Welcome to Day Eight of the 30 Day Financial Transition Challenge. Today’s article focuses on the proper use of credit. While Day 3 focused on paying off your consumer debt, especially credit cards, today will help develop a bigger picture regarding your overall credit situation.
Bottom Line Up Front (BLUF)
While paying off ‘bad debt’ such as credit cards and consumer loans is a great start, you should take some time to look at all the ways that debt touches your life. Used appropriately, the ability to access capital can be used to build incredible wealth over time. Today, you’re going to look at your credit situation, specifically when it comes to:
- Your ability to obtain credit
- Cost of debt
- Access to capital
As you transition, you may experience a lot of instability, especially in your first year or two. Finding opportunities to lower borrowing costs, establish lines of credit for emergency use, and knowing your credit score will help you as you transition. Furthermore, having access to low-cost capital will allow you to build long-term wealth.
Credit reporting. While it’s always good to keep an eye on your credit, life gets in the way. As you transition, you definitely want to buy yourself the opportunity to address any credit issues, particularly false reporting from creditors or identity theft.
Lowering your borrowing costs. You should always keep your eyes open for opportunities to refinance your ‘good debt.’ If you’re able to save $100 per month on your mortgage without raising your balance, then that’s $100 per month you can put somewhere else. Tax-advantaged or not, it’s always prudent to lower the cost of borrowing when possible.
Credit availability. As previously discussed in Day 2, it’s important to have enough savings set aside so that you can get through tight times and emergencies. However, it takes a while to build that savings account…what happens if lightning strikes before then? Having access to capital, like a home equity line of credit (HELOC) isn’t ideal, but it’s better than having to liquidate investments at the wrong time.
Your goal should be to figure out:
- What is being reported to the credit bureaus
- Whether you can lower the costs of your ‘good debt,’ such as mortgages & student loans
- Whether you can pre-qualify for a HELOC…and under what circumstances you would use it
What you need
- Your credit report. You can pull your credit report from any of the three reporting bureaus: Experian, TransUnion, or Equifax. Since you can access your credit report once per year from each of the bureaus, you should try to space this out to one report every four months.
- Statements from your mortgage company, student loan lender, or other lenders.
This is a three-part ‘how-to,’ consisting of credit reporting, refinancing opportunities, and lines of credit.
Review Your Credit report
1. Pull your most recent credit report. Be sure to type in “annualcreditreport.com.” No hyperlink here…you need to actually type this in, because there are many other imposter sites out there. If you land on one of their pages, you’ll become an identity theft victim. Once you’re on the website, you’ll follow the instructions for any of the three reporting agencies.
2. Go through your history. Pay particular attention to any:
- Late payment notices or delinquencies, even if they’ve been paid
- Past due accounts
- Closed accounts
- Collection notices
- Accounts that you aren’t aware of, or with retailers & companies that you don’t do business with
3. Write down a list of all the discrepancies. If there are things that sound strange, you’ll want to report them to the agency and follow their recommendations. Without going into too much detail, there is a TON of information on the Annual Credit Report website on what to do if you notice something wrong. Today’s focus is just getting a snapshot, and building your ‘to-do list.’
Review Your Outstanding Loans
4. Take note of all your loans (mortgage, student loan, etc.)
5. Is there an opportunity to refinance?
- Mortgages; When it comes to mortgages, there is a general rule of thumb. If a mortgage can be lowered by at least 1%, you should do so. However, when it comes to VA loans, you might find that you can do a streamlined refinance with very low (or no fees out of pocket. In a low-interest rate environment, there are many situations where it makes sense to refinance at less than 1%.
- Student loans: Where do you stand? Does it make sense to refinance? Again, there are no hard & fast rules, but you might have to rely upon what is available when you’re looking at refinances.
- Other loans: What else is there? A great answer is “Nothing,” but if that’s not the case, you might want to see what options you have.
Consider Your Available Credit
6. Do you have the opportunity to get pre-approved for a home equity loan or open a HELOC? As previously mentioned, hopefully you’ll never have to borrow that money. However, you’ll want to apply for it while you’ve got that military salary going for you, especially if you don’t know if you’re going to secure a job upon your transition. Lenders want to see your income…if you apply for credit while you’re in between jobs, it becomes a lot more difficult.
7. Signature loans. I would advise you stay away from signature loans. They’re usually very expensive, since there’s no collateral involved. You should either establish that HELOC, or use some other means to get capital. However, if you’re in the position where you might be considering a signature loan, you should at least see your installation’s financial counselor before going through with it.
To wrap up, today you’re going to:
- Find out where you stand with respect to your credit reporting
- Figure out if you can lower the cost of your existing debt
- Determine whether you can get pre-approved for a home equity loan or open a HELOC.
Tomorrow, we’ll discuss your rental real estate exposure (other than your primary house). If you’re an accidental landlord, you should consider whether it makes sense to keep that property or to get out of it before you transition.