Credit mistakes you should know before applying for a loan

Dear Liz: I’ve been reading your Money Talk column for years and it seems like about a third of the questions are related to credit scores. Why are people fixated on their FICO score?

I wasn’t aware of my score until recently when my bank accounts started showing my score when I was online. I’m 65 and have had credit cards since college over 45 years ago. I pay my bill in full every month. I have never defaulted on a mortgage payment or any other bill. When I’ve bought a property or a car, I’ve never been rejected.

In other words, I’ve used credit successfully for decades by acting responsibly without knowing my score. Are people interested in their FICO being used primarily as a status symbol or as a means of showing off?

Answers: Some do, but most understand that credit scores have a tremendous impact on our financial lives. The results help determine if we can get a loan and what interest rates we’re paying, but also if we’re able to rent an apartment, get affordable auto and homeowners insurance (in most states), and get the best deals to qualify from a cell phone provider.

Credit scores reward responsible behavior but have a few quirks worth knowing about. For example, using more than a small percentage of your credit card’s available limit can hurt your scores, even if you pay off your balance in full. And closing credit accounts might seem like responsibly handling a card you no longer use, but it can also hurt your results.

Also, you should know that you don’t have a single credit score; They have many, and they differ depending on which credit bureau and credit score formula was used.

FICO is the leading credit scoring formula, but many generations of the FICO score are currently in use, from the older versions long used in mortgage origination, through the most commonly used version (FICO 8) to the most recent version (FICO 10). Auto lenders and credit card issuers use versions of FICO customized for their industries.

FICO’s main competitor is VantageScore, which also uses different generations.

In addition, credit scores are constantly changing based on the ever-changing information on your credit reports.

Your bank makes it easy for you to monitor one of your scores, which can give you a general idea of ​​how lenders might view you as a borrower. Just don’t be surprised if the score your bank gives you doesn’t match what a lender uses the next time you buy a car or refinance your mortgage.

Assets under Management Advisor

Dear Liz: We have been working with a paid financial advisor for 25 years. We discussed what we needed, she told us how many hours it would take and then billed us at an hourly rate.

She recently joined a company that charges 1% of investment portfolios for the provision of financial advice. Is this still considered pure financial planning? If so, how do we find a company that charges an hourly rate? We don’t want to spend thousands of dollars to have someone just tweak the detailed roadmap already created.

Answers: So-called “assets under management” or AUM fees are actually considered pure fee planning as long as the advisor only accepts fees paid by clients and receives no commissions or other remuneration for the investments he recommends. AUM fees are a common method of compensation and 1% is a fairly common fee. If the advisor is doing significant ongoing planning and investment management for you, the fee may be worth it. If not, there are other compensation methods that may be more appropriate. Garrett Planning Network represents fee-based consultants who are willing to bill by the hour while XY planning network and the Alliance comprehensive planner offer pure consultants who charge retainer fees.

Liz Weston, Certified Financial Planner, is a personal finance columnist nerd wallet. Questions can be directed to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, USA, or by using the “Contact Us” form below asklizweston.com.

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