Credit & Savings Tips You Need to Hear
Often the information we see about credit is about keeping in low and paying it off, etc. For savings, it’s often, basically, just do it. But there are a few things that go beyond this that is often not talked about. We decided it was time to talk about these topics with First Pioneers CEO, Lawoka Bolden and VP of Lending, Jeff Fontenot.
Q: We talk about paying off debt all the time and about what a good thing that is, but there are times when paying off a loan, especially an installment loan, can actually impact your credit score. Jeff, can you kind of explain a little bit of why that is the case?
Jeff: So that's actually a very good question and it's one that I get asked very often by our members. And it's always a possibility it will affect your score. A lot of times what that can depend on is how limited your credit is. With very limited credit, it can cause a drop in your score because you don't really have a long established history to sort of balance that out. Paying off a loan early can throw your product mix out of balance.
And by product mix, I'm talking about having the right mix of revolving accounts like credit cards, installment accounts such as auto loans, a mortgage, personal loans, and things like that.
Q: Okay, so your score could take a hit for this, right? It could go down.
Jeff: It could. It's usually not something that would be a massive hit, but it is something that could cause a slight dip in your credit score.
Q: So, if it dips, it'll most likely come back up. I mean, how long do you think it would take for that to happen?
Jeff: A lot of times it goes back to how limited you are on your credit and how that affects your product mix. If it's not really something that affects those two variables it's probably not even going to be something that you notice. If it does, then you probably want to look into which one of those that's affecting you. If it's a closed credit card maybe try looking at getting another one to replace that. That gives you back that right mix of products, meaning, revolving accounts, installment loans, and a mortgage account.
And I'm going to clarify. An installment loan is something like a vehicle that has an end date as to when you pay it off.
Q: We talked about credit cards. This a big one that I think people need to know. I was talking to someone the other day and they were excited because they were paying off a credit card and they could not wait to make that last payment. And then they said, "As soon as I pay it off, I'm going to close it." And I looked at them and said, "Don't!" Can you explain why it is not a great idea to close that account?
Jeff: Sure. So, most consumers only have a few credit cards. And if you close that credit card, then you're going to lower what's referred to as "your available credit." And particularly if it's one with a larger limit and you're only leaving open a few credit cards that have smaller limits, that could have a significant effect on your credit score. Some people have 8 or 10 credit cards and they just want to pare it down some, and there's nothing wrong with that. Maybe they are having a little anxiety because of that much exposure. I would recommend you look at the ones with the smaller limits and also look at the ones that are the newer accounts.
You definitely don't want to close your older accounts because that can have a very adverse effect on your credit score. But you also don't want to close the ones that have the larger limits. If you are going to close anything, you want to look at closing those smaller ones. And if you've got one that you've had for many years versus one that you just opened last year or something like that, you would definitely want to strongly consider the more recently opened ones as opposed to the older ones. Because that can change what they refer to as "your average age" of your accounts, which accounts for a large chunk of what computes your credit score.
Q: Okay. That's good to know. But if you leave those cards open you don't want to let it sit and not use it. What would you recommend? Or what do they need to do?
Jeff: That's correct. Most everybody has their one or two cards that they use for a lot of their day-to-day, and so forth. And then you may have one or even more that you’ve had for a long time but you never use. What I always recommend is try using it at least once a year.
Even if you just buy something for $5 or $10 dollars or something like that, then see when your statement is issued, put a reminder in your phone so you remember and to make that payment on it. That will give you that one transaction per year that you need to keep it active. And you don’t forget to make the payment. I always say a year just because you don't want it to get too far out there. Most creditors will look at anywhere from one to three years of inactivity before they would close any kind of a credit card or anything like that. It's very rare that somebody's going to close one after just a year of inactivity. But if it's one that you've had for a really long time, you don't want to take that chance either.
Q: And is it also possible if you don't use the card, the company may reduce your credit limit, right?
Jeff: Yeah, and that's always another possibility because the whole idea behind closing the credit card or reducing the limit is if you don't use it often, you don't think about it, and you forget about it, you have a much higher risk of there being some fraud happening on that card. Somebody could get that credit card number and run up a bunch of charges and then because you don't see that card every day because you don't use that card every day because you're not logging in and checking it on your phone every day, you're not seeing it right away. It could even be a few months and then boom, you're hit with all of these large balances that you try to have to dispute. So, it's really a fraud deterrent too.
Q: Oh, that's a really good point. I wouldn't have thought about it like that either. And one more thing I want to ask you about when you take advantage of a 0% offer to purchase furniture or a computer or at another big box retailer. That actually shows up on your credit in kind of a different way. Could you explain that a little bit, how those really work on your credit?
Jeff: A lot of times they will open as a revolving account. So, its basically like a charge account. And if it's something that's open for the amount that you're borrowing or near the amount that you're borrowing, that is going to adversely affect the utilization, or how much your available credit you are using. And that, of course, in turn can have an adverse effect on your credit score as well.
That can have a significant impact on you if you're looking to buy another car, or looking to get a mortgage to buy or refinance your home, or something like that. So, it's always something that you want to be careful of whenever you're taking advantage of those kind of situations.
Another thing that you want to be aware of, even though most have gotten away from charge accounts and have gone through major issuers now, but you still have some that are direct issuers of their own store charge accounts. And with those, in the event that the card is compromised, you don't have the protections in place on those that you would if you had a major credit card, like a Visa, a Mastercard, or one of those. So, you're basically assuming all liability.
Wow, that is great information. That is not something I ever would have thought of, either. That's a lot of great information. Thank you, Jeff. And I just want to reiterate that these are things to keep in mind as you're taking out loans, or you're doing things at places like that where you're taking advantage of those offers. And if you are planning on taking out any big loans, maybe you need to buy a car or a home or something like that, keep these things in mind as you're looking at your credit score or your credit report, so that you understand what you're seeing on there, and how it's affecting your score. There may be things you can adjust or do, especially before you go make that big purchase.
Q: Now, I want to jump to savings for just a minute. I think there are people that often don't understand the choices that they have. And when it comes to savings accounts, that they can have multiple accounts. I also feel like sometimes it's hard to choose kind of what account is going to be best for you. Lawoka, can talk a little bit about the different account types, and maybe some of the pros and cons with the different accounts that are out there?
Lawoka: Sure. So here we have a regular savings account. You get unlimited withdrawals from it. You can deposit as much as you want. The interest rate does tend to be lower than other savings products.
Then you have your specialty savings accounts, like your Christmas club or your vacation club. Those you can make regular deposits into them, but you're limited to your withdrawals. You can withdraw from them, but there's usually a fee. And then the money is transferred over into your savings account, your regular savings account at a designated time. For Christmas clubs, those are transferred into your savings account November 1st. Again, the interest on those accounts is the same as the regular savings account. It's a lower interest rate, but it's the money safe and secure.
Then you have the money market account, which is generally a little bit higher interest rate. You can deposit as much as you want into that. You are limited to two withdrawals a month. And then if you need more withdrawals than that, within the month, it's $10. You do need to have a minimum deposit in those types of accounts to earn the higher interest rate, but it's low. On the money market, it's $500.
We have our youth savings accounts that we call Explorer Club. And it's a high-yield savings account. We want to encourage our young children to save their allowance or their birthday money or whatever they want. Right now it's earning 5.5% for the first $3,000. Most children do not have more than $3,000. We're not making this their college fund. It's just their savings account. Once the balance reaches higher than $3000, the amount over the $3,000 earns the regular savings rate.
It's great. The kids love it. They come in and every time they make an in-person deposit they get to either get a token to use the prize machine or they spin the prize wheel. So, our children love that product.
Then you have our CDs and our IRAs. Our CDs are at a higher interest rate. There's a minimum of $1,000 to open one. And we have terms between six months and five years. So, you pick what term you think best fits your situation. The interest rates are higher and there's an early withdrawal penalty if you do need your money earlier. And those are set based on the terms. So lets say you have a six-month penalty within 30 days of interest, you don't lose your principal. You never lose your principal in a CD or an IRA here. Our IRAs are based off of our CDs rates. So, they're safe and secure. You do not invest in the stock market for CDs or IRAs so the earning is safe and secure.
Q: So, it really seems like when you're looking at a savings account, you need to consider what is you're trying to do with that money. Determine your goals and what you are trying to save for. Then choose what account is going to be the best one to put that money in, right?
I feel like people don't always really understand that a CD can be a good option. I think they also get a little tripped up with the terms. Can you talk about that a little more with the CDs?
Sure, what I see here a lot is you have money sitting in a savings account, which is great. If you need the money, say within six months, then yes, put it in a savings account even though you're earning less money. But if you don't need it, right away then you want to put that in a CD, even if it’s a six months or a year CD. You're going to earn more interest if you're not going to need the money.
I see a lot of people just having money sit in their savings account instead of making their money work for them, basically earn them more money. If you don't need that money, then put it-- I call it lock it up, put it in the CD for that term. And then you're earning more money, you're making more money for yourself.
Right. And tell me again what the minimum deposit is for a CD.
The minimum deposit is $1,000 and the minimum term is six months.
So I think there's times when people feel like that it's out of reach, that they think they need more to deposit in a CD. But it's really not a huge amount. And if you've got that, like you said, that's a better way to grow that money than just in a regular savings account.
So, let's talk for just a minute about the terms because I know a lot of times with a CD, depending on the term and the rates vary from one term to another. It may be a different rate. So how do you understand that and know what to do or how to make a choice of which one to choose other than when you need the money?
That's one of the hardest things is to predict interest rates. I mean, the future is definitely uncertain. We have no idea. We can look at what economists say. Right now, the economists are saying that the Federal Reserve is going to lower the interest rate. If you looked at the beginning of the year, they said that it was going to lower it three times before the end of the year. Now they're saying one time. I mean, the future is uncertain, but we can only base our own financial decisions off of the experts. So right now they're expecting the rates to lower and they're calling this a declining rate environment. That means they're expecting the rates to go down over time.
So, what I would do is I would put my money long term. Five years at 4% versus six months at 4.5%, because what is interest rate going to be in six months? We don't know, but we do expect it to be lower. So, I would lock it up to 4% for five years because, in five years most likely the interest rate is not going to be 4%. It's going to be much lower.
Now, when the economists are expecting the rates to go up, so a rising rate environment, you want to do the opposite. You want to lock up your money for shorter amounts of time because say right now it's 4.5% but then in six months, it might be 5%. That's in a rising rate environment. We don't have that right now. We did have that two years ago when things were going up really fast. They're not coming down as quickly as they went up for sure. But that's what I would do. You look long term. A lot of people are looking at rates right now and they're like, "I'm going for the higher interest rate." But if you look at your six-month interest rate versus your five-year interest rate, even though the five-year interest rate is lower right now, you're going to end up earning more money. So that's what I would do. That's my recommendation to everyone that I talk to. Again, you can only base it off of what you what you need.
Like you said, the amount of time that you may have before you need the money obviously is going to play a big role in that decision. But if it's money that you're just kind of sitting on, you don't really need it or maybe it's something is an investment for you that you're looking at as long term, you're absolutely going to make more money if you just keep it in a long term.
We can't predict the future, but we can listen to the economist and kind of pay attention to what they're saying and what we feel like is going to happen in the future. This is just great information and I think it will help people who didn’t know they could have multiple accounts or that there were so many options available to them.
Thank you both for sharing with us today!
For those that have questions or want help exploring these options we are available at either branch of First Pioneers FCU. You're welcome to come by and speak with someone if that's what you're more comfortable doing and we can help explain these things to you. You can visit us online at firstpioneers.com. We also have a live chat on our website where you can chat with an attendant or a member services rep there if you have a question.