Don't Overlook Free Money

You’ll usually find only the occasional item that is financially pertinent and useful to docs. That’s why my crack staff culls long into the night to find you some kernels of wheat from the mountains of chaff.

Specifically, to our long-standing interest in “free money.” Financial Engines estimates that nationwide, employees are passing up millions annually by not maxing out their employers matching funds in their 401(k)s. That’s an average of $1,336 per person. Taking a conservative estimate, over the course of one’s working life, this can compound into 6 figures. Would you like someone to just walk up and give you a 6-figure check? Yes, you would. So be that person and put the max away every year. Your older self will be ever so grateful to your younger self.

More “free money:” By raising your credit score, you will get lower interest rates on house, car and other loans, which also, in the end, can compound to 6 figures in your bank account. MyFICO.com tells us what actually goes into our credit scores. Considering how vitally important this number can be to our financial lives, I’ll bet few of us have a clue how this number is reached.

Specifically, 35% results from your credit history. Pay on time, your score goes up, and vice-versa. Secondly, 30% is based on your credit utilization; how much you use of what is available. It helps to have a lot available, like a home equity line, and then don’t touch most of it.

Thirdly, 15% is based upon the length of your credit history. Consistency may be boring, but it sure helps the old FICO. Fourthly, how much new credit have you taken? New credit, and inquiries about credit, make you look shakier.

Lastly, 10% of your score is based upon the kind of credit you’ve used. Long-term, like a mortgage is ok, short term, like credit card, is less ok, unless paid off every month. Does all of this sound unfair? How would you do it if you were in the credit and loan business?

Not to leave you in the lurch, here are some recommended quick fixes. First, pay down your credit cards as quickly as possible. This has a big impact, especially since the interest rates are the highest.

Second, refinancing your home and equity line can help, especially if you have used more than 30% of your home equity line. And rates are still

low, so your payment may drop, as well.

Next, pull your credit report. What you don’t know can hurt you, badly. You are entitled to a free report annually from TransUnion, Experian, Transamerica, etc. Then, you can fix any mistakes, which are never in your favor. Surprise, surprise.

Oddly, it turns out to be important not to close credit accounts. That’s because it reduces the potential total of your credit available. So just let unused credit cards sit in your drawer.

In the “Duh” category, pay your bills on time, or at least the minimum required. Even one late payment is a ding on your score.

For credit beginners, open an investment account, even with just a $500 CD, and then use it as collateral to borrow against. Then pay the loan back on time.

This conservative approach to borrowing and its benefits reminds me of the story about a guy who walks into a bank and asks for a $1,000 loan, turning over his Rolls Royce as collateral. A month later, he walks back in, pays back the $1000 plus the 1% per month interest of $10. The loan manager says, “Excuse me sir, but why did you borrow so little, for such a short time?” - “Because I went to Europe for a month, and this was the only place I could park my car for a month for $10.”