Carolyn Bird and Molly C. Herndon
Last week, we discussed the first three steps PFMs can take with service members to get their finances on track: 1. Assess the situation; 2. Find the Motivation; and 3. Recruit Your Team. We also linked to free online tools that are useful in managing personal finances. This week, we’ll discuss credit scores and how you can guide your clients to improve their credit score..
Step 4: Know the Score
Having service members identify their credit score is a vital step on the path to financial freedom. It is especially important for service members to know their credit scores well in advance of making a major purchase; such as, buying a home or car. Helping service members understand how their everyday decisions affect their credit score empowers them to build stronger credit scores. Credit scores are comprised of many factors. By asking a service member the following questions, PFMPs can assist service members in understanding how their actions may affect their FICO score:
1. Payment history-35%. Are bills late and how often?
2. Amounts owed-30%. Are you maxed out? How many accounts have balances?
3. Length of credit history-15%. How long have credit accounts been opened?
4. New Credit-10%. Are you opening accounts frequently? How many new accounts do you have?
5. Credit types-10%. Is there a good mix of credit (credit cards, mortgages, or personal loans)?
As a financial educator at your installation you can assist service members in receiving their FICO score at no charge. The FINRA Investor Education Foundation provides special access for PFMPs to allow service members and their spouses an annual free FICO score. Click here to learn more about this FINRA-supported program. Access to the free FICO score site is arranged through your service branch’s Headquarters PFMP.
If your client discovers a low credit score, suggest the myriad of ways available to raise the score before making big purchases. Low credit scores mean higher interest rates which translate into larger monthly payments. Once service members understand this relationship, they will understand that raising the score quickly is in their best interest.
Service members with a strong credit score may want to move forward with their purchase. Lets say the service member in your office is thinking of purchasing a car. There are several items to consider, in addition to credit rating, that you may want to share. The service member will need to decide what type of vehicle is to be purchased and whether it will be new or used. A review of the service members finances will either support the initial choice or may suggest a change in approach. Together, tally up the monthly expenses to determine the amount of money that is available each month for a car payment and car related expenses, including insurance, gas and maintenance. Refer the service member to websites such as www.edmonds.com and www.kbb.com, and to the credit union to research car prices before visiting auto dealerships. For help determining the best options for car insurance, click here. Many insurance companies offer military discounts and the Insurance Information Institute has ways to lower car insurance costs. You may also suggest your client refers to http://www.nhtsa.gov/ to find out all the facts on their desired car before making a purchase. Fuel economy and safety features should be considered before making such a large purchase.
Besides a car purchase, when else do clients typically come to your office seeking a credit score report?