PRO TIPS: Answers From Real Personal Finance Experts
Let’s say you have a question about your personal finances. Maybe it’s about how to find a copy of your credit report—is that something you have pay for? Or maybe you want to learn more about building a great monthly budget, like how much room should you leave for unexpected expenses?
With your question firmly in mind, you sit down at your computer, open up Google and type it in. Google responds by delivering you page after page of tips, tricks and … cute panda videos? How do you know that these random web pages delivered to your digital doorstep contain the best advice? Are you really going to put your future into the hands of an algorithm?
Well, we’ve reached out to real life financial professionals from all across the country and asked them what kinds of questions they most commonly received, and what answers they give to them!
Think of it as your “personal finance crib sheet.” Enjoy!
- Mark Kantrowitz, Publisher and VP of Strategy, Cappex.com, @cappex
- Angel Radcliffe, MBA – CEO, CAS Consultants, @Cas_Dallas
- Kelvin Jiang, CFA – Buysidefocus.com, @buysidefocus
- Katie Ross, Education and Development Manager, American Consumer Credit Counseling, @TalkCentsBlog
The most common questions I hear about how to pay for college, especially questions about student loan debt. For example, how much student loan debt is reasonable and affordable?
I find that people want short answers, and are more likely to follow the advice if it is encoded as simple rules of thumb. In this case, I usually say that the student loan debt should be kept in sync with income. Total student loan debt at graduation should be less than the annual starting salary, and, ideally, a lot less. If total debt is less than annual income, the borrower should be able to repay their student loans in ten years or less.
Some of the common questions I receive are:
Why do I have three credit reports & scores? Equifax, Transunion & Experian are the largest credit reporting agencies in the US. Years ago, the bureau's only reported by region, they now all report country-wide. A creditor is only required to report to 1 credit bureau, although some creditors may report to all 3, hence why data on your report may vary. (Example: Credit Card A with a 2 year payment history is reporting to Equifax & Experian. You apply for a new card 'Credit Card B' which checks your Transunion report. Transunion is showing no payment history for any account (assuming credit card A is your only credit account) Credit Card B denies you)
How do you budget? When budgeting you want to look at your NET income. Many make the mistake of budgeting from their gross, NET is what you actually bring home AFTER taxes. I teach my clients the 50/30/20 rule, no more than 50% of net income should be spent on needs, no more than 30% on wants, and save at minimum 20% of net income.
What should I look for when applying for credit? When applying for credit, always look for the lowest interest rate. If you are applying for a credit card, look to see if you will be charged any type of annual/program fee, what the interest rate is and if the card has any perks such as cash back or mileage offers. If you are applying for a loan or line of credit, shop around for the best interest rate, be cognizant of the loan terms/length.
How much of a balance should I carry? If you ever have to carry a balance, be sure it's below 30%. 30% is a magic number when it comes to your available credit ratio. Staying below this number will help keep your credit score up, if you should ever carry a balance greater than 30% , you will see your credit scores slump at the drop of a dime. Creditors see you as a risk when you carry high balances and you may be denied credit or your credit limits may be reduced if you carry a high balance for long periods of time.
How to balance one’s long-term debt to asset ratio is the most common question I get.
Just like corporations that take on loans to fund their growth, people can take out 1-3 years loans to fund personal projects such as home improvement, large purchases, and starting a personal business. Especially given the low-interest rate environment we are in, personal loans has never been as affordable. The question is, what is the right amount of loans for you?
My advice is, create a personal budget to assess what amount of principal and interest payment you can afford each month. Use the interest you could afford and work backward to calculate the total amount of loans you can take out. If your project produces income in the future, the cost of the loan would be more than covered by your future cash flows.
Many of the questions we frequently get from clients are related to common financial myths or where to access certain information. When it comes to credit and personal finance, there is a lot of misinformation floating around. Here are the three most common questions we get:
1) Can I close a credit card account if there is still a balance on the card? Yes, you can! It is a commonly held belief that an account with an outstanding balance cannot be closed until the balance is paid. The money does have to be paid back, of course, but borrowers can close their accounts at any time. While closing an account is not always beneficial to a credit score, it is often necessary to discourage unwise spending habits and preventing deeper debt problems.
2) How can I access my credit report/score? Many consumers want to know what creditors see when they assess creditworthiness. Any consumer can receive one free copy of their credit report each year from each of the three major credit reporting agencies (Transunion, Equifax, and Experian). To access their free credit reports, consumers should go to www.AnnualCreditReport.com. Each credit report is requested separately, so it is recommended to spread out the three free requests throughout the year in order to monitor for identity theft or fraud. Credit scores are a little trickier. Many banks and credit card companies are beginning to include credit scores on monthly statements. If this service is not offered by a consumer’s account holders, they can buy their score directly from www.MyFICO.com. It is possible to get access a credit score for free, but many sites will only package the “free” score with a credit monitoring subscription service, so consumers should read all conditions before accessing their score.
What’s the difference between debt consolidation and debt settlement? If a consumer is looking for help with their debt, there are a lot of “debt relief” services available that offer different methods of solving debt problems. Debt Settlement or Debt Resolution services are generally considered riskier because they require consumers to allow their debt to go into default so that creditors will accept a lump sum payment to settle the debt. This has severe credit implications as well as tax liabilities. Debt Consolidation or Debt Management on the other hand usually allows those with debt to safely pay down their debt gradually by reducing interest rates and structuring a repayment plan that is designed to fit the consumer’s budget.
To learn more about the ins and outs of personal finance, you can follow these experts on Twitter. And check back next week when we’ll have even more expert advice on the OppLoans Blog.