Installment Loan Utilization Ratio and Credit Limit

Some people see a utilization ratio of their installment loans when they check their credit report. If you see a utilization ratio of your student loans or of your auto loans, for example, do not be surprised that it's close to 100% or over 100%. For many student loans, expect to see amount owed greater than the credit limit listed as well, making it seem that you have gone over your allowed limit.

Do not worry. Student loans and auto loans are installment loans and, therefore, even though a report might show the same type of features that it does for credit card, it is not counted the same. The credit scoring agencies are able to tell the difference between revolving accounts (credit cards) and installment loans and know that if you just took out a loan of $10,000 for your car, then your utilization will be 100% on the first payment as the balance and credit limit will both be $10,000. If you have student loans with capitalized interest, it will say that your credit limit is i.e. $10,000, yet the balance is $14,000 because you have so far run up a total of $4,000 in interest costs.

Credit scoring agencies know and understand the difference and the only utilization ratio and credit limit that you need to worry about is that of your revolving accounts.

Money in your 20's

Money management skills should be learned as early as possible and the 20's is a great place to start. Here are 10 financial projects you should take on in your 20's:

1. Learn to live on less than you make. Many people who find their first job, go all out with a new wardrobe, a new car, decorations for the new apartment, etc. Control your spending and only spend what you can afford with the money you have. See the Cash Flow blog post to see how you can see your cash flow with ease.
2. Start saving. Use the budget worksheet to see where you are overspending if you are unable to spend 15% of your take home pay. If you have large student loan payments, try to cut down in all areas to free up some space for savings, even if it's $5/month.
3. If your company offers a 401(k) match, start putting in the minimum amount you have to put in to get the full match.
4. Build an emergency fund in a high interest savings account.
5. Maintain a good credit score. Make sure you are never late. Automating your bills is an easy way to make sure of this.
6. Pay down on your student loan or any other debt with any extra funds that you have. If you receive a gift, a tax refund, or a bonus, try to apply it directly to your debt. See the Debt Pay Off Methods to see how you want to tackle your debt. See how even $5 per month extra will make a difference in your debt by using the Bankrate Amortization Calculator.
7. Save for retirement. Starting early is one of the best things you can do. Use a retirement calculator to see how much you should save. Start small if you can't contribute the full amount you are advised and increase your contributions yearly.
8. Designate separate savings accounts for various goals. Retirement should be saved in a 401(k) and an IRA. You should also have separate savings accounts for an emergency fund, grad school, vacation, car, down payment, etc. You can save in each account simultaneously or take it one step at a time and once your emergency fund is full, save for a vacation, once you have enough in that account, you can save for grad school and a car, etc.
9. Get health insurance. One accident can ruin all of your plans. 
10. Earn more money. Ask for a raise at the annual review or find a job that will pay you 15%-20% more and present the offer to the current employer. Be ready to leave for the new job if the offer isn't matched.

Annual Credit Report Three Times a Year

If you haven't checked your credit report in 2011 yet, make sure to do so at the free site provided by the credit scoring agencies at Annual Credit Report. There are 3 credit scoring agencies: Equifax, Experian, and TransUnion. Therefore, you can check your report thrice a year for free.

Most people who know they should check their credit reports and don't, forget to do it. Therefore, you should create a system that reminds you. Putting it on the calendar does not work for me. If the calendar does not work for you either, you could mark the days that you have to check your report by, for example, day light saving days and your birthday. Therefore, you check your credit report every time the time changes and around your birthday or other memorable day like the 4th of July. I do better at associations for remembering things and, therefore, this method works for me.

I also struggle with remembering which agency I checked last. Therefore, it might be easier if you do them in an alphabetical order. Check Equifax, then Experian, then TranUnion. Or, maybe you can check the agencies starting with an E on day light savings days and TransUnion on your birthday or whatever memorable day you chose.

Whatever system you use, make sure to check the credit reports to make sure you did not experience identity theft, there are no errors, and you have been on track with paying down your debts.

The Breakdown of Your Credit Score

If you've already checked your credit score on Credit Karma and Quizzle, two companies I wrote about in an earlier post, then you might be wondering how that number is determined.

Fico.com determines it by the following factors:

Therefore, if your credit score is lower than you want it to be, make sure you do the following:

1. Always pay on time, if you accidentally missed a due date, call the debt holder and ask for them to not post any negative information because you have been a 'good client'
2. Pay down your debt, all of your debt and don't close down your cards as they represent the total available credit to you
•  Debt (balances on your cards) to available credit (total combined credit limit available to you on all cards) should be under 10% every month
• Please remember that even if you pay your credit card in full every month, the balance that is due every month is the balance that gets reported, therefore if you have $5K as the credit limit, but every month you charge and pay $4K on the due date, your debt to available credit is 80%
• To lower your debt to available credit ratio, pay down your credit card before the card calculates your balance for the month
3. Don't close oldest cards or any cards at all in my opinion (unless they have outrageous annual fees that just would not make sense to keep)
4. Don't open any new cards or apply for any new loans so no new inquiries are posted on your credit report
5. Make sure you don't have any store cards (if you close any that you already have, you will probably be affected negatively though)
• This one is a little bit tricky as with 'types of credit,' FICO means you need to have credit cards, installment loans such as student loans, mortgages, etc. - I recommend staying away from all debt besides an affordable mortgage and reasonable student loans. You should have a couple credit cards just so your available credit is high.

Credit Report and Score

Your must know your credit score if you are going to apply for any credit as your interest rate depends on it. Your credit report is what determines your credit score. Therefore, you should look at your credit report regularly to spot any inaccuracies. The best place to check your credit report is from the free website Annual Credit Report where you can check three credit reports from the three different companies: Equifax, TransUnion, and Experian. I suggest looking at one report every 4 months so that you can check your free credit report 3 times a year.

As for the credit score, most companies charge even when they say the credit score is free. Or, they charge if you don't cancel their service, which some people forget. Therefore, there are two great truly free credit score websites available: Credit Karma and Quizzle. My Credit Karma score has always matched one of my scores that I have purchased from MyFico.com exactly. Quizzle has always been around 80 points lower than the average of my three scores, which have always been only a few points away from each other or equal. However, you can get a rough idea of where you are by getting both of these free scores.