Acing Your Credit Score

 Whether you are buying a house, a car, or refinancing student loans, lenders look at your credit scores (from 3 national credit bureaus: Equifax, Experian and TransUnion) to evaluate the risks they take on by lending you money.
Understanding, safe-guarding, and maxing your credit score is important because a higher credit score means lower interest rates, better terms on financing and getting a better value/overall price for your big ticket item purchases.

How a FICO Score breaks down

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Based on how your credit score break down, a few tips are helpful to boost/maintain your credit score.

  • New credit: only apply to credit that really benefits you whether it’s cash rewards or mileage. Multiple mortgage or auto loan applications done in a short time don’t ding your credit score repeatedly because it is understood that you will shop around for major financing as such. But if there are a few credit cards you want, apply for them all in a day or two so that they will be based off of your highest score.
  • Length of history: that card you have not used in eons. Don’t close it! It may be what’s lengthening your credit history (averages of the ages of your credit cards.) Just put it away safely somewhere. If you want to close accounts, close the new ones that you are not using!
  • Credit mix: department store credit cards are considered relatively low quality credit. Mortgage and car loan are high quality credit (difficult to obtain, shows financial maturity and responsibility.) Bank credit cards are somewhere in between. So don’t get a card from each department store, or if you absolutely can’t resist the card opening teaser rewards or discounts, close the department store cards after you got the sweet opening deals.
  • Payment history: pay all your bills on time. This really pays off. As you can see it is worth 35% of your credit score. Pay more minimum payments. I always pay minimum payment + $1 or dollar when paying 0% interest credit card debt.
  • Amounts owed: this is usually evaluated in terms of credit card revolving balance / credit card available limit. The lower the ratio, the better you score in this section.
  • Last but not least, monitor your credit score/ history. We used to PAY a monthly fee to monitor our credit. But now it’s free with many major credit card company and it is very convenient. When you log in online to your Capitol One, Chase, or Discover credit card, there’s a link to see your FICO score and some additional information such as open/closed accounts with monthly updated balances. This makes monitoring your credit quick, effortless, and FREE.

 

 

  • Do you know your credit scores (lender usually use the middle of the 3 scores for determining your financing options)?
  • What helps or hurts your credit score in your experience?
  • Are you enjoying the benefits of having high credit score such as getting the lowest car loan/mortgage/student loan refi interest rate? Also getting credit cards with generous rewards?

 

2015 Milestones…

As everyone excitedly talks about holiday plans and we hit the half way mark of first-year radiology training, (overnight calls will be upon us in 6 months), it hits me that 2015 is coming to an end. 2015 has been a big year in many ways and it’s time to reflect on 2015 and welcome 2016.

Milestone #1: March 2015

Started Debt Free Doctor website

Thanks to: med students/ co-residents/ interns/ fellows/ attending/ family and friends who ask questions and share their knowledge in personal finance.

Impact: Some readers refinanced and saved money on their student loans. Others started retirement savings. Others enjoyed credit card rewards.

Lesson learned: Even though this blog does not compensate me in dollars, it rewards me by empowering my colleagues to take charge of their finances. Knowing co-resident is saving 60k in student loan interest because of this blog puts a smile on my face.

 

Milestone #2: April 2015

Refinance our home from Doctor’s mortgage 4.375% 30 year fixed to conventional mortgage 3.375% 7/1 ARM.

Thanks to: Nana and my sister helping to close the gap between our re-appraised home value and loan balance to bring our loan to value ratio to 80%.

Impact: The 1% reduction in interest lowers my mortgage payment by $160, while increasing my principle payment by $40 monthly. Free up cash flow for retirement savings & increase speed in building equity.

Lesson learned:

  1. Not fear the unknown (i.e. adjustable mortgage). As long as the risks are calculated against benefits, one can comfortably take a 7/1 ARM instead of a 30 year fixed mortgage.
  2. Avoid Doctor’s loan if possible, interest rates are usually much higher than conventional loans.

 

Milestone #3: May 2015

 

Thanks to: Credit card companies wanting to carry my student debt at 0% interest to me.

Impact: I have been enjoying guaranteed & tax-free growth of my dollars at 6.8%. (Certainly beats the US stock market performance for year 2015.)

Lesson learned: Paying off high interest debt (interest rate that is close to long term/mature/passive/index fund investment) is one of the best use of your hard earned money.

 

Milestone #4: December 2015

Maxed out 18k in ROTH 403b and 5.5k in ROTH IRA for year 2015.

Thanks to: Credit cards 0% interest money, frugality, moonlighting, credit card CASH rewards. Grandparents’ gift partially offset childcare expenses.

Impact: This 23k (yes the net growth at this moment is negative due to market corrections) can become $229,497 when I turn 65 (assuming 7% average growth over the next 30+ years).

Lesson learned:

  1. Buy retirement nest eggs on sale (ie. pay taxes now and contribute to ROTH/post-tax space and enjoy completely tax-free distribution in retirement.)
  2. Buy the US stock market (Vanguard total stock market index fund etc.) and hold.
  3. Passive, low fee, automated monthly contribution.
  4. Pay my retirement account first before paying anyone else.
  5. Time value of $. Now, no matter how little, is always better than later.

 

Smaller milestones include getting a pay raise of ~2k in July 2015 when becoming a pgy2 and converting to the admiral share of Vanguard funds (and receiving a discount in expense ratio), etc…

Financial success, like successes in all dimensions of our lives, is built up from daily and seemingly inconsequential choices and actions driven by what we value.

Milestones are great to look back upon as they remind us how far we’ve come. As Nana always say, don’t forget to celebrate your milestones. I hope we all have achieved some of the goals we set at the beginning of 2015 and are ready to embrace 2016 for all it has to offer.

 

 

  • What financial milestones have you/ your family surpass this year?
  • What helped you achieve your goals?
  • What are your 2016 financial goals?
  • What did you learn from your 2015 financial decisions?

 

My favorite credit cards!

There are as many credit card options as toothpaste flavors in the supermarket. The perks they offer, when you use them responsibly, can stretch your hard earned dollar and help you build net worth (pay off debt sooner/ leverage 0% interest money for better return, etc.)

4 major ways credit card companies give back to you include,

  1. Lump sum cash at 0%-3% effective interest rate (ie. fees and APR combined) you can use towards anything at low interest for usually 12-15 months before paying the balance off completely.
  2. You can make purchases at 0% APR and pay off the card when 0% promotion ends while making much smaller payments until APR jumps.
  3. Reward you with cash when you make purchases with a credit card, in the form of statement credit, check, or electronic deposit into your bank account.
  4. Reward you with points you can redeem into gift cards/millage.

 

 

Chase Slate:

Strength: Best balance transfer checks. Good for getting a lump sum of cash (for any large purchase that can not be charged on a credit card or for paying someone/something that requires cash in the bank.)

What I did with it: I wrote myself a check and deposited it in my bank w/n 60 days of opening chase slate. 1) I then wrote a check to the roofing company for a new roof and get the $300 discount (which I won’t get if I charged the purchase onto a credit card.) 2) I paid off a card that was about to go from 0% APR to 16.99%.

Terms:

  • $0 Intro balance transfer fee when you transfer a balance or write a check during the first 60 days your account is open. 0% APR For 15 months from account opening day.

 

Citybank Simplicity:

Strength: 21 months 0% APR on purchases. Longest 0% APR in the market. 

What I did with it: I charge all chargeable monthly expenses on this card, freeing up cash flow to make monthly deduction for 403 ROTH and ROTH IRA. (Where else can I come up with 18k-23.5k per year?)

Terms:

  • Get 0% Intro APR on Balance Transfers and Purchases for 21 months. After that, the APR will be 11.99%-21.99% based upon your creditworthiness.*
  • There is a balance transfer fee of either $5 or 3% of the amount of each transfer.
  • $0 liability on unauthorized purchases and Citi® Identity Theft Solutions.
  • No annual fee*

 

DIscover It:

Strength: Highest potential cash back. Up to 10% in different categories for the first entire year. (Most credit cards have opening bonuses with cash back/points at high percentage/dollar spent INITIALLY but usually goes down to 1-3% cash back within a month or 2/ after you get $100-300 back.)

What I did with it: 1 click online and activate the 5% category quarterly. Enjoy 5% cash back at amazon, gas stations, restaurants etc. Then get another 5% (so total 10%) at my first anniversary with this card.

Terms:

  • 5% cash back in categories that change each quarter up to the quarterly maximum when you sign up**. Plus 1% cash back on all other purchases.
    5% Cashback Calendar
  • You can redeem your cash back for any amount at any time.6 And your cash back never expires.
  • We double all the cash back you’ve earned at the end of your first year – only for new cardmembers

I pulled the terms off of the website, but definitely read them closely yourself AT the time of your credit card application. More and more cards are popping up with different benefits. If you figure out what you want out of them and are disciplined about plans to pay them off & what you do with the Temporarily interest free money you get, you could really make YOUR dollar go much farther and achieve YOUR financial goals with some nice subsidy!

  • Which credit cards do you like? How did they benefit you?
  • Do you have cautionary credit card tales to share?

Comment below!

 

 

 

Christmas, a gift that keeps on giving!

Free illustration Cash Money Wealth Assets Free Image on Pixabay 1169650

Are you scratching your head for gift ideas? For most of us, we have everything we need. It is increasingly hard to come up with gifts that really add value to one’s life. Does my kid need yet another toy? Does my husband need another tie/shirt/belt? Does my wife need another purse or another diamond ring?

Personally, I believe the holidays are about getting together with loved ones, sharing meals, playing games, sharing experiences such as hiking, sight-seeing, going to museums, or trying new things together (for example, trail rides on horses.) I don’t spend time or money on trying to purchase variations of items that the person already has or does not have for good reasons (simply put, it is not worth the money/opportunity costs to the individual).

You may also have a spouse or parent who’s eager to shower you with gifts. Perhaps the only thing you want this year is to save enough money for a down payment for your first home, perhaps you big wish is to throw 20k at your student loans, or perhaps you want to max out the 5.5k limit for ROTH IRA before April 1st 2016 for the tax year 2015. In most cases, you may not be able get such as Christmas gift, not in its entirety at least.

But why not ask for part of it? Instead of getting a suit that’s worth 1k from your spouse who thinks you need to look sharp as a doc, (not knowing that we love wearing scrubs day in and day out) ask your spouse to help contribute 1k to your ROTH IRA or 401k.

This 1k towards your ROTH IRA will be worth $14,785 at retirement (assuming you are 30 now, retire at 65 and your 1k is put in a low cost vanguard index stock market fund earning 8% annual return over the long term). If you have the good fortune of living till 85 years old, you get $1,506 yearly for 2 decades after retirement.

That’s the power of compound interest and time.

So convert the 1k suit you don’t need to ROTH contribution that grows to $14,785 by your retirement and provide you with $30120 through out your retired years. 

Now say for the next 5 years while you are still in residency, you skip the suits and contribute 1k per year to your ROTH instead.  After contributing 5k total through 5 Christmas, you have $5,867 at the end of residency.

Assuming you are 30 now, retire at 65 and your 5 consecutive 1k over the next 5 years is put in a low cost vanguard index stock market earning 8% annual return over the long term; by retirement, you will have $59,038.

You have nearly 10 times as much at retirement as the 5 suits are worth initially.

Chances are your suits may not last or fit you in 30 years, but and extra $59,038 in retirement is surely much appreciated. 

Another point from the above exercise is that 1k at age 30 grows nearly 15 times in 35 years while about 6k at 35 grows nearly 10 times in 30 years. The difference of 5 years!

This reminds us the importance of NOW and as early as possible. 1k you put in NOW is much more valuable than 1k in 10 years because the first 1k gets to grow at 8% for 10 more years (8% return rate gives a doubling time of 9 years). So your 1k now is worth 2k in 9 years. So if you wait 9 years before contributing, you would have to put 2k instead (in addition to your then annual contribution) to catch up.

Merry Christmas! Carpe Diem!

  • What gifts are you giving or receiving?
  • Can you benefit from a suit-to-ROTH or purse-to-ROTH conversion?
  • Is there a purchasable item/experience NOW that can bring you as much lasting happiness as more nest egg in retirement or earlier retirement?

1 million for 1 dollar a day.

  • Does anyone other than yourself depend on your income?
  • Do you have children?
  • Do you have aging parents you wish to care for?
  • Do you have a significant other you are supporting?
  • In the event of death, do you wish to leave any financial support for those you love?

If you answer yes to any of the questions above, it is a high priority to look into buying a TERM life insurance. I don’t recommend WHOLE life insurance unless you have money flowing out of your ears and no where to put them. Term vs. Whole life insurance discussion will be for another post.

If you wish to care for any loved one in your potential absence (i.e. death), it would be wise investment to purchase a term life insurance. As a pgy2,  I have NOT accumulated much net worth to leave behind for those I love in the event of my death. Since I do not have the financial power to self-insure against my death, I decided to look into term life insurance.

I first purchased life insurance through work. For a few dollars a month, my kid and my partner can get 5x my current salary, i.e. 250k in the event of my death. This will allow them to pay off the house and have 50k left.

Then my mother in law encouraged me to look into additional coverage. After some not-too-cumbersome paper work and a simple physical (done at my house), I was qualified for a 1 million dollar term life policy for $359/year. Boy was I excited that $1 dollar a day can give my kid/partner $1 mil in the event of my death. Although I likely will make and save much more than $1 mil living a full life, $1 mil can provide quite a bit for my kid/partner.

For most of us, the TERM of of term life insurance will be covering our working decades, until 65 or so. Premium varies with several considerations, your health status, your age, your gender, the length of the term you desire, the amount of benefit, etc. But general rules are,

  1. The earlier you purchase your term life, the lower your premium.
  2. The fewer health issues you have, the cheaper your policy.
  3. The shorter the term desired and the smaller the benefit you anticipate, the cheaper the policy.

In short, if you have loved ones who depend on you, it’s never too early to purchase a term life insurance. At least get a quote and realize how the absence of YOU & YOUR financial support would devastate those you love. It becomes a pretty clear decision to eat out less and buy term life as early (as cheap) as possible.

 

  • Did you get a term life insurance premium quote?
  • Did you purchase a term life insurance? why or why not?
  • What have you done to protect/support your loved ones in the event of your death?