Employer-sponsored retirement accounts began as do-it-yourself savings plans. You decided if you wanted to save, if so how much — and how to invest that money. Unfortunately, many participants were lost in the process. Rather than figure it out, they just sat it out.
In recent weeks, high profile Republican and House Speaker Paul Ryan has become an outspoken critic of the Department of Labor’s fiduciary rule.
Boomers are packing up their McMansions and making a lifestyle change. Moving from their houses with room for the kids and making room for their RV. In some cases, walk-in closets are being replaced with a drive-through home.
It came in the mail and you just had to stare at it for a while. Your first real credit card. Not a debit card or one of those pre-paid or deposit-secured cards. The real thing. Shiny, new and ready for a real swiping.
Transunion, the credit reporting agency, estimates that the average person carries about $5,000 in credit card debt. That’s a big number, but it is easy to fall in a deep, dark financial hole if you’re not careful.
Last week, the Dave Ramsey conflict of interest issue raised a few concerns that investors should be reminded of. First, you can’t assume an expert’s advice is always right. Second, you must know how an advisor is paid. And third, it’s important to remember that, by and large, Wall Street is a rigged game.
Let’s say you wanted to snub your nose at the Corporate Global Machine and have vowed to live a noble life, spiritually guided and financially modest. Swearing off debt. Denouncing materialism. But you still need a job, right? You’ll probably need a good credit score to qualify. And yes, you want to live a minimalist life, but you’ve got have cable. I mean, if for nothing more than the Discovery Channel. Credit check. Want to rent a humble casa? Sign here and we’ll see if you qualify.
A few years ago, getting a mortgage loan was a humbling task. You’d wait in the lobby of a bank for a loan officer to usher you to a desk where you’d plead your worthiness. It didn’t feel like banks needed or even wanted your business; it seemed more like they were doing you a favor by even considering you for a loan.
And then came the great online equalizer, websites empowering consumers to shop mortgage rates, terms and lenders, and fire off their applications. Gone were the days of hat-in-hand borrowing — and, theoretically at least, discrimination. If they can’t see you, lenders can’t discriminate, right?
Objective financial advice is hard to find. So many “experts” have hidden agendas and profit motives. Now Dave Ramsey, who championed ‘envelope budgeting’ and ‘biblically based’ common sense personal finance, has fallen down the rabbit hole of conflict of interest. Continue reading “Dave Ramsey’s Conflict of Interest Corrupts His Financial Advice”
There’s just no denying it. By now, it’s clear to all of us that our modern lives are being monitored. What we do, say and buy; where we live — it’s all out there.
Our financial lives are of particular interest to Big Data. Especially your credit score. It’s one number that invisibly follows you everywhere, impacting your life in more ways than you may imagine. It is the ultimate grade. Here’s how it works and why it matters.
Who is keeping score?
The three big players in the credit score business are TransUnion, Equifax and Experian. They make their money selling your credit information, history and score to banks, businesses and even employers. Your credit report details your payment history, the amount of debt you’ve piled up — even where you work and live. Plus, if you’ve ever been sued, arrested or filed for bankruptcy.
They compile all of this information and generate a credit score — basically a grade — of how financially reliable you are. The higher the score, the better. Each credit bureau develops their own score, but the information is also compiled and interpreted by Fair Isaac Corp., which generates its own “FICO” score. Generally, that’s the one most creditors use.
Why should I care about my credit score?
Your credit score plays a big part in your life, even if you’ve sworn off debt. But you haven’t have you? Well, if you are looking to rent an apartment, buy a house, purchase insurance or get a new car, your credit score is in play.
Want a credit card? Score! Want to hook up to cable or satellite TV? Score! Even if you’re trying to get a job, some potential employers will have you sign a disclosure so that they can access your score. For better or worse, it’s a number that is being stamped on your life as a grade for your character and dependability.
What’s a good credit score? What’s a bad score?
Think of 7 as your lucky number. Generally, a credit score of 700 or more is considered favorable. Of course, things are never that simple. Each credit agency has its own score range with minimal variations — and then there’s an alternative scoring system called VantageScore. Developed by the Big Three agencies, it ranges from 150 to 990, just to confuse things a bit.
But the scores most reported, including the FICO score, commonly range from a low of 300 to a high of 850. Experian says that the average American has a credit score of 675, so at 700+ you’d rank above average.
Here’s how the curve is graded:
- Anything under 640 is considered a poor score — You’re likely to be considered a high-risk borrower and that means your credit card interest rates will be much higher than average and you won’t qualify for a typical loan.
- 641-680 is graded ‘fair’ — You may qualify for that loan or credit card, but your rate will be a higher than borrowers with a better credit rating.
- A credit score of 681-720 is good — You’re in the pocket. With a score in this range you’ll get plenty of credit card offers, qualify for loans with good rates and pay lower insurance premiums.
- 720 to 850 means you’re buying lunch — At this level you get the best rates on credit cards, car loans and home mortgages. 720 is the threshold to what is deemed a “perfect” score, so you don’t have to try to attain a lofty perch at 850, because no one will be handing out awards or additional perks.
What affects my credit score?
The “how and why” of your credit score doesn’t have to be a mystery. There are tangible reasons why your score changes, and specific steps that can be taken to improve your credit history and ultimately increase your credit score. Let’s look at what most impacts your credit score, according to the source itself: FICO.
- Credit history (35%) – Timely repayment of borrowed money is the most important factor in your credit report, impacting 35% of your FICO score. This includes credit cards, retail accounts (like department store credit cards), loans and finance company accounts. Late payments can impact your score for up to seven years. And your credit history also includes bankruptcies, foreclosures, lawsuits and other public record and collection items. Legal action can impact your score for 7-10 years, though the impact slowly lessens with time.
- Amounts owed (30%) — Carrying a large debt load can lower your score, even if you make payments on time. Having used a large portion of your available credit can account for 30% of your credit score. FICO also considers remaining balances due, as well as the number and types of credit accounts you have.
- Length of credit history (15%) — The longer you’ve managed credit, the better. Having a brief credit history can lower your score.
- Types of credit (10%) — This is not a key factor, accounting for only 10% of your FICO score, but still a consideration. Having a good mix of credit: retail accounts, credit cards, installment loans and a mortgage, are all considered. For example, not having a credit card can actually lower your score.
- New credit (10%) — FICO believes that having several new credit accounts pop up in your report within a short period of time means you represent a greater lending risk, especially if you have a short credit history.
Tips to improving your credit score
So there are a lot of moving parts that make up your credit score. I know my head is hurting a little bit just writing about it. But here’s the good part. There are some fairly simple things you can do to improve your score:
- Start early — You like this one, don’t you? It’s true, you have to begin building your credit history early, so get a credit card if you don’t have one.
- Use no more than half of your available credit –- For example, if your Visa card has a $1000 credit limit, train yourself to use just half — or less — of that available credit. By thinking of your card as maxing out at $500 instead of $1000, and disciplining yourself to spend less than the credit limit, you will lower your “balance-to-limit” ratio, which can help raise your score. This only applies to revolving consumer accounts, not to your mortgage or installment loans.
- Use payment reminders –- Since making timely payments is the greatest factor in your credit score, you may want to make the process as painless as possible. Using payment reminders or automatic debit payments can help, but remember to set the payments for an amount greater than simply the minimum required.
- Pay off accounts but don’t close them — Once you pay off a credit card that you think would be best retired for good, don’t use it again — but don’t close the account, either. Keeping it open will maintain your available credit, and by not using that credit you’ll enhance your balance-to-limit ratio.
Know your credit score
You can’t fix what you don’t know, so know your number. First, order a free credit report. Each of the Big Three bureaus is mandated by law through the Fair Credit Reporting Act (FCRA) to provide you a free report once a year. You can order all three reports at once or, by rotating your requests among each one, you can receive a fresh credit report every four months. Yessir, now that’s good, clean fun!
There is only one official site for obtaining your free report and it is annualcreditreport.com. Watch out for bogus sites claiming to be the official “free credit report” website. You can also call (877) 322-8228 to order a free report.
Once you have your credit report in hand, you’ll want to check it for accuracy. Make sure your address and other personal information is correct and then review each credit account, looking for inaccurate amounts owed and verify that each credit account is actually yours.
If you find errors, you’ll need to contact the individual credit agency issuing the report to begin the correction process. You can find help on correcting credit report errors, including a sample dispute letter, at the Federal Trade Commission website.
When you’re diving into the pages of your credit report, you may start scrambling to find your credit score. Let’s hope you stuck with me this far. You see, while your credit report is free, your credit score is not. You have to buy your FICO score for about $20 from myfico.com.
Some credit cards also provide your FICO score to you free, as a cardholder benefit.
And there are services that offer to estimate your credit score — some saying they will provide these “educational scores” for free — but it’s probably best to stick with the real thing.
The end game
Now that you know just how critical your credit score is to your financial life, you’re empowered to nurture your number. The keys are to know your score — what it means and how to improve it. In this case, Big Data, along with a big number, can help you live large.
I was having lunch with a buddy I hadn’t seen in years. After catching up on ‘whatever happened to old what’s his name?’ the conversation naturally turned to the stock market, investing in general and retirement planning.
Hey, if you take a CFP to lunch—and you’re buying—why not get a little free advice?
He was thinking about changing financial advisors. Things were OK—he felt like the firm he was currently with did a good enough job, but they were raising their annual fees and frankly he wondered if he was still getting a good deal.
The firm he’s currently with is known for it’s home cooking: selling their own brand of under-performing mutual funds. In fact, about five years ago some employees sued the firm for stuffing it’s own 401(k) with mutual funds run by the company’s investment arm. That’s when you know a financial advisory firm has a problem: when its advisors sue it for doing a lousy job of running its own retirement plan.
I told my friend, “You should consider a robo-advisor.”
He looked at me as if I had just told him to get financial advice from a Star Wars character.
“What’s a robo-advisor?”
He almost looked like he was in pain.
So I told him. Robo-advisors are computer programs that put together an investment mix and monitor and adjust it automatically.
It’s doing what a financial advisor says he will do—but rarely actually does.
Here’s the thing. You hire a financial advisor and you think, “OK, he’ll keep an eye on things and make sure I stay on track for retirement.” But most of the time, advisors will steer you to some “model allocation program” made up of mutual funds or exchange-traded funds and charge you something along the line of a 1% management fee. And that’s in addition to the expenses built in to the funds or ETFs.
These programs are called “managed accounts” by the big investment and brokerage firms.
And that’s exactly what a robo-advisor is. A managed allocation program—without the 1% additional fee. Most of the leading robo-advisors—like Vanguard’s Personal Advisor Services or Betterment—charge 0.30% or less. And their mutual funds and ETFs have lower internal expenses than the average (or worse) mutual funds a lot of financial advisors recommend.
Vanguard claims the management fee difference alone can add over $90,000 of value to a portfolio over 20 years. Human financial advisors worry that robo-advisors will cut into their profits. And they should.
So my buddy took all this in and frankly seemed totally unimpressed. In fact, he sent me a text later asking about some investment plan that he had found online. A do-it-yourself allocation of mutual funds that he was apparently considering.
Maybe he’ll try to manage his own investments, or even stay with his current advisory firm. It doesn’t seem likely that he’ll go with the low-cost, machine-made investment option.
Perhaps I didn’t do a very good job of explaining robo-advisors to him.
So maybe he’ll offer to buy me lunch again.