What is in a Credit Report?

There is a lot of mystery surrounding credit reports and the scores that are generated from the report. I think that bankers and other financial providers try to keep the truth a mystery to aid in their power trip when people come to apply for a loan. Why is it that most people find themselves feeling like they are headed to see wizard of Oz when they go to see the banker for a loan? The truth is that most loan officers are blowing smoke and using your misconceptions to leverage their salesmanship. Let’s pull the curtain back and give you some insight to what really makes up a credit report.

The REAL free credit report link www.annualcreditreport.com

First things first, if you want to see your report the only real free web site that is sponsored by the government is listed above. You are entitled to view your report annually for free – SO GO DO IT!

There are three credit bureau’s that gather data and generate reports. They are:

Trans Union, Equifax and Experian

Essentially these agencies are gathering the same data but to maintain accuracy and to avoid potential conflicts that could arrise from one entity, there are three companies. You can pull your report from each one of the agencies annually for free. So if you are considering paying a third party entity to monitor your credit and send you reports every month, don’t do it any more. You can pull a report once every 4 months for free your self! Pull the Trans Union report in January, the Equifax report in April and the Experian report in August. Boom! You just saved a bundle of money and achieved the same thing that those “experts” are providing.

What makes up the report?

A credit report is made up of data that lenders report. If you have an open line of credit, installment loan, charge card (those in-store cards you can only use at that store), credit card, mortgage or student loan it is on your report. It also might include negative information such as judgments from the court, items sent to collections and accounts that are charged off by the lender.

What is not included on the report?

Accounts at your daily service providers are not included on your credit report unless they extend you credit or they have to send your account to a collection agency. Often people think that their insurance company, cell phone provider and utility services are listed on their report. They are not.

What is the difference between a credit score and a credit report?

Your credit score is an artifact of the information listed in the credit report. The credit score is calculated using a secret algorithm that is proprietary to a company called Fair Isaac, also known as FICO. We do know some basics of what goes into the calculation. By and large the most important thing to do is pay all credit obligations on time over many years. Different credit providers are given more weighting in the calculation depending on their importance in repayment. For example, a long on-time payment history on a mortgage is given more weight than good history with a charge card. Likewise, a late payment on a mortgage will hurt your score more than a late payment on a charge card. The amount of credit out standing relative to the limit of the account is also a factor. A rule of thumb is: Never use more than 30% of the max amount of an account to maintain the best score.

In the past, it did hurt your score to have multiple inquires for credit in a short amount of time. This really put a damper on folks being able to shop around for the best loan. Legislation several years ago changed this rule and now allows for consumers to apply to multiple lenders in a two week period when shopping for a mortgage or an auto loan and it only counts as one inquiry. Always compare lenders just like you would any other product!

There are many nuances to credit reports, too many to cover in one article! If you have specific questions or want more information, please feel free to contact me. A good understanding or credit reports will liberate you and help you maintain a better score. A good credit score is essential to succeed in your savings pilgrimage.

Consumer Driven Health Care

Suppose I told you that you could go out and buy something very  valuable that cost $20,000 for $75 a month and a one-time cost of $10. Would you go buy the new item? Absolutely. Would you go buy a new one of these items every year? Sure, it’s only a one-time cost of $10 and you are already paying the required $75 a month.

But let’s assume that sellers of these items are in business to make money (like most businesses are). Wouldn’t you suppose that these business people would try to find ways to make more money as time goes on? Maybe they will raise the monthly cost, or maybe the one-time fee. Or maybe they will do something even more sinister – raise the value of the item.

What is the significance of raising the value of the underlying product? Well, if you can’t or wont pay the $75 per month then you are not eligible for the deal. So now, if you want the item you will have to pay the full $20,000 cost. Suddenly the item seems far more unattainable.

The valuable  item I am referring to is health care. Millions of Americans pay their monthly insurance premium ($75 per month) and when they go to the doctor, simply pay their $10 co-pay. Most health care users never even stop to look at the dollar value of the service they received, if they did they might stop for a second to catch their breath and thank God that they have health insurance.

Insurance companies are in business to make money, a lot of it. In order to do this, they raise the premium cost every year, increase co-pay cost and yes even more sinister – they inauspiciously contribute to the rising value of health care.

As consumers we should be leery of any product that we purchase where the actual value is hidden in the fine print of a statement we receive 6 months after the fact. Think about those paycheck advance shops on every street corner. The mere fact that they are everywhere tells me that they are in business to make lots and lots of money. The truth of the matter is that they do. Why? Because the consumers that use them do not clearly see the actual cost of the service.

Our society has labeled paycheck advance shops as “Predatory” to consumers. How is the health care insurance industry any different?

The only way for us to put an end to the rising cost of health care is to clearly state the actual cost of the services being offered. Would you pay 50% interest for a 3 day advance on a check? NO WAY! You would say “I can wait!” Would you go to the clinic for the sniffles if you knew that it cost $500 just for the 15 minute exam? I wouldn’t! I would only go to the clinic when I absolutely needed to, I would go when the value of the service matched the value I was willing to pay.

Forbes Article on Consumer Driven Health Care

Purchasing health care should be no different than purchasing a new TV at the local electronics store. The value of the item matches the value I am willing to pay. If the TV is more expense than I want to spend then I forgo purchase of the item.

The good news is that there are products out there that promote this logic and will help you on your savings pilgrimage. High deductable health insurance policies offer low monthly premiums and the ability to contribute to a health savings account. This puts the power back in your hands. Health savings accounts offer significant tax advantages and will help you to be a conscious consumer. If you want more information on these types of accounts please contact me! 

Choosing Your Retirement Lifestyle

You might not believe me, but one of the most difficult decisions you will make after completing your savings pilgrimage is how to live in retirement. You will have spent the majority of your life on the path to a goal, financial independence - the ability to do what you want, when you want, for as long as you want. Ah, what a great feeling this will be… but what is it you want to do?

Right now if I were to retire I would want to play golf, drive fast cars, exercise for 3 hours a day and grill out for every meal. Will I want to do these same things in 40 years? Not likely. But I can make some basic decisions: Will I want to work part time in retirement or what about volunteering? Will I travel more or stay around town? Do I want to follow my fellow retiree’s to live in Florida or Arizona?

The answers to these questions will be vastly different for everyone and there will be unique questions for each person’s situation. Your answers might even change after 10 or 15 years. I strongly recommend sitting down with your significant other and think about your ideal retirement lifestyle at least once every 5 years. This is a great way to stay on the same page with your goals and you might even re-energize your savings pilgrimage.

Remember, any financial plan is a living, breathing document. As your financial situation changes so should your plan. As you reduce debt you should look for places where you can put that extra money to work. If you earn a raise at work, make new plans for the extra money.

Retirement is not the same for everyone, you may not want to fully retire or you may choose to spend more in retirement then you did while you were working. The idea behind retirement planning is that you will have accumulated the resources to be able to choose either option. If you don’t have a financial plan or would like a second opinion on your current plan, feel free to contact me!

Harnessing your Mental Spending

I am as guilty of it as anyone. I think to myself: “When I get my tax return I am going to spend it on a brand new (insert favorite item here).”

For some reason I find myself doing this time and time again. Fortunately, I typically don’t go spend that money before I have it, call it discipline or just the fact that I know better. For millions of people this is where their savings pilgrimage fails and in some cases where their debt habits take off.

It is so easy to spend the extra money you might have coming in before you actually receive it.  Our culture is truly based on instant gratification, after all that’s why the credit card was invented, have something now – pay for it later. Don’t become a victim to self rationalizing credit card spending. If you find yourself justifying credit card spending because '”I will pay it off as soon as I get that bonus”, put the item down and walk away. 

This is a great place to put in a plug for a tool that is near and dear to my heart: The Emergency Fund. If you are saying: “Andrew, the things I am using my credit card for are essential items that I cannot live without.” You need an emergency fund. I will not go so far as to say that credit cards are evil or that you should never have a credit card but if you do not have an emergency fund, you have no business using a credit card. 

If you do not have an Emergency Fund, drop what you are doing and call me to set up a time to put together a plan to get one. 402-938-6800

If you are embarking on a savings pilgrimage, the quickest way to failure is to start mentally spending the money you are saving. One of my secrets to saving success is to “spend” my savings by investing it in an account that is very difficult for me to reach. If I send my savings to a Roth IRA, 401(k), investment club or credit union CD; I spent it. At first it might seem like this tactic would not work but once the savings has left my easily accessible checking or savings account – it’s gone. It works because I can’t spend it again. 

What are some ways that you have harnessed your mental spending to succeed in your savings pilgrimage? I would love to hear your tactics!

When is it right to work with a financial advisor?

Finding the right financial advisor is one of the most important decisions you can make for both you and your money. Identifying a true professional who is honest and loyal is easier said than done. The best way to start your search is by asking 5 to 10 people you trust and respect who they use for financial advise.

Once you identify a few potential candidates you should set up a time to interview them. Ask these advisors questions like:

How are you compensated?

How do you handle conflicts of interest?

What is your investment philosophy?

These 3 questions cover the major issues that set advisors apart from each other. You want to build a relationship with an advisor where you can stay for the rest of your investing career. One of the worst things you can do is jump from advisor to advisor every couple of years.

A great advisor should be compensated directly from the client to ensure that the clients interests are always put first. This type of compensation structure enables the advisor to implement investment plans that can focus on buy and hold strategy for the long term.

Many “fee only” advisors require minimum account balances but many also offer consulting on an hourly basis. This is a way to get the professional advise you need while building your account to the level required for complete management.

Gallup Federal Credit Union now offers financial planning and investment advisory services. Please feel free to contact me to learn more about the services we have to offer!