Savings Accounts

The Basics

Besides paying off credit card debt, it’s crucial when setting up your finances to prevent the need to rely on credit cards in the future. That means the first financial goal you should set is to start a savings account. There are also different types of savings accounts you can have for different purposes. Some prime things you should consider saving for are emergencies and job loss.

One of the ways credit card debt builds and becomes unmanageable is through unexpected expenses. There are some genuine emergencies where a person simply can’t go without spending money—like when you have to repair your car unexpectedly, or a broken plumbing line threatens to flood your home. In these kinds of situations, we pull out our plastic and borrow to pay off the mechanic, plumber, or other unavoidable expenses. These kinds of emergency expenses tend to be large and because they are unpredictable, most people don’t have the funds set aside to deal with them. That’s why we stress the need to start an emergency savings fund, so credit cards won’t be necessary to get through future crises.

This situation can be magnified in the unfortunate event of a job loss. The standard advice is to save up 3 to 9 months’ income in your emergency savings fund to weather a job loss or other loss of income. This is based on the statistic that the average period of unemployment is 9 months. So, assume it will take that long to find a new job and build up enough savings to get through that many months. Now, if you are a two-income family, or you have a second source of income, then 6 or even 3 months’ income might be sufficient for your emergency fund.

Even if you think you don’t have a reason to save, you never know when the time will come when you wish  you could go back and change your mind. It’s never too late to begin saving, so here are some tips for creating a savings account to prevent future credit card debt.

Save Consistently

You have to have a steady deposit into your savings account. It doesn’t have to be large at first. The important thing is to save something. When we help people pay off their credit card debt, our advice is to start taking the money they were sending to the credit card companies and start putting it into savings.

As long as you don’t get back into debt, you’ve got a monthly amount that you’re used to paying that can start building up every month.

Related Article: How to Effectively Manage Your Savings Account

Make it Automatic

The best way to ensure your monthly savings deposit is consistent is to make it automatic. If you get direct deposit of your paychecks, see if a percentage can be deposited directly into a second account.

Otherwise, set up an automatic transfer every month so that a percentage of your income goes from your checking straight to savings. The idea is to move that money to the right place before you even notice it’s there, so you won’t be tempted to spend it and won’t miss it.

Don’t Put off Saving

If you’re still working on paying off credit cards or other debt, it’s tempting to wait to save until you’ve knocked out your debt. That said, try to set aside some small amount, even while you’re still making debt payments. Treat saving like a muscle you have to develop—make it consistent, automatic, and turn it into a habit that you’re not likely to break. Once you start paying off debts, then you can increase the amount you’re putting toward your savings.

More Resources: Which Debt Should You Pay Off First?

Create a Budget 

Most people feel like there’s no room financially to set aside money for savings. By creating a budget, there’s always a way to set aside extra cash for crucial goals.

By tracking spending for a month, you’ll see where the money is going, and immediately see some obvious places to cut back. Remember, if you’re just starting out, the goal is to save something, any amount you can. Then you can increase your savings contribution over time as you get better at budgeting and pay off debts.

Take our free Budgeting 101 Course!

Figure Out How Much You Need

As you’re saving, you’ll want to set a few target amounts. First, your initial savings target should be manageable. A good idea is to look at your insurance deductibles. If your homeowners or renter’s insurance has a $1000 deductible, then that’s a good initial goal. Once you have that much money in savings, you’re ready for the kinds of emergencies that insurance covers.

Then, look at your monthly income. The biggest emergency that devastates people without a savings fund is loss of income. What if you lost your job, or were injured and unable to work? In these situations, the worst thing you can do is use credit cards to get by. Never use credit as a substitute for income. As stated before, the standard advice is to save up to 3 to 9 months’ income in an emergency savings account in case of a loss of income.

Keep Debts Paid Off

If you don’t have credit card bills to pay, then it’s going to be much easier to get by on your emergency fund during a period of unemployment or other lost income. If you’re having to dip into your savings to keep the creditors at bay, it will feel like all that time and effort that went into saving didn’t amount to much. Make your finances as easy to manage as you can to be ready for an emergency.

Put Extra Funds into Savings

If extra money comes your way—whether it’s from a tax refund, yard sale, gift, etc.—don’t spend it, save it. Too many people treat extra, unexpected income as a license to spend. But if you save that kind of windfall, no matter how small, then you’ll have an easier time building to your savings goals.

Learn More: Why Tax Refund Anticipation Loans are Bad for Credit

Don’t Touch the Savings Account

When is it appropriate to delve into your savings? We say a bona fide emergency is a circumstance that prevents your ability to earn an income, or is absolutely necessary to your life, like medical expenses. Remember, emergencies should be unexpected.

One smart tactic here might be to put your emergency savings in an account that is accessible, but not too convenient. A credit union that doesn’t have too many branches might be a good place. Try to avoid putting your emergency fund into an account that you could access with a simple online funds transfer. But on the flip side, don’t lock it down into a 5-year CD or other accounts you can’t access if you need it.

Keep Saving

Even after you reach your goal and have 3 to 9 months’ income in savings, keep saving. Now you can start setting “fun” savings’ goals. Plan for a family vacation, your next car, or any other thing you might want. You can also build toward a down payment for a home or a college fund for your kids… once you’ve established your emergency savings, then use the saving habit you’ve developed to work toward all of the things you want without having to rely on credit card debt to get them.

If you’re feeling overwhelmed by debt and don’t feel like you can start saving for emergencies, talk to a debt coach and put together a budget you can live with.

For tips and encouragement toward saving, check out America Saves, and consider taking the pledge to save.

No matter what your financial situation, creating a sufficient emergency savings fund is absolutely essential to your financial health. It will help you become a better saver, avoid future credit card debt, and achieve true financial freedom.



What is a Good Credit Score?

Credit Score Basics

If you’ve ever attempted to purchase a big-ticket item, such as a house or a car, the financing company likely spoke to you about your credit score. But what exactly is a credit score? Simply put, your credit score is a statistical number that is based on your credit history, i.e., your number of open accounts, levels of debt, and repayment history. Your credit score evaluates your creditworthiness, so lenders use this as a way to assess the probability that you will repay your loan in a timely manner. Therefore, this is one of the most defining factors lenders take into consideration to determine whether or not to give you a loan.

Credit card companies, insurance companies, and lenders all use credit scores to determine loan amounts and interest rates. Since your credit score is based on your credit history, it can have a huge effect on just how much you end up paying.

What is the Average Credit Score?

Answering this question may be difficult, as every expert, credit bureau, and loan officer has a varying opinion on what the threshold between good credit and poor credit is. A credit score that is considered bad by one agency may be deemed acceptable by another. 

So let’s take a look at the numbers:

Credit scores range from 300 to 850. Generally, a score of 670 or above is considered a good credit score, while any score above 740 is considered excellent. The first credit score model was created in 1998 by the Fair Isaac Corporation and is known as the FICO score. The FICO score is used by financial institutions and is by far the most commonly used system of scoring. Typically, using these ranges will give you a pretty good idea of where you stand. 

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

While every creditor will still define its own ranges for credit scores, using the average FICO score range will allow you to gauge where your credit score sits in the eyes of lenders. Furthermore, you can compare your score to national averages. According to FICO, the following proportions of consumers have scores in the following ranges:

Based on this information, more than 50% of the population has a credit score over 700, with 42% scoring below that level.

However, FICO is not the only scoring model used in the credit industry. The other main scoring model used is called VantageScore® which is now on its third version– VantageScore 3.0.

What Affects a Credit Score?

While every credit scoring model is different, there are a number of common factors that affect your score. These factors include:

  •  Payment history
  •  Using your credit limits
  •  Balances on your active credit
  •  Credit inquiries
  •  Available credit
  •  Number of accounts

Each factor has its own value in a credit score. If you want to keep your number at the higher end of the credit score scale, it’s important to stay on top of paying your bills, using your approved credit, and limiting inquiries.

However, if you are in the market to purchase a house or loan, there is an annual 45-day grace period in which all credit inquiries are considered one cumulative inquiry.  In other words, if you go to two or three lenders within a 45-day period to find the best rate and terms available for a loan, this only counts as one inquiry. This means that they are not all counted against you and will not affect your credit score. 

Why is Your Credit Score Low?

Lower credit scores aren’t always the result of late payments, bankruptcy, or other negative notations on a consumer’s credit file. Having little to no credit history can also result in a low score.

This can happen even if you had established credit in the past – if your credit report shows no activity for a long stretch of time, items may ‘fall off’ your report. Credit scores must have some type of activity as noted by a creditor within the past six months. If a creditor stops updating an old account that you don’t use, it will disappear from your credit report and leave FICO and or VantageScore with too little information to calculate a score.

Similarly, consumers new to credit must be aware that they will have no established credit history for FICO or VantageScore to appraise, resulting in a low score. Despite not making any mistakes, you are still considered a risky borrower because the credit bureaus don’t know enough about you.

How to Improve Your Credit Score:

If you are unsatisfied with your credit score and want to increase it, there are always methods to help you achieve this. Here is a list of things you can do to improve your credit score:

  •      Cleaning up your credit report
  •      Paying down your balance
  •      Paying twice a month
  •      Increasing your credit limit
  •      Opening a new account
  •      Negotiating outstanding balance
  •      Making payments on time offers consumers help in managing multiple payments. With a Debt Management Plan, you have the possibility of joining these payments into one lump sum with a lower interest rate. Learn more by reaching out to one of our credit coaches today!

Credit Score Range

What is a Bad Credit Score?

Bad credit score = 300 – 549: It is generally accepted that credit scores below 550 are going to result in a rejection of credit every time. If your score has fallen into this range, improving your score is going to take some work.

Filing for bankruptcy can bring a score down to this level. Statistically, borrowers with scores this low are delinquent approximately 75% of the time. But if you continue to make your payments on time, your score should improve. There are certain types of loans, like home loans, that are hard to get with a score in this range, but there are still options for getting a mortgage with bad credit. 

What is a Poor Credit Score?

Poor credit score = 550 – 619: Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk. Although it is possible to qualify for credit, it is often at very disadvantageous terms you will pay much higher interest rates and penalty fees.

If you find yourself in this range, you should begin to address any specific credit problems you have to try to boost your score before applying for credit. Subprime borrowers typically become delinquent 50% of the time.

What is a Fair Credit Score?

Fair credit score = 620- 679: Individuals with scores over 620 are considered less risky and are even more likely to be approved for credit.

In the mid-600s range, consumers become prime borrowers. This means they may qualify for higher loan amounts, higher credit limits, lower down payments and better negotiating power with loan and credit card terms. Only 15-30% of borrowers in this range become delinquent.

What is a Good Credit Score?

Good credit score = 680 – 739: Credit scores around 700 are considered the threshold to “good” credit. Lenders are comfortable with this FICO score range, and the decision to extend credit is much easier. Borrowers in this range will almost always be approved for a loan and will be offered lower interest rates. If you have a 680 credit score and it’s moving up, you’re definitely on the right track. 

According to FICO, the median credit score in the U.S. is in this range, at 723. Borrowers with this “good” credit score are only delinquent 5% of the time.

What is an Excellent Credit Score?

Excellent credit score = 740 – 850: Anything in the mid 700’s and higher is considered excellent credit and will be greeted by easy credit approvals and the very best interest rates. Consumers with excellent credit scores have a delinquency rate of approximately 2%.

In this high-end of credit scoring, extra points don’t improve your loan terms much. Most lenders would consider a credit score of 760 the same as 800. However, having a higher score can serve as a buffer if negative occurrences in your report. For example, if you max out a credit card (resulting in a 30-50 point reduction), the resulting damage won’t push you down into a lower tier.

The Takeaway

Different lenders have different standards and your experience may vary. You may have a high credit score, but a negative public record on your credit file may hurt your chances of getting a loan. And while credit scores don’t take your income into account, lenders will. No matter how good your credit score, a lender will not approve you if they feel there are risks, such as your inability to repay.

No matter where you land on the scale, always remember that there are a number of factors that can both harm your credit history and help you improve your score. If you’re struggling with overcoming credit card debt, reach out to one of our trained credit coaches to help. We’ll assist you in paying off your debt faster and teach you how to improve your personal financial situation. 



Essential Household Budgeting Tips

This article outlines some essential household budgeting tips and guidelines for you to follow.

We’ve seen countless different household budgeting strategies.

Here are our best recommendations for managing your household budget.

With the economy in turmoil, more experts are proposing different ideas about how to set up a budget. The trend seems to be toward simple advice. We’ve seen it suggested that you should adopt a simple 20/80 budget: save and invest 20% of your income, and live on the other 80%. On a basic level, this is sound advice, but it’s easier said than done in a lot of cases. We prefer to give more comprehensive advice.

Another suggestion is to put 20% of your income to savings, 50% towards necessary living expenses, and 30% towards discretionary spending. We strongly urge people to avoid this system, which for most people will be unrealistic.

This household budget guideline has 5 categories:

  1. Housing 35%
  2. Debt 15%
  3. Transportation 15%
  4. Expenses 25%
  5. Savings 10%

The “Expenses” category that makes up 25% of one’s budget includes groceries, cell phone, entertainment, charitable donations, and other things that don’t fit into the other categories. This means that one’s discretionary spending or “wants” are only one part of the 25% of one’s budget set aside for expenses.

These guidelines are more realistic and appropriate than the 20/50/30 budget plans, and they are useful for quick budgeting seminars, because the percentages add up to an even 100%, avoiding potential confusion.

We also offer a set of more comprehensive, flexible guidelines.

This household budget guideline has 9 categories:

  1. Housing – 35-45%
  2. Utilities – 8-15%
  3. Food – 10-20%
  4. Auto & Transportation – 15-25%
  5. Medical – 8-15%
  6. Clothing – 3-5%
  7. Personal & Miscellaneous – 5-10%
  8. Savings & Investment – 5-10%
  9. Monthly Installments – 10-20%

You’ll notice the percentages are presented as ranges, not fixed amounts. Each person needs to work with his/her own finances to create a budget that adds up to 100% That means if you spend the full 10% on personal & miscellaneous spending, you’ll need to make cuts somewhere else. Perhaps you get full medical coverage through your employer, and your medical expenses are below the 8-15% guideline; that means you will have more money to divvy up among the remaining categories. That doesn’t mean you should exceed any of them. We think it would be irresponsible to put 30% of one’s income toward personal and miscellaneous spending like the 50/30/10 budget mentioned above.

We feel these guidelines help each consumer craft a budget that matches their personal situation and doesn’t try to force them into a simplistic one-size-fits-all budget that only offers 3 categories. At the same time, it demands discipline from the consumer; it’s difficult for most people to get discretionary spending under 10%. We know that’s a big reason we’ve been necessary for the past 35 years; too many people have accepted the message that they should spend as much as 30% of their income on wants, and when the numbers didn’t add up, they turned to credit cards to keep up with all of their spending.

Speaking of credit cards, #9 is a category that’s designed to help the people who seek us out; people with credit cards and other debts they are struggling to repay. Say you put 10% aside for savings, as we suggest, and another 10% goes toward credit card bills. Once the credit cards are paid off, the smart thing to do is destroy the cards, and put that 10% of your income that was going toward debts into savings. Then you’ll be consistent with the 20/80 budget; save 20%, live on the other 80%.

As for savings, you’ll want to set 10% of your income aside for retirement. If you’re saving 20%, that means half will go toward retirement savings (like a 401[k]) and the other half will go toward other savings goals. Your first goal should be to save 3 to 4 months’ income or more in an emergency savings fund. Once you have that savings fund in place, you can use this part of your budget to save for specific goals like college, down payment on a home, etc. If you’re really doing a good job saving this portion of your income every month, you may even want to use some of that money to pay down your home’s mortgage faster; owning your home by the time you retire is an important goal, and not having a house payment will go a long way toward helping you afford a comfortable retirement.

If you want more detailed information on tracking your expenses and creating a budget, visit our website and download our free Power of Paycheck Planning materials.

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