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What’s next?
Last week was the first part of this two part series, where we covered the difference between good and bad debt and how to evaluate your spending. If you haven’t read the first part of this series, check it out here. This week we will cover how to positively change your credit score, begin saving, and creating an “emergency fund.”
What is a Credit Score?
In layman’s terms, a credit score is how lenders evaluate how likely you are to pay back a loan on time. Credit scores use a scoring model with information like your bill-paying history, current unpaid debt, the number and type of loan accounts you have, how long you have had your loan accounts open, how much available credit you are using, new applications for credit, and whether you have had a debt sent to collection, a foreclosure, or a bankruptcy, and how long ago any of those occurred. You can check your credit report through various services and most traditional banks offer you your credit score for free. Credit scores can range from 300 to 850 and there are varying opinions on what is considered a “good” credit score. According to Equifax, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
Why is a good credit score important?
Here’s what a good credit score can do for you:
Increases your chance to be approved for a loan or new line of credit
Increases your ability to raise your credit limit
Helps you get a loan at a lower interest rate
Gives you more leverage in negotiations
Gives you easier (and often cheaper) approval for rental homes and apartments
Improves your car insurance and cell phone contracts
Helps you avoid security deposits on certain things like utilities
As the urban philosopher Jay Z once said, “You wanna know what’s more important than throwin’ away money at a strip club? Credit.”
How to Improve your Credit Score
There are various ways to improve your credit score, but to start you should look at your credit report. There are three major credit reporting companies: Equifax, Experian, and TransUnion. These credit reports will include a list of things hurting your credit score - this will give you an idea on how to improve your credit right away. We’ll list a few general ways to improve your credit below.
Get a handle on your bill payments. Always make sure that you pay your bills on time - many payment systems include an “auto pay” option, which can help ensure you don’t accidentally miss any payments. This will help your credit score over time as you continue to consistently pay your bills on time.
Aim to use less than 30% of your available credit. To calculate this, you can look at your available credit (which is usually given to you by your credit cards) and ensure when your statements are finalized at the end of the month that you use only 30% or less of the available credit and you pay the bill off completely. This is a good habit to get into, not only because it improves your credit score, but can also lead to lower spending.
Limit your hard credit inquiries. This means limiting the number of times you apply for things that require someone to pull your credit report (e.g., apartment rental, credit card application, auto loan application, etc.).
Keep old accounts open and pay off any delinquencies you may have. A delinquency is old unpaid debt or unpaid collections. The age of old accounts attributes positively to credit scores, so keeping old accounts open, even if you are minimally using them, can positively contribute to your credit score.
Lastly, you can consolidate your debts into a single debt account to continually pay off your debts and these services can help you keep track of your debts!
I am by no means an expert in this field, but there is plenty of information online on how to raise your credit score. I firmly believe you do not need to pay for a service that will increase your credit score and if you follow these tips, you can increase your credit score on your own! It will take time, and at points will be frustrating, but stick with it!
Saving an Emergency Fund
An emergency fund is a sum of money held strictly for emergencies, like you losing your job, car breaking down and needing repairs, and other unforeseen expenses. There is a lot of debate between financial gurus on how much you should have in your safety fund, but the general consensus is having 3 to 6 months worth of living expenses in a savings account or a high-yield savings account. This is completely up to your risk tolerance. If you are just getting started, your risk tolerance is low, or you have uncertain employment, you may be more comfortable having 6 months worth of expenses in your fund.
Some more advanced methods for emergency funds include investing your emergency fund in various fairly liquid accounts. Generally if you lose your job or your car breaks down you have a couple days to make a payment or you can put charges on your credit card so you have a couple days or even up to a month to pay off your credit card (just remember the 30% rule discussed above). There are various methods you can pay off your credit card, with many including borrowing against your assets. There are companies like BlockFi and Celsius which allow you to borrow against your crypto assets to get a loan for a generally low interest rate. There are also various stock brokerage accounts, such as Charles Schwab, which allow you to borrow against your stock portfolio at a low interest rate. There are other ways to find money or minimize spending or increase earnings depending on the situations, but it all comes down to your risk tolerance and how you want to handle your own finances. Remember, it is called personal finance because it is up to you and how you want to handle it! What works for you, may not work for everyone but there is a solution out there for everyone.
If you’re new to stock investing, check out our introduction to stock investing series:
If you’re new to real estate investing, check out our real estate investing series:
Have a great rest of your week!
Brandon & Dan
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Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.