Money Management

A run on deposits leads to a bank failure, and all banking customers need to pay attention. 

Silicon Valley Bank was founded in 1983 and became one of the leading financial institutions used by technology and biotech companies as well as many other startups. The bank had approximately $175 billion of deposits as of the end of last year.

On Friday, it collapsed, and the Federal Deposit Insurance Corp. (FDIC) took control of its assets. The collapse occurred after a run on the bank, with many tech companies withdrawing their money after being advised to do so by venture capital firms.

Silicon Valley Bank had $209 billion in assets, making it the largest bank to fail since the Great Recession in 2008 (which took down Washington Mutual). Here’s what this means for customers of both this bank and other financial institutions.

Why Silicon Valley Bank collapsed

The collapse of Silicon Valley Bank seemed to happen quickly, occurring just two days after the financial institution took emergency measures to raise money and prevent this outcome. A recent run on the bank amidst financial concerns was the immediate driver of its downfall, but there were many factors leading up to the bank’s demise.

Issues include relaxed lending standards, high interest rates paid on deposits, and the bank’s practice of investing a substantial amount of its deposited funds.

The bank had invested heavily in Treasury and mortgage bonds when interest rates were low, which then had to be sold at a substantial loss of around $2 billion after the Federal Reserve raised rates. This made SVB’s investments less attractive and affected the market for start-up funding, causing bank customers to make the withdrawals that necessitated the asset sales at an inopportune time.

What this means for customers

On Friday, Silicon Valley Bank was closed by California regulators and put under the control of the FDIC, which is acting as a receiver. The FDIC subsequently transferred the bank’s assets to a new entity, National Bank of Santa Clara, which the agency has indicated will be operational starting Monday.

For customers who had account balances below the FDIC insured limits of $250,000 per depositor, per insured bank, there should be no financial loss. In fact, the FDIC said the new institution would continue to clear checks that were issued by Silicon Valley Bank and insured depositors could access their money as early as Monday, March 13, 2023.

However, if customers had accounts with funds above the FDIC limit, they would be provided with receivership certificates for uninsured funds. They cannot just withdraw all their money at this point, but will have first claim on funds that are recovered from Silicon Valley Bank. Uninsured depositors will receive an advance dividend in the upcoming week and as the FDIC sells the bank’s assets, uninsured depositors may receive future dividend payments from the proceeds.

This bank collapse will obviously have the most profound impact on customers of Silicon Valley Bank who had accounts above FDIC limits. But, the reverberations of it may impact others who do their banking elsewhere, too.

Shares of several other banks fell more than 20% in trading on Friday. And Treasury Secretary Janet Yellen also suggested that the risk of bank failure could be more widespread, testifying at a Ways and Means Committee Hearing on Friday that, “There are recent developments that concern a few banks that I’m monitoring very carefully and when banks experience financial losses, it is and should be a matter of concern”

Ultimately, the collapse is an important reminder that any financial institution — even massive banks — could potentially go down if the conditions are right. This is why it is important to choose an FDIC-insured account and to think carefully before making deposits in any one account that exceeds FDIC-insured limits.

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Make this the year that you fix your credit. 

Your credit score is an important number, and unfortunately, a low score can cost you a lot of money. Home buyers with bad or even average credit get APRs over 1.5% higher than those with excellent credit, according to MyFICO. That could end up costing you over $100,000 in interest on a $300,000 home. Your credit can also affect your car insurance costs in most states, and drivers with poor credit pay more than double in premiums.

Numbers like that provide plenty of motivation to improve your credit score, and this doesn’t need to be a process that takes years. With the right steps, you could potentially go from bad credit to good credit in 2023. Here’s how to do it.

1. Learn what’s good and bad for your credit

A good place to start is by learning exactly what factors impact your credit score. These are:

Payment history: On-time payments are good, and payments that are 30 or more days late are bad. If you make a late payment, but it’s less than 30 days after the due date, it doesn’t count as late on your credit report or affect your credit score.Amounts owed: This refers to how much debt you carry in total, but the key part is your credit utilization ratio — how much you owe on your credit cards compared to their credit limits.Length of credit history: This includes how long your accounts have been open, including your oldest account, newest account, and your average credit account age. A long credit history is better, but you can still have good credit without one.Credit mix: Your mix of credit cards, loans, and other financing plans. A more diverse mix is better, but it isn’t required for good credit.New credit: If you’ve opened too many new credit accounts recently, it can have a small impact on your credit score.

The two most important, by a wide margin, are payment history and amounts owed. If you do well in those areas, your credit score will be in good shape.

2. Pull your credit reports

Visit AnnualCreditReport.com to request your free credit report. This is the site authorized by the government to provide credit reports to consumers. Request your credit report from the three credit bureaus: Equifax, Experian, and TransUnion.

Consumers are entitled to one free credit report per year from each bureau. But through 2023, free weekly credit reports are available, so you should have no trouble getting your report free of charge as often as you want.

Once you have your credit reports, look for negative items affecting your credit score. That way, you’ll know exactly what to fix. Examples of what to look for include:

Late paymentsAccounts sent to collectionsHigh credit card balances

3. Dispute any mistakes you find

Credit reporting mistakes are more common than you might think, as 34% of Americans found them in 2021, according to a Consumer Reports investigation. It’s important to fix credit report errors, as they could have a big impact on your credit score.

To get an error removed, dispute it with the credit bureau that issued the credit report. Each credit bureau lets you do this online. Here are the links for each credit bureau’s dispute page:

Equifax disputesExperian disputesTransUnion disputes

4. Make every payment on time

Since your payment history is the most heavily weighted factor in your credit score, paying on time is extremely important. This is one area where there’s little room for error. Even a single late payment can cause your credit score to drop by over 100 points.

Fortunately, late payments don’t count against you until your account is 30 days past due. Before that, you have time to prevent any damage to your credit score. Keep in mind that if you have an account that’s officially late, it’s still helpful to get caught up. Accounts that are 60 days and 90 days past due hurt your credit more, so the sooner you make your payment, the better.

Consider setting up auto-pay on your credit cards and loans, or set payment reminders for yourself. Other types of bills, such as utilities, normally don’t count toward your credit score. The exception is if they go to collections. Of course, it’s still best to pay everything on time.

5. Pay down credit card debt

The other key factor in your credit score is your amounts owed, and more specifically your credit utilization ratio. An easy rule of thumb is to keep this below 30%. Let’s say you have one credit card with a $1,000 credit limit. It’s recommended that you keep the balance below $300.

The great thing about credit utilization is that only the current number matters. Your credit utilization from, say, three months ago doesn’t. That means if you have high utilization, and you pay down your balances, you can quickly improve your credit score. Come up with a plan to get out of credit card debt, and not only will you save money on interest, but your credit score will go up.

Going from bad credit to good credit isn’t a complicated process. All you really need to do is get rid of any errors on your credit report and follow a few good financial habits. Give the steps above a try, and you’ll have a much higher credit score by the end of the year.

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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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The proposal would reduce deficits for the next decade. 

On Thursday, President Biden released a budget proposal for fiscal year 2024. The plan proposes sweeping changes to medical benefits, domestic and foreign investment, taxes, and entitlement programs. While the proposal in its current form is highly unlikely to pass a Republican-controlled House, the proposal could indicate the priorities of Democratic leadership. Read on, where we’ll discuss the biggest impacts this plan will have on your personal finances.

Changes to the tax code

The most asked question in Washington, “Who will pay for it?” is answered in short order by the Biden administration. Biden’s campaign promise that “no one earning less than $400,000 per year will pay a penny in new taxes” appears to have held true with his recent budget. However, those earning more than half a million dollars per year would shoulder much of the proposal’s cost.

For some, Biden’s proposal would actually lower taxes. The president’s budget calls for the Child Tax Credit, which supports lower- and middle-income families, to be raised. The American Rescue Plan temporarily raised the credit from $2,000 to $3,600 per child under 6 years old during 2021, but was reverted for the 2022 tax year. Biden’s proposal would not only reinstate the credit to its 2021 amount, but would also make the credit fully refundable.

The plan’s funding would instead come from taxes on the wealthy. For those earning over $400,000 per year, the proposal would restore the top tax rate of 39.6%, which was reduced by the 2017 Tax Cuts and Jobs Act. Meanwhile, the budget would eliminate capital gains rates for those earning over a million dollars per year, and would close the carried interest loophole. Billionaires would be subject to a 25% minimum tax rate under Biden’s plan. The proposal would also raise taxes on corporate profits, stock buy-backs, and offshore accounts.

Changes to Medicare

Biden previewed the release of his budget with an opinion piece in the New York Times early this week. In the article, Biden restated his commitment to funding the Medicare program, which serves some 60 million Americans and is currently projected to become insolvent by 2028.

One of the key focal points of the Biden budget is allowing Medicare to lower costs internally. Prior to 2022, the program was unable to negotiate drug prices, leading in part to a majority of the program’s prescription budget being spent on only a few dozen proprietary drugs. The 2022 Inflation Reduction Act allowed the program to negotiate prices on a limited number of drugs. Biden’s proposal would expand that power and, by his estimation, reduce Medicare spending by $200 billion.

The Medicare program and other entitlements have been a target for conservative politicians for many years. A 2023 budget proposal by the Republican Study Committee suggested reducing Medicare and Social Security budgets in a bid to rein in government spending. Republicans, who have demanded reduced government spending in exchange for a debt ceiling crisis resolution, have not yet provided a spending bill of their own. The timing of the Biden administration’s proposal could be an attempt to force the Republicans’ hand to release a proposal of their own, which would likely include unpopular cuts to entitlement program spending.

Domestic investment

The budget proposal would continue to build on President Biden’s education reform initiatives. The maximum award offered through a Pell Grant, a grant for students with exceptional financial need, would be doubled over the next decade. Additionally, federal funds would be committed to expanding free community college across the nation.

Families would also see new benefits as a result of the proposal. The budget would institute a mandatory three month paid family and medical leave for workers and their families facing a medical crisis. All workers would also be entitled to seven paid sick days without jeopardizing their employment.

Biden’s budget proposal would make broad changes to tax code, entitlement programs, and domestic investment. But it should be understood that the proposal will almost certainly not be passed by a Republican-led House. The road to a budget resolution is a long one, but having a budget to negotiate is the first step.

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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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