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All About Credit Scores

It's difficult to imagine functioning in today's world without credit. Whether buying a car or purchasing a home, credit has become an integral part of our everyday lives. Having easy access to credit goes hand in hand with having a good credit score, so it's important to know how to maintain a positive credit score and credit history.

The importance of having a good credit score

Your credit score is based on your past and present credit transactions. Having a good credit score is important because most lenders use credit scores to evaluate the creditworthiness of a potential borrower. Borrowers with good credit are presumed to be more trustworthy and may find it easier to obtain a loan, often at a lower interest rate. Credit scores can even be a deciding factor when you rent an apartment or apply for a new job.

How is your credit score determined? The three major credit reporting agencies (Experian, Equifax, and TransUnion) track your credit history and assign you a corresponding credit score, typically using software developed by Fair Isaac Corporation (FICO).

The most common credit score is your FICO score, a three-digit number that ranges from 300-850. What's a good FICO score? For the most part, that depends on the lender and your particular situation. However, individuals with scores of 700 or higher are generally eligible for the most favorable terms from lenders, while those with scores below 700 may have to pay more of a premium for credit. Finally, individuals with scores below 620 may have trouble obtaining any credit at all.

Factors that can negatively impact your credit score

A number of factors could negatively affect your credit score, including:

  • A history of late payments. Your credit report provides information to lenders regarding your payment history over the previous 12 to 24 months. For the most part, a lender may assume that you can be trusted to make timely monthly debt payments in the future if you have done so in the past. Consequently, if you have a history of late payments and/or unpaid debts, a lender may consider you to be a high risk and turn you down for a loan.
  • Not enough good credit. You may have good credit, but you may not have a substantial credit history. As a result, you may need to build your credit history before a lender deems you worthy of taking take on additional debt.
  • Too many credit inquiries. Each time you apply for credit, the lender will request a copy of your credit history. The lender's request then appears as an inquiry on your credit report. Too many inquiries in a short amount of time could be viewed negatively by a potential lender, because it may indicate that you have a history of being turned down for loans or have access to too much credit.
  • Uncorrected errors on your credit report. Errors on a credit report could make it difficult for a lender to accurately evaluate your creditworthiness and might result in a loan denial. If you have errors on your credit report, it's important to take steps to correct your report, even if it doesn't contain derogatory information.

Fixing credit report errors

Because a mistake on your credit report can negatively impact your credit score, it's important to monitor your credit report from each credit reporting agency on a regular basis and make sure all versions are accurate.

If you find an error on your credit report, your first step should be to contact the credit reporting agency, either online or by mail, to indicate that you are disputing information on your report. The credit reporting agency usually must investigate the dispute within 30 days of receiving it. Once the investigation is complete, the agency must provide you with written results of its investigation. If the credit reporting agency concludes that your credit report does contain errors, the information on your report must be removed or corrected, and you'll receive an updated version of your credit report for free.

If the investigation does not resolve the issue to your satisfaction, you can add a 100-word consumer statement to your credit file. Even though creditors are not required to take consumer statements into consideration when evaluating your creditworthiness, the statement can at least give you a chance to tell your side of the story.

If you believe that your credit report error is the result of identity theft, you may need to take additional steps to resolve the issue, such as placing a fraud alert or security freeze on your credit report. You can visit the Federal Trade Commission (FTC) website at ftc.gov for more information on the various identity theft protections that might be available to you.

Finally, due to the amount of paperwork and steps involved, fixing a credit report error can often be a time-consuming and emotionally draining process. If at any time you believe that your credit reporting rights are being violated, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) at consumerfinance.gov.

How student loans affect your credit score

If you've graduated college within the last few years, chances are you're paying off student loans. The way in which you handle your student loans during the repayment phase can have a significant impact--positive or negative--on your credit history and credit score.

Your main goal when paying back student loans is to make your payments on time. Being late with even one or two loan payments can negatively affect your credit score. If you are in default on your student loans, don't ignore them--they aren't going to go away. If necessary, contact your lender about loan rehabilitation programs; successful completion of such programs can remove default status notations on your credit report. Of course, if you are making your loan payments on time, make sure that any positive repayment history is being correctly reported by all three credit bureaus.

Even if you are paying your student loans in a timely manner, having a large amount of student loan debt can have an impact on another important factor that affects your credit score: your debt-to-income ratio. Having a higher-than-average debt-to-income ratio could hurt your chances of obtaining new credit if a creditor believes your budget is stretched too thin, or if you're not making progress on paying down the debt you already have. Fortunately, there are steps you can take to help improve your debt-to-income ratio:

  • Consider a graduated repayment option in which the terms of your student loan remain the same but your payments are smaller in the early years and larger in the later years.
  • Consider extended or income-sensitive repayment options. Extended repayment options extend the term you have to repay your loans. You'll pay more interest over the long term, but your monthly payments will be smaller. Income-sensitive plans tie your monthly payment to your level of discretionary income; the lower your income, the lower your payment.
  • If you have several student loans, consider consolidating them through a student loan consolidation program. This won't reduce your total debt, but a larger loan may offer a longer repayment term or a better interest rate.

*Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.

Investment Advisory Services offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through Triad Advisors, LLC, a broker-dealer, Member FINRA/SIPC. Insurance offered through Charles River Financial Ins Agcy (CRFG). ASA, CRFG and Triad are separate companies.

The British Are Leaving! Why the Brexit Matters to Investors

On June 23, citizens of the United Kingdom (England, Scotland, Wales, and Northern Ireland) voted to leave the European Union by a margin of 52% to 48%

Though pre-election polls suggested that public opinion was evenly divided, when the election results became clear, financial markets around the world reacted swiftly to concerns about potential economic ramifications of a British exit—or Brexit—from the EU.

On June 24, the British pound plunged more than 10% against the dollar to its lowest point since 1985, before recovering slightly to settle nearly 8% lower at the end of the day.² European stocks suffered the worst sell-off since 2008, with the Stoxx Europe 600 Index tumbling 7%, and the Japanese Nikkei Index posted a one-day drop of 7.9%.³ In the United States, the S&P 500 Index fell 3.6%, reversing year-to-date gains.⁵

Here's an overview of the economic issues surrounding the Brexit, and what this historic decision could mean for the United Kingdom, world trade, and international investors.

The EU and the Referendum

The European Union was formed after World War II to help promote peace through economic cooperation. Over time, it became a common market, allowing goods and people to move freely around 28 member states as if they were one country. The U.K. joined the trading bloc in 1973, when there were only 9 member states.

In 2012, Prime Minister David Cameron rejected calls for a referendum on EU membership but later agreed to hold one if the Conservative party won the 2015 election.⁶ The leaders of all five major political parties campaigned to remain in the EU, including Cameron, warning voters that leaving the EU was a leap into the unknown that could damage the U.K.'s economy and weaken national security.⁷

Brexit supporters said leaving the EU allows the nation to take back control over business, labor, and immigration regulations and policies. They also claimed the money being contributed to the EU budget (a net contribution of 9.8 billion pounds in 2014) would be better spent on infrastructure and public services in the U.K.⁸

Economic Expectations

The negative outlook for the U.K. economy depends on the terms of trade deals yet to be negotiated with the EU and other nations. For example, the International Monetary Fund (IMF) projects that U.K. gross domestic product could decline about 1.5% by 2021, assuming the United Kingdom is granted access to the EU market quickly. Under a more adverse scenario (which assumes trade defaults to World Trade Organization rules), the IMF projects a precarious decline in GDP of about 4.5%.⁹

The U.K.'s departure strikes a serious blow to the EU, which has been beleaguered by debt crises, a Greek bailout, the influx of millions of refugees, high unemployment, and weak GDP growth. If trade activity and business conditions in the region deteriorate, it's possible that the U.K. and the EU could fall back into recession.

Next Steps

Once Article 50 of the Lisbon Treaty is invoked, the formal process of leaving the EU will begin, opening up a two-year window of negotiations on the terms of the exit. The U.K. will remain a member of the EU until it officially departs.ᴵᴼ

The U.K. is the first nation to break away from the EU, but a larger concern is that anti-EU factions in other nations could be empowered to follow suit. Moreover, Scotland could seek independence from the U.K. in order to remain in the EU, and Northern Ireland might consider reunification with the Republic of Ireland.¹¹

What About Us?

The EU is the largest trading partner of the United States, so the Brexit complicates pending trade negotiations and will require adjustments to existing agreements. It may also take time to forge new deals with the U.K.¹²

U.S. companies with a significant presence in the U.K. could take a hit. With the British pound weakening against an already strong dollar, U.S. exports become more expensive, reducing foreign sales. The U.S. economy is not as vulnerable as the EU, but the U.S. Federal Reserve may be more likely to delay its decision to raise interest rates until the consequences of the Brexit on U.S. and global markets can be assessed.¹³

Brexit-related anxiety could continue to spark market volatility until the details are finalized and the economic fallout is better understood, possibly for several years. Having a sound investing strategy that matches your risk tolerance could prevent you from making emotional decisions and losing sight of your long-term financial goals.

Investments are subject to market fluctuation, risk, and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest in any index.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Asset Strategy Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

9 Financial Must-Dos After Divorce

There's no doubt about it--going through a divorce can be an emotionally trying time. Ironing out a divorce settlement, attending various court hearings, and dealing with competing attorneys can all weigh heavily on the parties involved.

In addition to the emotional impact a divorce can have, it's important to be aware of how your financial position will be impacted. Now, more than ever, you need to make sure that your finances are on the right track. You will then be able to put the past behind you and set in place the building blocks that can be the foundation for your new financial future.

1. Assess your current financial situation

After a divorce, you'll need to get a handle on your finances and assess your current financial situation, taking into account the likely loss of your former spouse's income. In addition, you may now be responsible for paying for expenses that you were once able to share with your former spouse, such as housing, utilities, and car loans. Ultimately, you may come to the realization that you're no longer able to live the lifestyle you were accustomed to before your divorce.

2. Establish a budget

A good place to start is to establish a budget that reflects your current monthly income and expenses. In addition to your regular salary and wages, be sure to include other types of income, such as dividends and interest. If you will be receiving alimony and/or child support, you'll want to include those payments as well. As for expenses, you'll want to focus on dividing them into two categories: fixed and discretionary. Fixed expenses include things like housing, food, and transportation. Discretionary expenses include things like entertainment, vacations, etc. Keep in mind that you may need to cut back on some of your discretionary expenses until you adjust to living on less income. However, it's important not to deprive yourself entirely of any enjoyment. You'll want to build the occasional reward (for example, yoga class, dinner with friends) into your budget.

3. Reevaluate/reprioritize your financial goals

Your next step should be to reevaluate your financial goals. While you were married, you may have set certain financial goals with your spouse. Now that you are on your own, these goals may have changed. Start out by making a list of the things that you now would like to achieve. Do you need to put more money towards retirement? Are you interested in going back to school? Would you like to save for a new home? You'll want to be sure to reprioritize your financial goals as well. You and your spouse may have planned on buying a vacation home at the beach. After your divorce, however, you may find that other goals may become more important (for example, making sure your cash reserve is adequately funded).

4. Take control of your debt

While you're adjusting to your new budget, be sure that you take control of your debt and credit. You should try to avoid the temptation to rely on credit cards to provide extras. And if you do have debt, try to put a plan in place to pay it off as quickly as possible. The following are some tips to help you pay off your debt: • Keep track of balances and interest rates • Develop a plan to manage payments and avoid late fees • Pay off high-interest debt first • Take advantage of debt consolidation/refinancing options

5. Protect/establish credit

Since divorce can have a negative impact on your credit rating, consider taking steps to try to protect your credit record and/or establish credit in your own name. A positive credit history is important since it will allow you to obtain credit when you need it, and at a lower interest rate. Good credit is even sometimes viewed by employers as a prerequisite for employment. Review your credit report and check it for any inaccuracies. Are there joint accounts that have been closed or refinanced? Are there any names on the report that need to be changed? You're entitled to a free copy of your credit report once a year from each of the three major credit reporting agencies. You can go to www.annualcreditreport.com for more information. To establish a good track record with creditors, be sure to make your monthly bill payments on time and try to avoid having too many credit inquiries on your report. Such inquiries are made every time you apply for new credit cards.

6. Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement. However, you may have additional insurance needs that go beyond that which you were able to obtain through your divorce settlement. When it comes to health insurance, make having adequate coverage a priority. Unless your divorce settlement requires your spouse to provide you with health coverage, one option is to obtain temporary health insurance coverage (up to 36 months) through the Consolidated Omnibus Budget Reconciliation Act (COBRA). You can also look into purchasing individual coverage or, if you're employed, coverage through your employer. Now that you're on your own, you'll also want to make sure that your disability and life insurance coverage matches your current needs. This is especially true if you are reentering the workforce or if you're the custodial parent of your children. Finally, make sure that your property insurance coverage is updated. Any applicable property insurance policies may need to be modified or rewritten in order to reflect property ownership changes that may have resulted from your divorce.

7. Change your beneficiary designations

After a divorce, you'll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts you may have in place. Keep in mind that a divorce settlement may require you to keep a former spouse as a beneficiary on a policy, in which case you cannot change the beneficiary designation. This is also a good time to make a will or update your existing one to reflect your new status. Make sure that your former spouse isn't still named as a personal representative, successor trustee, beneficiary, or holder of a power of attorney in any of your estate planning documents.

8. Consider tax implications

You'll also need to consider the tax implications of your divorce. Your sources of income, filing status, and the credits and/or deductions for which you qualify may all be affected. In addition to your regular salary and wages, you may have new sources of income after your divorce, such as alimony and/or child support. If you are receiving alimony, it will be considered taxable income to you. Child support, on the other hand, will not be considered taxable income. Your tax filing status will also change. Filing status is determined as of the last day of the tax year (December 31). This means that even if you were divorced on December 31, you would, for tax purposes, be considered divorced for that entire year. Finally, if you have children, and depending on whether you are the custodial parent, you may be eligible to claim certain credits and deductions. These could include dependency exemptions, the child tax credit, and the credit for child and dependent care expenses, along with student loan interest and tuition deductions.

9. Consult a financial professional

Although it can certainly be done on your own, you may want to consider consulting a financial professional to assist you in adjusting to your new financial life. In addition to helping you assess your needs, a financial professional can work with you to develop a plan designed to help you address your financial goals, make recommendations about specific products and services, and monitor and adjust your plan as needed.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

Saving Versus Paying Off Debt

The saving versus paying off debt is an age-old quandary that has plagued people since the advent of consumer debt. Pose this question to a group of financial planners and the responses will be split, roughly down the middle. While there might be as many advocates for savings as there would be for paying down debt, the broad consensus will likely be that it really depends on the situation.

Much of the debt reduction argument stems from simple math. If you hold consumer debt that costs you 15% and the only available savings instruments yields 1%, then it would seem to be a no-brainer to pay the higher cost debt down. For as much as you can set aside in savings, the net effect is that you would be losing 14% on the money saved. So, the sooner you could pay the expensive debt off, the sooner you can be applying your cash flow to savings. Makes sense, right?

Most planners would agree that paying off high interest consumer debt should be a primary objective for all households, especially in today’s economic environment. The yields on savings accounts are stuck at historic lows and consumer debt interest rates and fees continue to rise for most people. There are two instances, however, where accelerating debt reduction should not come at the expense of savings.

Saving for an Emergency Fund

One lesson most people can take from this economy is that nothing is certain, especially when it comes to employment. And that may not be the biggest worry that an individual or household has to face. Life happens to everyone and unexpected emergencies can interrupt incomes for long periods of time. As tempting as paying off a credit card may be, having a six to twelve month cushion for meeting emergency expenses is a more critical need. Without that cushion, one emergency could cast you back into the debt spiral again, or exacerbate the one you are already in.

Retirement Savings

Unless you’re paying loan shark rates on your debt and it’s inhibiting your ability to make your other ends meet, you might want to think twice before sacrificing contributions to your qualified retirement plan, especially an employer provided plan. The opportunity to save money on a before tax basis and have your employer match your contribution may not always be around, and the lost opportunity to have that money accumulate tax deferred for many years is very costly. Better to pare your retirement contribution back a little and find other means to make debt payments.

For most people, the savings versus debt payoff solution is to arrive at some sort of balance between the two as a way to gain greater control over their financial future. It makes a tremendous amount of sense to get out from underneath the weight of crushing debt, however, in these uncertain times, it is vital to continue to weave that security blanket which might be the only layer of protection you have against the unexpected.

*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.