| Personal finance is about money management. It involves dealing with income, budgeting, banking, credit, debt, taxes, real estate, insurance, investment, estate planning, retirement, saving for college, and other financial tasks. Each topic has its own category under Personal Finance; and each category has a number of subjects or even sub categories. Below is a brief overview of the main categories:
Banking
A bank or credit union is a financial institution where you can deposit your money, earn interest, and withdraw part or all of your deposits at a later date. They typically offer savings, checking and CD accounts, which are all required to carry government (FDIC) insurance on your deposits up to $100,000. You pay various bank fees, and generally earn less interest, for the convenience of having bank accounts.
Your bank may provide other products such as mutual funds and annuities, which can offer higher returns than interest bearing accounts, but are not FDIC insured. Similarly, there are brokerage accounts that offer check-writing privileges and ATM access to compete for your business.
Other than traditional brick-and-mortar banks, there are internet banks that only do business online. These web-based banks typically offer higher interest rates due to reduced operating costs. Many of them also offer reimbursement for ATM fees.
More and more financial institutions now offer online banking. With online banking you can check your balances, transfer funds, pay bills, or set up automatic bill payment, all from the comfort of your own home.
Credit Management
To understand credit you must start with credit report. Your credit report is basically a record of all your financial activities since you first started using credit. It includes your personal information such as name, address and social security number, payment history with mortgage lenders, credit card accounts and loan companies, loan/debt information, number and types of bank accounts, bankruptcy, collection activities, tax liens, and credit inquiries.
Your credit reports are compiled by the three largest credit reporting companies: TransUnion, Experian and Equifax, using data supplied by financial institutions.
Your credit report is important because not only lenders and credit card companies, but potential employers, insurance companies and landlords all may examine your report before making a decision. But more importantly, your credit report is used to calculate your credit score. Without a (good) credit, it is virtually impossible to get a loan.
A credit score is a measure of creditworthiness. It represents the level of risk a lender sees when granting you a loan or extending you credit. The higher your score, the more likely you will make payment on time and as scheduled.
There are many types of credit scores, but FICO score has been dominating the market for 20 years and is the most widely used by lenders. In 2006, the three credit bureaus co-released VantageScore to challenge FICO, but it may take years to just rattle FICO's leading position.
A FICO score ranges from 300 to 850, with the majority of Americans falling between 650 and 750. It takes into consideration of:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit (10%)
Since a FICO score is directly impacting your qualification for a loan and the interest rate you will pay, it is very important to manage credit responsibly and maintain a high score.
- Pay bills on time.
- Keep credit balance and debt/credit ratio low.
- Open new credit only when needed, and don't open too many too quickly.
- Establish credit early.
- Have a variety of accounts and maintain good standing.
Based on:
1. Credit Education Center
2. CNN Money |