credit wisely

By Carrie Schwab-Pomerantz, Charles Schwab & Co.

Key points

  • It is important for all of us to use credit wisely.

  • It’s a good idea to periodically review your own debt situation — what you owe and your repayment plan — as well as checking your credit report annually.

  • Going on a cash-only diet is an effective way to change your credit card habits.

Using credit wisely is something everyone should focus on — no matter your age — because many Americans are awash in debt. According to the Federal Reserve, as of July 2016 revolving debt for American households totaled $969 billion; student debt was up to $1.4 trillion. Those are pretty eye-popping numbers!

While your own debt may not be in the stratosphere, I think it’s important for everyone to periodically test their knowledge of how to control credit and debt. So here are ten questions to ask yourself to make sure you’ve got a handle on your own debt situation.

1. Do you know the difference between good and bad debt — are you using credit wisely?

Not all debt is equal; some can work for you, some against you. To work for you, debt should ideally be low cost and have potential tax advantages. That’s good debt. Think home mortgages and equity lines of credit, even student debt, which has the added benefit of enhancing career opportunities and earning potential. On the other hand, credit card balances and auto loans are definitely in the bad debt category because they usually carry the highest interest rates and aren’t tax deductible.

2. When was the last time you checked your credit score?

Your credit score (or FICO score) plays a big part in your ability to get loans — mortgages, car loans, new credit cards, even your ability to rent an apartment. It can range from 250 to 900. With a low score, you’ll likely pay a higher interest rate, if you can get credit at all. A score of 760-800 or higher will generally get you the best deals. You can get a free credit report annually by going to annualcreditreport.com and, while the three major credit bureaus (Equifax, Experian, or TransUnion) charge for providing your credit score, most credit card issuers offer your credit score for free.

3. Have you taken steps to raise your credit score?

There are five simple ways to lift your credit score: pay your bills on time; keep your credit card balances low; establish a long credit history; minimize new credit requests; use different types of credit.

4. What’s your debt to credit ratio?

Also known as your credit utilization ratio, your debt to credit ratio represents the amount of credit you use relative to the amount of credit available to you, for instance, through your credit cards or other credit lines. To get your ratio, divide your total credit balance by your total available credit. A high ratio can negatively impact your credit score — and your ability to get new credit. The ideal credit usage is between 20 and 30 percent.

5. Do you pay your bills on time?

Paying your bills on time accounts for about 35 percent of your credit score. But credit score aside, late payments can also mean added fees and interest. Even if you can’t make the full payment, make a partial payment.

6. How much is your debt costing you? 

If you don’t pay your credit card balance every month, interest can get out of hand. Consider this example: Paying only $100 a month on a $3,000 credit card balance at 14 percent would cost you over $700 in interest. Plus it would take you approximately 38 months to pay it off!

7. Do you have the right credit cards for you?

Credit cards come with all kinds of perks and incentives. Don’t be taken in. Choose the perks that work for you —  whether points, cash back or travel rewards — and ideally stick to one or two cards because carrying balances on too many cards at the same time can also ding your credit score. Most importantly, look for a low-interest rate and no annual fee.

8. Is a HELOC right for you?

If you have enough equity in your home, a home equity line of credit (HELOC) can be a smart tool for accessing extra cash or consolidating debt. Plus, you may be able to deduct the interest on up to $100,000 of home equity debt secured by your home, whether in the form of a regular loan or a revolving line of credit.

9. What’s your debt payment plan?

If you’re carrying a monthly credit card balance, focus on paying it down. If you have multiple cards, start with the highest interest card while making minimum payments on the others. Work down your list. Keep on top of other debts with on-time payments. Make it easier on yourself by putting as much as possible on auto pay.

10. Should you go on a cash-only diet?

If you want to break yourself of the credit card habit, try using cash only for 30 days, especially for non-essential expenses. It’s an eye-opening exercise that may help you think differently about how you spend your money.

Credit is a powerful and convenient tool when used with care. Check your own credit smarts — and pass on what you’ve learned to the young people in your life.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC  

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly $475 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Additional Important Disclosures

The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.