Fiscal Responsibility

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As a Housing Counselor for a non-profit agency my job is to prepare clients for homeownership.  A large chunk of that preparation includes educating clients on fiscal responsibility. In the year and a half I’ve been employed at my agency I’ve seen hundreds of clients and what I’ve noticed is that many people have little to no knowledge of fiscal responsibility; things like credit building/repair, saving, debt management, etc. I’ve had retired couples who have never sat down together to budget or young adults who have never seen their credit score. What’s even more disturbing about this trend is that it’s mainly POC that are the most uneducated about finance. I don’t know exactly what it is about our community that makes us this way. Are we missing the information that’s out there? Is fiscal responsibility not taught in our homes? Do we not actively seek the knowledge? I’m sure it’s a combination of all these things in addition to bunch of others.

I’ve picked lots of wonderful information since I’ve been employed at my agency, information that I feel I should share.  I’m a firm believer that, as active consumers, everyone should be educated enough  so that we can make sound decisions. Proper knowledge also keeps us from being taken advantage of when making major purchases.

Budget/Saving: This needs to be done first and is typically the foundation of financial stability.   There isn’t much that can be done until one evaluates their spending and learns how to budget. As far as the method of budgeting, I typically give clients a few basic budget worksheets and  encourage them to research and play around with different systems until they find one that works for them. Each person is different, so there is no one blanket system for budgeting. Once a budgeting system is set in place then one can start saving. With the economy being what it is I understand that saving money may be a challenge. People tend to have a false idea that one needs to put aside hundreds of dollars a month. This couldn’t be further from the truth. Setting aside anywhere between $20-$100 a month can go a long way. Whatever a person can comfortably save without it being a strain is what I recommend.

Credit: This is a big one and there is so much information that I could probably write an essay, or at least an entire separate post on this alone. To save myself from writers cramp I’ll sum up the most essential things about credit. Credit is important because it’s a “snap shot” of how one pays (or doesn’t pay) their bills. The goal is to have more open credit in good standing than credit in default/collections. Common types of credit include loans (car, home, student, personal, business) and revolving (credit cards). Having a mixture of these types of credit generates what’s called a FICO score.  The scores come from three credit bureau companies, TransUnion,  Experian, and Equifax and range from  no credit to 850. The assumption is that the lower the score the more at risk the consumer is to default on a loan.  This is the reason why companies look at a person’s credit history before extending any type of credit. The following are some good tips on building/managing credit:

  • It is not necessary to have a  lot of credit cards and having several will not increase your credit score. In fact, too many credit cards will affect your debt to income ratio (something I will talk about later). It’s enough to have just a few, maybe 2-5.
  • When managing credit cards, keep them at no more than half the limit. For example, if you have a credit card with a $500 limit, don’t charge more than $250-$300. The closer you get to the limit the more it negatively affects your FICO score. *credit card balance has the most impact on overall credit score*
  • Contrary to popular belief, paying off an entire credit card balance each month does not help your credit score, unless you have a card that requires it such as AMEX. In fact, doing so will reflect on your credit report as though you do not use your credit card. While this wont make your score go down, it certainly won’t help it increase if you’re trying to improve it. The suggested thing to do is to leave a small balance on the credit card each month (small meaning $5-$20).
  • If you do chose to pay off the entire balance of a credit card don’t close the account. Doing so negatively affects your credit.
  • Old (established) credit has more weight than newly opened credit.
  • Pay credit cards and loans on time. Late payments negatively affect your credit. If the credit is new it’s important not to default in the first twenty-four months, as doing so will drastically lower your credit score.
  • It’s a good idea to check your credit once every six months to avoid fraud and identity theft.

The following is some information for those looking to repair bad credit:

  • Before doing anything obtain a copy of your credit report to see what is listed as a collection or default.
  • Verify if the statute of limitations has passed for the agency to collect on the defaulted account. Check what the statute is for your specific state, each has its own. If the time has passed, then dispute the collection directly with the three credit bureaus.
  • Before settling any debt with a collection agency request to them, in writing, that they validate it. This is your right as a consumer under FDCPA (Fair Debt Collection Practices Act).
  • The quickest way to settle debts is to start with the smaller balances and work your way up to the ones with the larger amounts. A collection is a collection and they all affect your score the same, regardless if they are for $20 or $2,000 so start with what’s most feasible.
  • Only settle for the amount that you know you owe as collection agencies tend to hike up the balance. For example, if you know your last Sprint bill was $150 before it went to collections but the agency is telling you that you now owe $800 (this happens, trust me) then haggle until they accept that $150.
  • Do not make an arrangement to pay a debt over the phone. Always send a check or money order as proof  you paid the debt.
  • Do not under any circumstances make arrangements to make installment payments on a debt and here’s why. As I said earlier collections have a statute of limitations for  being reported on a credit report, which is however many years–depending on the state– from the date of original default. However, as soon as you make an installment  payment it starts that cycle all over again. So say a person’s state has a statute of four years and has a debt that’s scheduled to fall off their credit next year, as soon as they make an arrangement for a payment plan on that debt it starts that four years all over again.

Of course there is a lot more to credit, these are just the basics. More information can definitely be researched.

Obtaining a Loan: When asking for any type of loan the one and only thing that lenders are checking on is your ability to repay the loan. It’s that simple, they aren’t concerned with anything else. Solid job history, savings (if it’s a home loan), credit history, and active debts are all used to determine if you qualify for a loan. Most lenders will want you to have at least a years worth of continuous employment. If you are purchasing a home the lender will want at least 6% of your loan saved in the bank. For example, if you’re pre-approved for a loan of $120,000 the bank will want you to have at least $7,200 saved. If it’s an auto loan, instead of providing banks statements you’ll need to provide a down payment. Earlier in this post I mentioned debt to income (DTI), which plays a large roll in loan approval. The more monthly debts you have (credit cards, student and car loans, line of credit, etc) the less money you have to pay back on a loan. This is why lenders only allow a certain percentage of a person’s monthly income to apply toward their monthly loan payment, including already existing debts. Each lender has their own maximum percentage that their client cannot exceed, which is found by adding up monthly debts and dividing by monthly income. Many people only focus on the most obvious items such as credit repair and saving, failing to consider DTI as they are working toward a major purchase.

Other Tips

  • Research and become familiar with your federal and state consumer laws such as the Fair Debt Collection Practices Act, Fair Credit Reporting Act, and the Truth in Lending Act.
  • Community centers, colleges, banks, and local non-profit agencies tend to offer free resources  on finance, especially seminars or classes.
  • When making a major purchase such as a car or home, it’s important to conduct a thorough background check on the company (auto finance, bank or lender, realty, etc) you’ll be doing business with. Consumer reviews will save you from possibly getting swindled.
  • As with anything, shop around. Just as there are options for buying a television or couch there are different loan products. Find out what’s out there.

This is the best summary I can provide about fiscal responsibility. There is so much more I could write about but I mainly wanted to provide an overview. I encourage people to research. There are a ton of  free resources, books, magazines, and websites dedicated to finance or you can always ask me. I’m happy to answer specific questions.

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