FICO Has Something to Say About You

You have all heard me talk about FICO scores and how important they are to your financial health. I’m going to walk you through a scenario so you can see how FICO affects you.

Let’s say that you are going to apply for credit.  You may be thinking of buying or leasing a new car, opening up another credit card, purchasing or refinancing a new home.  Whatever it is that you’re thinking about doing, it will involve the potential creditor accessing your credit report and score. This will help them decide if you are creditworthy and what terms you will be offered.

When the creditor prints your credit report, they will be looking at your credit from a specific date.  They’ll see who you have credit with, your credit limit, how much you owe, how long you have had your accounts, your history of paying back your debts, and whether or not there is derogatory / negative information with an account.  All this information is put into a formula to determine your credit score. 

The credit score that creditors use was developed by Fair Isaac and Company (FICO) to determine whether you are a good credit risk and what the likelihood is that you will pay the credit back on time.  The higher your credit score, the less risky you appear to a potential creditor.  FICO scores go from 300 to 850 – with 850 being the best. 

This is one of the major factors in determining your creditworthiness.  Creditors have guidelines that determine if you can be considered for a specific program.  For mortgages, your credit score has to be at least in the mid-range to even be considered for a mortgage program.  If your score is one point below the minimum score, I cannot offer you that mortgage program.  Auto loans have similar guidelines. When you see car financing commercials that offer people 0% financing for “well qualified borrowers,” they mean that you have to have a particular minimum credit score to be seen as “well qualified.”

So what happens if you don’t qualify for the best mortgage program or that 0% car financing?  You may still be approved, but you will be offered lesser terms.  Those less than favorable terms will mean that you will be paying more money out of your pocket.  A $250,000 mortgage at 8% instead of 6% will cost you an additional $335.00 per month. 

Bottom line: keep your credit score as high as possible, by doing everything possible from your own. This includes making sure your payments reach your creditors before the due date and checking your credit report regularly for suspicious activity.

Married Finances: Should Two Become One?

Weddings are an emotional celebration. We love the idea of a bride and groom starting a new life together. We use words like “two becoming one” or “sharing your lives as one,” meaning that everything will be shared as though the couple are no longer individuals. I believe this puts a lot of unnecessary sentimental pressure on a couple to share all their finances even though it’s not always necessary, or even wise, to do so for every single account or property.

So, how do you merge two separate financial lives?  There are many successful ways to do this.  Some couples keep their individual incomes and expenses separate by having separate bank accounts, credit cards etc. Then, they have a joint expense account for their household bills that they each put money into. Sharing the joint account can be as simple as having each person responsible for different bills, or figuring out the bill totals and having each put in their half. Some people base the joint account total on a salary percentage (this works great when one spouse earns more money that the other). And, of course, some people merge everything and all accounts are joint.

You need to think about what type of financial people you are.  Here are 3 questions to think about that will help you decide (and could possibly save some financial squabbles):

1. Are you a saver and your spouse a spender?  Having one person be the fall back for financial emergencies can be challenging financially and to the marriage.
2.  Are you both spenders? What will happen when there are no reserves for emergencies?
3.   How do you each handle bill payment? Are all your bills paid on time?  Do you have bills that have slipped through the cracks? 

Answers to these questions can be tricky, but worth the discomfort.  Proactive thought can be a financial life saver for your future.  Double check your answers by looking at your account statements and credit reports. You may not be as good at finances as you think you are, or you might be better than you thought. Discuss your habits with each other, as well as any outstanding issues that could affect you both.

I am a firm believer that you both should participle in your finances. You have joint goals in your future, so you should do the financial planning for this together as well. Don’t let the responsibility fall to one person.  If something were to happen to the “responsible” one, then the other party would be left completely in the dark, not knowing anything about the accounts or how to deal with them. I have seen many situations like this. It may seem kind, or convenient, to handle the money if your partner doesn’t know how, but it’s not.

Whichever way you choose to handle your finances as a married couple, make sure it’s a mutual decision based on real knowledge of your habits and goals.