Financial Literacy: Teach Your Children to Save

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One of the greatest gifts you can give your child is a financial education.  We all want our children to succeed in life, which means helping them become financially stable.  Once they reach college age and leave the comfort and safety of your home, a solid understanding of banking and financial best practices is critical to helping them avoid getting into debt at an early age.

More than three-quarters of adults live paycheck-to-paycheck, and 40% say they wouldn’t be able to cover a $400 emergency expense.  Looking towards the future, a third of Americans have no retirement savings, and almost a quarter have less than $10,000 saved for retirement.

Saving isn’t easy.  Neither is avoiding debt.  But it can be easier if children learn about banking and finance from an early age.  Currently, fewer than half of U.S. states require high school students to pass a personal finance course as a graduation requirement.  But, parents have to manage finances every month, which gives them an opportunity to teach their children good financial habits.

The American Bankers Association (ABA) understands that financial literacy is critical for children, and since 1997, the ABA Foundation has sponsored its Teach Children to Save program to promote financial literacy to millions of elementary and middle school students.

Today, April 22, is this year’s Teach Children to Save Day.  It’s a free national program that is designed to help young people develop savings habits at early ages and covers topics like saving, financial decision making, interest, banking careers, and more.  The goal of the program is to help children understand the value of saving and develop the knowledge, tools, and skills to make informed financial decisions throughout their lives.  The ABA has created a series of interactive resources for you and your children of all ages (including high schoolers and young adults) to help build their financial literacy.

The Milford Bank also supports financial literacy for children and offers its own Centsible Kids program designed to teach smart money habits to your kids.  The Centsible Kids program includes a free, kid-friendly mobile app – available for both iOS and Android devices – that encourages your children to become financially literate at an early age.  Key features of the Centsible Kids app include:

  • Games that teach financial knowledge and skills
  • Enabling kids to track spending, saving and giving goals
  • Foster positive family conversations around money
  • Allows safe tracking of money virtually without connecting to your actual bank accounts.

We know children pick up habits very quickly.  That means they will pick up good financial habits just as quickly as they will pick up bad ones.  So why not put them on a path to financial success early by helping them develop good savings and spending habits, encourage giving, and giving them a chance to practice their math skills in the process?

To learn more about the Centsible Kids program and app, contact any office of The Milford Bank.

When Should You Open a Savings Account for Your Child?

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By Celeste Lohrenz

You’ve had your baby shower, the nursery is set up, the closet is full of onesies, and you’ve got what seems like a year’s supply of diapers and formula, which will actually only last you a month, and your baby is due any day.  The only thing you haven’t thought about is your baby’s long-term financial future.  But, maybe you should.  After all, it’s never too early to start planning by opening a baby savings account.

If you’re wondering when it’s a good idea to open an account for your child, the answer is it’s never too early.  Why?  There are several great reasons to start early, and as soon as your baby is born, you’ll have all the information you need to open an account.

Start small

There’s no question a baby will have a significant impact on your budget for more than two decades, so you may not have much to save.  You don’t have to put away a lot.  Compound interest works best the longer an account is open, so starting early is the key.  Even if you put away only $10 each week, the account will grow consistently.  By the time your child reaches legal adulthood, the account you started at birth could have $10,000 or more, depending on the actual rate of return.

Financial literacy

As your child grows, the savings account can become a teaching moment.  By teaching your child to save early – like setting aside a portion of allowances or birthday money – you’ll be providing invaluable financial education around saving, budgeting, interest, and balancing.  From an early age, your child will see the long-term benefit of regular contributions.  It will not only help them understand how and why to save, but also benefit them once they enter the workforce, when they can start contributing to their own retirement accounts. Financial literacy is important, and more than half of young adults say the most valuable course they wish they had been able to take in high school is money management.  So why not put your kid on the right track?

Automatic deposits

Since your child won’t be accessing the account for years to come, you have a long runway for building a great financial base.  At the same time, since you’re not withdrawing funds, it can be easy to forget to contribute to it regularly.  Consider setting up small automatic deposits into the account to ensure it grows consistently and, if you find you can spare more, you can always increase the deposits or add additional funds on a one-off basis.

Choosing the right account

There are many types of accounts with different interest rates and minimum balances.  Check with your local bank to see what options they offer.  Some have special programs for children savings accounts that are affordable for parents and geared towards building children’s financial literacy as they grow.

529 Plans

An alternative to a savings account that is specifically earmarked for education expenses, including college tuition, is a 592 plan.  At a time when student loans are at an all-time high, starting a college fund early can be a great way to at least partially fund your child’s education.  These plans come with the additional benefit of tax-free interest, as long as the funds are used to pay for education-related expenses.

Your child will most likely have a piggy bank at some point, and that’s a great way for them to save some spending money to buy a special toy or video game.  But for the longer term, and to really teach them about banking and the value of saving, a savings account it the smarter option.  In fact, as they accumulate cash in their piggy bank, you can even encourage them to deposit a portion into the savings account.

As parents, your goal is to set your children up for success.  Making sure they have a solid understanding of banking will benefit them for their entire lives, and starting a savings account early comes with a bonus of a potentially large savings account to help them get started on their own or to help pay for college tuition.

While it’s never too early, it’s also never too late to open an account for your child.  For more information on what your best options are, contact your local bank’s financial experts.

Why Mutual Banks Make Sense

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By Jorge Santiago

Mutual banks have been around since the early 1800s.  There are currently about 470 in business across the country and nearly all of them are also classified by the FDIC as community banks.  They were initially created to provide savings opportunities to the working class, something they couldn’t easily get from commercial banks that focused on business customers.  Mutual banks offered individuals a safe place to deposit funds and earn interest, with a tradition of providing quality service to their customers.  Those values remain core to mutual banks today, which lead to several benefits that are passed on to customers.

Corporate Structure

The basic idea behind mutual banks is they are not controlled by stockholders or other direct owners.  Rather, their customers – the depositors that bank with them – are considered mutual owners.  As a result, mutual banks don’t make decisions based on shareholder interests, but focus on how they can deliver maximum value to their customers and support the communities they serve.

Customer Security

Nearly all mutual banks – like The Milford Bank – are insured by the FDIC, and on average, mutual banks have a Tier 1 capital ratio (an indicator of capital security) well above the minimum level and are considered “well capitalized” by the FDIC.  In addition, mutual banks are traditionally conservative when it comes to investments and spending, looking for safe opportunities and avoiding high-risk investments.  It’s one of the reasons mutual banks were almost the only banks that successfully navigated the Great Depression and why they continue to provide a safe banking option today.

Customer Service

Mutual banks have a longstanding reputation for quality service that stems from their focus on depositor value rather than corporate ownership.  Because customers are viewed as owners, serving their needs and delivering a high level of personalized service is their top priority – including a broad service portfolio, convenience, local access, and banking expertise.

Product Breadth

Today, mutual banks offer most of the same services private customers can get from larger commercial banks.  They are investing in digital banking technologies to make banking easier and more convenient, including tools to encourage saving.  They have knowledgeable local staff ready to provide valuable banking information and advice to help customers make responsible financial decisions.

Commitment to Community

Mutual banks are localized, which means they have a vested interest in their local communities.  Not only do their employees live and work in those communities, but so do their customers.  As a result, mutual banks tend to be very active in their communities.  Many offer special events in their towns – like The Milford Bank’s annual Shred & Recycle Days and the Milford Moves 5k – and regularly support local organizations and businesses through a number of initiatives.  Mutual banks espouse community values that reflect their dedication to their customers.  The Milford Bank, for instance, supports more than 100 local organizations throughout the year with not only financial support, but also time dedicated by its team to help these community groups.

When deciding where to put your money for safekeeping, you have options.  By nature, mutual banks can offer benefits that many larger corporate financial institutions cannot.  If you want to know exactly how you local mutual bank can support your banking needs, give them a call or go visit one of their offices for some firsthand detail.  Ultimately, the most important factor is that your money is safe and you have access to the services and expertise you need, when you need it.  As a client, that’s the commitment you’ll get from mutual banks.

Are You Prepared to Retire Early?

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Early retirement has always been a dream for many Americans, yet most have not been able to achieve that goal.  Prior to the COVID-19 pandemic, 46% of retirees said they ended up retiring earlier than expected due primarily to four factors:  health conditions, emotional status, financial readiness, or job loss.  That means, while many were hoping to retire early, others were forced into it due to unforeseen circumstances.

Likewise, 43% of today’s largest segment of the workforce – the Millennial generation – is expecting to retire early.  But, more recent data suggests that, due to the pandemic, that number has grown even higher, with 20% of the total workforce, including 15% of Millennials, saying current conditions have accelerated their retirement plans.

The question is, can they afford to retire early?  Some people will have a very hard time if they are pushed into early retirement, while others may have been able to plan ahead and, even if they weren’t planning on retiring early, will be able to live comfortably.  Here are some things to consider as you plan for retirement, regardless of your current age.

Invest – Despite the fact that the stock market has been extremely volatile this year, consider investing.  Whether you are just entering the workforce or nearing standard retirement age, maximizing your retirement investments may help you when you do retire.  That includes your 401k or IRA contributions.  But, you should do it wisely and adjust your allocations based on your current and expected circumstances to maximize your retirement funds.  Be sure to speak with a financial expert who can help you make choices that are best for you.

Social Security – The amount of social security benefits you receive is dependent upon when you claim benefits.   The longer you wait, the more you’ll receive.  Waiting until full retirement age (65-67 years, depending on birth year) will mean your benefits can be almost a third higher than if you take them at an earlier age.  Similarly, if you retire late (or at least wait to start claiming your SSA benefits), you stand to get almost a third more than at standard retirement age.  If you can afford to live comfortably without it, waiting to claim your benefits may be an advantage later in life.

Understand retirement – Perhaps the most important part of planning for retirement is knowing what you’ll need to live comfortably.  That includes what you plan to do once you retire, what your other sources of income may be, what your expenses will be, and other factors.  Retirement planning can also impact where you retire:  A significant portion of Americans today are looking to retire in other countries with lower costs of living. Remember, if you plan on early retirement, you’ll need more savings because you’ll be living off your retirement income for longer, and don’t forget to factor in healthcare costs, inflation, and changes to expenses as you age.

Pay off debt – If you have existing debt, try to pay it down before you decide to retire.  Massive debt can impact your retirement lifestyle.

Build your emergency fund – It’s always good to have an emergency fund that can cover several three to six months worth of expenses should an emergency arise.  This is particularly important when you retire, so you won’t have to dip into your retirement savings to cover unexpected costs.

Evaluate your current spending – If you are looking to put more into your retirement savings, the easiest way is to reduce your current spending.  If you need help saving, there are some great digital tools that can help you put away extra income, which you can put towards retirement.

It can be hard to plan far into the future, especially when it involves a dramatic change like no longer working.  But, by taking the steps today and being aware of some of the factors that can impact your retirement income, you can set yourself up more comfortably.  If you need advice on saving, retirement plans, or other ways to make sure you have enough saved, your bank’s financial experts are ready to help.

7 Things You Think You Know About Credit Scores, But Don’t

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By William LoCasto

When was the last time you checked you credit report?  If you’re like many people, it’s probably not frequently enough.  The good news is you can do it at least three times a year at no cost, because the three major credit reporting agencies are required to provide one free credit report a year.  In addition, your bank may offer additional services for checking you credit.

You credit scores and report will be a factor for so many decisions you make in life.  With many major financial commitments, you credit report is likely to be checked.  When you’re buying a home, your mortgage lender will look closely at your credit report.  The same goes for car loans.  Credit card companies check to determine not only whether they are willing to offer you credit, but also your card limit and interest rate.  Utility and phone companies may also want to check to determine how likely you are to pay your bills, or whether they should require a prepaid plan.  Even prospective employers often check credit reports.

The bottom line is that your credit report will play a role in most major events in your life.  This means it’s in your best interest to check you scores regularly for any anomalies, and so you know if you need to take steps to improve your score.  Checking your score is a great start, but only if you know how they actually work, which isn’t always easy.  For one thing, about a year ago, FICO (the most widely used credit scoring resource used by lenders), updated its scoring system, which could impact your score.

Aside from that, there are a number of common misconceptions about credit scores that could prevent you from improving your credit ratings.

Checking your credit report impacts your score

This is not true.  You can check your own credit score as often as you want without any impact.  However, if you are applying for credit from multiple sources, such as a car dealer, a mortgage lender, and a retail store, those credit checks could slightly dip you score.

Accessing lines of credit doesn’t impact your score

Again, this is not true.  The amount of credit you have used, compared to your available credit, is one of the biggest factors in your credit score.  A lower utilization rate is better for your overall credit.

Income changes your credit score

Yet again, this isn’t true.  Your job and income history has no impact on your credit score.  It is, however, used by lenders to determine how much they are willing to lend you.

Closing credit cards can improve your score

This is also not true.  In fact, if you close a credit card at the wrong time, you might actually lower your score because you’re reducing your available credit, which will increase the percentage of credit you’ve used.  That’s not to say you should never close credit accounts – there are often very good reasons to do so, but be aware it could impact your score.

Marriage changes your credit score

You guessed it, not true.  Credit scores aren’t like taxes; they aren’t combined into households.  Your credit score is yours alone.  Lenders, though, may ask for information about your spouse to determine your loan amount and interest rate.

You need to have a perfect score

Also false.  While it’s possible to have a perfect credit score, there’s isn’t a benefit.  Once you have reached high credit worthiness, making it perfect won’t create any noticeable benefits, other than knowing you have a perfect score.  That’s not to say you shouldn’t strive for perfection, but you also shouldn’t worry about not reaching it with your credit score – it won’t hurt you.

Poor credit is forever

This may be the best misconception of all.  Unless you have perfect credit, you can always improve your score over time.  The key is to not only understand what goes into your credit score, but to start following smart financial habits, including creating and sticking to budgets, paying off existing debt, and cutting out unnecessary spending.

There are many other questions that don’t have simple yes or no answers when it comes to credit scores.  For up-to-date information on what impacts your credit score and what doesn’t, or for advice on how you can start rebuilding your credit, talk to your bank’s experts.  Remember, you credit score will impact you for your entire life, but just because you don’t have a high score today doesn’t mean you can’t improve it.

Making New Year’s Resolutions That Will Actually Be Helpful

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By Celeste Lohrenz

As we reach the end of what has been nothing short of a challenging year – and hope 2021 will bring good news – it’s time for the age-old tradition of making New Year’s resolutions.  Most people, though, don’t follow through on them.  But, the key to making them stick is to make resolutions that are specific enough and achievable and, importantly, beneficial.  If you have a vested interest in keeping your resolutions, you’ll be more likely to do so.

Taking stock of your financial situation is a great place to start.  Then, you can look at where you may need or want to make changes in your spending or saving habits to improve one or more areas of your personal finances.  You can certainly do these things at any time, but if you need a little additional motivation, try making a financial New Year’s resolution and see how it changes your financial outlook by this time next year.  It’s something you have control over, and improving your finances will have short and long term benefits.  Here are a few suggestions.

Stick to your budget

One of the most important tools for financial responsibility is your budget.  Without one, it can be difficult to manage your spending and increase savings.  If you haven’t created a budget, start with understanding your monthly spending, then you can start to build a budget and see how that relates to how much you want to save.  If you already have a budget, review it to see if you can cut any spending to help save more.  But, make sure you create a reasonable budget.  If you set one that’s not realistic, you will not only fail to stick to it, but once you go over budget once, your spending can snowball quickly.

Check your credit report

Your credit score is a key factor in how banks decide whether to lend you money or not, and also what interest rates borrowers will get, which can all impact your ability to finance major investments, like homes or cars, or to get credit cards.  You can see your credit score every time to log into your online account here at The Milford Bank.  If there’s nothing suspicious and your credit score is strong, you won’t spend much time on it.  But, if you need to improve your score or notice something wrong, make it a priority to fix it.

It’s easy to say you’ll eliminate all your debt, but it’s a lot harder to do it if you have significant credit card balances, auto loans, student loans, or other debt.  Reducing it is much easier.  Try setting incremental, more achievable goals, like paying off one loan at a time, or paying an extra $50 or $100 a month on your credit card.  Even if you don’t pay it all off by the end of the year, you’ll have made significant progress that you can carry over into the following year.

Automate saving

Saving isn’t always easy, but using automated tools, like Plinqit, can help you reach your small and large saving goals by automating your savings deposits.  Regardless of what you’re saving for – college tuition, a wedding, the down payment on a new home, or anything else – you no longer have to remember to put money away.  Instead, set your goals and watch your savings grow each month.

Build an emergency fund

The thing about emergencies is you never know when they may happen.  Your roof may start leaking, dishwasher may stop working, your car may need a new engine, or any number of other things may come up that require access to funds.  That’s where having an emergency fund is can be a major benefit.  Instead of dipping into your savings or accumulating debt, an emergency fund provides security for any unexpected situations that come up, including loss of income.

Save for retirement

It’s never too early to start building your retirement nest egg.  It’s simple logic – the earlier you start, the more you are likely to have when you retire.  Whether you have a 401k plan or IRA, try maximizing how much you put into it each month, while still maintaining a reasonable budget (especially if your company matches your contribution).  You may also want to pay more attention to how your contributions are being invested.  Talk to your financial advisor if you’re not sure how to effectively manage your investments.

Start banking digitally

Just about everything we do these days can be done online.  If you haven’t yet tried online or mobile banking, you haven’t experienced the freedom and flexibility it provides.  Most of your everyday baking transactions can be done through your bank’s website or mobile app, reducing the number of trips you have to make to the branch and giving you more time to enjoy doing other things.  If you need help setting up your online account or mobile app, our bank’s specialists are ready to help.

Review your will

Nobody wants to think about it, but creating a will and making sure it’s updated as your financial circumstances change can be a huge help to your loved ones when the time comes.  Take the time to meet with a professional to document how you want your assets allocated, and enjoy the peace of mind that you’ve made things a little easier for your family in the future.

These are just a few ideas for kicking off the new year with a positive financial outlook.  Once you have assessed your current situation, you may find other ways you can improve your financial wellness.  The key is finding something that makes sense while setting a goal that is achievable yet meaningful enough to make you want to follow through.  Whether you’re looking at short-term benefit or long-term opportunities, you can’t achieve them if you don’t set objectives and create a path to financial success.

How to Avoid Phone Scams

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By Pam Reiss

Your phone is probably ringing a lot more than you would like it to, and often, you have no idea who is calling.  We recently talked about how to deal with the annoying sales and marketing calls (phone spam) that we’re all being bombarded with.  But, there’s another big problem that can be an even bigger nuisance: phone scams.  These calls come from criminals looking to prey on unsuspecting victims to get money, information, or both.  There are many different scams going on at all times and they leverage fear, compassion, or simply ignorance to get people to give them information.

Threats, prizes, special promotions are some of the more common tactics scammers use:

  • Debt collection agencies demanding payment;
  • Social Security Administration representatives saying there is an issue with your Social Security number;
  • Lottery scams claiming you’ve won a big prize but need to provide personal information or pay the taxes on your winning;
  • Arrest threats from scammers impersonating the IRS other federal entities;
  • Charities looking for funding, especially after a natural disaster or other crisis;
  • Tech support calls claiming you have a virus or other problem with your laptop or other device, asking you to let them log into your machine remotely.

Currently, there are also many COVID-19 scams circulating, with callers offering masks or sanitizer, testing services, work-from-home opportunities, debt consolidation, or loan repayment plans.  Other scammers are claiming to be with contact tracing services and may tell you there’s an outbreak in your area.

The most important thing to understand if you answer the phone is to never give out any personal information to anyone you don’t know.  That includes things as simple as confirming your name, address, email, or any other information.  Every piece of information you provide, regardless of how irrelevant it may be, is likely to be added to a growing file that scammers piece together and can use or sell to other scammers.  Realize that legitimate organizations aren’t going to call you and ask for sensitive information.

There are really two good options for handling calls from people you don’t know. 

The first is in situations when you answer the phone and realize it’s not someone you know.  Hang up immediately.  That’s the easiest way to avoid giving away any information.  Don’t engage callers, don’t threaten them, don’t even speak to them.  Once you start talking, they realize you are not only willing to answer the phone, but will engage them, which is yet another valuable piece of information.  Don’t even follow prompts to push certain buttons, and do not return single-ring calls.

If you think it may have been a legitimate call from your bank or some other organization, call them – not the number that just called you, but look up their main number – and find out if the call was real.  Legitimate callers won’t mind that you are taking extra precautions.

The other solution many people have started using is to simply not answer the phone if they don’t know the number or it’s not in their phone’s contact list.  Even if you think you might know the number, realize that scammers can easily spoof local numbers to make people think a friend is calling them.  In most cases, friends, family, and other legitimate callers will leave a message and you can call them back.  By not answering, you’re not even providing the small bit of data that you are likely to answer a call – which is valuable information to scammers.

You can also use technology to help.  Your home and mobile phone providers offer tools to help identify or block unwanted calls.  Check with your provider to see what options are available.  Most mobile providers have free and paid versions of call filtering apps that can help protect you.

If you do receive a scam call, you should also report it to the FCC.  How much information you provide is up to you, but the more information you are able to give, the more detail the FTC has to analyze complaint data and identify and react to ongoing scams and identify the individuals behind them.

Scammers count on their victims not being smart enough to figure out what’s going on before it’s too late.  Understanding the tactics scammers use and the ways they try to get information from you can help your identity and your money, and help avoid having to deal with recovering funds (which may not always even be possible) and identity theft.

Staying Financially Healthy During the Coronavirus Pandemic

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By Pam Reiss

As the world continues to cope with the COVID-19 pandemic, life as we know it has come to a grinding halt. Millions of us are working from home, our children are getting their schooling through videoconferencing, and our normal social and sports activities are in limbo.

Unfortunately, the situation can create some uncertainty around how to manage financially. Whether you’re currently working or not, it’s very likely you’ve been thinking about how to manage your finances during this time. The good news is at least some typical spending has naturally been cut because we’re all staying at home. But, there are many ways you may be able to keep your financial situation as stable as possible and stretch your budgets a bit.

Takeout vs. cooking – Ordering takeout or delivery is a great way to support local businesses during the crisis, but if you need to cut your spending, since you’re at home anyway, try limiting how often you order out. Instead, enjoy more home-cooked meals. There are many resources online for inexpensive, healthy meals. You can plan your entire week’s meals, make a complete shopping list, and make just one trip to the grocery store. You can even have one night of the week reserved for leftovers. If you want to continue to support a few local restaurants, set aside one or two days of the week for that.

Buy what you need – We’re still able to go to the grocery store, despite having to follow public safety guidelines. If you initially stocked up on non-perishables or frozen items, start using those instead of constantly buying more. Also, when you’re at the grocery store, there are still many items on sale each week. You can check out your grocery store’s flyer online to see what’s on sale, and plan your meals for the week accordingly.

Other ways to save – Take a look at some of the other things you’re spending on each week and see where you can cut a little out of your budget. Things to look at include video services. If you’re a cable subscriber, you might think about switching to a lower service tier, at least temporarily, or if you have multiple streaming services, consider cutting one of more of them. The monthly savings can add up quickly, and you can certainly find other ways to entertain your family.

Low interest rates – With interest rates dropping, this may be a good time to look into refinancing your mortgage or student loan, or even consolidating multiple loans. While there will be paperwork involved, lower interest rates can provide significant savings each month.

Emergency fund – If you’ve been following good financial habits and have built up an emergency fund, don’t automatically fall back on it. First take a look at ways you can reasonably adjust your spending. Then, if you find you need to dip into it, you can hopefully use just a little of it. If you’re fortunate enough to be working, this is a good time to add to or start your emergency fund. Since at least some of your normal extracurricular spending has been put on hold, consider putting that toward your emergency fund. You never know when you’ll need it.

Investment funds – It can be difficult watching retirement accounts and other investments lose money with the current market instability. The good news is they have historically bounced back reasonably quickly. Before you move or sell your investments, talk to your financial advisor, who can give you advice on whether it’s a smart move or not. Making a rash decision could actually end up hurting your investment funds.

Protect your credit – If at all possible, continue to pay your bills on time. If you’ve been using your credit cards, at the very least, pay the minimum on those to avoid hurting your credit score. If you are in a situation where you can’t pay some of your bills, contact your lenders. some lenders are allowing extra flexibility with payment terms or interest rates to help during the pandemic. You should also check your credit reports regularly. Fraudulent activity often increases during crises, and consumers and businesses are under a constant barrage from cyber criminals. Be extra cautious with emails, websites, and phone calls. There are thousands of malicious COVID-19 websites out there, and many phishing emails and phone calls looking to exploit uncertainty and fear.

The good news is most of the financial resources you normally have at your disposal are still available, though not in an in-person capacity. But, you can still contact us if you need advice.  Even though we’re all dealing with this pandemic, you can do things to help keep your finances in order and limit any long-term impact.

What Does the New FICO Scoring System Mean?

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by Paul Mulligan, SVP, Retail Lending

When you apply for a loan, lenders have access to a variety of information they use to decide whether to give you a loan and at what terms.  The most popular of those resources is your FICO score, a three-digit rating based on information in your credit reports, which helps lenders decide how likely to repay a loan, how much you can borrow, the length of you loan repayment period, and your interest rate.

While FICO scores give lenders a quick and consistent way to determine borrower worthiness, they also make sure you, the borrower, get a fair credit assessment and access to the funds you need.  FICO has become the de facto industry standard for lenders.

This month, FICO has updated its scoring system for the first time since 2014, which could impact your scores.  The new scoring places more emphasis on trend data in your credit report, looking at your credit utilization and payments over the past two years, as opposed to only current balances.  For instance, new data might include whether you tend to pay off balances quickly, carry extended debt, or consolidate loans, as well as your credit management predictability.

The other major change reflects changes in credit reports.  Tax liens, insurance-paid medical collections, and judgments are no longer part of credit reports, and healthcare defaults won’t appear on credit reports for at least six months.

At the end of the day, though, the real question is, how will the new scoring impact you?

The new scores will be less forgiving of risky credit behavior.  That means, if you regularly run up your credit, don’t pay off balances consistently, carry too many credit cards, or consolidate debt into personal loans in order to free up your credit cards, you may see your score go down.

On the other hand, some spending habits that may have previously been viewed negatively may no longer hurt you.  For instance, if you run up seasonal balances – such as during the holidays or summer vacations – and then pay them off, your score may not be negatively impacted because those are predictable one-time spikes, not regular habits.

Ultimately, what you need to keep in mind is the basics of good credit haven’t changed.  Payment history (35%) and credit usage (30%) are still the two biggest components of your FICO score.  If you follow good credit practices – pay your bills on time, keep balances below your credit limits, and don’t apply for too many new lines of credit (or too often) – you should have nothing to worry about.  In fact, if you manage your credit well, the new scoring could actually improve your score.

If you’re concerned about your credit rating and want to work to improve your score, the sooner you start following good financial habits and budgeting, the faster you can see positive change.  Of course, it’s not always easy, so if you need help or want advice on how to become more responsible with your spending, talk to our specialists.  They can provide information on financial best practices, budgeting and saving tips, and improving your credit.  On the other hand, if you have managed your credit responsibly, you probably don’t have anything to worry about.  Just continue to follow smart banking habits.