Dear Readers, October is a great month for festivals — harvest fairs, traditional Oktoberfests and Halloween activities. But there’s one event you may not be aware of that I think is well worth noting: the annual Get Smart About Credit Day sponsored by the American Bankers Association Community Engagement Foundation.
Officially celebrated on October 20 and now in its 14th year, this national program helps bankers in local communities offer events and classes to teach high school students and young adults about the importance of using credit wisely.
To me, this is something everyone should focus on — no matter your age — because many Americans are awash in debt. According to the Federal Reserve, as of July 2016, revolving debt for American households totaled $969 billion; student debt was up to $1.4 trillion. Those are pretty eye-popping numbers!
While your own debt may not be in the stratosphere, I think it’s important for everyone to periodically test their knowledge of how to control credit and debt. So here are ten questions to ask yourself to make sure you’ve got a handle on your own debt situation.
–Do you know the difference between good and bad debt? Not all debt is equal; some can work for you, some against you. To work for you, debt should ideally be low cost and have potential tax advantages. That’s good debt. Think home mortgages and equity lines of credit, even student debt, which has the added benefit of enhancing career opportunities and earning potential. On the other hand, credit card balances and auto loans are definitely in the bad debt category because they usually carry the highest interest rates and aren’t tax deductible.
–When was the last time you checked your credit score? Your credit score (or FICO score) plays a big part in your ability to get loans — mortgages, car loans, new credit cards, even your ability to rent an apartment. It can range from 250 to 900. With a low score, you’ll likely pay a higher interest rate, if you can get credit at all. A score of 760-800 or higher will generally get you the best deals. You can get a free credit report annually by going to annualcreditreport.com and, while the three major credit bureaus (Equifax, Experian, or TransUnion) charge for providing your credit score, most credit card issuers offer your credit score for free.
–Have you taken steps to raise your credit score? There are five simple ways to lift your credit score: pay your bills on time; keep your credit card balances low; establish a long credit history; minimize new credit requests; use different types of credit.
–What’s your debt to credit ratio? Also known as your credit utilization ratio, your debt to credit ratio represents the amount of credit you use relative to the amount of credit available to you, for instance, through your credit cards or other credit lines. To get your ratio, divide your total credit balance by your total available credit. A high ratio can negatively impact your credit score — and your ability to get new credit. The ideal credit usage is between 20 and 30 percent.
–Do you pay your bills on time? Paying your bills on time accounts for about 35 percent of your credit score. But credit score aside, late payments can also mean added fees and interest. Even if you can’t make the full payment, make a partial payment.
–How much is your debt costing you? If you don’t pay your credit card balance every month, interest can get out of hand. Consider this example: Paying only $100 a month on a $3,000 credit card balance at 14 percent would cost you over $700 in interest. Plus it would take you approximately 38 months to pay it off! Use an online calculator to do your own math.
–Do you have the right credit cards for you? Credit cards come with all kinds of perks and incentives. Don’t be taken in. Choose the perks that work for you– whether points, cash back or travel rewards — and ideally stick to one or two cards because carrying balances on too many cards at the same time can also ding your credit score. Most importantly, look for a low interest rate and no annual fee.
–Is a HELOC right for you? If you have enough equity in your home, a home equity line of credit (HELOC) can be a smart tool for accessing extra cash or consolidating debt. Plus, you can deduct the interest on up to $100,000 of home equity debt secured by your home, whether in the form of a regular loan or a revolving line of credit.
–What’s your debt payment plan? If you’re carrying a monthly credit card balance, focus on paying it down. If you have multiple cards, start with the highest interest card while making minimum payments on the others. Work down your list. Keep on top of other debts with on-time payments. Make it easier on yourself by putting as much as possible on auto pay.
–Should you go on a cash-only diet? If you want to break yourself of the credit card habit, try using cash only for 30 days, especially for nonessential expenses. It’s an eye-opening exercise that may help you think differently about how you spend your money.
Credit is a powerful and convenient tool when used with care. Check your own credit smarts — and pass on what you’ve learned to the young people in your life. Happy October!
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab. com.