Money Blue Book

As the American and world economies endure a period of economic recession, the once stable and thriving marketplace can seem like a distant memory. Not only does it seem like unemployment warning flags and disappointing corporate earning reports lurk around every corner, it’s all too easy to succumb to the financial despair. When you combine the mortgage market meltdown with increasing housing foreclosures, and you mix that with high gas prices, fears of another major Islamic terrorist attack, and snowballed consumer pessimism, you have a spicy cocktail for widespread financial depression. While I’m not a financial fortune teller, nor am I a guru who can predict when the recession or lingering credit crisis will pass, all I can do is reassure you of areas in your life where you ought not to be overly distraught or paranoid about.

One segment in the economy that has spawned a huge surge of concern and irrational panic is the area of bank failures and bank bankruptcies. Because of the excessive subprime lending to consumers totally unqualified to receive home mortgages made by irresponsible mortgage lenders in the past few years, the economy is now reaping the terrible financial whirlwind result of defaulting loans and home foreclosures. This calamity is currently happening on a massive scale as huge banking giants like Citibank and Bank of America, as well as major thrift saving institutions like Washington Mutual are getting pummeled for their ties to bad mortgage loans. Unable to recoup their housing mortgage investments, many of these financial service providers are having to write off billions of dollars of unrecoverable bad loans, triggering serious questions by creditors, deposit account holders, and shareholders of their ability to continue as viable going concerns.

Bank Failures Have A Way Of Sparking Emotional Panic, Regardless Of The Government Effort’s To Alleviate Fears

While most major banks have healthier segments of their financial businesses to siphon assets and capital from, thereby allowing them to stay afloat, a few have not been so lucky. Netbank, an online banking institution that was one of the first early adopters during the initial Internet banking craze, ultimately keeled over due to the disintegration of its mortgage business segment. When its asset position could no longer meet depositor demand, federal regulators swooped in to shut it down, forcing Netbank to ultimately file for bankruptcy.

Banking and mortgage services giant Countrywide Financial recently faltered under the crushing weight of bad mortgages as well, and was ultimately acquired by Bank of America at an extremely huge discount, saving it from near collapse.

Most recently, IndyMac Bank fell flat on its face, triggering shock waves that signified the United States’ second largest banking collapse in history. Due to the sheer financial size of IndyMac bank, and the large scale and huge number of account customers the banking collapse affected, the news triggered panic attacks and resulted in reports of huge lines of desperate customers clamoring to get their deposit money out of the bank out of fear of the unknown. Despite the federal government’s announcement that the vast majority of deposit holders would not lose a single cent of their money, news of catastrophic bank failures have a way of making consumers go crazy and act in irrationally frenzied ways. As someone who considers himself relatively educated about the subject of finance, even I have to admit I was disturbed by the sheer magnitude of the Indy Mac bank collapse. After all, if IndyMac could fall, who else could potentially be next? I felt a slight tinge of emotional panic despite my otherwise logical and rational mental faculties - and I wasn’t even an IndyMac banking or home mortgage customer. But yet, I still felt the reactive emotional ripples that made me question my faith and trust in my bank and the economy at large. While bank failures are incredibly rare, they do happen - especially when there is a significant and pervasive trigger (the subprime mortgage meltdown) that is causing the financially destructive domino effect.

Thus, that is why it is extremely important for us, as cool headed consumers, to greatly educate ourselves on the types of financial and banking protections the system has in place to shield the money we save up in banks, savings and loans, and credit unions from loss. By learning more about how the federal government, the FDIC, and private bank risk sharing agreements protect our deposits, the more our fears will diminish, thus helping to solidify our faith in our banking institutions. We live in an efficient market where there are powerful protective systems in place, and proper financial education will help to reinforce that confidence. Thus sometimes, “the only thing we have to fear is fear itself - a nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance” (a powerful quote made by former U.S. President Franklin D. Roosevelt during the Great Depression).

How Does FDIC Insurance Keep Our Bank Accounts and Deposit Money Safe?

The Federal Deposit Insurance Corporation (FDIC) is a federal government run entity that provides deposit insurance protection for participating member banks - guaranteeing their deposit accounts from loss. The FDIC system was set up to instill consumer confidence in our nation’s banking system during a time of severe economic recession and financial turmoil. To prevent massive runs on banks triggered by irrational consumer panic to withdraw money during times of crisis, the United States government set up the FDIC to guarantee depositors at insured banks that their money would always be safe, even during the worst of times.

As a general rule of thumb, the current FDIC insured amount per depositor at each bank is $100,000 (with extra exceptions for different ownership categories). This blanket protection insures member bank accounts from bank failure loss, up to the maximum insured amount of $100,000. The FDIC protection covers a variety of bank deposits, including - checking accounts, savings accounts, money market accounts, certificate of deposits (CD’s), and even bank money orders and cashier’s checks. However, the FDIC protection does not cover non bank deposit type accounts and assets like - stocks, bonds, mutual fund investments, variable or fixed annuities, U.S. Treasury securities, or contents stored in safe deposit boxes. As FDIC insurance only covers bank failure loss, it also does not provide protection against bank fire, fraud, or theft, although in the overwhelming majority of cases, individual banks usually have their own private hazard and casualty insurance coverage against these other types of loss.

The FDIC also provides loss protection for retirement accounts held in member banks in the form of deposits. The FDIC limit for retirement accounts, which includes self directed plans like Roth IRA’s, Traditional IRA’s, SEP’s, and Keogh’s, currently stands at - $250,000. The higher FDIC limit for retirement accounts is a clear recognition by the FDIC of the importance of ensuring that consumers always have their retirement nest eggs to fall back on.

How Does The Federal Government and The FDIC Monitor The Banking Industry?

While by no means a perfect system, the banking industry is highly regulated by the federal government and watched by multiple federal agencies - including the Federal Reserve, the U.S. Treasury’s Office of the Comptroller of Currency, the FDIC, and the Office of Thrift Supervision. Along with state banking regulators, there are multiple sets of eyes at all time on the state of the banking market. While bank failures are incredibly rare, they do happen on occasion unfortunately.

In such an occurrence, as soon as the federal and state regulators determine that a bank no longer has the capacity to meet depositor demands and sustain sufficient capital due to insolvency problems, the FDIC barges in to take command. Once it takes control, the execution is usually fairly rapid as the FDIC is highly motivated to ensure a seamless transition. Until the FDIC can find a suitable buyer of the failing bank’s assets, the bank generally continues to run as usual without significant interruption. In the rare event the FDIC cannot find a suitable buyer, it closes down the ailing bank and sends out checks to all account holders within the FDIC insurance limits along with interest. Usually the FDIC payments are sent out in a matter of days.

For Those Banking Customers With $100,000 Or Less In Total Bank Deposits, Your Money Is Fully Covered By The FDIC

If you are a young student or a person with relatively low income with little in the way of financial or banking assets, you probably won’t have to worry too much about losing your money in the event of a bank failure. If your total bank deposits are less than $100,000, you can rest assured that the full faith and credit of the United States government has your back. The ones that have to be more vigilant in how they structure their checking and savings account deposits are those with more than $100,000 in total deposits. Those with more than $100,000 in deposits will need to pay greater attention to how they break up and consolidate their money among FDIC insured banks to ensure maximum FDIC protection against loss.

For Those With More Than $100,000, You’ll Need To Pay Attention To How The FDIC Provides Separate Coverage For Different Ownership Categories At Any One Bank

While I personally don’t have more than $100,000 in total bank deposits that require me to even worry about this problem (yet!), it’s something I want to know more about because I know one day I will reach that goal (why dream if you can’t dream big). It’s better to know how to structure your bank deposit portfolio now and plan for that occasion, than not know what to do when you reach that point someday in the not too distant future.

While the FDIC insurance program protects individual bank depositors up to a maximum of $100,000 per bank, there are clever ways and not-so-secret methods to get you around this protection limit. The primary way to accomplish this is through deposit account diversification. By splitting your total deposits into multiple ownership category accounts or splitting your assets among different FDIC insured banks, you can ensure full protection of your money. Remember, bank deposit accounts at different banks are insured separately (although all bank branches are considered part of the same bank). Thus, each bank has its own complete set of FDIC coverage limits.

At any one bank, the FDIC offers each category of ownership account its own individual coverage cap. There are different types of ownership categories, each with its own $100,000 FDIC insurance limit. You can go straight to the official source if you want to know more about the FDIC’s policy on ownership categories, but the more common ownership categories are listed here. Remember, each ownership category (single account, joint accounts, etc) gets its own $100,000 FDIC coverage limit:

• Single Accounts - Most consumer bank accounts fall into this category, which covers checking, savings, and CD’s. Basically, if your bank account is in your name only, its ownership category is probably that of a single account. Single accounts also include sole proprietorship business accounts you may own at the same bank (DBA, “Doing Business As” type businesses). All personal and sole proprietorship business deposit accounts at the same bank are added together as single accounts and insured up to the combined maximum FDIC limit of $100,000.
• Joint Accounts - Joint accounts are simply bank deposit accounts that are owned by two people or more at the same bank. While most joint accounts are held by married couples, joint account owners don’t necessarily need to be married. For example, while I have my own individual bank account at a local Chevy Chase Bank, my mom and I also jointly hold a separate shared deposit account at the same bank. Individuals can have multiple joint accounts at the same bank, each with joint ownership involving different people, but when it comes to calculating the total FDIC limit for the joint account category, all proportional shares that each individual owner owns in all joint bank accounts at any one bank are added together and insured up to $100,000 for each individual. Thus, while a joint deposit account for a married couple may appear to enjoy a higher $200,000 FDIC limit, it’s actually made up of two separately capped $100,000 limits - one for the wife, and one for the husband.
• Trust Accounts - Both revocable and irrevocable trusts get their own FDIC insurance limits of $100,000. By listing others as beneficiaries, one can strategically use trust deposit accounts to get around the usual FDIC individual caps. For example, both a husband and wife can set up 2 separate revocable trusts in each other’s names to get an extra total $200,000 FDIC limit on top of their other single and joint account limits.
• Business Accounts - I’m sure business owners feel the FDIC insurance deposit limit for business accounts are currently much too low, but as it currently stands, bank deposit account funds held by corporations, limited liability companies (LLC’s), and partnerships at any one bank are combined and insured up to a maximum FDIC limit of only $100,000 (much too low in my opinion). Keep in mind, sole proprietorship business accounts are lumped in with single accounts.
• Retirement Accounts - Self directed retirement accounts where the account holder gets to decide what to do with his or her money, are offered much higher insurance limits under the FDIC - at $250,000. This particular ownership category includes the following retirement plans - individual retirement accounts (IRA’s), Roth IRA’s, Simplified Employee Pension Accounts, and Keogh Plan accounts. All retirement account deposits held by an individual at a single bank are added together and insured up to a maximum FDIC limit of $250,000. However, keep in mind, retirement account assets invested in stocks, bonds, and mutual funds are not FDIC insured as you’re actually investing through a broker with a working relationship with your bank. The FDIC coverage only protects retirement bank deposits, not investments.

Those With More Than $100,000 In Bank Assets Should Shift Bank Deposit Money Into Joint Accounts To Maximize FDIC Coverage

Because the FDIC provides $100,000 total protection limits for each ownership category, including $250,000 for self directed retirement accounts at the same bank, consumers may be able to greatly increase their total overall financial protection by splitting their money among different types of ownership accounts at the same bank. For example, if you have an individual savings account with total deposits valued at $275,000, you need to be extra careful about bank failure. In the event your bank fails or is suddenly unable to meet depositor demands, you stand to potentially lose $175,000 because only $100,000 worth of assets in the single account category are covered. The solution is not to open up multiple bank accounts like checking accounts or CD’s as they are all of the same ownership category and doing so won’t increase your overall FDIC limit. The best way to diversity and boost your FDIC limit is to spread your deposit among different ownership categories or among different banks. In the case of the hypothetical individual $275,000 savings account, it would be advisable to take at least $175,000 from that savings account and shift it into a joint account with your spouse, thereby sheltering the $175,000 under the $200,000 total joint account FDIC limit. You might even want to make sure you give each deposit account extra room under the FDIC cap to allow interest to accrue, but still remain fully protected.

To reiterate the point about ownership categories, let’s say you went to Washington Mutual and opened up a brick and mortar checking account, an online high interest savings account, and set up a few CD’s - your total coverage limit will still only be $100,000. However, if you opened a joint account with you and your wife or husband, while opening up your own individual checking account at the same time, you will be able to receive $100,000 coverage limit for the checking account, and another separate $200,000 total marital pool coverage limit for the joint account.

Business Accounts Are Covered By FDIC Insurance, But Depending On Type Of Business Entity, They May Or May Not Boost Your Overall Coverage

Depending on business type, a business bank deposit account may or may not enjoy its own separate $100,000 FDIC limit apart from the individual’s cap for single accounts. Because a sole proprietorship and the individual running it are regarded as one and the same for taxation and legal purposes, the FDIC treats sole proprietorships as single accounts for assessing the extent of FDIC coverage. Thus, opening a sole proprietorship business at the same bank as your consumer checking or savings account will not allow you to gain extra coverage.

Only partnerships, limited liability companies (LLC’s), and corporations are able to qualify as separate ownership categories for additional FDIC insurance coverage. Because the FDIC regards certain business entities as separate ownership categories for FDIC insurance purposes, it is not uncommon for clever but sneaky business types to express interest at creating phantom, dummy businesses for the sole purpose of inflating FDIC limits. However, FDIC regulations expressly forbid this practice and stipulate that business accounts for partnerships, corporations, and other unincorporated associations need to be engaged in an “independent activity” such that the business is not engaged primarily in boosting FDIC insurance coverage.

Further Bank Account Diversification Strategies Using Multiple Banks To Increase FDIC Coverage

Because FDIC insurance coverage is offered for not only different account ownership categories, but also for different banking institutions, the recommendation by some pundits for high networth individuals is to spread one’s assets among a multitude of banks. Because each bank offers its own set of bank failure protection limits by the FDIC, savvy account holders are often advised to sacrifice some of their deposits made at just a handful of high yielding banks for greater diversity by spreading it among a greater number of deposit institutions. Let’s say you have $300,000 in a high yield savings account at HSBC Direct that you want to fully protect under the FDIC. If setting up joint accounts to boost FDIC coverage is not available to you as a viable option, you could instead open up accounts at say, Bank of America and Wachovia, shifting $100,000 into each of those two new savings accounts. Thus, your total $300,000 portfolio would now enjoy separate $100,000 FDIC coverages at three different banks. As I mentioned above, in such an event, you may actually want to consider breaking up the $300,000 into four total banks instead of just three to give yourself room to grow in interest and stay fully protected.

One alternative way to shift your banking assets among different banks without actually having to run around the neighborhood or Internet looking for new banks is to participate in a Certificate of Deposit Account Registry Service (CDARS). Banks that are members of the CDARS network do the leg work for you by breaking up CD deposits into smaller size chunks that are separately held at different participating network banks. However, your funds continue to enjoy a single point of access at your primary bank with one statement and one interest rate. The practice is rapidly growing in popularity and I highly recommend it as a wonderful and hassle free way to diversify your banking holdings for maximum FDIC protection. Here’s a list of banks that participate in the CDARS network. One downside of using a CDARS bank is that they tend to be smaller, regional size community banks. Some people like smaller community banks, the type of place where everybody knows your name. However, I highly prefer mega-corporate size banks as they tend to resonate more stability and are better capitalized in my opinion. There are only a tiny handful of large institutional banks participating in the CDARS network at this time. Furthermore, because of the CDARS network fees that banks pay for each CDARS transaction (there is no fee to the customer), CDARS deposit account interest rates tend to be lower than that offered by more competitive non-CDARS banks.

However, if I had financial assets in the neighborhood of millions of dollars and account diversification was on my mind, it is unlikely I would be spending my time worrying about FDIC insurance limits. I would probably have the bulk of my money either invested in mutual funds, index funds, money market funds, or other broadly diversified investments that have never been known to actually fail. Frankly, I don’t even think broadly diversified investment assets could ever technically fail - in the worst case scenario, they would simply gradually lose their stock value over time. Buying super secure assets like U.S. Treasury Bills and Treasury Bonds would be viable alternatives for high net worth individuals as well. While U.S. Treasury products are not FDIC insured, they are fully backed by the full faith and credit of the United States government. The federal government could simply print more money if financial Armageddon necessitated that course of action.

After months of waiting and checking my mail box regularly like a little kid waiting for his video game to arrive, I was finally relieved to discover a little envelope from the United States Treasury yesterday - my long awaited 2008 Economic Stimulus Payment check had finally arrived! Cha-ching (punctuated with a few obligatory fist pumping motions).

Actually, about a week ago I had already been given written notice that the check was on its way. I received one of those pointless waste of paper junk mail letters from the Internal Revenue Service (IRS) letting me know that I was entitled to an economic stimulus payment check as provided by the Economic Stimulus Act of 2008, and to expect its arrival in a week or so. The letter also provided a simple breakdown of how the federal government calculated my small time stimulus payment.

But what was the point of sending this predecessor letter out to let me know this? Why is the IRS and federal government so oblivious and wasteful when it comes to wasting millions of dollars on paper and delivery costs to send out these pointless letters? Why not just combine the calculation breakdown letter with the actual stimulus rebate check that I received yesterday rather than sending them separately on different weeks? The financial savings for the federal government could easily have been several million dollars. Especially since we are now in an economic recession and the government keeps griping and raising issues about needing to balance the budget, and even some of the presidential candidates like Barack Obama keeps talking about raising taxes against those with higher incomes to pay for more federal government programs, why not practice some fiscal sense now by adopting real cost cutting techniques? The government’s habitual wasteful spending activities truly baffles me sometimes.

How My Economic Stimulus Tax Rebate Was Calculated

While I had hoped to receive my economic stimulus rebate via direct deposit, because I filed my 2007 tax return through TurboTax and actually owed a sizable amount of taxes, I was not able to provide my bank account routing numbers on my tax return for direct deposit purposes. Thus I was one of many who had to wait for my economic stimulus check to be mailed via the postal service.

Taking a look at my rebate, here is how my actual stimulus payment was broken down, in case you’re wondering. Because my adjusted gross income on my reported 2007 federal income tax return was above $75,000, the IRS reduced my stimulus payment by 5% of the amount of my adjusted gross income exceeding $75,000. As such, with my single filing status starting qualification amount of $600 increased by $0 for my lack of qualifying children, but reduced by $230.25 for the adjusted gross income limitation, my final calculated stimulus payment turned out to be only $369.75. It’s not a whole lot, especially since the cost of living in my D.C./Maryland suburban neighborhood is pretty high, but I suppose every little bit helps me pay the bills in the grand scheme of things.

How I Plan To Spend My Economic Stimulus Check, and Its Impact On My Future 2008 Tax Return

I’m obviously elated to receive my tax rebate check finally after all these months, but after looking at the relatively small amount, it sort of leaves me wondering, how is this small amount of money really supposed to stimulate the economy to any significant degree? While the check is certainly free windfall money in the sense that I wasn’t really expecting it or planning for it until recently, the amount isn’t really large enough for it to be good for much.

I considered several financially smart as well as a few fun but reckless ways to spend my tax rebate, now that I have it in my hand. Here are the choices and possible options I came up with:

1. Use the economic stimulus payment to help pay my rent - The downside is that with a pricey monthly rental obligation of $1,425.00, this small economic stimulus payment isn’t likely to make much of a dent in my case.
2. Deposit the small stimulus rebate into my high APY savings account to earn interest and help build up my backup emergency fund - I usually try to keep at least enough liquid cash in my savings account to last 6 months. I advocate more emergency fund savings than most, but I think this offers greater peace of mind. In this recession, you never know what unfortunate events may strike when you least expect it - everything from out of the blue vehicle repair charges to sudden unemployment necessitating the need to file for unemployment insurance benefits.
3. Save the stimulus rebate for retirement and contribute the amount towards my Roth IRA retirement fund. This is a good way to plan for the future. Great for you, but not so good for the economy (at least for the present time).
4. Pay off debt - While this sounds like a logical choice, other than my usual monthly revolving credit cards bills that I always pay off in full, my 0% APR balance transfer credit card arbitrage funds, and my very low interest student loans, I don’t have significant debt that demands my immediate attention to speak of. I think I’ve done a pretty good job of managing debt.
5. Spend the money and actually help directly stimulate the economy by injecting it back into the stream of commerce - Possibilities include using it for discretionary entertainment reasons like spending it on expensive movie tickets or even just using the amount to pay for necessary driving expenses brought about by spiraling high gas prices.

After much thought, I decided to deposit the amount into my high yield savings account like a good grasshopper (or was it the ant) and save for a rainy day. Why change my frugal savings minded personality just because I came upon some windfall money? I’m the type of person who would probably still drive around in a rain storm for a free car wash to save some money as a force of habit even after winning a lottery for millions.

As for the taxation aspects of the economic stimulus payment, due to the terms and nature of the Economic Stimulus Package, recipients of the tax rebate such as myself will not have to report the amount of our stimulus payments as taxable income on our 2008 federal income tax returns. The amount is indeed free money and not something we will have to pay back or pay taxes on. Furthermore, if any recipient also received any other federal benefits or federally financed benefits, those benefits generally will not be affected by any stimulus payment received as well.

Where’s My Economic Stimulus Payment? Ask The Almighty IRS

For those of you who are still waiting for your stimulus tax rebates with bated breath, you should utilize this handy IRS stimulus rebate tool to locate the status of your economic stimulus payment. It should be able to answer your most pressing tax rebate question. To use the online tool and verify your identity, you’ll need to provide your social security number, your filing status, and the total number of your exemptions.

If you still are not able to obtain a satisfactory answer, you may want to visit your local Taxpayer Assistance Center for help or call the IRS via the Rebate Hotline at 1-866-234-2942 for updates.

If you’re like most people out there, there’s inevitably going to come some point in your life when you’ll need to apply for credit and seek out deeper pockets to help you fulfill your personal financial goals and objectives. While the traditional American dream of home ownership seemed to be fading out of reach during the last few years, the housing meltdown is now thankfully forcing out of control real estate prices back down into sync with reality. But with the resultant repercussions and reverberations of the financial credit crisis, mortgage lenders have grown extra vigilant in weeding out unproven and unreliable mortgage debtors. While a mortgage applicant with a FICO score of 700 in the past could have easily obtained a lofty prime interest rate on their loan, lenders are now increasingly demanding higher FICO’s in excess of 760 for the same prime interest package. The subprime credit mess has made one’s credit report and credit score even more important gateway factors to determining who qualifies and who doesn’t for the loan conditions of their choice. It’s not just for expensive, higher denominational credit prospects like mortgage loans either - even routine applications for things like credit cards, checking accounts, auto loans, and even new jobs are undergoing greater credit worthiness scrutiny.

Both Your Credit Report History and Credit Score Help Determine Your Credit Worthiness, But Credit Scores Are More Uniform Measures Of Comparison From Individual To Individual

While credit reports, like your high school transcript does a better overall job in revealing the compete performance history of the individual, oftentimes, it’s the credit score, like the mathematically calculated grade point average (GPA) that is given the greatest initial attention. Like the analogous school GPA’s, credit scores are frequently used by major lenders to serve as cut off points to determine who will enjoy speedy approval and those who will require further scrutiny. As such, a high credit score serves up the best first impression when it comes to getting quickly approved for credit cards, car loans, and mortgages. Your complete credit report transcript conveys the rest of your credit history, but it’s your credit score that provides that first impression to determine whether you instantly qualify or not. If you’ve ever wondered why some people can get online and get instantly approved for a credit card in seconds, that’s because their credit scores are likely so remarkably high, credit card issuers feel they have more than enough information right off the bat to grant application approval. The same can be said for pre-qualification terms for mortgage or auto loans for favorable rates.

For those of you who buy into the financial wisdom of some personal finance pundits who advocate a cash only lifestyle and preach against all forms of debt, I personally think that is an all too safe but foolish perspective to cling to. It’s not credit or debt that is so evil, it’s the lack of financial education and mismanagement that dooms one to failure. Unless you are a millionaire, come from a very wealthy family, or your last name is Gates, Buffett, or Walton (of Walmart fame), you will inevitably need to take on student loans, car loans, or a housing mortgage loan in some form or another sometime during your life span. A cash only lifestyle is appropriate for engaging in small time transactions, but for the pricier car and home buying process, you will inevitably need to call upon your built up credit history and credit score eventually.

So What Is The Purpose Of Having A Good Credit Score And How Is It Calculated?

Your credit score is basically a three digit number that is mathematically generated by credit reporting agencies based on information found on your individual credit report. The credit score is a numeral representation used to assess your past debt payment history and predict your ability to fulfill future debt obligations. Everytime you perform actions or transactions that relate to the extension of credit in the real world, that request for credit is submitted to the three major U.S. credit bureaus (Equifax, Experian, TransUnion) for recordation. By taking that continuously updated information and plugging it into a special mathematical formula, credit bureaus can generate an up to date credit score on demand to accurately predict your present and future ability to pay off incurred liabilities. Positive actions like on-time payment and low credit usage will boost your credit score, while negative events like bankruptcies, foreclosures, and failures to pay on time will hurt your score. Experience and trends have shown that those with higher credit scores are more responsible with credit and are less likely to default on loans. However, because credit transactions are not always equally sent to all big three consumer credit reporting agencies and not all information is processed by all three in the same mistake or error-free way, there are bound to be slight differences and discrepancies among different credit bureau scoring results, even if they all utilized the same credit scoring methodology. Keep in mind, Equifax, Experian, and TransUnion all individually generate their own credit score results on request.

But in general, one’s credit score is a fairly uniform mathematical measure of credit worthiness. Banks, credit card companies, and mortgage creditors are in the business of taking on risk, and thus utilize this invaluable scoring system to gauge prospects. In exchange for taking on risk, these institutions are willing to extend you money on loan, but in return they expect to be compensated for the financial risk they take on in the form of additional interest rate payments. Different degrees of risk and possibilities of default demand different levels of interest. If you’re a risky debtor with a shaky credit history, you will be required to pay higher interest payments to the creditor to offset the risk. If you are a more reliable debtor, chances are your interest obligations will be a lot less. That is why it is important to keep your credit score high - it’s one of the most important things that lenders look at when they evaluate your financial profile. You might be a nice guy or a nice gal, really deserving of credit approval, but if your credit score is lackluster, your chances may be shot.

What Is The FICO Credit Score Made Up Of, and How Are The Scoring Categories Weighted?

When most people speak about credit scores, more likely than not they are referring to the FICO credit score, the popular credit scoring system created by the Fair Isaac Corporation. There are currently several alternative credit scoring systems out there, most notably, the new VantageScore jointly developed by the big three credit reporting agencies, Equifax, Experian, and TransUnion, but the FICO is still the most widely used scoring method. I recommend avoiding the VantageScore for now and staying clear of credit vendors that attempt to hawk it. Because the VantageScore also uses a three digit scoring system but on a different numerical range from 501-990, obtaining it at this time will only serve to confuse you. Because most lenders have not broadly adopted the use of the VantageScore yet, you are better off focusing on the FICO exclusively for now. There really is no particular purpose for consumers or lenders to adopt the VantageScore at this point in time as its development was primarily business motivated rather than designed to benefit the consumer. The credit reporting agencies simply got tired of having to pay royalties to Fair Isaac for utilizing their proprietary scoring formula and wanted to create their own cheaper version. For now, stick with the genuine FICO - it’s the most widely used credit score and currently still the most relevant by far.

The FICO credit score is formulated on a scale from 300 to 850, however most people will have scores between 600 and 800. It’s unlikely to find many people with scores below or above this general scoring range. As a rule of thumb, any FICO score that is above 700 should be deemed good, although in this current market, a FICO of 750 will probably be needed to guarantee you the most favorable loan rates. Here is how the FICO credit score is generated and broken down into its composition categories according to pie chart percentages:

1) Your Credit and Debt Payment History - ( 35% of Your FICO)

This is the absolute most important factor in determining your FICO credit score. To have a high score, you’ll need to develop a history of timely and punctual bill payments. When lenders evaluate you as a prospective credit candidate, they want to see that you have a solid history of not only fulfilling debt obligations, but that you also have a track record of paying on time. Past late payments and unpaid debts sent to collections will significantly damage your FICO score. Negative factors like bankruptcy and defaulted payments will hurt your score as well. How badly a failure to pay or a late payment will affect your credit score is determined by the total number of past due items, how long they were past due, and the length of time since your last late payment. Because the payment history category is weighted to favor more recent transactions over older actions on your credit history, it’s never too late to start paying on time. Better late than never.

2) Amounts and Balances Owed - ( 30% Of Your FICO)

The second most important factor other than timely payment is the total amount of credit money that you owe and the proportional amount of your total available credit utilized. If you are already carrying a substantial amount of active debt in the form of existing home mortgages, home equity lines, car loans, student loans, or credit cards, you are less favorable as a candidate to take on additional debt. Because of your existing debt obligations, you are seen as a greater potential credit risk. However, your total amount of outstanding debt can be hugely tempered and your risk factor greatly minimized by having a lower debt usage ratio.

Under the FICO formula, someone with an outstanding credit card balance of $900, with a total available limit of $1000 (utilization ratio of 90%) is deemed to be riskier than someone who has an outstanding credit card balance of $2000, but with a total credit limit of $10,000 (utilization ratio of 20%). Being saddled with a lot of debt isn’t necessarily bad in terms of your credit score if you are well under your total available credit limit. Obviously the more zero balance revolving credit accounts you have on your credit report the better, but the amount of your credit usage in proportion to your total credit available goes a long way to boosting your score.

Example: As someone who regularly engages in credit card arbitrage, I frequently carrying large 0% APR balances on my 0% balance transfer credit cards. But despite my high credit balances, I maintain a stellar FICO score (FICO of 758), attributable to my low overall credit usage ratio. I might carry credit card balances in excess of $20,000 on multiple cards, but because I have over $80,000 of unused revolving credit available to me, my low proportional usage keeps my FICO high.

3) Length of Your Credit History - ( 15% Of Your FICO)

When it comes to the FICO credit score, the older the credit account, the better. That is why consumers are sometimes encouraged to initiate credit usage at an earlier age, if only for the sole purpose of building up credit. College students are sometimes advised to open at a least one student credit card for the purpose of building up a credit history file. Those who stick with cash only and wait till later in life to start opening credit accounts are ultimately short changed when it comes to their FICO scores. The same rationale is also why it is almost never advisable to cancel old credit cards. Unless you are obsessive and compulsive when it comes to credit card spending, you should keep those older cards around and let the accounts age like fine wine. You don’t necessarily have to use those cards - just put them away in a drawer if you have to. Because the length of your credit history is based on the average ages of your total active credit accounts, it’s in your best interest to keep old accounts open indefinitely. If you absolutely must cancel a credit card, cancel a newer card instead. Closing out an old account will have the unintended backfire effect of hurting your FICO credit score.

4) Types Of Existing Credit Owned - ( 10% Of Your FICO)

The FICO scoring system favors credit users who are diverse with their usage. The system likes to see users mix it up a little and not just focus on one type of installment usage - like credit cards alone. In general, older individuals with longer credit histories usually tend to have a greater mix of credit account types, thus higher scores. While revolving credit accounts like mortgages and car loans help to inject some diversity into your usage, one shouldn’t go out of one’s way to mix it up purposely. Focus more on paying all bills on time and limiting your credit usage instead (they comprise 65% of your FICO credit score). In my opinion, this category has the least relevance and the least impact on your overall credit score.

5) New Credit or Recent Credit Sought - ( 10% Of Your FICO )

This is where hard credit checks and soft credit checks come in. Everytime you affirmatively submit an application for a loan or additional credit, a hard credit pull is made against your credit report. The resulting credit pull will have a short term negative hit against your formulated FICO score (in time the score will recover). In general, new and recent requests for credit are seen as risky factors in the eyes of lenders. However, new requests for additional revolving credit that follows a recent late payment will likely cause a more significant drain against your score, as they are seen as ominous signs of financial desperation.

However, the way the FICO system is set up, frequent requests for credit within a relatively short 30 day period is discounted in terms of aggregate negative effects on your credit score. This is to compensate and alleviate the effects of those who are merely interest rate shopping for mortgages or car loans who are likely to submit numerous applications within a short period of time. This is the reason why balance transfer arbitrage seekers are often advised to submit their numerous credit card applications simultaneously within a short period of time to minimize the overall hit against their credit score. As always though, only hard credit checks negatively affect your FICO. Self credit checks initiated by you to examine your own credit report or credit score will never hurt your rating.

What Is Not Considered In Your Credit Score, And How To Boost Your FICO

While the FICO score is a very important factor to those seeking instant approval for credit or a quicker path to the best loan terms and conditions, it’s not the end all. Lenders also carefully scrutinize your credit report and other financial factors like income, job stability, education, and amount of money you have in your checking and savings accounts to determine your credit worthiness. That’s because many relevant personal risk factors are not appropriately reflected in the credit report or the credit score model compiled by the big three credit reporting bureaus. Such information include age, race, sex, income, savings, marital status, education, and your current type of housing.

The FICO score also struggles with formulating an accurate score representation for new entrants into the credit world. Those with short credit histories like recent immigrants or college students are unlikely to have much of a credit report transcript to work off of. As evidenced by the Fair Isaac Corporation’s efforts at formulating and developing its new FICO Expansion Score to gauge the credit worthiness prospects of those with incomplete or thin files, the existing FICO system as is probably still needs some improvement, and is far from perfect. However, until a better thing comes along, consumers need to find ways to improve and keep their credit ratings high. Unless you don’t have plans to seek new employment, apply for a new credit card, obtain a home mortgage loan, find a new apartment, or apply for insurance in the next few years, it’s in your self interest to improve your FICO credit score and keep it high in case you ever need to use it.

As it is relevant to your ultimate credit score, I’d recommend taking several minutes to download a free credit report at annualcreditreport.com. With this free federal government service, you get to request a single credit report from each of the three major credit bureaus every four months. Instead of requesting all three credit reports at once, you might want to stagger them out to three times a year for continuous monitoring. If you spot an error, notify the bureau (online, by phone or by mail) and the creditor (call and also send a letter) immediately. While your credit score isn’t free, there are ways to get get your free credit score from the big three credit reporting agencies. Remember, if you want consistency, stick with the FICO score exclusively for now.

I consider myself one of many rate chasers out there - savvy savers who hunt for the best annual percentage yield (APY) interest rates at banks and credit unions, and who are keen on quickly moving large sums of money from one account to another in pursuit of that financial ideal. High yield interest rate chasers seek out the highest available interest rate offerings possible, whether available at popular brick and mortar branches or whether available only through obscure online banks. We keep tabs on them all regularly and shift our bank balances around in pursuit of that elusive, but perfect high yield savings account. Rather than be content with letting our savings accounts sit idle, earning stable, yet passive interest growth, rate chasers such as myself prefer to actively manage our bank accounts to maximize interest earnings. Interest rates periodically change, thus so should we. Currently, I use my compiled list of the Best High Yield Savings Accounts to actively keep tabs on bank rate updates and changes.

High Yield Savings Accounts Offer Not Only Liquidity, But Rock Solid Financial Security and Reliable Growth As Well

While I have a diversified investment portfolio made up of high performing stocks, bonds, exchange traded funds, and mutual funds, I still try to put a sizable amount of what I own in cash form, invested in stable interest bearing savings accounts. The type of money I put in a savings account is money I can’t afford to risk or jeopardize, and the type of funds that I may need to call upon to weather difficult financial times or unexpected financial emergencies. While I personally use credit cards for emergency fund purposes at least in the short term, stable savings account funds make up the bulk of my long term emergency money strategy. I try to keep at least 6 months worth of liquid assets on hand at all times - money that can be quickly converted into usable cash to pay current bills and liabilities on a moment’s notice. You never know what type of sudden unemployment, cash flow, car trouble, or health problems might befall you that might necessitate the need to call upon such an emergency influx of readily available funds. I choose to invest my emergency fund money into savings and money market accounts because they not only provide a modest degree of interest growth that usually outpaces or at least keeps up with inflation, the invested funds are liquid and extremely well protected from loss. I plan to work certificate of deposits (CD’s) into my emergency fund planning approach in the future, but wish to save up more in my savings before dabbling with higher yielding, but less liquid assets like CD’s.

Some people call rate chasers - day traders of the banking world, but I think that’s a terrible analogy. Unlike day traders who trade on short term, violent swings in the stock market, we do not take actions that could even remotely be construed as gambling or high risk stakes. Interest rate chasers tend to be risk adverse, and are almost always play-it-safe type investors and emergency fund builders who seek safety and pursue predictable rates of return, rather than high flying, speculative investments.

Besides, bank accounts, whether checking, savings, or money market accounts are one of the most stable, reliable, and dependent sources of asset preservation. While most traditional banking institutions do not provide investment assets that will make one rich as their rates of return are generally lower than that offered by other investment options such as stocks, bonds, options, or foreign currency exchange, they do provide a very stable and predictable rate of return. Insured by the Federal Deposit Insurance Corporation (FDIC), the potential risk of loss of assets stored in a banking account is virtually nil. The FDIC, an independent agency of the United States government utilizes the full faith and credit of the federal government to protect the assets of all insured banks. Most major savings and banking associations are FDIC insured, and as such most traditional accounts offered by the insured bank, including checking, savings, money market accounts, CD’s, and even IRA retirement accounts are protected from loss. Even if the bank fails, goes bankrupt, goes out of business, gets robbed, burns down, or succumbs to some market catastrophe like the mortgage meltdown or credit crisis, the money stored in a FDIC insured high yield savings account remains 100% safe, up to the coverage amount. For savings accounts, the legal coverage limit is $100,000. If you own substantial assets that exceed this basic coverage limit and want to be 100% safe, you may want to consider spreading your assets among difference asset categories or banks.

Register With The Top High Yield Savings Accounts And Manage Your Fund Transfers As Interest Rates Periodically Fluctuate

There are certain basic steps savvy rate chasers and high yield online bank arbitrage seekers (as I like to them sometimes) take to properly manage their pursuit of high interest savings rates:

1) Open High Yield Accounts With Online Banks That Consistently Offer the Highest APY Interest Rates For Savings Accounts

I currently own several savings and money market accounts with the top online banks that have consistently offered the best APY interest rates. Personally, I avoid savings accounts from major brick and mortar retail banks like Wachovia, Wells Fargo, Bank of America, or even Citibank, since most rarely offer attractive interest rates as they don’t need to offer them to attract customers. Most of these big retail banks rely on convenience and physical location presence to attract clientele. On the other hand, online banking sites, blessed with lower operational and maintenance costs, are highly motivated and more willing to offer competitive interest rates for account holders.

Most of my recently opened high yield savings accounts are with generally well known online banking institution favorites like HSBC Direct, Countrywide’s Savings, Washington Mutual, WT Direct, E-trade Savings Bank, and Capital One Direct Savings. Oldies but goodies like ING Direct Savings (get an ING Direct Sign Up Bonus), and Emigrant Direct still remain alive and well as members of my complete savings account tracking roster. While the actual order in the interest rate sliding scale changes periodically, the mentioned banks tend to offer consistently high rates. After opening accounts, it’s simply a matter of tracking APY changes and shifting funds around accordingly.

It’s important as a rate chaser to have target bank accounts ready for quick transfers as interest rates change. Back in the old caveman days before the advent of the Internet, opening new savings accounts was cumbersome and limited to local brick and mortar branches, and phone banking was a pain. With the emergence of the Internet and the development of fully functional online banking websites, online funds can now be shifted around instantly with a few strategic key strokes. To manage your online accounts and prep them for transfers, all you have to do is register for online account access and set up linked ACH electronic access. To set up ACH transfer permissions, you’ll be required to submit information about the bank account that you want to link up - including the bank account number and the banking institution’s ABA routing number (you can ask your bank for this information). Frequently the online system will initiate two small denominational test deposits into your linked bank account, the amounts which you’ll have to verify to confirm that you are the actual owner.

2) Be Watchful Of New Bank Account Credit Report Check Penalties, and Electronic Bank Transfer Limits

If you’re like me, you try to maximize your money whenever possible. In my case, so long as the resulting effects don’t put myself in a potentially worse off financial position and the necessary actions to get me there aren’t too prohibitive, I try to go for the gold whenever possible. For those looking to open multiple bank accounts, one thing to keep in mind is the health of your credit score. When a new savings or money market account is opened, some banks initiate a hard credit check. The resulting hard credit pull, as it is sometimes called, may result in a small credit score hit in the nature of a request by one seeking credit. Not all banks initiate a hard credit pull that will ding your precious FICO score for new savings account applications, but some do. Examples of online bank account applications that result in harmless soft credit pulls include - Capital One Direct Savings, Countrywide, Emigrant Direct, E-Trade Savings, FNBO, HSBC Savings, ING Direct savings, and Washington Mutual.

Another thing rate chasers have to watch out for as well is the federal savings account limit of 6 ACH transfers a month. However, unless you are shifting your savings around every few days, the 6 ACH transfer limit per account should not be too much of a limitation or restrictive hassle. Be mindful that the transfer limitation also applies to money market deposit accounts as well. For most comparative factors, savings and money market accounts have little differences except money markets usually provide slightly higher interest rates and sometimes offer check writing privileges. However, money markets usually have higher tiered minimum balance requirements, although that is not always the case.

3) Manage Your Portfolio Of Multiple Savings Accounts By Using An Account Aggregation Service

To keep an eagle eye on your bank balances and army of savings accounts, I recommend using an account aggregation service like Yodlee, or Mint. Yodlee in particular offers its banking account consolidation service through other financial providers as well, such as Bank of America. In my case, I utilize Yodlee through Fidelity’s Full View access, which allows me to link up all of my high yield savings accounts and money markets to Fidelity Investments, storing my account passwords securely so that I can easily view my regularly updated account balances from one location. To make actual transfers however, you’ll have to log into the desired bank account directly.

4) Periodically and Regularly Shift Your Bank Balances Around As Major Interest Rate Changes Are Issued By the Federal Reserve

One thing to note is that I’m not a rabid or fanatic rate chaser. While some hardcore rate chasers shift their money around as soon as interest rate offerings change the slightest, I prefer to my make shift once or twice a month at the very most - call me a mild rate chaser if you wish. Usually I only shift my balances around in pursuit of higher APY rates every two or three months on average. Thus I don’t go hog wild over every slightest budge in APY, although there are lots of super online rate chasers who do though. Just look at those crazies who post on Fatwallet forums - they go nuts over a single .01% change.

Frequently, I fashion my fund transfers from one savings account to another around major interest rate moves by the Federal Reserve when I know major changes are coming my way. Upcoming federal reserve meeting dates on the calendar greatly interest me because decisions by the Federal Reserve frequently have a correlative effect across the board on the interest rate offerings by major banks. Rate cuts by the Fed usually signal subsequent APY interest rate drops by banks in a matter of days. Similarly, raises in the Fed Funds rate usually signal potential banking interest rate increases. Thus I usually try to make my electronic fund transfers as major rate changes are made across the board in response to Fed interest rate moves. Usually there is a lag time of about 1-2 weeks before banks at large fully and collectively respond to Fed announcements. Keep that in mind as well, lest you shift or chase that higher APY interest offering prematurely.