The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore.
Welcome to 2021! The introduction of a new year is always met with excitement and the ubiquitous “out with the old, in with the new” commitments, or resolutions. 2021 is the right time to get your financial house in order and position yourself for maximum financial success. To that end, here’s the top five financial resolutions to put on your list this year:
Getting out of credit card debt – Credit card debt, to the extent you’re carrying any, is likely the most expensive debt you’ll ever service. According to CreditCards.com, the average credit card interest rate at the end of 2020 was a little over 16%, and that’s if you have good credit. For those with poor credit the average rate jumps to over 25%.[1]
The good news about credit card debt, however, is that it is entirely voluntary. Being in credit card debt can easily be avoided if you only charge what you can pay in full each month. At that point the interest rate or “APR” on your credit card becomes immaterial as there’s no balance to revolve from month to month and no debt to service.
If, however, you find yourself in credit card debt that cannot be exhausted within a month or two, you may want to consider alternatives such as a debt management program or even settlement. Keep in mind, however, that some of the alternatives to paying your debt in full the traditional way can lead to lower credit scores.
Become an owner rather than a renter – Mortgage interest rates continue to hover at near historic lows. According to Forbes the average mortgage interest rate at the end of 2020 for a 30-year fixed rate mortgage loan was 2.67%.[2]
And when you consider that mortgage interest can be a tax deduction, the effective interest rate is actually lower. Point being, it’s really inexpensive to finance a home right now.
If your credit scores are solid and you have a stable income, 2021 might be the right time to pivot from being a renter to a homeowner. Keep in mind that, unlike mortgage interest rates, property values are going to vary wildly depending on where you live. In some states home prices increased considerably in 2020 and inventory is limited. In other states inventory is still strong and prices have not increased as much, although Zillow is forecasting strong price appreciation through 2021.[3]
Even if you are buying at or near the top of your market, you may thank yourself in a few years if values continue to rise as you’ll have created wealth in the form of home equity.
Improve your credit scores – Improving your credit is a mainstay on New Year’s Resolution-lists year after year. The reason is simple, having good credit is extremely important and an easy way to build wealth. If you have good credit scores then the things you are going to finance will be less expensive. And, the less you’re paying to a lender each month, the more you’re able to redirect that money elsewhere.
Strategies for improving credit scores are going to vary from consumer to consumer. Some of you may be able to improve your credit scores simply by paying down your credit card debt. Others may have to wait while negative information ages and is eventually removed from your credit reports. Regardless, if you commit to improving your credit scores, the process can begin today.
Commonly used credit scores are scaled with a 300 to 850 range. The higher the score, the better it will be for your borrowing prospects. Having said that, you certainly do not need an 850 in order to secure the best deals lenders have to offer. If you’re able to exceed 750 at all three of the consumer credit reporting companies (Equifax, Experian, TransUnion) then you’re generally considered to have elite level credit scores.
Start building a retirement nest egg – The stock market hit several all-time highs in 2020, even with the influence of COVID-19. Those who were able to weather the first quarter of 2020 when the markets fell to their annual low are happier and wealthier now that they did. In fact, if you invested in or around mid-March 2020 you did very well for the year as mid-March represented market lows for the year.[4]
Of course, investing in the stock market is not the only way to build a nest egg for your retirement. You can participate in your employer sponsored 401K plan. Or, you can contribute to a Simplified Employee Pension plan or “SEP”, which is essentially a 401K for self-employed people. Each of these plans allow you to invest now (but defer taxes on your gains until you’re much older) and also to reduce your taxable income each year you contribute.
If 401Ks, SEPs and brokerage accounts are not of interest, then at the very least you should consider building a rainy-day fund with a local bank or credit union. Your deposits are guaranteed by the Federal Government for up to $250,000 and you’ll earn a small amount of interest income on your deposits. Rainy-day funds should optimally equal the sum of your household expenses times the amount of time it will likely take for you to find a new job, if you unfortunately lose the one you currently have.
Freeze your credit reports – Another way to build wealth is to avoid the time and costs of dealing with credit fraud. And while the Fair Credit Billing Act and Electronic Funds Transfer Act significantly limit your downside financial liability of both credit card and debit card fraud, it’s still a good idea to take advantage of what I believe to be the Fort Knox of credit report protection, the credit freeze.
By placing a credit freeze (or “security freeze”) on your three credit reports you will restrict their access to only certain circumstances that are largely controlled by you. For example, if you freeze your three credit reports and a fraudster applies for credit in your name, the lender will not be able to access your credit reports or credit scores. This will stop the fraud in its tracks and prevent a new account from being opened in your name.[5]
Security freezes are free thanks to the Economic Growth, Regulatory Relief and Consumer Protection Act signed by President Trump in 2018.[6]
Prior to 2018 there was a cost to place and remove a security freeze, unless you had been a verified victim of identity theft. In order to place security freezes on your three credit reports you’ll have to contact each of the credit reporting companies independently.
Summary
There’s no better time to begin building financial security than a new calendar year. There are some simple steps you can take in order to position yourself for maximum financial success in the new year. Eliminating expensive debt, investing in a home of your own, contributing to wealth building accounts, improving your credit scores and protecting your credit reports are all fantastic evergreen strategies that anyone can accomplish with minimal investment.
[1] https://www.creditcards.com/credit-card-news/rate-report/
[2] https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-12-31-2020/
[3] https://www.zillow.com/home-values/
[4] https://quotes.fidelity.com/ftgw/fbc/ofquotes/mmnet/Charts?SID_VALUE_ID=.DJI&navBar=true
[5] https://www.equifax.com/personal/credit-report-services/credit-freeze/
