Money Management

Your credit score affects loan rates, the credit cards you can open, and much more. Get a better understanding of your credit score with this handy guide. 

Your credit score is a number used to measure your creditworthiness. It’s an important part of your personal finances. For example, it’s a big factor in deciding the interest rates you’ll get on loans. If you have a high credit score, it can make life easier and cheaper.

By understanding how your credit score works, you’ll be able to manage it well and achieve excellent credit. In this guide, we’ll cover all the need-to-know details, including what determines your credit score and how it’s used.

How your credit score is calculated

There are three credit reporting agencies that calculate a credit score for you: Equifax, Experian, and TransUnion. These agencies maintain a credit file based on the information they receive about you from creditors. Using that information, they calculate a credit score.

If they all have the same information on you, then your credit score should be the same with each one. Sometimes they have different information, which is why it’s recommended to review your credit report with each agency at least once per year. If one of them has incorrect data, it can negatively affect your credit.

To calculate your score, the agencies use a credit scoring system. The most commonly used is the FICO® Score system. It was created by the Fair Isaac Corporation, which is partnered with all three credit reporting agencies. While there are other types of credit scores, FICO® Score is the one most lenders look at. It ranges from 300 to 850.

Factors that determine your credit score

So, what exactly goes into your FICO® Score? The Fair Isaac Corporation is a for-profit company, so it keeps that information under wraps. Just like Coca-Cola doesn’t reveal its secret formula, neither does Fair Isaac.

It has, however, provided a general breakdown of the scoring system on its website. Here are the five factors and how heavily weighted they are in your FICO® Score:

Payment history (35%): The most important part of your credit score is your payment history with creditors. When creditors report that you paid on time, it’s good for your credit. Any type of payment issue, such as late payments or filing bankruptcy, heavily damages your credit score.Amounts owed (30%): This looks at the credit accounts you have open, such as credit cards and loans, and how much you owe on them. Your credit utilization, meaning your ratio of card balances to credit limits, has the largest impact here. Lower is better, and it’s recommended that you keep your card balance below 30% of your credit limit.Length of credit history (15%): People who have been using credit for a long time are considered less of a risk. Your length of credit history includes both how long you’ve had your oldest credit account and the average age of your credit accounts.New credit (10%): Applications for new credit can have a small impact on your credit score. It’s not a big deal to apply for the occasional loan or credit card. But if you apply for new credit frequently, it can lower your credit score.Types of credit used (10%): It’s better from a credit scoring perspective to have a mix of credit card and loan accounts. Since this only has a small impact, don’t feel the need to get a new loan or credit card solely to diversify your accounts.

Why your credit score matters

Your credit score affects your life in more ways than many people realize. It’s important any time you’re borrowing money or opening a credit product. If you’re interested in the credit cards with the most benefits, you’ll likely need a high credit score. If you want low interest rates on mortgages, auto loans, or any other type of loan, that will depend on your credit score as well.

Those aren’t the only situations where your credit score comes into play. Here are more examples of when companies may look at your credit file:

Some companies run credit checks as part of the hiring process, especially if the job involves handling corporate funds.Landlords and property management companies check the credit of prospective applicants. If your score isn’t high enough, your application could be denied, or the company may want a larger security deposit.Insurers in most states are allowed to use your credit to set your premiums on things like auto and homeowners insurance.Utility companies may want to check your credit and either charge you a deposit or deny your service if you have a low score.

What a perfect score looks like — and why it’s not necessary

Many years ago, TransUnion provided information online about what the profile of someone with a perfect 850 credit score might look like. It’s unverified, but here’s what it said:

A few credit cards with high credit limits ($10,000 or more) and very low balances on only one or two at mostOne charge card (a type of card that’s paid in full every month)All credit accounts are at least six months old, and at least one is more than three years oldNo derogatory marksVery few credit inquiries from new credit applications (no more than three within a six-month period)At least one installment loan account, such as a mortgage or auto loan, in good standing

But here’s the thing: Nobody needs a perfect credit score. Once you have a 760 FICO® Score, your score is high enough. You can get the lowest interest rates on any type of loan. To confirm this, check out FICO’s loan savings calculator. It shows that credit scores in the 760 to 850 range receive the lowest loan rates. Once you’re in that range, there’s no need to raise your score.

While there’s a lot that goes into a credit score, all you really need to worry about is paying your bills on time and not borrowing too much money, especially on credit cards. If you do those two things, that alone can take you all the way to excellent credit.

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Eyecare does not have to be expensive. Here, we break down how much you can save by having your eyes examined at Costco. 

When you’re too sick to go to work, you may be forced into a doctor’s office whether you want to go or not. However, unless something unusual arises, it’s easy to push off a visit to the ophthalmologist to check your vision. If the reason you avoid eye exams has to do with a lack of vision insurance, Costco may be the answer.

Out of pocket

As of June 2023, the average cost of an eye exam without insurance is $194. On average, a basic eye exam at Costco will set you back by $64 to $70 without insurance. If you wear contact lenses, you’ll pay around $104 to $120. The exact price you pay will depend, in part, on where you live.

If you have a Costco membership, you’re free to have your exam and purchase eyeglasses or contacts from the retail giant. If you don’t have a membership, you’re still free to have your eyes examined. With so many online and storefront discount eyeglass stores available, it’s easy to take your prescription somewhere else.

The ability to save over $100 on an exam leaves you with more money to tuck away in savings or use in some other way.

Your Costco eye doctor

Costco does not employ its own ophthalmologists. Instead, eye doctors work as independent contractors. The stores have the latest technology and equipment, and each doctor is held to the standard set by Costco, which helps explain the strong online reviews its optical department receives.

Still, it’s possible to go into your appointment with even more confidence in the doctor scheduled to examine your eyes. When you make your appointment, ask which doctor you’re scheduled to see. Once you have the doctor’s name, check out their credentials by visiting the American Board of Ophthalmology online or call the organization directly at (610) 664-1175. You can also check credentials through the American Board of Medical Specialties’ online portal or by calling (866) 275-2267.

Another way to save

Some people have health insurance through their employers, but don’t have access to vision coverage. Still, there may still be a way to cover the cost of eyecare. If you have a health savings account (HSA) or flexible spending account (FSA), either will cover eye-related expenses. Be sure to take advantage of that perk.

Financial resources

If your household budget is tight, and you can’t cover the cost of eyecare, there are organizations that want to help. Here’s a sample of places you can reach out to:

Community health centers: Some community health centers include an eye clinic. If the community health center near you offers an eye clinic, check its website or give them a call to ask if they offer free or low-cost care.Nearby universities: If you live near a college or university, check to see if it has an optometry or ophthalmology program. If so, call to learn if they provide low-cost eyecare (some do).Lions Clubs International: For years, Lions Clubs have helped pay for eyecare through local clubs.VSP Eyes of Hope: Provides no-cost eyecare and eyeglasses. If you have a limited income and don’t have health insurance, you can apply for Eyes of Hope. You can find information regarding the program and how to apply here.New Eyes: This organization provides prescription eyeglasses to those who can’t afford the out-of-pocket costs. You can find more information on the New Eyes website.EyeCare America: Provides free comprehensive eye exams, as well as one year of care, to those aged 65 and older. EyeCare America also provides care to people who are at a higher risk of developing glaucoma.All Children See: If your child has an existing vision problem or a problem caught through a vision screening, this public service organization will connect you with an eye doctor who can provide a comprehensive exam. All Children See is only available in some states.InfantSEE: Provides free eye assessments for babies between the ages of 6 and 12 months. InfantSee seeks to catch vision issues that a regular check-up may miss.

Not everyone has funds they can pull from their personal checking account to cover an eye exam, but if you do, Costco provides a great low-cost alternative to typical eye doctor offices.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Dana George has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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The Federal Reserve wants to regulate risk-taking by banks. Here’s why customers could benefit from more bank scrutiny. 

Banks generally decide how much risk they want to take and what types of risks they’re exposed to. While there are regulations currently in place to help ensure banks are financially sound, the recent collapse of Silicon Valley Bank and a few other banks just a few months ago proves that when some banks are willing to make riskier decisions, the rest of the industry — and potentially the economy — foot the bill.

The Federal Reserve wants to help mitigate some of this risk by having large banks shift toward a standardized way of evaluating credit, trading, and operational risks based on international standards.

And there are a few reasons why moving banks away from their own risk assessment standards could be a good thing for consumers.

Why bank risk can be a problem for consumers

First, when banks use their own formulas and data to determine if a certain investment or loan is risky, it sometimes leads to making big mistakes that potentially hurt individual customers.

In the case of SVB, the bank decided that buying lots of long-term bonds was a good investment decision. When interest rates rose quickly, the value of those bonds went down fast, and the bank couldn’t sell them without significant losses.

SVB customers then got worried about their bank accounts and started pulling their money out, causing what’s called a bank run. While not all of the factors in play could have been controlled by SVB, it’s a recent example of how one bank’s risk assessment caused panic among customers and led to other worries about the health of the banking industry in general.

The Federal Reserve’s proposed standards aim to lessen some of this risk by not only requiring large banks to adhere to the same risk assessment standards but by also forcing the largest banks to set aside more capital to protect against rainy days — $2 of capital for each $100 in risk-weighted assets, according to Bloomberg.

One additional benefit to more standardized rules could be more transparency for consumers. If all banks evaluate their investments and loans using the same system, consumers may be better able to compare one bank’s services to another.

Bank regulations don’t fix everything

It’s impossible to regulate risk away completely. And just like individuals take on some risk to find financially rewarding investments, banks need to be able to do the same.

The average consumer can protect themselves by being in the best financial shape possible. That means storing money in FDIC-insured accounts, which protect up to $250,000 per depositor, per bank ($500,000 for joint accounts). Additionally, it may be a good time to evaluate your own potential risk taking. Early this year, personal loan balances were up 26% compared to last year, at the same time that interest rates were elevated.

Taking on too much risk, it seems, may be natural for both banks and individuals. And while bank regulations can help protect the economy, sound personal financial standards like paying off debt, saving money in an emergency fund, and building a retirement portfolio will significantly benefit your daily financial life.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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A HELOC can be a convenient way to borrow. But what if you don’t end up using it? Find out what happens. 

If you need to borrow money, there are different ways you can go about it. You could take out a personal loan, which allows you to borrow money for any purpose. But if you own a home, you may want to borrow against the equity you have in that property. You can do so via a home equity loan or home equity line of credit (HELOC).

The benefit of taking out a HELOC is that you aren’t locked into borrowing a preset amount of money. Rather, you get access to a line of credit you can draw from at any time during a specified period — commonly 10 years, but it could be more or less.

Also, with a HELOC, you don’t have to actually borrow the entire sum you qualify for. You could take out a $30,000 HELOC to give yourself leeway to make improvements to your home. But if you only end up needing to borrow $20,000, you can leave the remaining $10,000 untouched. That way, you won’t have to pay interest on it.

As of the first quarter of 2023, outstanding HELOC balances stood at $339 billion, according to the Federal Reserve Bank of New York. So clearly, they’re a pretty popular borrowing option. But if you’re going to take out a HELOC, you’ll want to make sure you actually have a need for the money. If you open an HELOC you don’t end up using, you could end up throwing some money away.

When you don’t end up tapping your HELOC

It’s common to take out a HELOC and not withdraw the amount you’re eligible to borrow in its entirety. But if you don’t borrow from your HELOC at all after putting it in place, there could be some penalties.

Some lenders require you to take minimum withdrawals from a HELOC. If you don’t, you could be charged an inactivity fee. There can also be cancellation fees if you realize you don’t need your HELOC and want to close it early.

The good news is that these fees should be disclosed to you as part of your HELOC contract. So there shouldn’t be any surprises. But it is important to know what you’re getting into.

You should also know that there can be application fees and closing costs for putting a HELOC in place. As such, you really don’t want to open a HELOC just for the sake of having money to tap. You may be better off waiting until you have an actual need to borrow.

In fact, let’s say you want to make sure you have access to $10,000 at all times in case a home repair pops up. You may be inclined to open a $10,000 HELOC. But not using it could cost you. So a better bet in that situation is to build a $10,000 emergency fund and keep that money in a savings account instead.

Be careful when signing a HELOC

A HELOC can be a convenient way to borrow, but there are drawbacks to taking one out. In addition to the costs you might face for putting one in place and for leaving yours untapped, falling behind on HELOC payments could eventually put you at risk of losing your home. So it’s important to consider all of your borrowing options if you need access to money, and not just assume a HELOC is automatically your best bet.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Sometimes we come across a piece of advice that really resonates with us. Here’s one writer’s experience. 

There’s a ton of personal finance advice out there. And I mean a ton. A metric tonne, even.

Sifting through that advice for useful stuff can sometimes be hard. But there are certain pieces of financial wisdom that we stumble across that really stick with us.

For me, the best piece of financial advice I’ve ever received came from, of all places, a blog I read roughly 10 years ago. I can’t remember anything about the website or the writer, but I distinctly remember the advice: Treat your credit card like it’s a debit card.

‘Treat your credit card like it’s a debit card.’

This piece of advice is all about avoiding the dreaded credit card interest. And its heart is that you should always make sure you have the cash in your bank account to cover any expenses you put on your credit card.

If you’re not charging beyond your means, you’ll be able to pay off your balance in full every single month, avoiding interest fees — and the accumulation of debt. To explore this advice further, let’s talk about the difference between credit cards and debit cards.

Credit cards vs. debit cards

Credit cards and debit cards have a lot of similarities. They’re both payment cards you can swipe — or, these days, tap or insert your chip — to make purchases at businesses. You can also use both to make online purchases. (And they both make handy scrapers in a pinch.)

But that’s about where the similarities end. Debit cards are attached to your bank account. When you use your debit card, it essentially pulls money from your bank account to pay for your purchase.

If you don’t have the money in the bank, your debit card will generally deny the purchase. (In some cases, you can set your debit card to allow the purchase, but this means an overdraft — and an overdraft fee. Don’t do this.)

Your credit cards, on the other hand, are a few steps removed from your bank account. Instead, they’re linked to a line of credit extended to you by the issuer. When you make a purchase, the issuer pays the business. Then, you have to pay the issuer when your credit card bill comes due.

If you don’t have the money in the bank to cover the cost of charging something on your credit card, you can still make the purchase. Now you have debt. If you can get the money before your bill comes due and you pay it off during the grace period (i.e., before your due date), then you can still avoid interest.

But if you can’t pay your bill in full, you’ll start accruing interest fees. And as your debt grows, those interest fees can get out of control.

Bringing back the checkbook

One of the easiest ways to ensure you’re treating your credit cards like debit cards is to track your purchases. My favorite method is an old-school one, but it’s very effective: the checkbook.

For those who may not know (or remember), people used to use paper checks to buy things. These checks came in packs with a little ledger booklet. When you wrote a check, you’d make a note in the ledger of the check number, what it was for, and the amount.

Then, later, you could balance your checkbook, meaning you could compare the transactions in your ledger with the transactions on your bank statement. (And yes, before they were online, your bank statements were mailed to you every month on actual paper.)

While few of us use paper checks these days (unless you’re buying a house; prepare to have a few in this case), the little checkbook ledger is still a very useful tool. Instead of tracking paper checks, though, you can track your credit card purchases. Each time you use your card, make note of the where, when, and how much. If you keep a running total, you always know where you stand compared to your bank account balance.

Of course, if you’d rather be one with the digital age, there’s another solution: mobile apps. Between your bank app and your credit card app, you can see your balances pretty much whenever you want.

The downside? Many transactions take time to show up on your accounts. So if you forget that you got gas, for instance, you could be in for an unpleasant surprise when it shows up in your account three days later.

Swipe now, regret later

In case it’s not obvious by my long career talking about their benefits, I love credit cards. I do. BUT — I also accept that they have their issues. And one of the biggest of those issues is that it’s so easy to swipe and forget. Credit cards are so divorced from your actual cash monies that it can sometimes feel like the debt your’e accumulating isn’t even real.

Trust me, it is very real. And it can get you into very real trouble if you aren’t carefully managing your balances. It doesn’t matter if you keep it old school with some paper and a pen, or go digital with an all-in-one budgeting app.

Whatever you do, try to avoid the swipe-and-hope method; you know, the one that relies on your bank account magically having the money you need. Because one day, the magic will fail and you’ll be looking at some very expensive debt.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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You may be thinking about using a personal loan to fund your home down payment. Read on to learn why this is a bad idea — and may not be possible. 

Since 2018, first-time home buyers have typically made a down payment of about 6% to 7%, according to the National Association of Realtors. With the median sale price of a house sold in the U.S. totaling $436,800 as of April 25, 2023, that could add up to a down payment of about $30,576.

With a down payment costing so much, you may be wondering if it’s possible to borrow for one using a personal loan, so you can get into a house sooner. Here’s what the rules are with regard to using a personal loan as a down payment.

Your lender probably won’t allow you to use a personal loan as a home down payment

If you are hoping to use a personal loan for a home down payment, you are likely going to be disappointed. The majority of mortgage lenders are not going to allow you to use personal loan funds as your down payment money.

Lenders don’t want you to use personal loan funds because part of the point of a down payment is so you have some of your own cash on the line. If you’ve put thousands of dollars down on a home purchase, you’re much less likely to just walk away and let the bank foreclose on it. That’s not necessarily the case if you just borrowed that down payment money via taking out a personal loan, too.

A down payment is also supposed to show the bank you’ve been able to save money responsibly. Taking out a personal loan does nothing to show you’ve been diligent in saving for months or even years to be able to buy a home. You’ll be considered a higher-risk borrower without providing proof of this financial discipline.

Lenders also don’t want you to have too much debt when you borrow to buy a home. In fact, for many mortgage lenders, you’ll have to keep total debt payments — including your new housing costs — to 36% or less of your income. If you take on a personal loan, you are taking on more debt and there’s a greater risk of you not paying it back.

For all of these reasons, you most likely won’t be able to use a personal loan as your down payment source. You’ll need to save up money instead. And lenders will want documentation of where your down payment funds came from, so you can’t just sneak that personal loan in there, either.

Using a personal loan would be a bad idea anyway

Even if you could find a lender who allows you to use a personal loan, doing so would likely be a bad idea. First, you’d be committing to multiple new monthly payments at the same time, which could cause you a lot of financial stress. And, second, without equity in your home, you’d risk owing more than the house is worth. This is called being underwater. If you had to sell soon after buying, you probably wouldn’t be able to make enough to pay off your personal loan and the mortgage too.

Ultimately, while it may seem like a pain to wait and save up a down payment, doing so is the right financial move. You shouldn’t try to buy a home until you have at least some money to put down on the property — or you could end up regretting it.

Our picks for the best credit cards

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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