Don’t ignore these credit score quirks
Dear Liz: Why are people fixated on their FICO result?
I was unaware of my score until recently, when my bank accounts started showing my score when I am online. I am 65 and have had credit cards since college. I pay my bill in full each month. I have never been late with a mortgage payment or any other bill. When I have gone to buy real property, I have never been turned down.
I have used credit successfully for decades without knowing my score. Are people interested in their FICO mostly to be used as a way to brag?
Answer: Some are, but most understand that credit scores are hugely influential in our financial lives. Scores help determine not only whether we can get credit and the interest rates we pay but also whether we’re able to rent an apartment, get affordable auto insurance (in most states) and qualify for a cellphone carrier’s best deals.
Credit scores have some quirks. Using more than a small percentage of your credit cards’ available limit, for example, can hurt your scores, even if you pay your balances in full. And closing credit accounts you no longer use might hurt your scores.
Also, you don’t have a single credit score; you have many, and they will differ based on which credit bureau and credit scoring formula was used.
FICO is the leading credit scoring formula, but there are many generations of the FICO score in use, from the older versions used in mortgage lending, to the most commonly used version (FICO 8), to the most recent version (FICO 10). Auto lenders and credit card issuers use versions of the FICO that are adapted for their industries.
VantageScore, a FICO rival, also has different generations in use.
Your bank is making it easy for you to monitor one of your scores, which can give you a general idea of how lenders might view you as a borrower. Just don’t be surprised if that score doesn’t match what a lender uses the next time you refinance your mortgage.
How asset advisors calculate charges
Dear Liz: We’ve been using a fee-only financial advisor for 25 years. We would discuss what we needed and she would tell us how many hours it would take, then invoice us at an hourly fee.
She recently joined a company that charges 1% of investment portfolios to provide financial advice. Is this still considered fee-only financial planning?
Answer: So-called assets under management, or AUM, fees are indeed considered fee-only planning, as long as the advisor only accepts fees paid by the clients and does not receive commissions or other compensation for the investments they recommend. AUM fees are a common compensation method and 1% is a fairly standard fee. If the advisor is doing significant, ongoing planning and investment management for you, the fee may be worthwhile. If not, there are other compensation methods that may be a better fit. Garrett Planning Network represents fee-only advisors willing to charge by the hour, while XY Planning Network and the Alliance of Comprehensive Planners offer fee-only advisors who charge retainer fees.