Your Credit Score

From the interest rate and features you are offered on a credit card to your ability to qualify for a mortgage, your credit score plays a large part in the bank's decision making process. A good score can have banks competing for your business when you apply for a loan. A bad score may mean that you won't qualify for your auto, mortgage or credit card – or if you do, you may only be offered high rates which will cost you extra money each month.

 

How is your credit score determined?  Not too many years ago the way it was calculated and the actual score was a big secret.  When I worked at a bank in Indiana we would link up with the credit bureaus to obtain credit scores and reports on people applying for a loan.  We were told very explicitly to never give a person their credit score – that it was proprietary information that the loan applicant could not be given.

 

Things have changed quite a bit since then.  You can now find out your credit score (for a fee, of course) through a number of different websites or when you apply for a loan your lender will usually tell you what your score is (if you ask).  Fair Isaac and Company, the company that determines your FICO score (which is the score most often used by lenders), has also released the general parts of what is called the Credit Pie.

 

The Credit Pie

 

Here is how the credit pie looks:

 

 

Let’s examine each of those pieces of the pie briefly.

 

Payment History (35%): This piece of the pie is determined by how well you have paid your debts.  Your lenders send information on your payment history every month to the credit bureaus.  If you are late it is reported on your report, and in turn takes your score down.  Negative items such as bankruptcy, judgments and liens are also factored in here.  Because this is the biggest piece of the pie you should focus on getting your loan payments in on time, every month.

 

Amounts Owed (30%): As the second biggest piece of the pie it is important to pay close attention to this piece as well.  While there are several factors that go in to this, the biggest one is the percentage of credit you are using.  If you have a credit card with a $1000 limit and you consistently carry a balance of $700 you are using 70% of your available credit.  You want to keep that below 25% for the best score.  On installment loans they will look at how much you owe in proportion to the original balance.

 

Length of History (15%): Two factors play in here – how long you have had credit and how long since there has been activity on the account.  Someone who has been using credit for 25 years is going to have a higher score than someone who has been using it for 2 years (everything else being equal).

 

New Credit (10%): This piece of the pie is determined by the number of recently opened accounts and the number of inquiries on the report.  What is an inquiry?  Recently I was picking some things up at JCPenney and they asked if I wanted to apply for a JCPenney credit card – just for applying I would get 10% off my total purchase.  I declined the offer, but if I had accepted they would have pulled my credit report and checked my score.  That is an inquiry.  If you have a number of inquiries that starts to pull your score down.  Don’t let that stop you from shopping for a loan, though – inquires within a short period of time are just counted as one inquiry.

 

Types of Credit Used (10%): Lenders like to see that you can handle several different types of loans, such as installment loans (auto loan), revolving credit (credit cards), student loans, a mortgage, etc. 

In my experience, people tend to worry about the little things; such as how many inquiries are on their report.  While it is important to watch all of this, remember that 65% of your score is determined by your payment history and amounts owed.  Focus on making your payments on time and paying your balances down.  Over time these two actions will have the greatest impact on your score.

 

How much of a difference will having a good credit score make?  Based on national averages, here is how much you will pay for a 36-month auto loan:

 

Credit Score       Interest Rate     Payment

500                         18.957%               $916
620                         12.213%               $833
720                         5.141%                  $751

 

Between the high and the low score you have a difference of $165, or $1280 for the year!  $1200 will go a long way for most families.

 

For more information visit http://www.myfico.com/crediteducation/.

 

Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

Top Ten Teen Financial Tips

Our department is in the implementation stage of an exciting outreach activity.  We want to share it with you.  Last spring, we were awarded a gift from the State Farm Youth Advisory Board.  The resulting program is titled the “Top Ten Teen Financial Tips” and teams of upper-division undergraduate students are delivering the program to personal finance courses in fifty Missouri high schools.  Our goal is to reach 6,000 students.  Today, our tip is to briefly outline these tips and ask you to consider how well you are doing in reaching the goals implied in each.

 

1.       Education for Income! – We all know that people with greater education, on average, earn greater incomes.  Economists call these investments in education, investments in human capital.  Clearly, this investment is the best one you can make for it is the one type of capital you fully control.

2.       Budget Your Money! – Living within ones means, including savings, is a goal that many fail to reach.  Yet, living beyond ones means is the recipe for financial disaster.  Budgeting is not hard.  Budgeting instills a sense of discipline and empowerment to your money management.

3.       Establish Good Credit! – Learn how and when to use credit.  Begin with a starter card.  Use it only for necessities, like gasoline, and then pay it off at the end of the month.  Credit does make many transactions easier, even possible.  Yet, when one ignores the annual percentage rate (APR), the transaction costs, or the extra expense involved in using credit for non-appreciating assets, they begin the downward spiral toward financial failure.

4.       Emergency Money! – Establishing an emergency fund of three to six months’ living expenses is a key to a household’s financial strength.  Doing so allows you to increase insurance deductibles, thus saving insurance premium dollars.  It also provides the freedom to search for another job, should you lose the one you have.  An emergency fund is not optional.

5.       Manage Your Risks! – Retain those risks you can afford.  (See Tip #4 for how.)  Reduce your exposure to hazards by being responsible in your decision making and actions.  Transfer the risks you cannot afford to retain: personal liability, loss of income following your death when you have financial dependents, loss of income from disability, loss of property, or loss of health.

6.       Compounding Power! – Do not forget the power of compounding on your invested savings.  Start as young as you can to allow the power of time to add to your investments.  Albert Einstein once said, “The most powerful thing in the universe is compound interest.”  The power is within your reach, if you start young and continue.  (Hint: You’re not getting any younger, so you might as well start today.)

7.       Smart Investing! – Maintain a well diversified portfolio of assets, starting with educating yourself about investing.  Try to keep your investment management expenses low.  Thus, low-cost index mutual funds or Exchange Traded Funds (ETFs) are powerful.  Don’t forget international investing, real estate, and other investments as you accumulate the funds to broaden your diversification.  Research continues to demonstrate the superiority of portfolios with international and long-run equity exposure.

8.       Don’t Forget Taxes! – Taxes must be paid on your earnings, your investment gains, your purchases, your home, your car, your boat, and, ultimately, your death – if estate taxes are reinstated next year.  You must pay them.  Taxes also buy things we need like education, roads, defense, social-security, and et cetera.  If you don’t like taxes, then tell your elected representatives those things on which you want them to spend less money. 

9.       Think Outside Your Box! – Don’t follow the crowd.  Chart your own course.  Keep focused on your destination, even when others are jumping ship.  Buy low and sell high, contrary to your emotions. Eat well.  Exercise.  Take care of your future.  Remember, just because no one in your family has been financially successful doesn’t mean you can’t.

10.   Believe You Can - Dare to dream dreams and then seek your goals.  I’ve heard it said that, in the context of goals, “success” has five S’s.  You must first See it.  Second, Say it to others to improve your commitment. Sign it by writing it down and putting it somewhere to remind you.  Support it with your actions and, finally, Stick to it when things seem to be harder than you expected.

Well, that is a brief summary.  In fact, it reads like a summary of several of the financial tips we’ve published in this blog over the years.  We want to share this program with your high school, if you’re in Missouri.  Contact us by email at the Office for Financial Success and someone will contact you to put you on our calendar.  Soon we’ll have a website, linked through the Office for Financial Success website for you to access a .pdf of the PowerPoint slides for this program.  Or, just look through the website for other teacher resources or look at the library of resources provided by the Missouri Council on Economic Education.  If you have questions, let us know what we can do to help you on your way to financial success.

 

 

Utilities - More than Monopoly pieces.

Before I came to college, I knew that utilities provided my family services that we paid for. But I really didn’t understand the cost until I came to college. Even then, I didn’t really understand the utility system. I knew that I was metered and paid for my electric, water, and other usage, but I never really looked at the rate or the fixed costs. The bill came, I split it with the roommates, we paid it, and life went on.

I think this was because I was a renter. There are steps a renter can take to really limit the cost of utilities, but he or she doesn’t have the freedom (or perhaps the monetary incentive) to make large changes that save on the cost of utilities over several years (when the renter may be gone in months). Once I bought a home, however, I took an interest in how my electric, water, sewer, and other rates were calculated.

Today’s Financial Tip of the Week will explore the ins and outs of one utility: electricity.

Electricity

Electricity makes our modern life possible. I have lived without electricity on my camping trips in New Mexico and around Missouri, but I still had with me items that were made with electricity (plus I think I had a flashlight or two). A true attempt at living without electricity would mean living without anything made possible by electricity. As I look around my office and think about my home, I’m not sure that I have such things in my life (even the plants in my front yard were probably grown in a greenhouse with electric fans and electric-powered watering systems). Thankfully, electricity is abundant, almost ubiquitous, and has increased our standard of living a tremendous amount.

Measuring electricity

In our homes, electricity usage is usually measured in kilowatt hours (kWh). This measure is a combination of energy and time. Fortunately, the electric devices we use often list their wattage either on the box or on the device. With winter approaching, many families will heat some portions of their homes with electric heaters. These heaters are often rated in watts--a common type of heater is the 1000 watt heater. If left on for one hour, it will consume 1 kWh. Incandescent bulbs are also rated by wattage. A 100 watt bulb will consume .1 kWh per hour. So if a 100 watt bulb is used for 10 hours, it has used 1 kWh.

However, it is probably rare to leave a light on for 10 hours or have a 1000 watt heater on full blast all the time because electric heaters often have internal thermostats that regulate the temperature in the room. If you really want to know how much energy a device an appliance is using, a kWh measuring device can be used (example: Kill-A-Watt). These plug into the wall outlet (sometimes called the ‘mains’) and the appliance plugs into the measuring device. They measure both the wattage being consumed at that moment, but also the kWh of electricity that has been consumed since the device was plugged into the mains (YouTube has plenty of helpful videos). 

Another excellent way to measure electricity is to read the electric meter for your house. In the past, these meters have not been easy to read with their odd dials (thankfully, there are plenty of tutorial YouTube videos), but many electric providers have switched to the meters with digital readouts. These meters only display the amount of electricity (in kWh) used, so the best way to determine your home’s energy usage is to make a notebook log and track the energy amount used at different times during the day or week. The difference between the electric meter’s displayed number shows the kilowatt hours consumed in the intervening time. 

Rates

Once you have an idea of an appliance’s energy usage or your home’s total usage, you can apply the rate to determine how much the use of the appliance is costing you. Most electric bills have a fixed charge and a usage charge.

Fixed charge

Fixed charges often help pay to get the electricity to your home. This helps pay for the poles, electric transformers, and other infrastructure. This can vary a lot between providers. For example, the City of Columbia, Mo charges $6.95 per month for its fixed charge. Customers must pay this no matter how much energy they use. The Boone Electric Cooperative charges $19.70 for its fixed monthly charge, and  AmerenUE charges $8.00 per month.

Usage charges

Usage charges are often split into summer and non-summer rates. Electricity usage is much higher in the summer because of the need for air conditioning.  Electricity is also charged on a tier basis. Depending on your usage, you may be charged a higher or lower rate.
 

Provider	Summer rates	Winter rates
City of Columbia	First 750 kWh: 9.275 cents per kWh	First 750 kWh: 9.275 cents per kWh
	Next 1,250 kWh: 12.637 cents per kWh	All remaining kWh: 10.764 cents per kWh
	All remaining kWh: 13.642 cents per kWh
Boone Electric Cooperative	First 600 kWh: 8.7cents per kWh	First 600 kWh: 8.7 cents per kWh
	Next 1,400 kWh: 7.7 cents per kWh	Next 1,400 kWh: 7.7 cents per kWh
	All remaining kWh: 7.0 cents per kWh	All remaining kWh: 7.0 cents per kWh
AmerenUE	All kWh: 9.67 cents per kWh	First 750 kWh: 6.87 cents per kWh
		All remaining kWh: 4.61 cents per kWh

 

Conclusion

One kWh may be standard, but the cost of that one kWh will vary with your electricity provider and the appliances in your home will also use different amounts of electricity. By taking some time to study the appliances in your home that use electricity and the cost of that electricity, you can be a better consumer when shopping for appliances, have a better basis for evaluating changes to your home, and feel confident that you know the true monetary cost of the electricity in your home.

Andrew Zumwalt, M.S.
Director of the MoTax Education Initiative
162 Stanley Hall

Happiness at What Price?

An article was published this week in the Proceedings of the National Academy of Sciences by Princeton University professors Daniel Kahneman and Angus Deaton titled High income improves evaluation of life but not emotional well-being.  In the study the authors examine the issue of whether or not money can buy happiness.

There are two aspects of well-being (or happiness) that they study:

·         Emotional well-being refers to the emotional quality of an individual's everyday experience—the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one's life pleasant or unpleasant.

·         Life evaluation refers to the thoughts that people have about their life when they think about it.

The study looks at the influence money has on these two aspects of well-being.  Emotional well-being can be seen as day-to-day happiness, and life evaluation can be seen as how a person sees their life overall.

For emotional well-being the authors found that more money does make for brighter days, but levels out at $75,000.

For life evaluation, however, with every doubling of income people are more satisfied with their lives, and that continues well above $75,000.

“Giving people more money beyond $75,000 is not going to do much for their daily mood…but it is going to make them feel they have a better life” said Deaton in an interview with the Associated Press.  For every doubling of income people continue moving up the happiness “ladder” in terms of life evaluation.

As you might expect the authors found that those who didn’t have enough money to meet their basic needs experience emotional pain and unhappiness in both areas.

There are a number of life lessons that students can extract from this study – we will examine just three.

First – when you are looking at career choices be sure to find something you are passionate about – something that helps you be happy day-to-day.  I have known a few people who chose high-paying careers but found that they were miserable because they hated their jobs.  I even had a friend who was drafted into the NFL with a very high-paying contract and confided in me that he hated playing football and he was miserable – his dream was to retire as soon as possible and open a fly-fishing shop. 

Second – while not having enough money finds you unhappy in both areas day-to-day happiness can be found in many areas – family, your faith, continuing education, a good book, friends, a walk on the beach – or any number of other areas.

Finally, the amount of money you earn has little to do with the financial peace you have in your life.  Personally, I believe that financial peace can be found by living below your means, having some money set aside for a rainy day, saving for the future and being debt-free.  There’s an old saying that goes something like this:  Income five dollars and expenses six dollars: misery. Income four dollars and expenses three dollars: peace.  Perhaps we could update that to say “Income $50,000 and expenses $60,000: misery.  Income $40,000 and expenses $30,000: peace.”

To read the full article follow this link:

http://www.pnas.org/content/early/2010/08/27/1011492107.full.pdf

 

Ryan H. Law, M.S., AFC

lawr@missouri.edu

Teens and Money

There was an article in the recent Family & Consumer Sciences Research Journal titled What Do Teens Want to Know About Money? that had some interesting statistics I would like to discuss today.

First – one of the most alarming statistics:

·         Financial test scores are at 48.3%, which is down from 57.3% in 1997

An almost 10% drop in scores which were already at a failing rate is alarming – what are we doing to stem this tide of financial illiteracy?

Fortunately we are trying to do our part.  State Farm generously donated money to the Personal Financial Planning department to send some of our students around to 50 high schools over the next year to present the “Top Ten Teen Financial Tips.”  Our students will share their passion for managing their finances and hopefully a few of the tips will stick with the high school students!

On to some of the other interesting statistics:

What do teens most want to know about money?

·         74% - How financing works for large purchases such as a car or home

·         72% - Investing money

·         68% - Identity theft

·         62% - Saving money

·         58% - Budgeting

·         55% - Checking accounts

·         55% - Credit cards

These are the things they want to learn about money, but how do they want to learn about it?

·         54% - During school

·         40% - Magazines/newsletters

·         32% - Internet

·         19% - Groups outside school

I found it interesting that “at home” wasn’t included as a response on here.  I have a strong belief that parents can have a profound impact on their children’s financial education – perhaps stronger than anyone else.  If you are a parent reading this please consider each of the areas above and think about how you can teach your child these concepts.

If you are a teacher are you teaching your class these items?  Even if you don’t teach personal finance can you pass along some helpful hints for the students in your class – some of the mistakes to avoid and good decisions to make?  I remember in high school I had a Chemistry teacher who would occasionally say “Put away your textbooks and put your desks in a circle.  We are going to learn some life skills today.”  We would then spend the hour learning life lessons – we talked about college, careers, money, relationships and more.  These lessons had a stronger impact than many of the other lessons I was taught.  Perhaps you can occasionally do the same with your class.

Finally – how do teens get their money?

·         49% - Parents

·         31% - Full or part-time job

·         25% - Odd jobs

The fact that almost 50% of teens get some money from parents provides a valuable teaching opportunity.  Are we just handing money over or are we spending time teaching important lessons?  This follows along with the Tip from two weeks ago about Children and Allowances (http://mufinancialtip.blogspot.com/2010/08/children-and-allowance.html) and last week’s Tip about National Money Talk Night (http://mufinancialtip.blogspot.com/2010/08/national-money-talk-night.html).

We would love to get a discussion going among our readers about these items – if you are a student, what do you most want to learn about money, how do you want to learn about it, and where do you get your money?  If you are an educator or parent, what are some of your “best practices” for teaching these things?

You can comment by going to http://mufinancialtip.blogspot.com.  At the end of the article click the Comment link.  (As a side note for Ryan’s 3282 class – if you post a comment answering those 3 questions before class on Wednesday I will give you 2 free points on your quiz.)

For the full article from the Family & Consumer Sciences Research Journal click this link:

http://onlinelibrary.wiley.com/doi/10.1111/j.1552-3934.2010.00032.x/pdf

Ryan H Law, M.S., AFC
239 Stanley Hall
lawr@missouri.edu