Dad can be a bit old-school sometimes, so you may think his words of wisdom don’t really apply anymore. But you might find a few pearls among them. Why not honor him on Father’s Day by putting some of his tried-and-true financial insights into practice? You might find that father really does know best.
Spend Less Than You Earn
Your dad probably has a strong opinion about budgeting, and you’ve heard it many times: “Live within your means.” “Spend less than you earn.” “Know what you have.” It’s true in any generation — the first rule of establishing and maintaining good credit is debt management.
Would you like to see your credit score now? YES, SHOW ME MY CREDIT SCORE
Get a firm handle on how much you earn and the cost of your necessities each month. Your father will probably tell you to save the difference if your income exceeds your expenses, but apply this rule to borrowing as well. Try not to spend more than a portion of your monthly income on extras.
The 50/20/30 rule suggests that you should keep "personal choice" spending to 30 percent after paying for essentials and meeting other financial obligations. If you're charging more than this amount per month, you're spending money you don’t have yet. Interest will continue to accrue on your balance until you earn the money to pay it off. Only charge amounts you feel confident paying off at the end of each month.
Don’t Use Credit Cards! (Or Should You?)
Dad also probably advised you to always pay cash, but it’s difficult to pay cash for big-ticket items in these economic times. You’ll inevitably find yourself applying for an auto loan or a mortgage, and your credit score may be an important factor in the approval process. Using credit cards can help establish your credit scores as long as you use them wisely. That means making payments on time and establishing that you’re responsible with money.
If you can’t pay off your credit card balances in full every month, at least keep your balances as low as possible. Your credit utilization ratio — the percentage of your available credit lines you've used — is an important factor in your credit scores. But money may be tighter some months than in others. If you find yourself in a bind and can't make more than the minimum payment on one account, make sure it’s not the one charging you the highest rate of interest.
Be Proactive with Payments
Your dad probably also told you that paying your mortgage off early can save you a bundle in interest. If you have some extra cash on your hands and low credit card balances, consider making an extra principal payment on a mortgage. You’ll cut back on the interest you’ll pay over the life of the loan, and slowly and systematically add to your net worth.
Beware of Fraud
Your father probably didn't have to worry much about identity theft in his younger years, but things have changed. The National Cyber Security Alliance reports that approximately one in five U.S. households was victim to data breach in 2014. Stay on top of your credit by asking for your free annual credit report and make sure all included information is accurate.
While you’re taking precautions, ask your credit card issuers to replace your old “magnetic strip” cards with chip cards. MasterCard and Visa are obligated to provide them based on new anti-fraud legislation that went into effect in October 2015. The new cards have computer chips that help prevent fraudulent counterfeits. Dad will be so proud.