Keeping Score
You likely know that your credit score is a crucial piece of your holistic financial picture, playing a role in your ability to make large purchases and affecting your interest rates and insurance premiums. However, despite those factors, a 2017 TransUnion survey found that only 16% of baby boomers considered maintaining good credit a top financial priority as they prepared for retirement.
Whatever chapter of your life you're in, your credit score may come into play more often than you think - which makes understanding how to maintain it key to your long-term financial success. Here, you'll find an overview of what determines your score and how you can keep your credit in shape in the years to come.
Not Just Another Number
While your credit score might not seem quite as critical as your savings or other factors in ensuring your long term financial stability, this three-digit number plays a big role in seeing you through certain events, such as the purchase of a house or car. For those nearing retirement, you may not plan to move again and may be less concerned about potential credit checks. However, there are several instances in which things could end up changing. Unexpected changes in the property value ( for better or worse) or home damage could spur you to move or seek a loan to cover repairs. Or, perhaps you stumble upon your dream home while on vacation and decide to change course.
The same goes for cars. While it might be ideal to keep yours long term, a recall or accident could necessitate buying another. Whether with a home or car, any large purchase will require a credit check, and a better score will get you a better interest rate on your loan.
There are several scenarios in which your credit could come into play unexpectedly. A child or a grandchild could need a co-signer on a loan, for example. Or perhaps you stumble upon a business idea or venture and need a loan to get it started. Unexpected medical costs can also throw a wrench in our financial plans and spur the need to borrow funds if you don't have enough in your rainy-day fund. Just as you should have some savings handy for the unexpected, ensuring your credit score is ready for a surprise, too, can make all the difference in preparing for your financial future.
Keeping Your Credit In Check
So how exactly do credit bureaus come up with your credit score? You're probably already aware of some of the factors: your payment history, level of debt, credit age, your mix of credit as well as credit inquiries.
Once your aware of the factors influencing your scores, maintaining a good one becomes that much simpler. Beyond practicing good financial habits - like paying bills on time and keeping low credit utilization - simply keeping an eye on your credit is important to ensure you catch any negative reports, signs of fraud or even a forgotten medical bill. You should also consider keeping old credit accounts active, even if your not using them anymore, as their age might boost your score.
To Your Credit
Keeping a good credit score can also create opportunities should you wish to take advantage of them. For example, an excellent credit score might give you access to credit cards with great rewards, which could include anything from travel points and discounts to concierge services to cash bonuses for signing up.
Some people will even use a credit card as their emergency fund in lieu of holding a substantial amount of cash. Should something come up, they have access to a line of credit until they have the chance to thoughtfully transfer other funds from an investment account or money market. An advisor can help you weigh the benefits and considerations of each course of action.
If you're considering credit card options, think first about what you typically spend on. While a credit card with excellent travel rewards makes sense for someone who travels frequently, those perks might be lost on someone who would benefit more from a cash-back reward. It's no secret that credit cards incentivize spending, so applying smart personal finance practices is as you know, a must.
Pass It On
Whether you choose to utilize a line of credit for your spending needs, maintaining a good credit score is an important factor in helping ensure your long-term financial stability. As you consider your options and any next steps, consider involving your children or grandchildren in the conversations, simply so they can learn from your experiences as you've worked diligently to grow and maintain your score.
Talking Money As A Couple
She loves gardening, so she handles the yardwork. He loves to cook, so he handles the grocery shopping. Splitting household tasks by preference and ability is a fine idea except when it come to financial matters.
That’s because having one partner in charge of all financial decisions – a sort of household CFO- creates a financial risk for the “non-CFO” in the relationship. For example, nearly 74% of women who outsourced the money management to male partners discovered an unpleasant financial surprise after divorce or widowhood, according to a 2019 USB survey of high-net-worth women.
It’s important for both you and your partners to understand the basics of shared fiances, even if you prefer to be hands off or take the lead. In the survey, nine of 10 women who said they share the responsibility for long-term planning and investing reported more confidence in their financial future. Collaborating can also improve the quality of your relationship. According to TD Bank’s 2018 Love and Money Survey, couples are happier when they talk about money matters regularly. Nearly 90% of happy couples discuss finances once a month.
Here are four ways to ensure you’re working as an equally empowered team on all thing financial.
FINANCIAL DATE NIGHT
There’s value in setting aside distraction-free time to discuss what’s on their mind when it comes to money. Having a monthly budget check-in over a relaxed meal with your partner can help you connect everyday spending with the big picture goals you’re planning for, whether its a vacation home or your retirement. Personal finance author Farnoosh Torabi suggests the following script to get the ball rolling:
“I know it’s not the most exciting thing to talk about, but it would make me a lot more comfortable if we could go over our finances together. I just think it’s helpful if we share the basics so that we’re both on the same page and can work toward common goals.”
Torabi also shares that her first “money summit” with her soon-to-be husband was at their favorite bar over a round of margaritas. A fun and familiar setting helped ease the tension, she says.
If you’re in the habit of discussing spending and budgeting, take the conversation up a level to discuss big milestones on the horizon. If you need help, check out the list of money conversation starters paired with this article. The idea is to have open and honest conversations about what you want out of life.
THERE’S AN APP FOR THAT
If your partner’s eyes glaze over every time you show them your budgeting spreadsheet, don’t despair. Instead, try a budgeting app that puts financial transparency at your partner’s fingertips (some top-rated ones include Mint and YNAB). Choose one with stellar security that allows you to see assets, debt and spending trends through charts and graphs.
Most of these apps have notifications that will prompt your significant other to check cash flow, as well as alerts that show when your shared spending has exceeded a preset budgets. Over time, they will become more familiar with the mix of accounts and the ebb and flow of your money – without you having to create series of PowerPoint presentations.
KEEP IT SIMPLE
Can’t seem to get your spouse off the sidelines when it comes to money matters? It might be time to simplify. Here are a few examples. If you’re going through a complex bill-paying process to earn cash back on a credit card, switch tactics and set up bill pay through your bank for all-in-one convenience. If you have a sprawling number of accounts to keep track of, consolidate a bit so it’s not so daunting. Your advisor can also offer some guidance and help you find a path forward.
Consolidation can make it easier for the lesser involved spouse should they ever need to step in. It also prepares for the eventual decline of financial decision-making ability as we age, which is “extremely common,” Daniel Marson, a neurology professor at the University of Alabama at Birmingham, told Kiplinger. “Just the fact that you’re 70 or 80 years old may be impacting your financial skills.”
Once you’ve streamlined, upload a list of accounts and instructions for accessing them into a secure online vault. Lindsay Cook, co-author of “Money Fight Club,” advocates for this in a column for the Financial Times, saying she has exchanged online credentials with her husband using the password manager LastPass.
BUILD RAPPORT WITH YOUR PROS
The professionals in your corner (advisor, accountant, estate attorney, etc.) should be working with both partners in a household. You don’t need to be equally involved if that's not your style, but it’s important that each person knows who to turn to in the event one partner dies or becomes incapacitated. This is especially crucial when an advisor is putting together a financial plan – if one spouse is left out of the conversation, there might be a missing piece of information that can dramatically impact planning. If your significant other doesn’t seem to have time now to dive deeper into the finances, continue to offer opportunities for their voice to be heard and keep them updated. If they ever want or need to take the lead, they’ll be ready.
-2020 Raymond James & Associates Inc. Financial Perspectives