Raise Your Credit Score

Having access to credit can be important, especially at key times in your life like buying a home, and paying for your student loan.  Credit for more frivolous needs is perhaps not to be recommended, as debt can prove a heavy burden, from both a time-consuming and emotional perspective.

If you are thinking of taking on a loan in the near to medium future, it is worthwhile to know the basics about credit reports and credit scores.  When you apply for a loan, the lender, as part of the approval procedure will contact one of the three main credit report agencies (TransUnion, Experian and Equifax) to obtain your credit report and credit score.  Depending on the contents of your report, and the score you achieve the lender will decide upon i) whether to offer you a loan at all, and ii) and what interest rate to offer the loan. So the bottom line is that a clean report, and high credit score can grant you access to for example a mortgage at savings of many thousands of dollars over the lifetime of the loan due to the relatively low interest rate you will be charged.

The three bureaus, Equifax, Experian and TransUnion provide slightly different formats of report, but the basic information is the same (though it may differ from one bureau to another, as they all keep their own sets of data).

A Credit Report typically has this format, and includes the following basic information:

Other information such as bankruptcies, tax liens, court judgements etc is also included.

The credit score attached to your credit report is more often than not your FICO score. This is calculated by the credit bureau using a computer system from the company Fair Isaac. But note that each bureau will use their own data to work out your credit score, so your score may differ from one bureau to the next. FICO scores have a 300 to 850 range with 750 to 800 being the most common score (a ‘good’ rating).

Obtaining the contents of your credit report (without the score) is straight-forward, and is certainly recommended if you are  considering applying for a loan in the near or medium term. Each calendar year you can obtain one (free) copy of your credit report from each of the credit bureaus, see annualcreditreport.com.  Finding out your actual  FICO scores costs a small amount, you can do this at myfico.com.

On receiving your credit report, the first thing you should do is check for any errors.  If you find any contact the company concerned; they have a statutory obligation to correct any errors.  Secondly look at the Negative Items.  Now you’ll realise the effects that missing payments has – a blemish on your credit record.  Make sure that in the future you pay your bills on time. Also take careful note of the ‘Previous Requests’ section.  Too many enquiries (caused often by shopping around for the best interest rate when looking for a loan) can have a negative effect on the terms offered by a lender.

Improving your credit score is a simple matter of managing your credit more efficiently and in a timely fashion.  The FICO site action includes:

Apply for and open new credit accounts only as needed

Have credit cards but manage them responsibly

Note that closing an account doesn’t make it go away.

Lastly it’s interesting to notice that having no entries in the ‘Credit Accounts Summary’ section can actually damage your credit score, since you have not established a history of being a reliable payer.  So having a credit card, and using it sensibly can help with your score.

Best Finance’s (from 100BestEverything) ratings for Credit Reports: Financial Management: 4 stars out of 5

Municipal Bonds

Municipal Bonds (called Munis for short) are issued by second and third tier local government to finance the building of public infrastructure, such as highways, libraries, sewerage works, and schools.   The big plus point of Munis is that all the income from the bond is free of federal tax, and if you live in the state issuing the bond, free of state tax, and if you live in the city issuing the bond, free of city tax.  Eg NYC Municipal Bonds are triple tax exempt when purchased by a resident of the city.  So always double check that your home address qualifies you for the tax breaks when buying Munis.

Munis are just one step down from Treasuries in terms of security, and so after allowing for the tax concessions with Munis, typically Treasuries and Munis are priced pretty similarly.   So Munis tend to be especially attractive than Treasuries for high-income investors looking for no-hassle tax-free income.

There are two main types of Municipal Bonds. The first is General Obligation Bonds. These are guaranteed by the ‘credit and taxing power’ of the local body issuing the bond.  The second is Revenue Bonds which are issued for a specific project, and backed by the predicted revenue stream for the project.   So General Obligation Bonds have a better intrinsic guarantee, and are less risky than Revenue Bonds.   You may come across other types of Munis, such as housing bonds, tax bonds, floater bonds and lease revenue bonds, but make sure you completely comprehend the nature of these more esoteric offerings before investing.   Also some bonds are described as Private Purpose meaning they support a project whose funding is partly privately financed.  Again investigate further before committing to these, as the great tax breaks of Munis may not apply here.

When you invest in Munis, you should be aware of the risks associated with this form of investment-

Firstly there’s the credit risk.  As with all bonds, this cannot be considered to be absolutely zero.  For instance in 1995, investors in Orange County Munis lost over $1.5 billion when the county filed for bankruptcy, after the state refused to pitch in with any rescue package.  The OC fiasco was due to a pretty rare set of circumstances (mainly thanks to a public finance manager who made wild decisions well beyond his remit).    Other famous cases include WPPSS’s (Washington Public Power Supply System) default on $2.25 billion in General Obligation bonds, after a project to build 5 nuclear power stations collapsed after just 1 had been completed.  The ratings agency Moody’s gives ratings to Munis, from AAA for high quality bonds, down to D, to those in default. 

Secondly there’s interest rate risk. Interest rates may rise and any new bonds issued will pay a better rate than the existing ones. But the converse is obviously also true.  Interest rates may well fall, leading to an increase in value of your bonds.

Lastly (not applicable to most bonds) consider  call risk. Any Muni may have what’s termed  ‘call provision’, meaning the bond can be redeemed by the issuer early.  This would happen if interest rates became super low, meaning it would be difficult to re-invest the funds at a similar rate to the terminated bonds.

It’s difficult to give general advice on Purchasing Munis, because by the very nature of the bonds, the range availabe differs from location to location.  One of the best options is to keep an eye open for new issues in your local press.   Alternatively contact a local broker who will detail the options available.

When buying bonds you can purchase individual bonds, or go for a collective fund, such as a mutual or ETF.  Individual Bonds generally come with maturities of 5, 10, or 20 years, with a minimum investment threshold of $5000.  Commission of buying individual bonds is around 0.5% and 1%, relatively small when weighed against the lifetime of the bond.  No further management charges etc are applicable.   From then on you’ll collect the interest payments, and when the bond matures remember to present it to the issuer for repayment (in general they will not pay you automatically!).  You can also sell your bond early through a broker (it’s value will depend on its coupon and length to maturity).  Collective funds such as mutuals or ETFs are normally broken down by state to ensure the tax free benefits are still available.  These funds allow you to invest smaller amounts, and spread your risk over several different bonds.  But purchasing commission, buy-sell spread, and annual management charges can take a big bite from your money.

For further interesting reading on Munis see Municipal Bonds – A Conundrum and Are Municipal Bonds the Next Shoe to Fall.

Best Finance’s (from 100BestEverything) ratings for Munis: Security: 5 stars out of 5. Costs 5 stars out of 5 (when bought direct). Flexibility 4 stars out of 5.

An ETF (Exchange Traded Fund) is an index-tracking investment managed by an investment management company. ETFs are bought and sold in exactly the same way as regular stocks, and can be traded at any time of the trading day on the exchange.

ETFs have a fairly short history – in 1993 the US Stock Exchange launched the S&P Depositary Receipts Series 1 – it’s a bit of a mouthful, and the new investment vehicle quickly gained the nickname ‘Spiders’.  These Depositary Receipts tracked the S&P 500.

Nowadays, there’s are huge range of ETFs to choose from.  Long established ETFs include

Today, as well as equity ETFS, bond ETFs are available.  These track a wide selection of fixed-income bonds, from Treasuries to Mortgage Backed Securites to junk bonds.

As an investment, the greatest pro of ETFs is that charges are typically low, as running an index-tracking fund should be simple since  no investment research/stock-picking expertise is required.   Annual fees are typically in the region of 0.3-0.4% for an ETF, 0.6-0.8% for an index-tracking Mutual Fund, up to around 1.5% for an actively managed Mutual Fund.  But it’s debatable whether many ‘active-management’ outfits add value in the long term.

ETFs can be bought and sold through a stock broker just like any other share, with regular dealing costs.

The trading price of an ETF should be approximately the same as the value of the underlying securities plus any undistributed income.

Best Finance’s ratings for ETFs: Investment Overhead Costs 4 stars out of 5. Flexibility 4 stars out of 5.

Stafford Federal Student Loans are federal sponsored loans available to undergraduates and grad students, offering low rates of interest, and deferred repayment until your course completes.

There are 2 types of Stafford Loan -

To apply for a Stafford Loan, you fill in a FAFSA (Free Application for Federal Financial Aid), and send it to the relevant department at your school. Applications are normally accepted from the summer before school year, right through to spring. You can only apply for a loan for the current academic year, and will need to re-apply every year.

The school evaluates your loan request, and will inform you if your application is successful. Finally you’ll have to sign a promisory note, acknowledging your legal obligations to repay the loan, as the loan will not be cancelled if you drop out early, or fail to find employment after school.

Schools generally participate one of two types of Stafford Loans – FFEL Stafford Loans, where the lender is a bank or credit union, or Direct Stafford Loans, where the lender is the US Department of Education. Don’t worry which your school offers, as in general there’s no practical difference.You’ll be paid through the school. The money is first applied to tuition fees, room and board, and then you’ll receive remaining funds by check.

Best Finance’s ratings for Stafford Loans: Value 4 stars out of 5. Flexibility 4 stars out of 5.