Credit Scores: What Are They? How Do They Work? How Can You Improve Yours?

As a society, we are increasingly dependent on using credit to purchase goods and services. In fact, you probably used a credit card today to buy something at a store or online.

But buying products on credit isn’t limited to using cards. We also use credit in the form of loans to invest in bigger-ticket items such as cars, college tuition, and homes.

What you might not realize when you use credit to purchase something is that, in most cases, you are paying more for that product than if you used cash. You are paying more because you borrow money from a lender, be it a credit card company, credit union, or bank, and they charge you interest on the transaction.

A variety of factors determine the amount you pay for a specific item, the biggest being the loan’s interest rate. And it’s your credit score that ultimately determines this rate.

But what exactly is a credit score? How is it defined? And what, if anything, can you do to improve this rating?

This article will answer these questions and provide additional information to help you manage your credit.

So, What is a Credit Score?

A credit score is a three-digit number ranging from 300 to 850 that uses a variety of financial factors to determine an individual’s creditworthiness. Lenders use this number to evaluate risk and decide how likely a person is to pay back a loan based on their credit history.

Why Does Your Credit Score Matter?

Because your credit score is an indicator of your overall financial stability, it is vitally important to maintain it as it directly affects:

  1. Whether you get approved for a financial product, such as a credit card or loan
  2. The amount of interest you will pay on that product if you are approved

As a rule of thumb, the higher your credit rating, also known as your FICO score, the more likely you will get approved for a credit card or loan. Plus, a high score usually means a lower interest rate. On the contrary, an individual with a low FICO score, in the poor to the fair range, will typically pay a higher interest rate or may even fail to qualify for a credit card or loan.

What is a Good Credit Score?

According to the FICO® Scoring system, which is used by 90% of the top lending institutions in the United States, a good credit score falls between 670 to 739. As previously mentioned, scores range between 300 to 850.

By design, the higher the number, the better your credit score. When evaluating credit, lenders may often refer to this number in terms of credit level or quality, such as poor, fair, good, or excellent.


What Factors Are Used to Determine Your Credit Score?

There are five primary factors used to determine a credit score. Each one of these factors is weighted differently and evaluated to help determine your credit score. These factors include:

  • Payment History (35%): Your payment history is one of the most critical components of your credit score. Lenders want to ensure that the money they provide is paid back on time. What they want to see here is a consistent history of paying debts. Therefore, even one missed payment in the past can hurt your score.
  • Amounts Owed (30%): Amounts owed, sometimes referred to as debt burden, is another crucial area of consideration among lenders. Generally, the less you owe, the better your credit will be. However, other factors, like your credit utilization ratio, will be examined.

Your credit utilization ratio is the number of credit limits you’ve used across all your credit cards and lines of credit. In short, the closer you are to maxing out your credit limits, the worse it will be for your credit score.

  • Length of Credit History (15%): Regarding your credit score, maturity matters. How long you’ve held credit accounts makes up 15% of your FICO® Score. This includes the age of your oldest credit account, your newest credit account, and the average age of all your accounts—generally, the longer your credit history, the higher your credit scores.
  • New Credit (10%): Every time you apply for a credit card or a loan, the lender will check your credit report with one or more of the major bureaus. The bureau notes this check as a “hard inquiry” on your credit report, which will negatively impact your credit score.
  • Credit Mix (10%): Not all debt is created equal. And, when it comes to evaluating your credit mix, lenders want to understand your loan landscape. As a rule, the more diverse your loans are, the better your score will be because it demonstrates that you have experience and can handle different types of debt.

How Can You Improve Your Credit Score?

There are many benefits associated with having good credit. The good news is if you have less than optimal credit, there are some things you can do to improve your score. Below are five steps you can take.

  1. Pay Your Bills on Time. As noted earlier, your payment history is the most influential factor in determining your credit score. As mentioned, you should do everything possible to avoid late or missed payments. One solution is to set up calendar reminders or autopay to manage recurring bills.
  2. Keep Your Credit Utilization Number Low. To help you manage your credit utilization ratio and keep it low, you should continually monitor your balances for each account to ensure you are not coming close to maxing out your credit limits.
  3. Only Apply for Credit When it’s Necessary. A hard inquiry is posted on your report every time you apply for a line of credit. Most lenders view too many or too frequent hard inquiries as a risk. To avoid the negative implications of a hard inquiry, you should refrain from applying for credit cards or lines of credit that you don’t need.

If you need to apply for new credit, do yourself a favor and research and try to get pre-approval or pre-qualification from the lender. In many instances, pre-approval results in a soft rather than a hard inquiry. Soft inquiries don’t affect your credit score, so you will reduce the risk of negatively impacting your credit score.

  1. Leave Old Accounts Open. Keeping old accounts on your credit report, like a paid-off student loan or credit card, can help your credit score. Therefore you should avoid the urge to wipe them from your credit history. Remember, having an account with a long history and track record of consistent payments is what lenders are looking for.
  2. Monitor Your Credit. When you view your credit report, a soft inquiry is pulled, which doesn’t affect your credit like a hard inquiry. Monitoring your score’s fluctuations can help you understand how well you manage your credit and whether you should make any changes.

Did You Know?

You are entitled by law to a free credit report from each of the major credit bureaus once per year. You can request these reports at AnnualCreditReport.com. There are also several credit monitoring apps and services, some of which are free that you can use to track your credit throughout the year.

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Eight Steps to Establishing an Estate Plan in Maine

Why Do Maine Residents Need an Estate Plan?

For many Maine residents, creating an estate plan is a task that gets pushed to the bottom of the to-do pile. After all, we live in Vacationland and would much prefer living our lives than thinking about how we will handle our demise. There is also a big misconception that having an estate plan is only meant for the wealthy. 

The truth is that everyone has an estate and people they care about. And an estate plan is a valuable tool that outlines the maintenance, management, and distribution of your assets to those loved ones when you pass away or become incapacitated.

Some of the most common benefits of having an estate plan in Maine include the following:

  • Being able to define your medical directives if you become incapacitated clearly
  • Allowing you to choose who inherits your assets
  • It helps protect your family, including young children
  • It prevents your heirs from overpaying on Maine taxes
  • It could help to keep your assets out of Maine probate

Depending on your circumstances, there are dozens of additional benefits to developing an estate plan, so you can see why they are essential. 

But how do you create an estate plan? What documents do you need to draft? And where do you start? 

To help answer these questions, we’ve defined an eight-step process below. Of course, if you ever have any questions, you can contact us, and we’ll be happy to help you navigate the estate planning maze.

Developing Your Maine Estate Plan

Below is a list of steps you should take when developing your estate plan in Maine. You should note creating an estate plan is more than just a one-person job. There are times when you should consult with experts such as an attorney, accountant, or certified financial planner (CFP) to help you manage this plan. 

Other individuals you will want to consider and consult with as part of this process include a guardian, power of attorney, and a trustee.

As you assemble your team, they can help you identify and define each of the following steps.

Step 1. Set Your Estate Plan Goals

Like the development of any plan, you will want to take some time to determine what you wish to accomplish by creating your estate plan. Before you begin, please look at your life’s big picture and all those you share it with. Then, think about what goals you want to address.

A few estate planning goals include:

  • Ensuring financial support for your family
  • Choosing the beneficiaries of your estate
  • Naming guardians for any dependants and having a financial plan for their support
  • Dictating the future management of a business
  • Leaving your assets to a charity
  • Requesting specific funeral arrangements, senior care, or health care preferences
  • Specifying your preferences in the case of a medical emergency or incapacitation

Now, it’s possible that your plan could include many, if not all, of these goals. The important thing here is to make sure you identify and address the goals that are most relevant to you. 

Ideally, it would be best to understand your goals before creating key documents such as your last will, power of attorney (POA), or a trust

Step 2. Get Your Financial House in Order

Depending on how organized you are, you can either work independently or hire a financial professional, like a Certified Financial Planner (CFP), to help you document and compile a list of your debt and your tangible and intangible assets. 

By identifying how much you owe in debt, you will be able to determine the total amount of assets you can distribute for loved ones as part of your estate plan.

When analyzing debt, make sure you review the following:

  • Credit card balances
  • Student loans
  • Vehicle loans
  • Mortgages
  • Home equity lines of credit

When reviewing tangible assets, make sure you include material things, such as:

  • Land
  • Houses and other real estate investments
  • Vehicles (e.g., boats, cars, and motorcycles)
  • Personal valuables (e.g., books, jewelry, tools, and household furnishings)
  • Collectibles (e.g., art, coins, stamps, trading cards, and antiques)

Intangible assets include non-material things that you can’t touch or hold, such as:

  • Bonds, stocks, and mutual funds
  • Checking and saving accounts
  • Retirement plans
  • Life insurance
  • Businesses owned

Step 3. Create a Last Will and Testament

Your Last Will and Testament is the document with the most authority in your estate plan as it allows you to control and communicate how to distribute your assets after you pass away. It is also the document that a probate court will use to settle your estate.

When drafting your Last Will, you should consider working closely with an attorney as you will need to appoint an executor of your Last Will and a guardian if you have any children under the age of 18 years old. The attorney can also help you document how you wish to assign your assets to your beneficiaries.

If you have high-valued property or a significant amount of assets, you might want to consider establishing a trust. We will talk about the benefits of this option a little later in Step 6.

Understanding the Role of the Executor 

Choosing the right executor for your Last Will is crucial because they bear a lot of responsibility on your behalf.

As the executor of your Last Will, they are responsible for ensuring your requests or terms are carried out precisely as you wish. 

The executor of your Last Will is also responsible for:

  • Distributing your property and assets to your beneficiaries
  • Arranging for debt repayment
  • Recovering money from other parties who owe you
  • Filing necessary forms, including your final tax return
  • Acting on behalf of your business interests
  • Arranging for the correct parties to receive any charitable donations or gifts

Your executor should be someone you can trust, who is responsible, and willing to act as your personal representative. The executor’s role is often a spouse, friend, or relative.

Step 4. Establish a Power of Attorney (POA)

Establishing a Power of Attorney (POA) helps you with important matters while you’re alive or if you become ill or incapacitated. By creating a Power of Attorney (POA) document you are legally allowing one or more people (called an attorney-in-fact) the authority to make financial or medical decisions on your behalf. 

Many estate plans in Maine include two POAs that are effective even if you become incapacitated. 

These two POAs are commonly known as:

  • A financial POA: This designation allows allows someone to handle your financial or business matters, and
  • A health care POA: This person is allowed to make medical decisions on your behalf. (In Maine, this POA is combined with a living will, which lays out your wishes for medical treatment, and the combined document is called an “advance health care directive.”)

In most estate plans, these POAs are considered “durable” POAs, which means that they retain their effectiveness even after you’re incapacitated. 

When choosing a POA, you should seek out a person you trust who is of sound mind and body as they will, if called upon, be required to make important decisions on your behalf.

Step 5. Write A Living Will

Your estate plan can and should do more than provide instructions on how to disburse your financial assets when you pass away. A comprehensive estate plan can also include a Living Will. 

A Living Will guides your loved ones and medical professionals on your preferences for end-of-life medical intervention in case you become incapacitated and can’t communicate for yourself.

Most Living Wills provide instructions on how to handle:

  • Life-prolonging treatments, such as blood transfusions, medications, and surgery
  • Artificial life support and ventilators
  • Pain relief management 
  • Administration of food and water (including tube feeding)
  • Do-not-resuscitate (DNR) orders

A Living Will can be as specific as you like, denote your religious preferences, and outline any plans for organ donation. 

Your attorney can help you draft a Living Will alongside the rest of your estate plan. 

When completed, send a copy to your primary care physician to ensure that your living will is easily accessible and becomes part of your medical record. 

Step 6. Build a Trust

Building a trust is no longer for the uber wealthy. Yes, an estate plan that includes a trust will cost more, but it also gives you greater control over your assets than a will. 

Why Should Your Estate Plan Include a Trust?

When you rely on the will you wrote, your intent is to leave assets to a specific person such as your daughter, brother, friend or favorite charity. The problem is a will is probated, and once it enters the courts it can be a long, expensive process that offers no guarantee that your wishes will be followed. 

By using a trust, you can avoid many of these risks and ensure that the right assets are going to be received by the right people in less time, and with less headache.

In fact, establishing a trust can also help:

  • Potentially reduce the taxes owed by your estate and heirs
  • Protect your assets from creditors and lawsuits
  • Put conditions on how and when your assets are distributed

Understanding the Three Types of Trusts

Trusts can either be testamentary (created after your death) or living (created while you’re alive). Living trusts can either be revocable or irrevocable. Here’s how each works:

Testamentary trust: Testamentary trusts are set up in a will and go into effect after your death. The trust becomes the owner of any assets that pass to it in your will.

Revocable living trust: These are set up during your life and have the most flexibility. After you create the trust, you have the option to change what’s in it, who manages it, and who the beneficiaries are.

Irrevocable living trust: This type of trust is also set up during your life and is usually used to reduce the amount of assets subject to estate tax.* Once you’ve established and funded it, generally it can’t be changed.

By adding a trust to your estate plan, your options become greater and more individualized. When considering a trust you should seek the advice of your estate planning attorney to make sure this recommendation is right for you.

Step 7. Organize and Store Your Important Documents in a Safe Place

Organizing and storing all of your documents in a central location, like a safe deposit box, helps ensure the execution of your estate to go more smoothly when the time comes. As part of this step, you should gather copies of all the important documents that you may need for your estate plan and keep them in a safe location that can only be accessed by the people you trust managing your estate.

Important documents may include:

  • Marriage, divorce, and separation documents
  • Adoption and birth certificates for children
  • Property deeds and titles
  • Business and investment share certificates
  • Bank account information
  • Social media account information
  • Having these documents alongside your estate planning documents can assist with proving ownership or relationship changes in the event of a dispute.

By laying out clear and legally sound estate plans and having all relevant documentation, you can help to make the process easier and less stressful for your loved ones.

Step 8.  Review & Update Your Estate Plan As Needed

Life moves pretty quickly, so it is important to review and update your estate plan, or specific documents in your plan, if you experience any major life changes. 

These sudden life changes may include, but are not limited to:

  • Getting married
  • Getting divorced or separated
  • A representative’s death
  • A beneficiary’s death
  • Purchasing any significant assets (such as a car or house)
  • Losing or acquiring debt
  • Having or adopting children

Outside of any major life changes, you should expect to revisit and evaluate your estate plan every 3 to 5 years to ensure it remains current.

Conclusion:

We know that taking the time to develop an estate plan can be overwhelming, but it is vitally important to those you love. If you want to move forward, but still aren’t sure how, give us a call or email us to schedule a consultation. 

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