School is in Session: Get Your Credit House in Order

Every financial step we take leads to good or bad financial marks. Ignoring the topic of credit education can block us from achieving our personal goals such as applying for a critical loan, housing or pursuing an employment opportunity. Credit Education Month offers an ideal time to slow down long enough to check accounts for identity fraud and explore methods to analyze debt. Student loans, credit cards, living paycheck to paycheck, and experiencing other financial emergencies such as job loss can entangle Americans in financial binds that can greatly impact their credit history. Financial topics can feel overwhelming to unpack, but developing comfort to discussing them can improve our future, relationships, and business endeavors. 

Credit Scores Can Open or Close Doors

Equifax (https://www.equifax.com), a consumer credit reporting agency, noted that “a credit score is a three-digit number, typically between 300 and 850, which is calculated based on information in your credit history. It is a simple, numeric expression of your creditworthiness.”

Equifax Inc, Experian and TransUnion (the “Big Three”) provide comprehensive financial data and services that intertwine with our creditworthiness. Consumers can set up alerts and key changes to Equifax, Experian and TransUnion credit files, in addition to obtaining credit reports.

According to Experian, 90 percent of top lenders use FICO® Scores. 

“A FICO score is a type of credit score developed by the Fair Isaac Corporation. While this is a commonly used score when it comes to lending decisions, your FICO score is not the only credit score you have. You may also have multiple FICO scores because there are multiple iterations of this credit score used for different purposes. For example, there are versions designed specifically for home and car loans,” Citi added.

Note educational financial resources, including the Federal Deposit Insurance Corporation. 

“Understanding your rights helps you know how to protect your credit history,” according to the Federal Deposit Insurance Corporation (FDIC).

 FDIC is an  independent agency created by Congress. According to the FDIC, the it insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection. It makes large and complex financial institutions resolvable and manages receiverships.

“In the 1920s and early 1930s, a rise in bank failures created a national crisis, wiping out many Americans’ savings. Since FDIC insurance began in 1934, no depositor has lost a single penny of insured funds due to bank failure,” according to the FDIC’s website.

The FDIC provides educational tools for individuals of all ages, including teacher resources (“Know Your Risk: Spending, Saving, and Protecting Your Money https://ymiclassroom.com/lesson-plans/knowyourrisk)” designed for students who are in grades nine to 12. Games that adults can play about everyday financial topics are available via https://playmoneysmart.fdic.gov/games to increase knowledge about money.

Understand Your Debt-to-Income Ratio (DTI)

A part of healing our financial health is facing the reality of our debts. However, consumers are sometimes unaware of critical terms such as Debt-to-Income Ratio. Wells Fargo points out that “when you apply for credit, lenders evaluate your DTI to help determine the risk associated with you taking on another payment. Use the information below to calculate your own debt-to-income ratio and understand what it means to lenders.”

Explore Wells Fargo’s DTI calculator for educational purposes, if you would like to further educate yourself about your personal DTI (https://www.wellsfargo.com/goals-credit/debt-to-income-calculator).

Invest in Purchases Wisely

Do not create unnecessary debt while trying to “keep up with the Joneses.” Ask yourself if buying a new luxury handbag on a credit card, upgrading a car for show, moving into a home that exceeds your practical needs, or living a lifestyle that adds financial pressure is worth it. Even if your finances improve, maintaining a more expensive lifestyle creates more debt. For example, moving into a large home with bells and whistles can lead to greater repairs and time-consuming upkeep. Signing up for a new car payment can increase your DTI. Think before you leap into stressful waters.

Develop strategies to prepare for emergencies, attack debt, and reach your financial goals faster.`

Not everyone grew up having access to financial knowledge, but it is never too late to embrace financial education. For example, Dave Ramsey, a financial expert, national bestselling author, and founder and CEO of Ramsey Solutions, breaks down 7 baby steps to help individuals take control of their money(https://www.ramseysolutions.com/dave-ramsey-7-baby-steps).

“It’s time to take control—and the first step is saving $1,000 for a starter emergency fund,” according to the plan.