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What should my husband and I do first and in what order? Should we pay off our car notes first, concentrate on college savings for our three children, or should we establish a six- to eight-month emergency fund? We’re confused because we’ve heard so many different opinions on how to prioritize our funds.

—K. Jackson
Via E-mail

Paying down debt, educating the next generation, and creating a cushion for emergencies are all worthy efforts. With so many demands on the average American family it’s difficult to prioritize. Here’s how I’d go about it:

Although some personal finance solutions are a matter of opinion, almost all financial planners would counsel you and your husband to build an emergency fund first. Experts used to suggest a fund that would carry a family through six to eight months, but in today’s difficult job market, emergency money should cover your family’s living expenses for as long a period as it’s likely to take to find new employment.

Next, I’d recommend contributing at least 10% of your income to a retirement savings account. If you have extra money each month, feel free to start a college savings account for your children. However, your retirement savings takes priority—since your children can play a role in financing their own education with scholarships, grants, and loans.

The last item on your list should be to aggressively reduce the principals on your car loans. But unless you have the resources to do that and cover the rest of your priorities, paying the scheduled monthly payments is fine. For more help prioritizing your finances, consult the Black Enterprise Wealth for Life Principles.

Khalfani-Cox says perfect credit is within reach.

In personal finance expert Lynnette Khalfani-Cox’s latest book, Perfect Credit: 7 Steps to a Great Credit Rating, she outlines the steps consumers need to take in order to get their credit in tip-top shape. I recently sat down with the Money Coach and got the scoop.

Why did you write this book?
I personally had struggles with credit issues. I have great credit now, but for many years I had really bad credit, and I know what it’s like to suffer through that. I also want to show consumers how being in debt impacts your ability to have great credit. There’s a big tie-in between credit and debt.

What is perfect credit? Does it mean having no debt?
No, absolutely not. I define perfect credit in the book, in terms of objective measures and what it means. Your credit score is one objective way for you to look at how well you’re managing your credit. I consider anybody who has a 760 or higher FICO score to be in that perfect credit range. Things like your ability to sign on the dotted line and get any loan that you want  based upon the strength of your credit reputation is one factor that determines whether or not you have perfect credit.  Another thing, as far as debt, is that you have to know exactly where your finances stand so that you have the ability to eliminate bad forms of debt such as high rate debt and consumer debt like credit cards. Some people can have great credit and still have debt. It can actually help your credit rating to show multiple forms of debt or multiple types of loans in your credit profile because it accounts for 10% of your FICO score.

What are some barriers to perfect credit?
Many consumers don’t understand the rules of credit. They might know some of the basics, such as paying on time, but they don’t really understand the unwritten rules about credit. I learned a lot of this through trial and error, but I’ve also learned through the work I’ve done with consumers. In general, we need to know the three dominant rules of the credit world, which are outlined in the book. If you don’t know the undeclared rules of credit, you’re sunk. If you understand how things work, you can play by the rules and know what to do if they change.

If you already have great credit, how do you maintain it?
The first thing is to continue to pay all your bills on time.  That’s paramount because the reality is, for those who have really great credit ratings, the smallest slip up can hurt them the most. For example, the person who has a 600 FICO score who has a late payment might only see their FICO  score drop a fraction of the amount of someone with a 750 or 800 FICO score. It’s imperative that the person who has great credit works overtime to make sure they don’t do anything that can be counted as a misstep, such as making a late payment. Continue to practice good financial habits and pay close attention to any changes in your credit report.

Come back to Black Enterprise every Tuesday  for a new Money Expert Q&A.

The kind of plastic you use matters

I recently got an offer in the mail for a charge card. How is this different from my credit card or my debit card?

—S. Chung
New York

A charge card differs from a credit card because you’re required to pay the balance in full each month. In addition, there is no periodic or annual percentage rate since balances are not carried from one billing cycle to the next. (However, some charge cards offer the option to carry over a portion of the debt. Finance charges usually come with this feature.) These cards also do not have a preset spending limit. The traditional American Express card is one example of a charge card.

Furthermore, when it comes to VantageScore and newer versions of the FICO scoring model, charge cards don’t count toward your credit utilization—the ratio of your outstanding balance to your credit limit—when credit reporting agencies calculate your credit score, since charge cards don’t have credit limits. Instead, charge cards count toward your payment history and length of payment history. This means that a high balance will not negatively affect your credit score.

Charge cards are different from your debit card because you are using borrowed money rather than your own. One benefit of a charge card is that you won’t carry debt each month. Charge cards also tend to have better rewards programs. However, if you don’t pay on time, you’ll face late fees and penalties. Know that if you’re interested in applying for a charge card, you’ll need to have good to excellent credit.
—S.N.

Having the ability to obtain an affordable home loan is only one example of how it pays to have good credit. Your insurance premiums will also be lower if you have a high credit score. “An excellent credit score is 750 or higher; 680 to 740 is good. The lower 600s would be considered fair. Anything below that is poor or subprime,” says Ben Woolsey, director of marketing and consumer research for CreditCards.com, a consumer advocacy Website. What’s more, your credit report could prevent you from getting hired or promoted. “Employers look at credit reports and conduct credit risk assessments to determine an applicant’s level of responsibility and debt liability,” said John Ulzheimer, president of consumer education for Credit.com, another consumer advocacy Website. “In the current economy, the last thing you want is for your credit report to get between you and a job.”

The rules for boosting credit have not changed in light of the new Credit CARD Act. “The rules have stayed the same: Pay bills on time, keep credit card balances low, and avoid bankruptcy and foreclosure,” says LaToya Irby, credit and debt management expert for About.com.

If you’re looking to increase your credit score, make sure you follow these tips:

Pay your bills on time. If you have a lot of debt, pay it down. If you’re behind on payments, catching up would be the fastest way to boost your credit. “Miss a meal before you miss a payment. Once you start missing payments, it’s only a matter of time before you hit ground zero. The longer you go past due, you have to deal with tax liens, bankruptcies and repossession,” says Ulzheimer.

Keep your credit utilization ratio as low as possible. Credit utilization looks at your total used credit in relation to your total available credit. It’s best to utilize as little of your available credit as possible. Don’t charge high-cost items on your credit cards unless you can pay it down right away.

Have incorrect negative information removed from your report. Check your credit report annually. If you notice any mistakes, dispute them. It usually takes 30 to 45 days for complaints to be processed. “There could be erroneous reports that were sent to collections agencies,” says Irby. “Myfico.com posts the credit score used most by lenders. In addition, Creditkarma.com offers free credit reports, but they are provided by TransUnion, not FICO.”

Apply for credit when you need it, but don’t apply excessively. “Inquiries count toward 10% of your credit score,” says Ulzheimer. “The damage that one inquiry can cost lasts a year. If you plan to buy a car or a home in the next year, think wisely about inquiries.” That retail store credit card that will save you 10% every time you use it isn’t worth it. Although, “your credit report should include various types of credit: Auto loans, credit cards and mortgages,” says Woolsey. “If you’re shopping for a loan for a car or home, shop within 45 days. Loan inquires that occur with a 45-day period are counted as one inquiry, said Ulzheimer.

This article originally appeared in the January 2010 issue of Black Enterprise magazine.

Monroe wasn’t happy. He felt he wasn’t the credit risk his slightly blemished FICO score implied.

So the couple kept looking. In the end, the Monroes found a new lender in Illinois Service Federal Savings and Loan Association (No. 16 on the B.E. Banks list with $143.8 million in assets), a small community bank headquartered just five blocks from their home in Chicago’s Bronzeville neighborhood.

One of the bank’s executives knew Monroe from their work together as part of a community group. Illinois Service offered the Monroes a 30-year, fixed-rate mortgage at 5.4% with no extra fees. Since receiving their loan, the Monroes moved their savings and checking accounts to the bank. “I feel foolish that I didn’t do this a long time ago,” says Monroe. “This bank has outstanding service and a real sense of kinship with the neighborhood. More importantly, they trust that we’re good folks and will pay our loans back.”

The banking industry’s problems are well known—perhaps too much so. Fortunately, consumers have choices that go beyond the big, national financial institutions. There are nearly 8,000 community banks in the U.S. and more than 50,000 branch locations; many of them are growing, innovating, and challenging their larger competitors for customers. This new movement among smaller banks comes after more than a decade of losing out to national, name-brand banking firms.

In 1994, for instance, community banks held the majority of U.S. deposits—70%. Today, only 30% of U.S. deposits are kept in community institutions. Experts believe consumers flocked to the larger banks because they offered more active products such as online banking, free ATM use, and free checking—at a time when community banks were hesitant to modernize.

Community banks see now as a perfect time to make their move. Many are offering the same innovative products as the big boys, without any of the worries. “Consumers are definitely waking up. And they’re realizing that the TARP-ridden mega-banks may not be the most beneficial banking relationship for them over the long term,” notes Gabe Krajicek, CEO of BancVue, a consultancy that helps community banks modernize. BancVue provides software, marketing, and other services for more than 550 community banks.

“Consumers look at the news. They see the meltdowns that have taken place because of the large financial institutions and feel a real lack of confidence and trust,” says Karen Tyson, spokeswoman for the Independent Community Bankers of America, or ICBA, a trade association for nearly 5,000 community banks. “People are looking to work with a bank they trust, one they know is looking out for their best interests and the best interests of their communities. They find that with a community bank.”

That’s not just talk. In the first three months of 2009, ICBA member banks tripled their mortgage loan volume compared to the same period in 2008. In a press release trumpeting the jump, Dave Petro, president and CEO of ICBA’s mortgage arm, called the increase “a dramatic indication that community bankers are regaining lost market shares in the residential mortgage arena. It also demonstrates that despite the challenging economic environment, our nation’s [community] banks are commonsense lenders that continue to lend to their customers in cities and towns throughout America.”

Although some smaller banks have run into trouble, “most of them avoided the crazy loans made by so many larger banks,” says Greg McBride, senior financial analyst at Bankrate.com. Thus, many community banks, including credit unions, are still making loans. A good number are also offering higher yields and lower fees than their larger competitors to attract deposits.

Sure, your local community bank might offer half a percentage point less on a money market deposit account than you could find online: that’s $50 a year (before tax) for every $10,000 you keep there. In return for giving up a smidgen of yield, you have the opportunity to deal with real people, face-to-face, and to resolve any problems personally. Mell Monroe, for instance, says he loves the fact that customer service reps at Illinois Service Federal recognize his voice when he calls.

Of course, there can be some drawbacks to community banks. For example, some offer limited products and services. Your local bank may not offer as many mortgage options, investments, annuities, and financial advisory services as JPMorgan Chase or Bank of America.

Even so, your local bank might offer you the best (or only) deal you’ll find. “Officers and directors of local community banks have often lived in the same small town their entire lives,” says Bedda D’Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, North Carolina.

“If you start hanging around the local Chamber of Commerce, you will meet attorneys, real estate agents, and bankers who went to school together and do business together. One of my former clients bought her house from a real estate agent who talked the executive lending officer of the community bank into approving a mortgage. The transaction would never have met Fannie Mae standards, but she got her loan.”

For customers like the Monroes, community banks are living up to their name as vital economic engines in their local environs. The couple is preparing a business plan to turn their five-bedroom 1890s historic Bronzeville home into a bed-and-breakfast. Where do they hope to get their small business loan?  Illinois Service Federal. Says Monroe, “When I talk to friends now who bank with those big, national banks, I ask them: ‘Do they really know you?’”

– John Simons contributed to this article.

This story originally appeared in the July 2009 issue of Black Enterprise magazine.

The scoring range is still the same, 300-850 (and the higher the number, the better). The new method is supposed to be a more accurate risk detector. But judging by the lingo from the Fair Isaac news release, it’s all about the bottom line for their clients – nine of the top 10 companies in the Fortune 500, two-thirds of the top 100 banks in the world, 90 of the 100 largest financial institutions in the U.S., and the 100 largest U.S. credit card issuers.

The “improvement will increase the ability of clients to reduce losses within current portfolios and to acquire more profitable prospects,” Fair Isaac says. Just who are those “profitable prospects?” My guess is they’re “revolvers,” a term used in the credit card industry to refer to the most profitable customers, those who carry monthly credit card debt.

It’s all about mitigating risk, and the “increased predictive power,” (sounds a little like Ms. Cleo, if you ask me) of the new formula apparently holds the power to do so.

As for consumers, this new system is supposed to be more forgiving to one-time slip-ups and impose stricter penalties on repeat offenders.

TransUnion is the first of the three credit reporting bureaus to implement the new scoring. “It’s more reflective of a person’s [financial] scenario,” says Lee Baker, a certified financial planner with Apex Financial.

The new system will also take a deeper look into credit histories.

“Now they’re going to look for patterns,” says Ivory Johnson, director of financial planning at Scarborough Capital Management. They’re also going to look at what type of payments you’re late on.” Johnson says reporting dings due to a late cable bill won’t weigh as heavily as that from, perhaps, a missed car payment.

Those with shorter credit histories may have to work a little harder to establish themselves.  “For that younger person starting out, it may take a longer period of time to see where they can get credit on their own to purchase a car or home,” Baker says. But market conditions will also have some impact.

Let’s not forget about the market conditions of yore that fostered wanton spending with abysmal savings in the United States. The housing boom and subsequent bust that sent the economy reeling was spurred in part by poor assessment of borrowers risk, Johnson says.  “If someone has four credit cards and is paying on time, how does that translate to ‘I can buy a house?’”

Don’t expect any changes just yet. The new criteria could take as long as six months to go into full effect.

For more information on boosting your credit score, check out Boost Your Credit Score.

Don’t forget to visit AnnualCreditReport.com for your yearly free credit report from all three credit agencies. The report may be free, but you’ll have to pay to access your FICO score.

Renita Burns is the editorial assistant at BlackEnterprise.com.

Ever since subprime mortgages became more “sub” than “prime,” lenders have been tightening up on credit. The days of the nothing-down, no-documentation mortgage are gone.

Now homebuyers need a down payment and proof of income. What’s more, mortgage applicants need a winning credit score.

Credit scores are also weighed when you want to refinance a home loan or buy something on time. Some auto and home insurance companies will accept or reject you based on your credit score. Even if you’re accepted, the price you pay for insurance may vary according to your credit score.

Fair Isaac is the company that developed the FICO scores used by most lenders. On Myfico.com, the company illustrates how a higher score can lead to better deals on a 30-year, $300,000, fixed-rate mortgage:

The median FICO score in the U.S. is 723. Even if you’re a cut below that level, with a 660 score, you won’t pay that much more than someone with a superlative 800 score.

However, once your score dips below 660 (about 30% the U.S. population falls into this group), you’re considered more of a credit risk so you’ll pay much higher interest rates. Those with scores under 620 are likely to be quoted rates far above the norm, if they can get credit at all.
The bottom line is that your credit score has become vital to your financial well-being, so bringing up your score pays off. To do so, you should know how your score is compiled. Here’s what goes into a FICO score:

Payment history: 35% of your score. Pay your bills on time, even if you send in only the minimum amount due. Late payments will knock points off your score. Generally, a 90-day delinquency is more serious than a 60-day delinquency, but recency also counts. For example, a 60-day lateness a few months ago will hurt your score more than a 90-day late payment five years ago. This part of your score also takes into account factors such as bankruptcies, foreclosures, and wage attachments. Filing for bankruptcy, for example, can affect your score for seven to 10 years.

Amounts owed: 30%. The key here is your debt-to-credit ratio. Once you go over 35%, your score might drop, according to Steven Katz, director of consumer education for TransUnion’s TrueCredit.com. Suppose, for example, you have $20,000 worth of available credit on your credit cards. If your balance goes over $7,000 (35% of $20,000) your score might drop, even if you pay down the amount you owe by the due date.

That 35% rule may be card-by-card. For example, if you have a $12,000 limit on one credit card and an $8,000 limit on another, charging $4,000 on the $8,000 card can lower your score, even if you owe nothing on the $12,000 card. Generally, says Katz, it’s better for your score to spread your credit card usage among two or more cards, rather than load up on one card.

Length of credit history: 15%. When it comes to credit scoring, older is better. You shouldn’t close down old cards where you have a good record. Moreover, closing old cards reduces your total credit availability, which can raise your debt-to-credit ratio. Say you have $30,000 in credit lines from three cards. You close one card with a $10,000 limit, bringing your total credit down to $20,000. If you have balances adding up to $9,000, you’ll go from a 30% debt-to-credit ratio ($9,000 over $30,000) to a ratio of 45%, which probably will raise red flags.

New credit: 10%. Try to avoid opening many accounts within a few weeks. “Some people fall into a trap during the year-end holiday season,” Katz says. Shoppers are told they can get, say, 15% off on all purchases that day by getting a store card. That opens a new line of credit, and opening several new lines in a short time can lower your credit score.

Types of credit: 10%. Your history will look better if you have a record of making payments on installment debt (such as an auto loan) as well as revolving debt (credit cards). If you want to see your credit scores from all three credit bureaus (Equifax, Experian, and TransUnion) go to www.myfico.com.

FICO FAST FACTS

• You have multiple types of credit, such as student loans, credit cards, and a mortgage.
• You have several accounts in good standing.

Your credit score might decrease if:

• The only credit you have is an authorized user account.
• You are near the limit on several credit cards.

If you’re working to improve your credit, listen up. Fair Isaac Corp., creators of the FICO credit score, announced a new scoring model expected to take effect this spring. The model, named FICO ’08, provides a more precise way for lenders to determine a borrower’s creditworthiness. One major change is that FICO scores will now exclude authorized user accounts, also known as “piggyback credit,” from the scoring formula, says Craig Watts, public relations manager at Fair Isaac. This is partly a response to the rise in credit-repair companies charging consumers fees as high as $2,000 to be added to the account of someone with good credit who is in turn paid by the company for the use of their account.

Emily Davidson , an expert at Credit.com, a credit information Website, says teen borrowers will be hit the hardest. “Many young people have authorized user accounts because their parents wanted to help them establish credit. But once the new model is in place, authorized users without a credit history of their own will not have a credit score,” says Davidson.

In cases where an authorized account is the first type of account a borrower obtained, not including it can shorten the credit history, resulting in a lower score. Length of credit history accounts for 15% of one’s total score and payment history accounts for 35%. According to Fair Isaac, 30% of the population has an authorized user account on their credit report and between 60 million and 75 million borrowers will be affected by the change. As an alternative, Davidson suggests becoming a joint cardholder, where each person is equally responsible for the payments and outstanding balance.

Another change is that more points will be given to borrowers with several credit types, such as student loans, credit cards, and a mortgage, because it demonstrates they can manage payments on various types of loans. Furthermore, delinquencies will be handled differently. “Under the current version of the FICO score, if a person has one delinquent account, they’ll get lumped together with people who have more than one delinquent account. But the new model separates people from those who have multiple delinquencies,” says Watts. One thing that won’t change is the scoring range. It will remain 300 to 850.