Understanding Credit Scores and FICO

Credit Scores

• Credit scores are determined by agencies like Equifax, TransUnion, and Experian.
• Lenders use FICO scores because they are less subjective than other evaluation methods.
• A good FICO score ranges from 700 to 850, while a bad score ranges from 300 to 650.

FICO Score Breakdown

• Payment history is the largest factor in determining your FICO score.
• Credit utilization is calculated by dividing the amount of credit used by the total credit limit on all revolving credit accounts.
• A hard inquiry occurs when applying for credit (e.g., buying a home) and can negatively affect your credit score.
• A soft inquiry occurs when checking your own credit score or during a background check and does not affect your credit score.

Improving Credit Score

• Potential ways to improve your credit score include communicating with creditors to negotiate late payments.
• Have payments reported to credit agencies and regularly check credit reports for accuracy.
• Making payments at the beginning of the month or when you get paid can help improve your score.
• There is no substitute for disciplined financial behavior when it comes to maintaining a good credit score.
• You are entitled to one free credit report per year, but it may not include your FICO score.
• Some credit card companies provide FICO score information to their customers.

Credit Cards

• Each purchase made with a credit card results in a small debt.
• The billing cycle is important for understanding when balances are reported to credit agencies, which occurs at the end of the billing cycle before the grace period.
• The grace period is typically 21-25 days after the billing cycle ends, during which no interest is charged if the balance is paid in full.
• To improve your credit score, aim to keep credit utilization under 29% and make payments throughout the billing cycle.

Consequences of Not Paying in Full

• Late fees can range from $20 to $50.
• Interest rates on unpaid balances can be 15-30% annualized.
• Not paying in full can decrease your credit score, with credit card companies typically reporting after 30 days.

Minimum Payment

• Making the minimum payment avoids late fees and prevents a decrease in credit score.
• A 90-day late payment has a greater negative impact on your credit score than a 30-day late payment.

Credit Card vs. Debit Card

• Debit cards are linked directly to your checking account, while credit cards involve borrowing the credit card company's money.
• With debit cards, you are using your own money, while with credit cards, you are using the credit card company's money.
• Credit cards offer fraud protection, ensuring money won't leave your account, while debit cards typically don't have the same level of protection.

Credit Card Points/Rewards

• Understand the conversion rates from money spent to rewards given.
• Two main types: rewards based on spending and sign-on bonuses.
• Some cards offer more points/rewards for spending in certain categories.

Debt

• Common types of debt include home loans, personal loans, auto loans, credit cards, and student loans.

Home Mortgage

• For mortgage loan terms (15 vs. 30 year): the 15 year has a higher interest rate and less interest over the life of the loan than the 30 year, but higher monthly payments.

Loan Amortization

• Focus on the interest portion of loan amortization, specifically understanding how much you would pay in interest in a given month based on interest rate, balance, and payment amount.
• The amount going towards the principal is the payment amount minus the interest (Payment – Interest = Amount that pays down debt or principle).

Fixed vs. Variable Rate

• Variable interest rates are typically lower due to the risk involved, while fixed rates offer security against rate increases.
• Adjustable Rate Mortgage (ARM) involves paying a fixed rate for a set period, after which the rate adjusts annually.

Auto Loans

• Auto loans typically range from 3-7 years.
• Cars depreciate quickly and have higher interest rates compared to mortgages.
• Auto loans can be obtained from banks, credit unions, or dealerships with "financing available."

Student Loans

• Student loans offer a 6-month grace period after graduation, dropping below half-time enrollment, or dropout before payments begin.
• Federal loan amortization is typically 10 years, while private loans range from 5 to 20 years.
• Consider student loans as an investment and evaluate the return on investment, especially for graduate school.
• Repayment options include standard repayment, public service loan forgiveness, and income-based repayment.
• Forbearance is available upon request from your provider.

Personal Loans

• Personal loans are not backed by collateral and are used for various purposes like moving, weddings, or emergencies.
• Personal loan interest rates are generally higher than those of secured loans.

Debt Repayment Strategies

• Snowball method focuses on paying off the smallest balance first and then working up to larger balances.
• Avalanche method prioritizes paying off the debt with the highest interest rate first, resulting in less overall interest paid.

Buying a Home

• "Pre-approval" involves a bank analyzing your assets, income, and debt to determine a maximum home purchase amount.
• Pre-approval does not guarantee loan approval.
• The pre-approved amount may not always align with your budget.

Buying Agent

• Buyers typically do not pay a buying agent; the seller pays 3% to both their own agent and the buyer's agent.
• Buying agents assist in finding homes, negotiating offers, and writing offers.
• The seller of the home pays the buying agent.

Factors to Consider When Looking for a Home

• Factors to consider include size, schools nearby, price, and location.

Offer

• An escalation clause is a provision in an offer that automatically increases the offer by a set amount (e.g., $500) when a higher offer is made, up to a specified maximum (e.g., $625,000).

Due Diligence

• An inspection involves a non-invasive examination of the home by an independent party to identify issues.
• An appraisal is a valuation of the home by an independent third party.

Loan to Value

• Understand the relationship between appraisal, purchase price, and loan amount, and how much you have to pay out of pocket.

Closing

• Closing costs typically range from 3-5% of the home's value.

Escrow

• Escrow involves making monthly payments that are used to cover property taxes and insurance premiums when they are due.
• Property tax payments are typically due semi-annually.
• Escrow manages these payments on your behalf using your monthly payments.

Down Payment

• The down payment is the amount you pay at the closing of the home purchase.
• Down payments are typically around 5-20% of the home's value, depending on the loan amount.

Private Mortgage Insurance (PMI)

• PMI is a monthly fee paid if the loan is 80% or more of the home's value, typically 0.5-1% extra percentage interest on your loan.
• Once the loan value reaches 80% of the original value, you can request to stop PMI payments.

First-Time Home Buyer Programs

• These programs can assist with down payments, closing costs, loan acceptance, and grants.

Home Warranty

• A home warranty involves paying a monthly premium to cover certain home repairs, often with a one-time fee for the initial service call.

Refinancing

• If interest rates decrease, refinancing your home loan may be an option, but consider the associated costs to determine if it's worthwhile.

Paystubs and Social Security

• Tax withholding is the amount of money the government keeps from your income until you file your taxes.
• Tax withholding started during World War II.
• It is possible to adjust your withholding amount, subject to a minimum amount determined during onboarding.

FICA Taxes

• FICA taxes are also known as payroll taxes.
• FICA taxes consist of Social Security (6.2% paid by both employer and employee) and Medicare (1.45% paid by both employer and employee).
• The employee and employer each pay 7.65% in FICA taxes.
• Deductible retirement savings (Traditional IRA/401(k)) do not reduce FICA taxes.

Social Security

• Women generally have a longer life expectancy than men.
• President Franklin D. Roosevelt signed Social Security into law.
• Key ages for Social Security: 67 is the Full Retirement Age (FRA), 62 is the earliest age to receive benefits, and 70 is the latest age to wait to receive benefits.
• Social Security benefits are progressive.
• Low-income individuals receive a larger portion of their taxed Social Security income back when receiving benefits compared to high-income individuals.
• "Full Coverage" requires 40 quarters of work history.
• "Currently Insured" requires 6 of the last 13 quarters.
• Other Social Security benefits include disability, survivor's benefits (if a family member dies, you may receive a portion of their benefit), and a death benefit (a lump sum to spouse or kids).
• If you think you’ll die before 80 consider taking it at 62, round 80 consider 67, longer than 80 wait till 70