Goals for new year

Ways to pay down debt and improve credit score

Setting up a budget is key to any plan involving management of money

January 06, 2008|By Eve Mitchell | Eve Mitchell,Contra Costa Times

WALNUT CREEK, Calif. -- The new year is upon us, and with it comes the potential to improve your financial situation.

While that goal may seem easier said than done, there are steps consumers can take to make 2008 a better financial year than 2007 - steps that will help you save money, improve your credit score and pay down your debts.

Setting up a budget is key to any plan involving the management of money.

"First off, you have to have a reliable budget. It doesn't make any sense if you are making $100,000 a year and spending $110,000. Figure out what are your financial expenses: rent, mortgage, payments for insurance, how much you spend on food and clothing," said Ron Flaiani, director of financial services at Fremont Bank.

As a general rule, try to set aside 10 percent of income toward retirement savings, he advised.

Consumers investing in a traditional 401(k) or other retirement account funded with pretax dollars should try to contribute the maximum amount possible, Flaiani said.

"A lot of people just put 3 percent [of their paycheck] because the company matches 3 percent," he said. "If they are not maxing out pretax contributions to their 401(k) they need to look at that."

Selecting the right 401(k) that best meets long-range retirement needs can be a challenge for employees who participate in these retirement plans.

"It's very important that [employee] participants know what options they have in their plan," when selecting a fund, said Catherine Miller, vice president of 401(k) education for San Francisco-based Charles Schwab Corp.

To that end, consumers should see what kind of investment assistance options are available to them through their 401(k) plan.

Reviewing insurance needs should be done on an annual basis, advised Gary Finnegan, senior relationship manager with the wealth services division of Fremont Bank. A lifestyle change such as a marriage, divorce, or a new child in the family could require a change in coverage provided by a life, disability or other policy.

Credit - how it is managed and used - is a key factor that needs to be considered to have a good financial life, experts point out. After all, your credit score is used by banks and other lenders to help decide whether you qualify for a car loan, the interest rate you pay on a home loan or credit card, or if a landlord will rent you an apartment, among other things.

Consumers who want to improve their credit score need to think like a lender as opposed to a consumer, said John Ulzheimer, president of educational services at San Francisco-based www.credit.com, a Web site with personal finance tips., and author of You're Nothing But a Number.

Paying debts on time, along with keeping credit card balances low, are two of the most important ways to raise a credit score.

"Make sure your payments are received on time," Ulzheimer said. "We see many times consumers who view the due date more as a suggestion than as a hard and fast date. So what they run into is they make the payment around the due date but it is not received by the due date."

Signing up for a bank's electronic bill-paying service can help save on the cost of stamps while providing a convenient way to manage payments. But consumers should not assume bills will always get paid and processed on time, Ulzheimer said.

Not all merchants are set up to receive electronic payments from banks, Ulzheimer said. In such cases, the bank has to mail a paper check, which can result in payment processing delays, late charges and dings on credit scores.

That's why users of electronic bill payment services should set payment dates several days ahead of the actual due date, Ulzheimer advised.

Credit scores can go down when unpaid balances approach maximum spending levels.

People with a high level of credit card utilization - which results from running up balances that approach maximum spending limits - risk having their credit scores drop if they cancel unused credit cards with zero balances, Ulzheimer said.

"If you close a bunch of accounts that have zero balances, you are taking them out of the [available credit amount] ... and making the utilization higher," he said. "It's terrible for your credit score."

Consumers with multiple credit cards should focus on paying off the ones that have the highest interest rates first, said Ken Jones, a regional president for Wells Fargo in California.

Consumers can also call up a credit card company and ask to have a lower interest rate.

"You won't know if you don't ask," Jones said.

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