunately, it didn’t just go away like you’d hoped. 

The fix: Stop using your credit cards 

It’s time to be an adult and own up to your mistakes. Learn how to say no to impulsive purchases and to live within your means. Create a budget to help monitor and track your discretionary spending instead of mindlessly plowing through your paycheck each month. Stop swiping your credit cards and stick to debit or cash only. Don’t let those credit card bills get any higher! 

2.) The mistake: Ignoring your credit score 

Aside from being the gateway to endless spending, aggressive credit card balances have probably handicapped your credit score, making it difficult or impossible to obtain a personal loan. A poor score will also burden you with an unfavorable interest rate for the loans you do qualify for. And that means you’ll be paying off the mistakes of your 20s for years to come. 

The fix: Know your score and pay down your credit card debt 

It’s never too late to fix a credit score. Begin by monitoring your score. You can order a complimentary credit report once a year from each of the three major credit agencies at annualcreditreport.com. You can also check out your score on sites like CreditKarma.com and Bankrate.com. This will give you an idea of what you’re working with as you work on climbing out of financial hardship. 

Next, work on paying off credit card debt instead of only making the minimum payments each month. Look through your credit card bills and crunch some numbers until you know exactly how high your credit card debt really is. Then, choose one bill to pay down first and begin making the maximum payment your budget will allow. Once you’ve paid it off, divert all those funds onto the next bill until it’s gone and repeat until you have no more debt. Paying down your debt and minimizing the utilization rate on your credit cards will greatly improve your score. 

3.) The mistake: Skipping student loan bills

When you’re facing a debt in the tens of thousands of dollars while earning an entry-level salary, it’s tempting to just pretend it doesn’t exist. Unfortunately, though, that’s the worst thing you can do for your loan and your credit.

The fix: Work it into your budget

Call your lender to work out a more feasible payment plan. You can also check if you qualify for a student loan forgiveness program. Most importantly, make your student loan payments a part of your debt payment plan so you never miss a payment.

4.) The mistake: Neglecting your retirement

Planning for your decades-away retirement may be one of the last things on your list. However, starting to fund your retirement later in the game means missing out on years of compound interest gains.

The fix: Think of it as a fixed expense

Don’t think of retirement savings as an extra; think of it as a necessary, fixed expense that belongs in your budget like your rent and phone bill. Work with the most you can afford and max out your contributions to an IRA or your company’s 401(k) plan.

5.) The mistake: Not having an emergency fund

Life’s great—who needs to think about emergencies? Unfortunately, you do. Scrambling for funds to pay for a large medical expense or to live off of during an unexpected layoff can be a nightmare. Turning toward credit cards to help you get through a rough time can also be the beginning of a debt cycle whose effects are felt for years to come.

The fix: Start small

Experts recommend socking away 3-6 months’ worth of living expenses, but if that’s just not possible for you, start small. Work with whatever you can to make monthly contributions to an emergency fund. Set up an automatic monthly transfer so you never forget. It’s best to keep your emergency money in an account that offers an attractive earnings rate but allows you to withdraw funds without paying a penalty. [Credit union’s Flex Certificates and Savings Accounts are both good choices. Call, click or stop by to speak to a MSRP about setting yours up today.]

6.) The mistake: Not creating financial goals

It’s understandable not to have your entire life planned out yet, but it’s important to set some financial goals.

The fix: Create goals now

Take some time to set some financial goals. Do you want to buy a house within the next decade? Do you dream of opening a business? Are you hoping to retire at 55? Having a concrete goal in mind will help you stick to your budget and manage your money responsibly.

Messed up while in your 20s? It’s not too late to get your finances on track! Follow our tips for a financially sound future.

Your Turn: How did you fix the financial mistakes of your 20s? Let us know in the comments!

 

SOURCES:

https://money.usnews.com/money/blogs/my-money/articles/2018-10-25/how-to-recover-from-financial-mistakes-made-in-your-20s

https://www.thebalance.com/how-to-fix-money-mistakes-in-your-twenties-2385529

https://www.mybanktracker.com/news/fix-financial-mistakes

Your Credit Score: The (Other) Key To Your New Home

On By mutualcuIn Credit score, Financial Lessons, Saving MoneyLeave a comment
     Each potential home buyer dreams of the day they’ll finally get the symbol of independence, security and prosperity: the key to the front door of their new home. Before you get that one, though, there’s another key you need to craft. Your credit score, a numerical representation of your credit history as an indicator of your ability to pay your bills, will determine a lot about your housing situation, from how much house you can afford to the interest rates you’ll receive.
     Your credit score is determined by three different credit monitoring agencies: TransUnion, Equifax and Experian. Each has its own method for determining which events are most important to your score, so your number may vary depending upon the agency. Paying debts off, making payments on time and using only a small percentage of your available credit make your score go up. Missing payments, opening many credit accounts or carrying a significant balance of debt from month-to-month will decrease your score.
     Less important than the actual score is your score grouping. Lenders tend to lump borrowers into four categories: sub-prime, near-prime, prime and super-prime. Different lenders break these categories down at different score points, but the terminology and treatment are fairly universal. Super-prime lenders get the lowest rates, because they represent the lowest level of risk for the lender. Sub-prime and near-prime borrowers will have a lower cap for the size of the loan they can take and will generally pay a higher interest rate. If you’re working on raising a low credit score, a good target number is 640. This will generally put you in the prime group and ensure you don’t have to pay extra on your mortgage because of credit. If you’re building good credit, 740 is generally the lowest super-prime score, which will give you access to some of the best rates and terms available.
     If you’re going house-hunting in the next year, there are three steps you can take right now to improve the terms of your mortgage. Check your credit score, take steps to raise it and manage your loan in other ways. Taking these three steps will put you on the fast track to affordable home ownership!
Check your credit score
     You can check your credit report for free once a year at annualcreditreport.com. Note, though, that there may be a nominal fee to receive your actual score along with the report. There are many similar websites, but many of them will charge you. Annualcreditreport.com is the site created by the three credit companies to provide consumers with transparent access to their financial information.
If your score isn’t at the level you think it should be, there may be errors or inaccuracies that are dragging down your good name. Look for accounts you don’t recognize or balances that are not up-to-date. You may even catch an identity thief red-handed! The report comes with instructions for challenging any item. In most cases, you can leave a note for lenders in the file explaining the item under dispute.
Boost your credit score!
     There are no simple tricks to bump your credit score in advance of a mortgage. You need to develop a 6- to 12-month plan to boost your credit score before getting your mortgage by making sound financial decisions. Demonstrate to lenders that you can use credit responsibly, and your score will increase.
     One of the biggest drags on a credit score is percentage of utilized debt. If you’re carrying a balance on credit cards, this tells lenders that you may be using credit to pay for your day-to-day expenses, and that lending you more money would not be a smart move for them. Getting balances to zero should be goal number one!
     Also, take care that you don’t make any major purchases using credit right before you attempt to qualify for a mortgage. Even if you’re expecting a major windfall, such as an overtime check or a tax refund, creditors don’t see that on your report. Hold off until you have the cash in hand before you splurge on a new TV or car!
     If it’s a lack of credit history that’s hurting your score, Mutual Credit Union offers “credit builder” loans. These involve borrowing a small amount of money and making regular installment payments on it.
What else?
     If your credit score is low, and there’s nothing you can do about it, you may need to take other steps to get a better position on a loan. You might try boosting your down payment or shopping for less expensive houses, so you’re borrowing a smaller sum of money. A co-signer, another responsible party willing to take on the risk of the loan, can also improve your terms. If your debt is a serious problem, perhaps moving into a new house isn’t a good short-term priority. Focus instead on paying off debt and saving up for a down payment. This can keep you from getting stuck with a house payment you can’t afford before you’re ready for it.