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Part 2 Module 2 Chapters 4-7During this call, we will discuss ways to get the whole household involved with financial goals. We will also discuss credit scoring and ways in which members can improve their credit.Working as a TeamIf only one person in the household understands the financial picture, it will be very difficult for them to implement a lasting and successful change.The Household Meeting:Set a time to meet when everyone will be there. If one person is not involved, it may prevent success.It may be important to have a preliminary discussion with key decision makers beforehand and come up with a plan of how to start the discussion.Be open and honest, open up the books. Tell everyone what you are struggling with, and what needs to change to fix the problem.The amount of information you share will depend on the age/abilities of the others. Don’t share too much information that will worry the kidsRemember to talk about the positive outcomes if everyone can follow the plan.Give everyone a responsibility, ask everyone to contribute.It can be something major, like getting a job to pay for their own expenses.It could be as simple as the responsibility to adjust the temp before leaving the house and checking to ensure all lights and appliances are off.Ask everyone how they can contribute, they may have great ideas.It is important for the kids to know that there is a real reason you may say no to an expense they want you to pay for. Show them your own personal spending budget. Share your successes and also failures with them. Have them encourage you to stick to the family plan. Find positive ways to teach them.Have them work towards their own goals, include them and provide rewards for successesAsk for comments. You want to hear their frustrationsIf they feel ignored or that they are not part of the plan, they will less motivated to help you.The meeting should not be a one time event. You need to periodically discuss progress. Some people may need to express frustrations. Be sympathetic, but do not join in on the negative comments. Tell them you understand, and that the goal is to improve the family finances so that these difficulties can be avoided in the future. As you solve the problems today, you are preventing even more difficult discussions and frustrations in the future.Ignoring the problem will only compound the struggles.Write down key household goals, establish a plan. Place this WRITTEN plan in a location that everyone can see.This will be a struggle, prepare them.There will be successes, and failures. What is the contingency plan: if the plan breaks down, what is plan B?Don’t keep secrets, encourage the member to not feel ashamed. They should not hide their situation from extended family (and in some cases, friends). They may get support from those around themInstead of an invite to a restaurant, those around you may suggest a dine in optionKeeping ScoreChapter 5 focuses in detail on credit scoring. This is a very important topic, but shouldn’t always be an area of focus.Sometimes members focus too much on credit when they should be focusing on cash flow, or another area.I often have to convince people that they need to go into survival mode. Stop thinking about what everyone things. Stop thinking about maintaining the highest credit score, and start thinking about a long term financial plan for success.That being said, most of the advice you will give members will help them improve their credit.One of the by-products of counseling: improved credit standing.Now let’s move on and actually talk about improving credit.The FICO scoring model is the most important, and the one the manual discusses in depth. Why? It is the system that lenders have used for years and like.Experian announced on January 19th 2011 (Costa Mesa, CA) that they will begin including rental data from RentBureau in credit scores. It makes sense, 1/3 of the nation rents. This could be a good indicator for lending.It appears this is just a VantageScore change, we will have to wait and see how it progresses.We will also have to wait and see if FICO implements anything similar.The FICO score range is 300 to 850. Some people become fixated on getting a perfect score, they want it higher and higher.This is wasteful in my opinion. Once you break the 760 mark, does it really matter(Please let me know, what score is the good enough that there is no reason for the member to try and go higher? What does your credit union say?) If have your manual, I would encourage you to look at the graph on page 35. If you don’t have this memorized, I would encourage you to do so.That being said, there are really two sections that I focus on.Payment History and Amounts Owed are the vital components of the members credit score. The other pieces will fall into place and most of the time, they shouldn’t worry about them.I will come back and talk about Payment History and Amounts Owed in a momentLength of Credit History – Maintain accounts long term. Don’t close out older established credit lines unless they will never be used again, and you are not applying for credit in the near future. Other than this, you can’t really counsel them to make many changes in this area.New Credit – New credit lines are good, but this can be counterproductive. If someone opens a bunch of new credit lines, it can be seen as a problem. Inquires for credit will lower the score, new accounts will lower the overall average account age, and you should really only open new accounts if you need them.Types of Credit in Use – It is good to have different types: CC, store cards, auto loans, mortgage, student loans, personal loans, etc. But in general, most members shouldn’t just open accounts to increase their credit accounts in use. Often this gets them into trouble. Obtaining debt to build credit is generally not the best advice. If they don’t need an automobile, you should not advise them to get an auto installment loan.Payment History – Pretty simple advice: PAY ALL CREDIT LINES ON TIME every single month. If you don’t, it could result in fees, higher interest, and credit score damage. Payment history from the last 7 years will be included in the score. However, the last 24 months of payments are more heavily weighted in the FICO score.Amounts Owed – Unfortunately, many members will not understand how vital credit balances and ratios are on their score. Most know that late payments can hurt them, but they don’t know that being near their credit limit is hurting their score. If they are maxed out on credit lines, or near maxed out, it will lower their FICO score. Paying the bill on time is not the only thing that matters. Everyone has their own interpretation of the utilization ratios, and FICO is always quiet on most of these matters.Most recommend staying below a 50% utilization ratio on all accounts.Staying below 33% should be even better for your score.The member should find the balance between keeping balances low, and having sufficient credit lines for their spending habits.A very big misconception is that if they pull their own credit report, it will hurt their score. This is not true. “Hard” inquiries come from applying for credit. But when you pull your own report, it is listed as a “Soft” inquiry.Another area in which consumers are often confused. Checking and Savings accounts, cell phones, utilities, etc do not build credit. The consumer may think that because their credit report was pulled for a specific item, that the service provider is helping them build credit.When applying for credit, shop in windows for cars and mortgages. This manual indicates a 14 to 45 day window for shopping on those loans, but I see different figures everywhere. I have yet to hear FICO confirm anything on conference calls. But many industry experts have told me that autos have a 14 day window, and mortgages are a bit longer (I have heard 30-45 days.)Credit ProvidersRetailers or Store Cards – Interest rates are higher than normal credit cards. Incentives are used to get consumers to open these accounts. They are often used very infrequently. They are easier to obtain for lower credit consumers. Credit limits are usually small.Banks – Tighter lending standards than retailers, lower rates and fees. It is a corporate approach to lending, they often have good rewards programs. Often provide very large credit limits.Credit Unions – The approach to lending is better for the member. I am a CU member personally. They charge the lowest rates and fees on all cards, but have the tightest lending restrictions. This is good though, the low risk in the portfolio allows for better rates and benefits for members that qualify. I have heard on FICO conference calls though that CU accounts are weighed slightly less than National credit cards for building credit. Finance Companies – Provided through smaller retailers that don’t handle their own credit portfolios. Many jewelers for example, can provide you with financing through a third party, they are not the lender. They are often interest free for a period. Consumers should take caution as these account are often the most tricky to understand, and can tack on severe fees.Consumers often ask me what card they should get. You are in a great position as you likely know the products that your credit union offers. Through your conversation, you will likely understand what type of product would best suit their needs.When I am shopping for a credit line, I look for the following:Rewards ProgramsNo fee accounts (unless the benefits outweigh the fees)Online access is important to meREAD the fine printThe manual discusses home equity loans. I will end today by saying that they can be a great part of the solution for many members. But I would also caution them to make changes to their spending habits so that they don’t charge their cards back up. This is a big risk, they are converting and unsecured debt to a secured debt for the benefit of a lower payment and rate, and tax benefit. Is it worth it, maybe. Make sure they understand the consequence, and can make the needed changes to not further their indebtedness.Congratulations, you are officially ? through the training modules and conference calls. ................
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