Back-to-school means getting smart about credit and debt
Take this quiz before you take action on debt
By Andrew Housser
For most of the United States, August is the month when students – and parents – prepare to go back to school. With Aug. 17 designated as Get Smart About Credit Day, this month is a good time for learners of all ages to hone their credit and debt knowledge. This quiz can help you identify areas that are ripe for some homework.
What is the most important factor in your credit score?
A. How many credit cards you have
B.How many times you have moved
C. Whether or not you are married
D. Whether or not you pay bills on time
E. The total amount of your debt
Answer: d. Total debt and number of credit accounts do factor into credit scores. But the single biggest factor – accounting for 35 percent of scores – is whether you pay bills on time. To help, set up a simple organization system you will use consistently. Automated and online payments can make this task easier, too. Running out of money before you run out of bills to pay is a different issue. If you are having trouble, take action right away. Reduce monthly expenses, take a second job or get help from a reputable debt relief company. Note that your marital status does not affect credit scores – although in decades past, it could have. Moving does not affect credit scores directly, although your credit reports will include a list of former addresses.
When it comes to borrowing money, which is most important to your financial health?
A. The interest rate
B. The monthly payment
C. The loan term
D. Whether the debt is tax-deductible
Answer: b. All of these factors can make a difference. Yet the single most important factor for your financial health is whether you can afford to repay your debt promptly. It is easy for some people to get caught up in chasing lower interest rates or doing a balance transfer, then worrying about the length of promotional terms for the new account. Do not neglect the big picture: Can you repay the debt, on time, consistently, with the goal of eliminating the debt altogether?
When it comes to debt vs. savings, you should:
A. Prioritize building an emergency fund over paying off debt
B. Avoid saving and instead pay off debt
C. Prioritize retirement savings over paying off debt
D. Pay off student loans first and juggle credit cards as needed
E. Do both, even if it means starting with very small amounts
F. Focus on repaying a mortgage so you can become debt-free
Answer: e. First, make required payments on your home (mortgage or rent) and car. If you do not pay these bills on time, you could lose the asset. Next, make required payments on any student loan debt. Work on paying down credit card and other debt next. Few, if any, investments will return as much as paying down credit card debt; at today’s rates, paying it off effectively produces a 15-20 percent return. While it may be very difficult to do, build an emergency fund at the same time. Start small, and work toward a fund that covers six-nine months of expenses. If you work for a company that offers a retirement savings plan, try very hard to contribute to this while taking care of debts.
Which of these actions can damage your credit profile?
A. Checking your own credit report
B. Paying off debts
C. Closing unused credit accounts
D. Making minimum payments on credit card balances
Answer: c. Creditors use a ratio of the credit you use to your available credit as part of their formula to determine whether you are a good credit risk. Closing accounts reduces your amount of available credit. As the debt-to-credit ratio gets tighter, your credit score might decline. In addition, the longer you hold a credit card account, the more valuable it is in your credit score determination. It makes sense to keep credit card accounts with a long (positive) history. If you do not wish to use a particular card, store it safely away, but do not close the account.
If you cannot make minimum payments on your credit card accounts, what should you do?
A. Do a balance transfer to a new credit card
B. Contact a reputable debt relief company
D. Use the avalanche or snowball debt reduction method
Answer: b. While many people do panic, the best option in this situation is to recognize the need for help. A credible debt relief firm can provide sound advice on options including credit counseling, debt settlement and debt consolidation. For those struggling to make minimum payments, debt settlement may be particularly effective. The American Fair Credit Council (AFCC) is a good place to find reputable firms.
The other choices can be good options for consumers who can make more than minimum payments. Transferring balances to a low-interest, or zero-interest, card can help someone looking to consolidate debts from multiple accounts with high interest rates. In addition, since balance-transfer cards typically are available to people with good credit, they may be difficult to get for someone struggling to make minimum payments. The avalanche and snowball methods are excellent options for someone who can determine a fixed monthly amount – more than the combined minimum payments on all credit cards – to pay toward debt.
How did you do? If your results would not earn you an “A” grade, doing your homework will help you make smart financial choices that will pay off throughout your life.
|Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.|