Your Pocketbook Financial Companion

Managing Your Credit, Debt, and Money

By Jon Ricardo Orozco

(Updated 8/17 12AM)

For my two sisters.

For Charlie.

For those who have helped define my moral fiber and made a significant impact on my life.

For those of you who are no longer in my life. You are always in my thoughts and live forever in my heart. =]

And for my nephew Alex. The Gen Z that will succeed me.

Introduction

I have a secret. I am a millennial like you.

My original plan was a book for my brothers and sisters. We are all around the same age, born circa 1980 to 1996. I started this back in 2008 and shelved it. I just dusted it off and intend to finish it in 2023, fifteen years later. Better late than never.

I have always wanted to pass knowledge to strangers and prevent the pain I’ve witnessed over twelve years in banking. I’ve seen families gutted by poor budgeting and planning. It saddens me to see people in their 30s, 40s, even 50s working paycheck to paycheck and still eating Top Ramen. It is not the size of the paycheck. It is the lack of financial prudence with the paychecks they have.

My goal: read this booklet, use it as a guide, make smart choices, prevent suffering. I do not want to see my brothers and sisters hurting. Neither do you.

So why write this now? It is long overdue. Our American school system teaches math, history, English, science, and other abstract subjects. Not a shred of financial prudence. This booklet fills that gap without the weight of a textbook.

Look at your bookcase. See where all your books collect dust? That is not where this pocketbook should go. Look at your backpack or purse. Open a pocket. Slide it in. When something pops up on the road, grab it and consult it.

I’ll close this section with a thank you. Thank you for picking up my booklet. This is my first. Many more editions to come.

I’ll borrow a line from my college professor. Professor Lear wrote in his book Workers, Neighbors, and Citizens: The Revolution in Mexico City, “All shortcomings of this book are my own.” I humbly accept all mistakes in this booklet as mine and mine alone.

What Are the Bare Essentials of Finance?

The bare essentials are what you need to navigate the turbulent 21st century:

Basics in Personal Finances
Basics in Credit Management
Basics in Loans and Interest Rates
Basics in Insurance
1st Car Purchase

Establishing a Foundation: Checking and Savings

Choosing Between a Bank and Credit Union

Banks are for-profit. They are funded by shareholders, who own pieces of the bank. Executives report to a board of directors elected by shareholders. The purpose is profit and dividends to shareholders. Nobody else. Banks are huge and nationwide with deep marketing budgets.

Credit unions offer the same products and services. Here is where they differ. Credit unions are not for profit. No shareholders. They have members who invest in the credit union. The owners are the members. Members voice opinions to the Board of Directors on what products to offer and what rates to set on loans and deposits (within financial prudence). The purpose is making members’ lives easier and better. Less excessive fees. Fewer surprises.

Checking Account

A bank or credit union account that lets you deposit checks, cash, and other negotiable instruments. You can run ACH payments (think CashApp), write physical checks, swipe a debit card at a store, pay bills online (Online Bill Pay), and more.

Checking accounts normally come with a debit card. Think of it as a portable check. Use it anywhere Visa or MasterCard is accepted.

What is overdraft protection?

Overdraft protection (ODP) is when the bank pays a charge that would otherwise bounce. There is usually a max (around $500) and a fee per item. ODP is expensive because every covered item triggers an overdraft charge.

What’s an overdraft charge?

A very expensive mistake if you forget to balance your checkbook. Current overdraft charges run $20 to $40 per item. Example: your bank charges $25, you have $1.75 in checking, nothing in savings, and you buy a $2.50 Happy Meal. That meal just cost $27.50. Not so happy now.

Avoiding overdraft charges

Balance your checking account. Always know your funds.

If you are like me, a line of credit helps. It attaches to your checking and covers shortfalls before an overdraft fires. Say your checking pulls $50 from your line of credit to cover three items over two weeks at 10% APR. You end up paying roughly 20 cents. Beats $75 in fees from overdraft protection.

What’s the difference between a debit card and a credit card?

Debit card transactions hit your checking account immediately. If there are no funds, it pulls from savings and charges a fee. No savings either? Overdraft.

Credit cards are different. They post to a separate line of credit. You can pay it off monthly or pay a minimum (and pay interest).

What is FDIC / NCUA?

FDIC (Federal Deposit Insurance Corporation) is insurance for banks, backed by the U.S. Government. If the bank fails, FDIC pays you back the money on deposit (currently up to $250,000). NCUA (National Credit Union Association) is the same thing for credit unions.

Savings Account

A savings account is self-defined. It helps you save money. Unlike checking, it pays interest monthly.

Rules for savings

The U.S. Government (Regulation D) sets rules on what you can and cannot do with a savings account. Maximum six transfers from savings to checking by phone, online, or ATM per month. After six, you get hit with a nominal fee (around $5) each time, or the institution blocks the transaction. The good news: unlimited transfers in person between checking and savings.

The point is to push people to plan and budget, so they actually use savings as savings. Savings accounts also cannot carry a MasterCard or Visa debit card. They can have an ATM card.

How to Save: I One

Some call it “Pay Yourself 1st.” I call it I One. Every paycheck, you agree to put at least 10% into savings first. You are the first to get paid every paycheck.

It does not matter what you make. Pay yourself first before any bills. Leave savings alone unless it is an emergency. When you put yourself first to get paid, you always win. I one. I won.

Example: you make $250 every two weeks and agree to 10%. After six months you’ve saved $325 plus interest by putting away $25 per paycheck.

What are normal fees?

In the 21st century almost all bank fees are ridiculous. Fees to avoid at all costs (literally):

Overdraft fees
Debit transaction fees
Monthly maintenance fees
Check writing fees
Teller access fees
Minimum balance fees

Checklist

Savings
Checking
Debit Card
Line of Credit
Online Banking with Bill Pay and Paperless Statements

Basics in Credit

What is Credit?

Credit is a revolving or installment loan you make monthly payments on (if you carry a balance).

Revolving credit has a limit. You borrow against it, pay it off, and use it again. Typically a credit card.

An installment loan has a fixed payment for a set number of months. After the loan is paid off, you cannot use it again. Typically a car loan.

What Builds Credit?

Credit builds when a revolving or installment loan reports your account in good standing monthly. Examples:

Credit Card
Gas or department store charge card
Vehicle Loan
Personal Loan
Student Loan
Home Mortgage
Line of Credit
Secured Loan
Consumer Finance Loans
Other revolving credit

What Does NOT Build Credit?

Most people get this wrong. They assume these build credit. They do not.

Lease or rent
Saving or checking
Cell phone
Utility bills
Cable and internet
Payday loans

What is “Good Standing?”

The financial institution reports your loan status to the credit bureaus. They report current balance, months paid, whether you were on time or late, and special notes (like a deferred student loan).

What is “Late” on Credit Accounts?

Late is 30 days past due. If your loan is due June 10, you cannot be reported late until July 10. You may get late charges before 30 days. But the bureau report waits until 30.

Where is your credit reported to?

Three major credit bureaus in the United States. Equifax, Experian, and TransUnion. They receive information independently. They do not share with each other.

Each gathers data and produces a credit report and a credit score. The score measures lending risk. Higher score, lower risk. Not all institutions report to every bureau. Some only report to one.

Where do I get a Credit Report?

Under the Fair Credit Reporting Act, you are entitled to a free credit report from each of the three bureaus every 12 months. Pull yours at www.annualcreditreport.com.

Your report is free. Your score is not. Average cost: $10.00.

What is a Credit Score?

This applies specifically to FICO (Fair Isaac Corporation) scores. FICO is the most known and oldest credit score in the U.S.

Consumers are assigned a score between 350 and 850. The score measures risk: the likelihood you miss payments or stop paying. Higher score, lower risk.

The score breaks down as follows:

35% Payment History (~300 points)
30% Revolving Debt to Limit % (255 points)
15% Length of Credit History (~125 points)
10% Types of Credit (85 points)
10% New Credit (85 points)

100% total. 850 points out of 850.

Payment History. The biggest piece. Pay your bills on time. A missed payment can drag your score for up to seven years.
Revolving Debt to Limit. All your limits divided by your usage. If you have $10,000 in total limits and $2,500 in balances, your utilization is 25%. I suspect every 10% of usage costs you about 25.5 points.
Length of Credit History. Your oldest line to your newest. If your oldest is 10 years old and your second oldest is 7 years, closing the oldest costs you 3 years of history. Rule of thumb: never close your oldest limit. Keep it active by using it.
Types of Credit. A mix of accounts shows you can manage several at once. A couple of credit cards, an auto loan, a student loan, a line of credit. Without missing payments, of course.
New Credit. Hit by how recently you opened accounts and how many hard inquiries you have over several months. Multiple inquiries signal you are desperate or maxed out elsewhere.

What is a Good Credit Score?

A score that gets you a home at a favorable rate starts around 680. Every lender writes their own rules. Most consider A+ credit at 740 or higher, which gets you the best interest rate.

General guideline:

350 to 500: Extremely High Risk of default (Worst)
501 to 620: High Risk of Default (Bad)
625 to 679: Medium Risk of Default (Okay)
680 to 739: Low Risk of Default (Good)
740 and up: Very Low Risk of Default (Best)

How do I keep my credit cards “Active?”

No universal rule. Generally, use a card every six to twelve months and it stays active. When cards go inactive, they stop helping your credit and show as closed on your report. Buy a tank of gas or groceries every six to twelve months. Done.

What is the difference between a soft inquiry and a hard inquiry?

Two types of inquiries appear on your credit report. Hard and soft.

A soft inquiry is promotional (credit companies pulling to offer you 0% for six months). Only you see it when you pull your report. No impact on your score.

A hard inquiry typically costs about five points. Everyone who pulls your credit sees it.

NOTE: When applying for auto or mortgage loans, only one hard inquiry hits your score within a two-week window. This is rate shopping. You can compare multiple lenders without tanking your score.

What is the difference between secured and unsecured loans?

Secured lending attaches a loan to an item of value. Typically an auto loan or mortgage. If you stop paying, the loan is charged off, the collateral is seized and sold to pay off the loan.

Unsecured lending is a promise to repay. Typically a credit card.

What is a “Charge-off?”

A charge-off is a loss the institution reports when an individual stops paying for several months (typically 90 to 120 days). The charge-off goes on your report with the owing balance. Other lenders will not extend credit unless it is paid off. Or they will charge a brutal interest rate (over 20%).

How does a Secured Credit Card or Line of Credit work?

Sometimes an institution requires you to deposit funds to obtain credit. Usually for people with credit problems. Here is how it works.

Say you have $500 in savings. The institution puts a hold on the $500 and issues a line of credit equal to that amount. The funds are released when you pay off and close the line.

If you stop making payments and the line is maxed out, the institution takes the $500 from savings, pays off the line, and closes it. Your credit rating stays intact because the funds were secured. You cannot be late.

What is a Credit Card?

A credit card is a loan in card form. You charge it up and (hopefully) pay it off when the statement arrives. If you do not, you pay interest (APR).

What to look for when shopping for a card:

No annual fee (no reason to pay one)
Interest rate: 5% to 20% (lower is better, never exceed 20%)
Cash advance fee: under 4% with a maximum if possible
Cash advance interest rate: usually higher than your regular APR

What is an APR (Annual Percentage Rate)?

Every credit card has an APR. It is the interest charged after your grace period ends. Example: your rate is 18%. You borrow $1,000 for a full year (unrealistic but stay with me). Your cost for one year: $18. Monthly interest: $1.50.

Interest stacks. Pay it off in full every month.

What is a Cash Advance?

When you enter your pin or ask the bank to give you cash off your credit card, you are using cash advance. Cash advances are expensive. Do not use one unless it is an absolute emergency.

Scenario: you advance $2,000 off your credit card during an emergency. Cash advance fee 5%, APR 29.99%.

30 days later balance: $2,152.

Understanding Car Values

The sticker price on a car is almost never the true market value. Find objective, reliable data and use it. When emotions and internal value drive the price, the number balloons. People still pay it. You will not.

I recommend pulling from both sites below. Use the average as your starting offer.

Kelley Blue Book (KBB) is the best known: www.kbb.com.

NADA (National Automobile Dealers Association) is another solid source. They call themselves “the largest publisher of value guides in the world… industry leader since 1933.” jdpower.com/cars (NADA Guides moved there in 2021).

Other data to gather:

How many of this car are in your area
Competing dealerships with the same car
Gas prices (higher prices, lower sales of bigger cars)

Now you have a real picture of the car’s value.

My experience

I wanted an SUV. Dealer offered it at $21,999. KBB and NADA averaged $19,000.

I wanted the car. I refused to overpay. I told them, “I see you are looking for $21,999. KBB and NADA both value this car at $19,000. To me, $19,000 is sticker. KBB and NADA also tell me the dealership probably paid $13,500 trade-in credit for this car. I do not believe in paying outrageous commissions. A fair offer is $14,500. That gives you about $1,000 profit.”

Turned out they had given $15,000 trade-in credit. They said $16,500 was fair. I disagreed. Gas prices were at $3.75 a gallon. After some tactful back and forth, ending price was $15,999. Sold.

This shows how much dealers mark up cars hoping for a big payday. Most of the time they win. My $6,000 cut off sticker was no accident. Careful research and planning got me there.

Guaranteed Asset Protection (GAP)

GAP protects you from a significant financial loss. It pays the gap between what your insurance pays and what you owe on your auto loan. When buying a car, especially a new one, GAP is worth considering. Here is why.

Say you buy a new car worth $20,000 MSRP. Your total loan is $22,000 (with taxes, registration, fees). 12 months in, you crash. The insurer totals it. They value the car at $17,500 and offer to pay that. You still owe $20,000.

Who pays the $2,500 difference? You do. Yikes.

If you bought GAP, you are covered. GAP pays the difference. Saves you $2,500.

How much should you pay for GAP?

Dealers usually charge $500 to $1,200. They mark it up to pocket the spread. Do not pay more than $500. I have it on good authority (I work there) that some credit unions offer GAP near cost, around $300.

What doesn’t GAP cover?

GAP does not cover past-due payments, late charges, insurance payments charged to the loan, refundable service contracts, or negative equity from trade-ins.

Negative equity is when you trade in your car and the dealer offers you less than what you owe. You roll the difference into the new loan. That difference is negative equity.

Example: I trade in my 2005 Xterra for $12,000 but I still owe $13,500. The $1,500 gets added to the new loan. GAP will not cover that $1,500.

Car Insurance

You may not impress your family with insurance trivia. But you will need this when buying a car or changing your policy.

Liability to Others (required by most states): Covers the motorist you hit if you are at fault. Two categories. Bodily injury and property damage you caused.
Collision (optional): Damage to your car in an accident.
Comprehensive (optional): Damage from anything else. Falling tree, fire, vandalism.
Personal Injury Protection (optional): Dental, medical, lost wages, and potentially funeral costs.
Underinsured Motorist (optional): If you are hit by an underinsured or uninsured at-fault driver, it pays the gap their insurance leaves, or your full costs if they are uninsured.

Service Warranty Contracts

Service contracts run $1,000 to $2,500 and up. Are they worth it? Almost always no. They add real cost to your new car.

History: in the 1970s and 80s, warranties were offered to protect you when a new car broke down. Today almost all new cars come with manufacturer warranties that cover most defects.

Bumper-to-Bumper Warranty

If your car is new, most manufacturers cover it defect-free for the first three years or 36,000 miles, whichever comes first. They cover front bumper to back bumper, assuming you were not negligent. Save your oil change receipts.

Powertrain Warranty

Powertrain warranty covers the transmission (including clutch) and engine as a unit.

Top 10 Sites a Millennial Must Know

Google. Essential to finding anything online. Gmail, Documents, Picaso3, Chrome, and finance tools will help you along the way.

How to focus your search:
- Use ” ” for an exact match (example: “Jim Bean”)
- Use ’ : ’ for specific data within a website (example: Music:Msnbc.com)
- Use ’ - ’ to exclude (example: Pizza -hut)
- Use ’ + ’ to require a word (example: Safeway +)
- Use ’ * ’ as a placeholder (example: names * of the year)
Kayak.com. Flights, car rentals, hotels nationwide. Objective and customizable.
Wikipedia.com. Quick reference on almost anything.
jobhuntersbible.com. Most comprehensive resume building, interview prep, and salary negotiation guide I’ve found.
www.dinkytown.net/java/PayrollHourly.html. Great paycheck estimator calculator.
Hulu.com. Sometimes you need to watch a show.
Craigslist.org. Jobs, roommates, properties, items.
MSNBC.com. My favorite news site. Any preferred news source works.
WebMd.com. Most comprehensive health information online.
INGDirect.com. The future of banking for millennials and everyone else.

Trade School / College Education

Let me show you how to get trade school or your associate’s degree almost for free.

FAQs about College and Financial Aid

What if my parents aren’t contributing to my college education and don’t support me? Do I still have to include their finances in my FAFSA?

Unfortunately the U.S. government requires you to affirm one of these before being considered independent from your parents:

Were you born before January 1, 1986? (for the 09-10 academic year)
Are you working on a master’s or doctorate program?
As of the date you file the FAFSA, are you married?
Do you have children who receive more than half of their support from you?
Are you an orphan?
Are you a ward or dependent of the court?
Are you a veteran of the U.S. Armed Forces or currently on active duty?
Do you have dependents (other than your children or spouse) who live with you and receive more than half of their support from you?

Closing

I plan to keep this booklet updated and reprinted like those college text books with X edition. The only difference (besides the $150+ sticker shock): I want you to update it with me. This pocket guide is mine just as it is yours.

What do you want to see in future updates?

Sound off on my website: JonOrozco.com.