Credit Report Basics

Do you ever wonder how lenders decide who gets a loan and who doesn't?  Ponder why you were turned down for that credit card? Think that you might file for bankruptcy and hope no one will ever know?  If so, you need to know more about your credit report, how it works, and how it can affect your financial future. The following information gives basic information about what a credit report is, who uses it, how to obtain a copy of your own, and correcting a mistake if you find one.

What is my credit report?

Your credit report is a compilation of financial data about you. Credit bureaus across the country compile credit information from banks, finance companies, merchants, credit card companies, and other creditors and enter it into a centralized computer system. Your report contains personal information such as your address, social security number, and birth date. It may also contain information about your employment and income, spouse’s information, former addresses, etc. More importantly, your credit report file details information about credit transactions and balances due, payment history, suits, judgments and tax liens. Your record also shows if you have declared bankruptcy. This is especially important to note, because this information will not be removed from your file for seven to ten years!

Who uses my credit report?

A potential creditor will usually check your credit report when you apply for a loan or credit card or rent an apartment. The lender or company will request a copy of your report and make their lending decision after reviewing your history. The lending company, not the credit bureau, makes the decision about whether you are approved or not. Although the credit reporting industry claims they do not sell credit scores to employers, there is nothing in the law to prohibit employers from obtaining a credit score if you give them written permission.  There are no reliable sources of information with respect to how often potential employees are asked to grant permission. Your report cannot be used by just anyone who wants information about you (such as friends). Anyone requesting a copy of your report must want it for an approved purpose and must be able to provide proof that they are a legitimate company with the right to view your report.

Can I see a copy of my credit report?

Yes, and in fact, it is a good idea to periodically check your credit reports to be sure that the information is correct. Congress created the 1971 Fair Credit Reporting Act, which gives you the right to see a copy of your re- port. As of March 1, 2005, you can order a free credit re- port one time each year. The three largest credit reporting bureaus are using one central address to provide this information. Do not contact the credit bureaus directly to obtain your free annual credit report.

 

To order your free credit report:

 

·         Visit www.annualcreditreport.com;

·         Call 1-877-322-8228; OR

·         Print the form at http://www.ftc.gov/bcp/conline/edcams/credit/ docs/fact_act_request_form.pdf and mail it to:        Annual Credit Report Request Service

PO Box 105281

Atlanta, GA 30348-5281

 

Be cautious about companies offering “free credit reports” on slick TV commercials, on websites or in magazine advertisements. Many of them have a snag such as having to pay a hidden fee for some other service they offer or requiring a subscription of some kind. You do not need a company to obtain a free

credit report for you; can you do it yourself. The contact information listed directly above is the official place to go to get your free credit report.

You can contact the three large credit reporting bureaus directly to request a free credit report every twelve months if:

·         you have been turned down for credit, employment or insurance within the last thirty days due to something in your credit report;

·         you are unemployed and plan to seek employment within 60 days;

·         you are on welfare; or

·         your report is inaccurate due to fraud. Otherwise, you usually have to pay a small fee to obtain

a copy of your report.

 

The three largest credit bureaus are:

•             Equifax

P.O. Box 740241

Atlanta, GA 30374

1-800-685-1111

 

•             Trans Union

2 Baldwin Place, P.O. Box 2000

Chester, PA 19022

1-800-888-4213

 

•             Experian

P.O. Box 2002

Allen, TX 75013

1-888-397-3742

 

There is also another large credit bureau called Innovis Data Solutions. This bureau differs from the other three main ones, however, because it sells your credit information to companies that compile mailings for unsolicited mail, including credit cards. You can also look under “Credit Bureaus” in your local yellow pages.

There is a mistake on my credit report. Now what? If you find an error on your credit report, contact the credit bureau. If the information is very old (more than seven to ten years), you should ask to have the information deleted. If it is a more recent error, provide as much information as you can about the situation. The bureau must investigate the problem. You also may try contacting the reporting party to see if they can help you resolve the situation. If you cannot resolve the issue, you can file a written statement of up to 100 words with the credit bureau telling your side of the story.

Note:

Beware of “credit repair” scams that promise to erase your bad credit history. You can take the same steps they will take to remove incorrect information without having to pay a high fee. Information that is legitimate, however, cannot be magically erased--by anyone!

 

Mobile Check Deposit

by Andrew Zumwalt, M.S., Associate State Specialist, Personal Financial Planning, University of Missouri Extension

What is it?

Some financial institutions are now allowing remote mobile check deposit. Customers of these institutions can use their smartphone to deposit checks into their accounts anytime and anywhere.

What are the advantages?

Consumers can deposit checks from anywhere with their smartphone and internet access. This avoids the need to visit a bank or ATM.

What is required?

·         A bank that allows mobile check deposit

·         A smartphone

·         An app (usually free) from your bank installed on your smartphone

·         A check made out to you and endorsed by you

How does it work?

The smartphone app uses the smartphone’s camera to capture the front and back of an endorsed check. The app sends the images to the bank, which then processes the check normally.

What kind of smartphone can I use?

Generally, apps are developed for either the iPhone or Android devices. This may expand in the future to include Windows phones.

What should I do with the check I cashed with the smartphone app?

Follow the instructions given by your bank. Typically banks will ask that you mark the check as being electronically deposited (either by writing “electronically deposited” on the check or by putting a sticky note on the check). Banks will also ask that you hold onto the check for a short period of time (14-30 days) until the check clears with no errors (example: check bounces). After that period of time, shred or otherwise securely dispose of the check.

How should I endorse my checks?

Follow the instructions given by your bank. Often, banks will require your signature, followed by the phrase “For Deposit Only” and your account number. However, in order to ensure that your check is deposited quickly, follow your bank’s procedure.

If you are endorsing and cashing a large number of checks or you have trouble remembering the instructions, you may want to consider ordering a small custom stamp with the endorsement information required by your bank (without your signature). This reduces the chance for error.

What happens if I make an error endorsing the check?

Your bank will have its own policies, but most banks will require that you either visit a physical branch to deposit the check or that you mail the check to the bank.

What if I don’t have a bank account?

While not available currently, consumers who use prepaid debit cards may soon have the ability to cash checks with their smartphones and have the money deposited onto their prepaid debit cards.

What else can I do with the app on my smartphone?

Often, the bank apps allow customers to pay bills, check balances, and transfer money between accounts. If your bank is associated with a brokerage, you may also be able to place trades.

Resources:

Please note that these are the policies of individual banks and may not represent the policies of your bank. They are also open to change at any time. They are listed here as possible resources and are not meant to show preference for certain banks.

content.schwab.com/mobile/iphone-deposit.html?section=faq

redfcu.org/pdfs/RemoteDepositFAQ.pdf

fidelity.com/products/iphone/ChkScanFAQ.shtml

Ways to track spending

by Lucy Schrader

Spending money is easy.  Keeping track of it takes more time.  The time, however, is very well worth it to help you manage your finances, stress and life.  In this fast world of automatic withdrawals, credit cards, debit cards, quick buys and on-line purchasing, people do not always realize where their money is going.   This holds true for adults, teens and youth. 

Tracking your expenses gives you a better picture of what you buy, helps you decide what you want and helps make a financial plan for you and your family.  It is so important to involve kids and teens and help teach them to track their money, too!

From here, you can make a budget for how you want to spend and save your money.  When you know what you want to do (get out of debt, save for a trip, save for college, buy day-to-day items), you see what is important to you and what is not.   You can decide to save on things that are not as important to you, so you can have and do the things that are important to you.

Where to start?

The hardest part is getting started.  Don’t worry… the first few months may not be completely accurate.  That’s all right!  As you get going, you’ll get a better idea of what works and what does not work.  If you keep it simple, you are more likely to follow through.  I use a system that would make an accountant faint.  But it works for my family and I understand it.

When you track, you account for all of your income sources and your expenses.  You make notes of when you get money and when you spend or save it.  You have several different options.  If you don’t know where to begin, start simple like making columns on paper or a spreadsheet.  You can expand as you understand your finances better.

Here are a few examples of how to track your expenses (note: These are just a few ideas. This is not an endorsement for specific companies and their products, but just some examples.):

• Paper or a notebook
• Spreadsheets (Microsoft has free templates to download)
• Templates (Managing Your Money handout with fillable worksheets http://extension.missouri.edu/p/gh3830; Google docs has different spreadsheets to download and use— view a sample at https://docs.google.com/previewtemplate?id=0As3tAuweYU9QcHlVM3hrY2tocEkzUWVjVVlqUUdfTUE&mode=public)
• Accounting programs that track and do more (Quicken, QuickBooks)
• Free on-line programs—sites might have ads from lenders and other vendors  (Mvelopes http://www.mvelopes.com/; Mint.com https://www.mint.com/)
• Paid money management systems
• Texting services—tied to your checking/account(s), you text your expenses and get your updated bank balance, may have a fee (Chext http://www.chext.net/)
• Banks, lending institutions and credit cards may have budget systems to help you track your expenses
• Or make one up like I did 

Before you sign up for a money management system, find out the following:

• Where is your personal information going and how is it used?
• Can you enter your information safely over public Wi-Fi (what kind of security does the system have)?
• Do you want a system that you download to your computer or do you want to be able to enter information from wherever you are (using your phone, laptop, tablet, computer, etc)?
• What is the cost?
• If it is free, will you get ads or other obligations?
• Can more than one person enter expenses from different places (if you need this as a family)?  (For example, one of the fee-based texting services lets more than one person enter amounts from different phones, so a family with a joint account can stay current with their balances.)

Remember that it can take several weeks or months to get into the full swing of tracking your expenses. 

• Start somewhere (even in the middle of the month)
• Small steps make a big difference
• Time upfront can save you time and money later
• Simple is often better—you’re more likely to use the system.

One person decided he would start with just four categories on a spreadsheet.  These four categories gave him a starting point and helped him see where his money was going and how he could make changes.  Here are his four categories:

• Income
• Necessities (food, rent/mortgage, transportation, medical, some clothes, etc)
• Fun and entertainment
• Investments and savings

Again, tracking your expenses isn’t about cutting out all of your fun.  It’s to help you decide what is important to you and what you can do later.  Budgeting can help reduce financial and family stress.

Involve youth and teens

Youth and teens have a wide range of income levels.  Some get small allowances, some get large amounts, others work and some have no money for themselves.  It’s very important for them to understand finances and how to stay within their means.  Setting a good example and involving them early is a great place to start.

Because I recently started tracking expenses, I’m paying more attention to our kids’ habits, too.  I am very aware that my son likes to spend his money, so we’re starting a system on paper with columns for him.  Pokémon does not grow on trees.  For now, I am going to pay him $1-2 per month to track.  I want him to get into the habit of it and see how important balance and living within his means are.

You can use books to help get conversations going about money and how to track spending.    Here are just a couple of examples:

For youth:

Alexander, Who Used to Be Rich Last Sunday by Judith Viorst and Ray Cruz

For teens:

Budgeting Smarts: How to Set Goals, Save Money, Spend Wisely, and More  by Sandra Donovan

By tracking your spending you’re making a great step in taking charge of your money and helping you reach your goals!

For Extension financial programs in your area, check with your local Extension Center.  In Missouri, you can find Extension Specialists and office contact information at http://extension.missouri.edu/index.aspx

 

Lucy Schrader
HES Associate State Specialist and
Building Strong Families Program Coordinator
University of Missouri Extension
162 Stanley Hall
Columbia, MO  65211
573-882-4071 or SchraderL@missouri.edu

http://extension.missouri.edu/bsf

 

Financial Planning for College Students

Around the country, college students are beginning a new school year in the midst of rising tuition and living expenses.  Many college students are on their own for the first time and, for many of them, that includes being on their own financially. They are expected to earn money and manage their own finances along with their busy college schedules and social lives. College financial plans don’t have to be complicated, but they are necessary. Taking a few simple steps now to manage personal finances will lead to much more positive outcomes down the road.

Here are some financial tips for college students beginning the new school year:

• Buy used textbooks or e-books when possible and compare textbook prices online.
• Don’t be tricked by credit card offers that come with a bag of candy, free shirt or free pizza.
• Before signing a lease, be sure you understand the entire contract.
• Educate yourself about student loans – know what types of loans you have, how much you owe, your interest rate, and what your monthly payment will be. For information on your federal loans, visit:  http://www.nslds.ed.gov
• Before turning to private loans to help pay for your education, visit your financial aid adviser to be sure you have exhausted all federal loan opportunities.
• Stay away from payday loans.  They carry very high interest rates and can trap you in debt for years.
• Shop around for a bank account.  Different banks and credit unions offer a wide variety of products – from free checking to low rates on loans. You also want to consider convenience – it is helpful if there is an ATM or branch on campus or close to where you live.
• Every time you are about to spend money, ask yourself if it would be better spent on something else or saved for a rainy day.
• Don’t carry your social security card in your wallet, and don’t give your Social Security number to people that don’t need it. The only thing thieves need to steal your identity is your Social Security number.
• Watch your eating out, entertainment and clothes spending carefully.
• Track spending to help avoid buying more than you can afford.
• Time is your best friend when it comes to saving for retirement – start saving now if you have a job and can invest a little for retirement.

Ryan H. Law, M.S., CFP®, AFC®

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

162 Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

Life Insurance Primer

For most people seeking financial advice from an advisor or planner, death is the last thing that they probably think about.  “Why would I need to worry about money when I’m dead?”  For those who are young with dependents needing their income, the risk of death can spell failure in attaining the goals of the household.  The first question that must be answered is, “Do I need life insurance?”  If you have others whose financial futures are depending on you, the answer is likely “Yes”.  Otherwise, the answer is “No”.

 

                Life insurance does not insure your life.  Rather, life insurance is designed to provide monetary resources that are needed by the survivors of the decedent (a fancy word for a dead person). If there are no survivors who need monetary resources upon the decedent’s death, there is no need for her to purchase a life insurance policy, as the risk of loss of income does not exist. For those who have financial dependents, a second question should be asked, “How much do I need?”  This question will be taken up in a subsequent financial tip and it should be followed by, “Which kind should I purchase?”  The rest of this Tip introduces the types of life insurance.

 

There are two basic kinds of life insurance; whole life and term life.  Term insurance is pure insurance and provides the greatest amount of coverage for one’s premium dollars, particularly when one is young.  As one ages, the probability of death increases and the cost of term insurance increases.  Term life is so called, as it only lasts for a specific period of time, or term.  The advantage of term insurance is that you get a lot of coverage for a little amount of money, albeit over a short period of time.  If it is guaranteed renewable term insurance you may repurchase the policy, with higher premiums, at the expiration of each term.  One’s greater need for insurance coverage, coupled with the lower cost of term insurance, may make term insurance the most attractive.

 

                A person’s life insurance needs may extend longer than one’s working life and they may desire to have constant premiums.  Examples of a long-term need for life insurance are issues stemming from estate planning issues, like business succession or estate taxes. This second primary type of life insurance is known as whole life.  Whole life insurance is in force for one’s whole life, if premium payments are continued, and contains both insurance and savings elements.  Due to its long term nature, the constant premium will purchase less insurance, as one gets older, forcing the portion of the premium going to savings to decrease.  What is not used for insurance is saved in a tax-advantaged account.

 

A benefit of whole life insurance that is little understood is that life insurance savings (called cash values) can be accessed while the insured is alive.  The savings portion may be “borrowed” to provide retirement income with the repayment coming from the reduced death benefit upon the insured’s ultimate demise. Moreover, an older insured may have need for income protection beyond their working years, if they have special needs dependents or have young children late in life. 

 

The cash value portion of the policy grows, as long as the policy is in force.  A characteristic of whole life insurance savings is that the cash value may be used while you are alive without any tax penalty and you can use the money for any purpose.  If you decide that you are one of the minority of the public who has a need for life insurance for their whole life, it is always best to get it from a financial secure company, rated AA, and who pays the greatest dividends, everything else being the same.   

 

Beyond these two basic types of life insurance are variable and universal life insurance policies, as well as combinations.  Universal life insurance policies combine a term insurance policy with a savings element, typically invested in safe, short-term financial products.  Universal policies “unbundle” the premiums enabling the insured to know how much of the premium purchases insurance and how much to savings, unlike whole life products.  Moreover, universal products allow the insured to vary premiums and to put more, or less, into savings.  On the other hand, variable life insurance allows the insured to invest the saving portion in higher risk, potentially higher return, investments like mutual funds.  Yes, you guessed it.  There are even variable universal products which combine the ability to change premium payments with greater expected return investment vehicles.

 

                If this sounds confusing, it should. Life insurance is mixed with options other than straight term life insurance.  It is recommended that you consider the type of life insurance which best provides adequate protection for your family.  Often, there is only one type of policy a consumer can afford which delivers adequate protection.  Thus, you need to give careful consideration to your life insurance needs.  Whichever type you decide to purchase, make sure that you do not get too much, or too little.  It is not wise for a salesperson to say, “You need six times your salary in insurance coverage.  Now, sign here!”  Rather, find an insurance agent who takes the time to walk you through a risk analysis, in order to determine that best estimate of the amount that fits your needs and your budget.  When you’ve listened to her, call another agent and see what they recommend.  If they both agree, you can more easily rest assured in their answers and to then purchase a policy from the most secure company at the best price.

 

-          Robert O. Weagley, Ph.D., CFP^(r)

Chair, Personal Financial Planning

Financial Therapy Association Conference

by Ryan Law

Welcome back to school and our Financial Tip! We took a break from writing the Tip over the summer but we are all set to get it back underway for the semester.

This summer a good portion of my time was filled up planning for an exciting conference that we have coming to the University of Missouri in September. I want to tell you a little bit more about the organization and invite you to attend the conference.

The organization is the Financial Therapy Association – it is a new organization that started in Manhattan, Kansas a few years ago. Financial Therapy has been described as the integration of cognitive, emotional, behavioral, relational, and economic aspects that promote financial health^[i]. Financial Therapists are interested in helping people achieve their financial goals by looking at all aspects of a person’s life. Often this involves helping clients explore their beliefs and emotions about money and how those were formed. Financial Therapists seek to understand how and why people make (or in many cases, don’t make) positive changes in their lives.

Financial Therapists can be found operating their own offices, working within a financial counseling or planning office^[ii], or in many cases financial planners and others are becoming educated in the basics of financial therapy so they can assist their clients more fully.

The field of financial therapy brings together many different disciplines, including financial planning, financial counseling, estate planners, marriage and family therapy, psychology, social work and more.

The Personal Financial Planning department at the University of Missouri is excited to be hosting the 3^rd annual Financial Therapy Association conference. The purpose of the conference is to provide a forum for researchers, practitioners, the media, and policymakers to share research and practice methods and models of financial therapy. The conference will be held September 23-25, 2012 and is open to anyone who is interested in learning more about the field and hearing current research, including students (students get in for a much lower cost and attending a conference like this is a GREAT way to network with professionals in the field). For financial planners or counselors with the CFP® or AFC® designation you can also get continuing education credits for attending various sessions.

Carl Richards, author of The Behavior Gap^[iii] and Clyde Anderson, author and weekly CNN contributor^[iv], will be our keynote speakers. Both will be signing copies of their books at the conference. There are also sessions on everything from motivational interviewing to estate planning and everything in between. You can see the full schedule at the conference website.

We would like to invite YOU to attend the conference. If you sign up before Aug 31 you get early-bird pricing on your registration.

We look forward to seeing you at the conference.

You can learn more and register here:

http://financialtherapyassociation.org/2012_Conference.html

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[i] http://financialtherapyassociation.org/About_the_FTA.html

[ii] http://www.fpanet.org/journal/CurrentIssue/TableofContents/CollaboratingwithaFinancialTherapist/

[iii] http://www.behaviorgap.com/

[iv] http://www.clydeandersononline.com/

Exchange Traded Funds

Several online brokerage firms, including TD Ameritrade (100+ ETFs), Fidelity (31 ETFs), Vanguard (64 ETFs), and Schwab (11 ETFs), offer investors the ability to purchase Exchange Traded Funds (ETFs) for zero commissions.  That is not a typographical error.  One may purchase a diversified portfolio of stocks for $0 in commissions.  Before we take advantage of this bargain, let’s make sure we understand the characteristics of this increasingly popular investment.

 

Why are ETFs so popular?  First, they allow the purchaser to buy shares of a highly diversified portfolio of securities.  Second, there is no minimum purchase, like there is in many mutual funds, enabling the small investor to use their limited resources to diversify across and within sectors.  Third, the expense ratios of ETFs are low, relative to their cousin the “Mutual Fund”.  The average expense ratio for all ETFs is a little more than 50 basis points (bps), while it is over 100 bps for mutual funds.  Fourth, they are relatively tax efficient, as they are designed to mimic an index.  When an index is purchased there are fewer reasons to trade securities which results in fewer capital gain distributions.

 

What do they do?  ETFs mimic index mutual funds by tracking a broad based index while holding a diversified portfolio of stocks and/or bonds.  ETFs exist for most of the world’s major indices, as well as focusing on specific segments of the stock market.  This “indexing” reduces turnover and, hence, capital gains distributions.  Moreover, low-cost indexing is hard to beat as a strategy, especially for beginning investors seeking to achieve market returns.  For, if you own the market index, you should receive the return on that index, less the expense ratio of the index.

 

A characteristic of ETFs is that shares are purchased and sold on stock exchanges (hence, we call them exchange traded funds).  This is similar to other common stocks and, with the growth in low-cost internet trading platforms, make it possible to be diversified without having to spend a fortune.  (Zero commissions are pretty low commissions.)  The catch, if there is one, is that the price of an ETF is determined by both the value of the securities held within the fund – similar to other mutual funds – and by market supply and demand factors.  If, for example, there is a either a large increase or decrease in demand for an ETF investment, the price per share could increase or decrease, respectively, according to these external factors.  Another cost is that most stocks are sold on a bid/ask basis, where they are sold at the ask price and purchased at the bid price.  This creates a bid/ask spread which profits the market maker in the ETF.  This could reduce your returns.  These “hidden” stock characteristics, however, also allow for other aspects of stocks to exist in the ETF market.  Practices such as limit orders (set a limit on what you are willing to pay per share) and stop orders (set a price at which your security is sold) are available to the ETF investor, while the mutual fund investor simply buys or sells at the close of the day’s business.  Increasingly, the ability to sell ETFs short and to purchase them through a margin account, allows investors to invest in their beliefs with regard to market moves, as opposed to the moves in a single security. 

 

Whether you choose an ETF, a mutual fund, or individual securities to invest your money you must never forget the importance of disciplined saving, diversification of investments, and beginning while you are young to work toward your financial success. 

 

NOTE:  We discussed whether we should continue the Financial Tip of the Week over the summer months of June and July.  Our staff is skeletal during the summer and, as our biggest users are teachers of personal finance, we have decided to suspend publication of the Financial Tip until August.  If you receive it today, you will again receive it in August.  We are just taking a break, while we work on our own Financial Success.

 

May you have a summer to remember and many blessings within it.