On Jan. 23, Fair Isaac Corp., the creator of FICO scores changed the formula for calculating your credit score.

It is estimated that this will affect about 110 million consumers. About half will see their score increase while half will see a reduction in credit score. The new procedure will look at personal loans deeper. There are many apps where you can quickly borrow money.

Americans are borrowing heavily according to the Federal Reserve Bank of New York. Household debt increased by $92 billion in the third quarter of 2019 and now is $13.95 trillion. People with high debt on credit cards or those that have recently missed payments could see a drop in their FICO score.

It is expected that those who pay off their credit card balances monthly will not be penalized as much for one time large purchases or an occasional high balance. There is concern that people are taking out personal loans to pay off high interest credit cards and then continuing to use the cards. This can get a consumer caught in a credit squeeze.

When I meet with clients, it is amazing how many people continue making the minimum payments. This is like borrowing from a legal loan shark. Interest rates of 18% or higher are not normal in most financial channels. Miss a payment and you might go to 29%!

The same rules apply to managing your credit score. Pay your bills on time. Do not open too many new accounts. Opening one will ding your credit score about five points for a few months. Also, only use a portion of your credit limit. This is known as utilization percentage. For the highest score, you should be around 30%.

As with all matters dealing in personal finance, you must be concerned about the details. Know your monthly cash flow. It is your sources of income each month and your required payments. The difference is what you have to spend. Then, prioritize your expenditures. There is a difference between what we need and what we want.

You can maximize your budget by planning ahead for what you need to take advantage of sales and other opportunities to save. If cash flow is tight, use a shopping list and stick to it. It is easy to pick up a lot of impulse items or thing we would like, Maybe do your shopping when you do not have the children with you?

Remember to pay yourself first. Out of each month cash flow, set aside some money for emergencies. If you are carrying a balance on credit cards, pay more than the minimum. If you have more than one card with a balance, pay off the one with the smallest balance first if the interest rates are the same on all of your cards. Then when you can put away money for retirement or some other goal, have a plan and stick to it.

You can do this.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.

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