SHOW NOTES: 2019-08-29 MiM

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Last Week’s Question of the Week: Is there a penalty if you take money out of an annuity prior to the age of 59 ½?

ANSWER: Yes. If you take money out of an annuity prior to age 59 ½, you will pay a penalty.

HOST: As we are working towards figuring out how to retire, along the way many of us get caught up with what our credit score IS or what it should be. Can you bring some light to the importance of OUR credit score?

KLAAS FINANCIAL: First, a little history about credit scores. They were invented in the late 1950’s by an engineer Bill Fair who teamed up with mathematician Earl Isaac to create Fair, Isaac and Company — sound familiar, FICO. Their goal was to create a standardized, impartial credit scoring system. Within two years, they had begun selling their first credit scoring system.

The FICO model and score as we know it today, began to be used in 1989 by most banks and credit grantors and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion.

Purpose of Credit Scores: Lenders use credit scores essentially to save time in granting credit. A credit score allows lenders to help them decide how likely it is that they will be repaid on time if they give a person a loan or a credit card.
Before credit scores were around, lenders physically looked over each applicant’s credit report. This process was time-consuming, led to mistakes or biased results, and allowed lenders to make decisions that may have had little bearing on the applicant’s ability to repay debt.

Today, credit scores help lenders assess risk more fairly. Credit scores are consistent and objective. They reflect only your likelihood to repay debt responsibly based on your past credit history and current credit status. A decent credit score may be important for your financial well-being because the higher it is, the less of a credit risk you are.

HOST: How is the actual score calculated?

KLAAS FINANCIAL: Your credit score is solely built on how much debt you have, what kind of debt you have, how long you’ve had it, and how you’ve paid on it. Anyone can borrow money and end up with a good credit score! You don’t see anything there about your bank account. There’s no mention of your monthly budget or any cash you have saved for emergencies and retirement. 

It requires about six months of history in order to create a person’s first credit score. Generally, most people will begin with a middle of the road credit score. Credit scores generally range from 300, the lowest possible, to 850, the highest possible. Generally, a FICO® Score above 670 is considered a good credit score on these models, and a score above 800 is usually perceived to be exceptional.

According to FICO, your credit score is calculated like this:

  • 35% is based on your payment history
  • 30% is based on your debt level
  • 15% is the length of time you’re in debt
  • 10% is new debt
  • 10% is the type of debt
    Our views regarding debt and even credit scores in general compare to that of radio show host Dave Ramsey reminds us of a fundamental point: “a simple way to improve your credit score that might surprise you. Pay off your debt, don’t add any new debt, and let your credit score go extinct. It’s time to improve your credit score by getting rid of it.”

    While establishing and maintaining good credit as you may want to buy a house or purchase a car will be helpful, the key thing to understand is that having little to no debt; and savings in the bank is really where we want our listeners to move towards especially as they work to plan and fund their future retirements.

    HOST: Is it a good idea to monitor our credit rating? How can we do that?

    KLAAS FINANCIAL: Yes, given the amount of daily breaches we hear about with regards to our private information out there, it is important to either monitor your own credit or pay a company to do this for you.

    Review your credit report at least once per year. Doing so more often can be beneficial, particularly since identity theft is on the rise. Regularly checking this information can also help you spot any possible errors in your credit file. So monitoring your credit report regularly (monthly, for instance) can help you catch any unusual activity early.

    When reviewing your credit information, it’s important to verify personal details such as your name, address, and Social Security number. In addition, be sure to note whether all your current and past loans are listed, and that loans you have paid off are reported as such.

    GREAT FREE choices include:

    • — You can access your own credit at no cost from each of the 3 big credit bureaus: Equifax, Experian, and TransUnion once per year.
    • provides the only truly free credit monitoring service. There’s no trial subscription and you’ll never have to give your credit card number. Credit Karma allows you to monitor your TransUnion and Equifax credit report score at no cost.

    There are also many “credit monitoring” companies you can pay to have this done which can also help you to detect instances of identity theft – one of the 10 biggest crimes. Protecting your credit from identity theft is key to ensuring thieves don’t run up big bills in your name and leave you to deal with the damage.

    HOST: Now, let’s look to our Money in Motion Listener Question Corner, where one of your listeners, Susan, submitted this question from your website: “If I retire at age 62 and begin my social security, can I also begin Medicare at the same time?”

    KLAAS FINANCIAL: Thanks, Susan, we hear that question often. It’s a good question. While age 62 is the earliest that you can begin collecting your social security benefit (assuming you have earned enough credits to have one), Medicare is different. The earliest you can begin traditional Medicare (the federal health insurance program) is when you are 65 or older, and there are exceptions for certain younger people with disabilities or with End-Stage Renal Disease.

    If you are indeed retiring at 62, you will have to look at either going on your partners health insurance plan, or a COBRA plan if your employer offers one. Otherwise, you’ll need to look at a private plan or a plan from the Affordable Care Act until you qualify for Medicare at 65.

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    Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.