It’s important to ask questions about how personal finances work. Without asking questions, you may end up making bad decisions that could hurt your finances. That’s why MoneyKey looks to answer some of these questions on our blog. Scroll down for answers to some of the financial questions you may have.
1. What is a Credit Score?
To understand your credit score, you have to know what a credit report is. A credit report is a comprehensive record of your credit history put together by a credit bureau.
It shows things like:
- The number of accounts you have open and the dates they were opened
- The balances you keep on your credit accounts such as credit cards and loans
- The payment histories of your accounts which show how often you pay your bills on time
- The amount of debt you owe
Depending on your credit use, that may be a lot of data to go through.
A quick way to evaluate how well you’ve managed your credit without going into the details listed above is by reviewing your credit score (also included in your credit report).
Where your score falls on the credit score range will determine if you’re a prime or subprime borrower. Prime borrowers may have more credit options at lower rates than subprime borrowers.
2. What is a ‘Perfect Credit Score’?
According to the FICO and VantageScore credit score ranges, 850 is the highest score you can possibly get.
To reach a credit score of 800 or higher, you may need:
- A longstanding credit history with no delinquencies
- A varied mix of responsibly managed accounts
- An ultra-low credit utilization rate
- Infrequent applications for new credit, whenever possible
Few people manage to check all of these things off their list. Just 1.2 percent of FICO scores hit 850.
3. What is My Credit Score if I’ve Never Had a Credit Card?
There’s no way to estimate your unique score without knowing more about the rest of your credit history. Although a credit card is one of the most popular ways to build credit history, it’s not the only way.
With an unsecured personal loan such as an installment loan or a line of credit, one way in which these credit products may affect your score is if a lender reports your payment history to one of the major credit agencies.
However, if you don’t have much of a credit history, you may have something called ‘thin’ or ‘invisible credit’.
Thin or invisible credit means you don’t have enough info in your credit report for a prime credit agency to assign you a credit score.
4. Why Do You Need a Budget?
If you have trouble holding onto your money, a budget may help you keep it where it belongs.
A budget is a spending plan that helps you keep track of your finances so you have enough money to cover the important things — from necessary bills to proactive savings.
You can use your budget as a plan to avoid these financial mistakes, or you can use it to keep track of your non-essential spending, like new clothes, vacations, and takeout.
How to Make a Budget
A budget helps you spend your money mindfully, so you can develop better money habits.
The basic principal behind it is that, if you track your expenses, you may be more likely to manage your money well and put it towards bills and savings than wasting it on unnecessary splurges.
There are plenty of budgeting techniques that may help you achieve this goal in different ways. Check out our Ultimate Budgeting Guide to find out how to make a budget using three separate methods.
How to stick to a budget is another matter. Following through with a new spending plan takes determination.
If you’re finding it a challenge, your phone may offer some relief. You can download money management apps that act as a budget assistant. They’ll help you build an affordable spending plan and may notify you if you’re in danger of overspending.
5. How Much Do I Need in Savings?
Savings are an essential part of a balanced budget and healthy finances. But there’s no one answer that fits every person, goal, and situation.
The answer depends on what you’re saving for, your income, and the rest of your budget. With so many possibilities for variances, it’s easier if we take a look at two examples of common savings goals and their basic benchmarks.
An emergency fund
A lot of financial advice will tell you to save six month’s worth of living expenses in an emergency fund. This money is there to help you in case something goes wrong — whether you face an unexpected household repair or a sudden layoff.
Of course, how much you end up saving will depend on your budget. David Bach, the author of The Latte Factor, admits to having two years’ worth of living expenses in his emergency fund.
How to save for emergency fund
For most, the goal of six months of expenses may be a big challenge. Only 29 percent of Americans actually have this much in their savings. Nearly one in four have nothing in their emergency fund.
If you want to give a boost to your fund, make it a regular monthly contribution, even if it’s something as little as $10. When it comes to your emergency fund, anything is better than nothing.
To boost your savings even further, slash unnecessary expenses from your spending plan and reroute this money towards your emergency fund. You may also want to learn how to reduce what you pay on the necessities, so you can free up more income to go towards savings.
Once you collect some money, keep it separate from your checking account. Look for savings accounts that help you save, like a savings account with higher interest rates.
If you do run into an unexpected emergency expense and you don’t have enough money in your emergency fund to cover it, a personal installment loan may be able to help. These loans can be used to help you handle an unforeseen expense when you don’t have the money to handle it and it needs to be addressed right away.
A retirement fund
When some financial advisors talk about retirement savings, they throw around something called the 80 Percent Rule. According to this rule, your annual retirement income should equal 80 percent of your pre-retirement annual income.
Let’s say you’re making $50,000 before you retire. According to the 80 Percent Rule, you’d need to have enough savings to generate $40,000 every year during retirement to live comfortably.
To find out what you need saved in total to reach this goal, advisors sometimes rely on a second rule: the 4 Percent Rule. By dividing your annual retirement income by four percent, you’ll find out how much money you’ll need sitting in a fund to provide your annual retirement income.
So, for example, if you need $40,000 every year, your retirement fund would have to be $1 million. This is no small chunk of change, and a lot of people may find it challenging to save for retirement.
How to start saving for retirement
Like your emergency fund, one of the best ways to start saving is by making it a regular part of your budget.
You may have to tweak where this money goes, moving away from basic savings accounts to something specialized. IRAs, Roth IRAs, and Simple IRAs are special retirement savings accounts that may offer tax-free growth.
You should also ask your employer if they offer 401(k)s. This savings plan deducts money from your paycheck before taxes and places it in a high-yield account. And in some cases, your employer will match your contributions.
Whether you have an IRA or 401(k) or both, you shouldn’t tap into your retirement funds if you can help it. These specialized savings work best if you let them sit untouched earning interest.
6. What is an Online Loan?
It wasn’t too long ago that you’d have to visit a bank, credit union, or other financial company in-person if you needed a loan. Now, you can borrow money online.
When you borrow money online, you can sometimes expect:
- Uncomplicated application processes
- The ability to compare rates quickly and easily
- Fast qualification and approvals, sometimes within minutes
- To receive, service, and repay your loan online
What is an Online Direct Lender?
Some online lenders are also direct lenders. This means they evaluate and underwrite loans without the help of another financial company or bank.
Since there isn’t another financial company involved, a direct lender loan may end up being faster and more convenient than certain alternatives.
Are you still not sure what this means or when you should look for a direct lender in your state? Check out our article on direct lenders for an in-depth answer to the question: what is an online direct lender?
Why Would You Borrow Money Online?
There are plenty of reasons why you would borrow money online. Some of the most common ones include:
You don’t live close enough to a local branch. In 2018, nearly 2,000 bank branches closed down, making in-person banking a challenging task for some rural consumers.
- You work typical hours. If you work during the day , it might be very difficult to visit your retail bank during their business hours without taking time off.
- You don’t meet mainstream criteria. Traditional banks often deny personal loans and lines of credit to people with poor credit. You may have a better chance at getting an online loan through a non-traditional lender as some of them have fewer restrictions.
How Do You Get a Loan Online
Getting a loan online can be easy. You don’t have to take time off work or travel far away to reach a branch. Just open a browser and start researching your options.
If you’ve been denied a loan from a traditional financial institution due to poor credit history, a MoneyKey Installment Loan may be a stopgap in case of emergencies or unexpected expenses. The online application is simple and takes only a few minutes.
7. How Do Interest Rates Work?
Whether you borrow money online or go to a bank branch, some lenders may apply interest and/or fees only to what you owe. It’s a part of the cost of borrowing money, as it’s additional money you’ll have to pay on top of the principal (the amount you borrow).
If it’s an interest only credit product, interest is generally calculated as a percentage of your outstanding loan.
The interest rate for your loan will influence how much you end up paying overall, so it’s important you check this rate before you agree to any loan.
If you aren’t sure how your interest rate will impact what you owe, this as an example of one type of an interest calculator. It crunches the numbers for you, so you know approximately how much money you’ll pay in interest over your estimated term.
In most cases, however, your lender will tell you what your interest rate is. For example, a lender like MoneyKey will also break down your payments to show you how much interest applies over your contract.
8. How Do Fixed and Variable Interest Rates Work?
The interest rate on your loan depends on the rate your lender charges. There are two types of interest: fixed and variable.
A fixed interest rate will never change. It’s chosen at the start of your loan and remains the same until you pay all of it back. Generally, something like an online loan will have a fixed interest rate.
A variable interest rate, which may also be called floating or adjustable interest, may change depending on the market. This means your interest rate may fluctuate during your term — or it may not!
If you’re lucky, it dips lower than that what you would pay with a fixed rate. But there’s also a chance that you could end up paying a higher interest rate.
There Are No Dumb Questions
When it comes to your finances, knowledge is power. The more you understand how the financial world operates, the more likely you’ll make the right decisions. These decisions help you pay off debt, start saving, invest responsibly, and find practical financing options.
Sometimes, learning these skills means asking the right questions. If it’s a question about how to get an online loan from MoneyKey, get in touch with someone from our Customer Care team. We're happy to help you in any way we can! You can reach us seven days a week for any questions relating to our products and services.
