Every April is National Financial Literacy Month. Having a broad understanding of financial literacy is important.
The lack of such knowledge when it comes to major financial decisions could result in negative consequences. The last thing you want to do is cost yourself more money, stay stuck in debt longer, or expose your personal information just due to a lack of knowledge.
Most financial literacy terms are evergreen topics, but it’s always good to use this time of year to refresh your memory or clear up misconceptions centered around your finances.
There’s a lot of varied information to be understood under the greater umbrella of credit knowledge, and your credit needs are going to vary depending on your personal situation.
However, with credit scores being so important to many aspects of one’s financial life, it’s important to understand a few key universals when it comes to credit.
What’s in Your Credit Scores
There are many credit scoring models out there, with FICO and Vantage score being among the most popular. You might look up a credit score and get one number online, but when you apply for a loan, the bank could end up with a different credit score.
While certain scoring models may weigh certain factors slightly more than others, they mostly consider the same major criteria.
Payment history is the most common major factor across all credit scoring models, so make regular, on-time payments to stay on top of this. How much debt you owe is the next biggest factor.
Your credit utilization, or the amount of your available credit being used, can negatively affect your scores. You can help this factor by keeping your debt balances paid down as low as you can to reduce the impact this can have on your credit.
The length of your credit history is factored in as well, so it can be a good idea to keep credit cards open once you pay them off in full, even if you don’t plan on using them going forward. Closing a card will also raise your overall utilization percentage, so closing a card can affect two criteria when it comes to your credit.
Lastly, avoid applying for too much credit at one time. Too many hard inquiries in a short period of time could lead to your scores taking a dip. Try to space out major credit decisions, or if you know you have any important needs coming up such as a loan, don’t be pressured by a retail clerk to apply for a store credit card around the same time.
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The subject of home ownership covers a very broad range of financial topics, but once you own a home, one of the most important things to have a good grasp on is how to deal with repairs or additions to your home since it’s now your full responsibility as a homeowner.
Home equity is the difference between what your home is worth and what you still owe your lender. As you make mortgage payments, you reduce your principal, or the balance of your loan, which in turn builds equity.
Paying down your principal is the primary way to build equity, but if the local housing market sees positive changes, your home’s value could go up (and conversely, be negatively affected if the market takes a negative turn).
Your equity can be used to your advantage, especially if you have major home remodels or repairs that you have to take care of. A home equity line of credit, or HELOC, is a type of second mortgage that allows you to borrow money against the equity you have in your home.
If you qualify, the money is provided as a line of credit, and the funds can be used for a variety of purposes, from the aforementioned home renovations, or even major life expenditures like education or consolidating credit card debt.
A home equity loan is similar to a HELOC, but you get the money in one lump sum, and it has fixed monthly payments and interest rates. Each option has its own fees to consider, so weigh the pros and cons of both to see what would work best for you.
Another home-related piece of knowledge that could help offset some of the financial responsibility of owning a home is a home warranty. Home warranties are annual contracts that cover certain repairs or replacements of major appliances and home systems.
This differs from home insurance which only includes damage to the structure of your house, theft, or injuries that happen on your property. A home warranty can even pay for a replacement or repair to the interior appliance due to normal wear and tear or defects.
The cost of a home warranty depends on several factors including where you live, the plan you select, and the service fee that goes along with it. If you shop around for the best price, and you know what’s covered and think it could be worth getting, a home warranty can provide some extra peace of mind as a homeowner.
Keeping your financial and personal information secure starts out small with basic preventative measures such as making sure a website you’re entering personal information onto is securely encrypted or being wary of fraudulent email, text, and phone scams, which are steadily on the rise every year. Two lesser-known tools in your financial security arsenal that could help prevent future damage due to fraud are credit freezes and fraud alerts.
Credit freezes are a way to prevent lenders from opening new credit accounts in your name. A credit freeze blocks hard inquiries on your credit reports, and thus prevents credit bureaus from sharing your credit reports with any person or entity.
To apply for a credit freeze, you have to contact each of the major three credit bureaus: Equifax, TransUnion, and Experian. Once applied, the freeze will last until you unfreeze your reports – which you’ll have to do if you want to apply for any new credit. Plus, credit freezes don’t affect your credit scores in any way.
Another less strict way to protect your credit is to use fraud alerts. Contact any one of the major credit bureaus and they’re legally required to contact the other two on your behalf.
Once fraud alerts are placed on your credit reports, lenders will have to verify your identity before issuing any new credit card or loan in your name. This gives you a chance to confirm the request before it goes through.
What separates fraud alerts from credit freezes is that fraud alerts don’t completely stop hard inquiries, but rather add the extra verification step before finalizing it.
If there’s something you’re not quite sure about when it comes to your finances, there’s really no better way to gain that knowledge than to ask the right questions. Speak to professionals like an accountant, a banker, or contact your credit card company to get the answers you need.
Financial Literacy Month is a great time to double-check your financial situation and make adjustments if needed. It’s a lot easier once you gain the knowledge to make changes where it can count.