By Hollis Colquhoun
There are two important indicators of your money management skills and financial position: your balance sheet which shows your net worth at a specific point in time, and your credit report, which continually rates your ability to handle debt.
We will start by discussing the balance sheet and net worth. Net worth is derived from listing the assets you have, what you own, and comparing them against your liabilities or what you owe. You may own a million dollar home, which is a nice asset, but if you have an $850,000 mortgage against it, the net asset value is only $150,000. By the same token you may have $50,000 in savings or stocks but if you have $50,000 in credit card debt, these two values cancel each other out.
You may already know the following information but I think it’s important to review some basics. There are two different kinds of assets- liquid (like mutual fund shares) meaning they can easily be converted to cash, and illiquid (like a house or boat) which are harder to turn into cash. There are also two kinds of debt- secured, meaning attached to a particular property (like a car loan and a car) and unsecured (only backed by your promise to pay). Secured debt has high priority in your budget because if the monthly bill isn’t paid, the lender has the authority to take back the property. Losing your car wouldn’t be good.
Debt can be individual or joint. Usually a husband and wife jointly own their home and cars and are jointly responsible for the mortgage and car loans. When you co-sign for a loan on anyone’s behalf, you are totally responsible for paying it back if the other person disappears. With credit cards, the ownership can be joint or individual and an authorized user can be named for either type account. Realize that an authorized user is approved to use the card up to its limit but has NO responsibility for paying it back.
Construct a balance sheet or net worth statement at least once per year to evaluate where you stand financially, particularly if you are married and have a combination of joint and individual accounts. Keep monthly records of all financial accounts, yours AND your husband’s individual accounts as well as your joint accounts, including checking, savings, investment, retirement accounts, loans, credit cards, medical debt, school loan statements, secured loans, and personal loans. In other words have a monthly, quarterly or year-end statement for every possible account that involves your MONEY. And set up a separate file that holds your annual IRS returns, whether they’re joint or separate. (Keep your returns for at least 7 years.) Building wealth – increasing your net worth- involves actively monitoring and managing the growth of your assets and staying in control of your debt. If something happens to your marriage, and approximately 50% don’t last, you will have a complete marital financial accounting within reach and you will be more prepared.
Whenever you apply for or get credit or a loan, it appears on your credit report. There are three major credit bureaus: TransUnion, Equifax and Experian. Your credit report contains your basic identification information, public records (like civil crimes, bankruptcy and judgements), collection items (old delinquent accounts), and your debt payment history over the past seven years. The report shows how well you have handled the amount of debt you owe, both joint and individual, whether you are near, at or over you credit limit, your monthly payment history, the different types of debt you have and how often you have applied for new credit. All of these factors are evaluated and quantified based on the Fair Isaac Corporation rating system resulting in a FICO score that can range between 300 (awful) and 850 (perfect). Your payment history and credit availability are the two most important components of your score (each count for about 30%). This score will determine whether you get approved for a loan and what interest rate you will be charged. It will also have an impact on your employment eligibility and your ability to get approved for an apartment lease. Your credit report shows how responsible you have been with your finances. If your score is low, potential employers and landlords will figure that you will be an irresponsible employee or tenant.
Everyone is entitled to get a free credit report annually from each of the credit bureaus. Go to www.annualcreditreport.com , which is the site supported by the bureaus. You will get the reports for free but not your scores (that’s an extra $8.00). Don’t go to www.freecreditreport.com because it isn’t free (you must give them your credit card number to get the “free report” but you are then signed up for their credit monitoring service which is about $20 per month; you must call to cancel it).
Since you’re allowed three free reports per year it’s good to stagger them and get one every 3-4 months. You need to keep track of what is on your report even more than your score. A recent study determined that 80% of credit reports have an error on them. In addition, identity theft is today’s fastest growing industry, so you must make sure that your information is correct and that you are aware of all of your individual and joint debt obligations. For example, you may have had an emergency room visit last year, received ten different bills and thought you paid them all. There were no other delinquent notices and one bill remained unpaid. After three months, it could be in collection and you would have no clue. This situation with medical bills happens all the time. Checking your report periodically will alert you and prevent serious damage to your credit profile.
Hollis Colquhoun is an Accredited Financial Counselor and co-author of Women Empowering Themselves: A Financial Survival Guide. With over twenty years of experience in the financial industry, she also writes articles and gives workshops for women on “Financial Education and Survival Tactics”. Hollis can be contacted at womenempoweringthemselves (at) gmail (dot) com.
