Things on my mind lately

  • Whoa, I come back from vacation and find I have feed subscribers! Hello to both of you!
  • Wondering how it is possible to spend 7k on bingo in a year. There’s definitely a post coming on this one.
  • Life insurance
  • Refi postmortem
  • Mid-year goals assessments
  • Estimating expenses for next year’s vacation(s)

Personal Finance Basics: Credit Scores

What is a credit score?
Your credit scores are numbers generated from your credit reports using a secret algorithm created by the Fair Isaac Corporation. These numbers, called FICO scores, supposedly correspond to the likeliness you will pay your debts in a timely manner. Your FICO scores are important because they directly affect your insurance premiums, the interest rate you will pay when you obtain a loan, and whether you are eligible to be hired for employment.

A word brief about debt
Let’s talk about debt for a moment. Debts are not the same as bills. A credit card or a loan is a debt, while your electric bill is not. Missing single a electric bill will not show up on your credit reports; however, if you stop paying your bills altogether, they become debts because you didn’t pay them and the fact that you didn’t pay in a timely manner will eventually show up on your credit reports.

What factors determine my FICO scores?
FICO scores range from 500 – 850, the higher the better. The pie chart below illustrates the weight of the factors that determine your score.

As you can see Payment History is the most important factor of your FICO scores, so at least pay the minimum payments for all your debts and bills.

From where does the information behind FICO scores come?
In the United States, three consumer reporting agencies are Equifax, Experian, and TransUnion. These for-profit corporations collect information from credit card companies, financial institutions, and collections agencies to build your credit report. Since there are three consumer reporting agencies, you have three different credit reports and three different FICO scores.

Where can I get my credit reports?
The best place to get your credit reports is from Annual Credit Report because you can get all three credit reports for free once a year. Notice I said credit reports for free not credit scores for free. You are entitled to view your credit reports from all three consumer reporting agencies under Federal laws (long pdfs warning). Since there are three credit reports I recommended checking one every four months. This way you can look for errors or identity theft all year long instead of once a year.

Unfortunately the Federal laws don’t include free FICO scores, and the three consumer reporting agencies don’t sell FICO scores anyway. They each sell their own proprietary scores known as FAKO scores. FAKO scores are basically fake FICO scores that have a numerical range similar to FICO scores. Basically the three consumer reporting agencies are trying to oust FICO in favor of their proprietary scores by making it difficult for consumers to access their real FICO scores. Regardless of these shenanigans, lenders look at FICO scores and will continue to do so for the foreseeable future.

Where do I get my FICO scores?
The only place you can reliably get your Equifax and Experian FICO scores for a reasonable price is from MyFICO.com. For your TransUnion FICO score MyFICO or TransUnion Consumer Solutions are your only hope.

Lending Tree does offer a 30-day credit monitoring trial that provides an Experian FICO score and credit report, but then it’s $12/month until you cancel. MyFICO offers a 30-day credit monitoring trial that provides an Equifax FICO score and credit report, but then charges an annual payment of $89.95 if you don’t cancel.

FYI, it is highly unlikely all three of your FICO scores will be exactly the same, since all three consumer reporting agencies use their own slightly different rules to build your credit reports. Don’t freak if they vary rather significantly. Potential lenders will pull all three scores and take the middle score.

Controversy Time
Ok, I’m going to be fairly controversial for a moment and say don’t worry about your FICO scores. There is no reason for you to shell out money to track your FICO scores unless you are applying for a loan or seeking employment that requires a handling money or a security clearance. If you aren’t doing these activities, who cares what your scores are? You won’t get any prizes. The most you’ll get is bragging rights on personal finance blogs Note I said FICO score and not credit report.

If you have been consistently paying your debts (mortgages, credit cards, other loans) on time for several years, your FICO scores will be in decent shape. If you want excellent FICO scores, continue consistently paying your debts on time and reduce the amount of debt you have.

Let’s recap:

    1. FICO scores represent the likeliness you will pay your debts in a timely manner
    2. Payment History, Amounts Owed, Length of Credit History, New Credit, and Types of Credit in Use are the factors that determine your FICO scores ranked in order of importance
    3. FICO scores come from information contained in your credit reports from the three consumer reporting agencies
    4. Always obtain your credit reports from the Annual Credit Report website
    5. You can only get your FICO scores from MyFICO.com or TransUnion Consumer Solutions
    6. Don’t worry about the scores if you aren’t looking for a loan or seeking employment that has to do with money or security clearances

Thrifty Thursday: ShareBuilder Offer For Costco Members

ShareBuilder has a limited offer for Costco members that open a new account before 08/24/2008.

Executive Costco Members will receive

  • a $90 account bonus
  • 25% quarterly transaction charge rebates*

Gold Star and Business Costco Members will receive

  • a $70 account bonus
  • 10% quarterly transaction charge rebates*

in addition to ShareBuilder‘s normal account benefits

  • No account minimum
  • No inactivity fees
  • Invest any amount

*Be sure to read the fine print.

May Financials – Part 1 Expenses and Income

Personal

Income and Expenses:

May Notes:

  • I made three auto loan payments
  • Got paid three times this month
  • Made $35 in free money.

Emergency Fund Progress:

Family

Income and Expenses:

May Notes:

  • Paid Mortgage #1 on May 30 since June 1 fell on a weekend
  • Getting stimulated, receiving three pay checks, and getting some free money explains the increase in Wages.
  • Turning off the heat, not turning on the air, no income taxes due, and a mysterious credit on the electric bill, explain the massive decrease in non-credit card bills

Emergency Fund Progress:


Pay PMI Out of Pocket or Roll It Into the Loan?

We have decided to refinance our mortgage to a 5.875% 30 year fixed. We currently have 80/20 mortgages, which probably wasn’t the wisest choice in retrospec. C’est la vie. Our 80 mortgage is 30 year fixed at 6.375%; however, our 20 mortgage is 15 year balloon amortized over 30 years at 10.25% because we wanted a fixed rate. We have been in our house for 2.5 years and live in an area of the country unaffected by the housing bubble property value-wise, so our house has appreciated about 4.5%. Clearly we don’t have a lot of equity in our home, so we are required to have PMI.

For those that don’t know what PMI is Private Mortgage Insurance. It’s required for those that have less than a 20% down payment to protect the lender against a default. In our case PMI will be approximately $2800. If we were to pay it out of pocket, we would take it from our emergency fund even though this obviously isn’t an emergency. I admit this probably is not a good idea.

I used this fantastic home mortgage template from Vertex42 to look at the interest after 80% LTV, using a 2.5% rate of appreciation, is achieved and the monthly principle and interest payment for each scenario. I am looking at the LTV because you can stop paying PMI once you achieve an 80% LTV.

For paying the PMI out of pocket:

  • it would take 8 years to achieve an 80% LTV resulting in $85.7k in interest
  • the monthly P&I payment would be $1136

For rolling the PMI into the loan:

  • it would take 9 years to achieve an 80% LTV resulting in $95.8k in interest
  • the monthly P&I payment would be $1147

Based on this information the P&I monthly payment isn’t worth raiding our eFund. However, after the eFund is fully funded, I think we’ll consider making addition principle payments.

Things on my mind today

  • Is a million enough anymore? Should we all be aiming to be deca-millionaires? – First impression is no and yes. Might do a post with actual numbers.
  • Gas-saving tires – First impression is buying smaller wheels and tires would probably be safer.
  • Refinancing the mortgage – It’s on. Now thinking about paying the PMI out of pocket instead of rolling it into the loan.
  • Prioritizing our budget items – I’ve decided to take my own advice ;oP Plus I found some expenses we should account for on a monthly basis.
  • Re-estimating our emergency fund goal – It’ll be increasing due to the expenses I haven’t been taking into account.
  • Mid-year annual goal review – Yeah, gotta get on it.
  • A blog title – My current title is kinda lame.