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There are a lot of different kinds of credit out there. One of the most common forms is the auto loan. Though we are all itching to pay off our long-term debts and own something free and clear, there are a few precautions to know about before racing to get that statement to read zero.

To determine if paying off your car loan will help your credit score, it is important to understand several factors that go into your credit score.

Multiple facets of FICO

First, it’s important to understand the components that make up your FICO credit score. There are five key elements that are used to makeup that all-important number:

35% of your score is weighted toward your payment history
30% is weighted toward the amounts owed on your credit cards
15% is devoted to length of credit history
10% is generated by new credit
10% comes from types of credit used.

The relative importance of each category depends on the consumer themselves.

If you have an auto loan that you’ve been diligent about paying, you’ve benefitted from that 35% devoted to payment history. By paying it down, you are also contributing to that 30% element of amount owed, since theoretically you are decreasing your credit utilization rate. However, if you’ve been increasing the balance on other forms of credit, that may cancel out some of that good behavior.

If you have a 3 to 5 year car loan, you also have length of credit history going for you. The new credit category doesn’t really apply in this scenario.

Types of Credit

But what’s interesting is the 10% weighted to types of credit used. On a positive note, a car loan alters the types of credit you have, assuming you have things like credit cards or even a mortgage. However, if you pay it off, you may eliminate this type of installment loan as a type of credit used (this is a very different type of credit than a credit card).

Your ability to pay installment accounts, in addition to others, demonstrates that you are responsible and diligent enough to plan your finances around all these different types of credit.

The Biggest Factor

Weighing against all this, however, is a large factor that requires you to look more holistically at your credit lifestyle. A general rule of thumb is that if you can pay off a debt of any kind, in full, do so (with the exception of a mortgage).

Article courtesy of Nerd Wallet Online

While the latest news proclaims that the economy is rebounding, the truth is that how Americans spend money is dismal. Spending is up, which is good for the economy — but can spell bad news for consumers on the individual level.

“Consumers who find themselves mired in debt are serving the larger economy at great personal sacrifice,” says Stuart Vyse, professor of psychology at Connecticut College and author of Going Broke: Why Americans Can’t Hold on to Their Money. ”The economy runs on consumption, and as a result, personal savings is never mentioned because it is considered counterproductive and a drag on the economy.”

According to the Employee Benefit Research Institute’s (EBRI) annual Retirement Confidence Survey, Americans are living longer — and they do not have anywhere near enough saved for retirement. In fact, the report found that the majority of Americans (57 percent) have less than $25,000 in total household savings or investments.

Where and How People Spend Money — Instead of Saving

Certainly the recent tough times have reduced disposable income and the ability to save, are there other aspects influencing how Americans spend money? Why can’t Americans seem to keep their money in their bank accounts?

1. Lack of education about budgeting, investing and saving for retirement.

“One of the main reasons that people don’t save money in the short or long-term is that they’re simply unfamiliar with concepts such as setting a monthly or annual personal budget and saving for retirement,” notes Andrew Schrage, co-owner of MoneyCrashers Personal Finance. Budgeting is important – and something everyone should be educated on and practice on a monthly basis.

First Financial provides a number of FREE educational seminars throughout the year on topics which include budgeting, retirement, and credit management. Visit our event calendar on our website to keep up-to-date on all of our seminars and to sign up online! If you would like to set up a no-cost consultation with the Investment & Retirement Center located at First Financial Federal Credit Union to discuss your brokerage, investments, and/or savings goals, contact us at 732.312.1500 or stop in to make an appointment at any branch!*

2. No emergency savings.

Too many people have experienced being out of work for long and short periods of time, have had a car breakdown, or a health crisis that an emergency fund could help cover.

“Despite how high a salary may be, one is likely to be broke due to the lack of preparation for emergencies. Emergency savings is the key to financial success and without it, you’re just making it more difficult to be financially stable,” says Xavier Epps, owner of XNE Financial Advising, LLC. According to the Bureau of Economic Analysis, Americans only saved 2.5% of their income on average for the month of April, Epps points out. “Consumers should aim to save much more in order to cover unexpected expenses and possibly job loss.”

3. High inflation.

Some personal finance experts point to inflation as a big factor in suppressing people’s ability to consistently add to their bank account. “Our government deficit spending has skyrocketed, and the main cost of that spending is weaker buying power for the dollar,” comments Brian Luftman, founder and president  of American Farm Investors.

“Our government says inflation is at 3%, but Americans are paying significantly more for food, heating and cooling bills, gasoline and healthcare,” says Luftman. “All of those costs have virtually doubled since 2008, and very few Americans are making any more money than they were in 2008. I think real inflation is 10 to 15% a year, and I don’t see that changing.”

4. Overspending made easy.

Rachel Parrent, Vantage Credit Union’s Community Engagement Manager, says, “With social media like Facebook and Twitter and we can see what everyone in our own social circle is doing, what they are purchasing, and where they are eating, traveling and shopping. Many times it makes us believe that if they can afford it, so can we. People fall into bad habits like eating out regularly or thinking that spending a little here, a little there won’t amount to a lot by the end of the month. Credit cards and electronic purchasing make it much easier to spend than having cash in your pocket.”

These social pressures and the ease of spending combine to create an environment that “places enormous burdens on self-control” and how people spend money, says Vyse. “All of the barriers to consumption have been removed: you can shop 24-hours a day, with or without cash on hand. The urge to purchase something can be satisfied in minutes without ever leaving home.”

5. Taking on big, long-term loans.

“Perhaps the worst mistake people make is to assume large, long-term debt burdens that are difficult to escape without the certainty of enough sustained income to support them,” Vyse says. “In today’s world, the most common examples are student loans and mortgage loans.” Should circumstances change and the borrower is unable to make monthly payments towards these debts, there is no quick-fix solution. “If you have calculated incorrectly or if your income drops, these kinds of debts can have a dramatic effect on your life and well-being.”

Considering that the average American college student graduating in 2011 had accrued $27,000 in student loan debt, rising college costs definitely play a role in the ability to save. “By having to make significant monthly payments for student loans shortly after graduating, it can be virtually impossible to start an emergency fund or begin saving for retirement,” says Schrage. “It can even make staying on top of monthly bills a challenge, which often leads to credit card debt.”

Brian Frederick, JD, CFP of  Stillwater Financial Partners adds that student debt doesn’t just affect younger generations, but parents as well. “I’m seeing more and more people sacrifice  their own retirement savings needs and run up large credit card balances to  fund their children’s college. This can result in credit card debt of  $20,000 and up at high rates — without a lot of excess cash flow  to pay down the debt, they just keep paying the interest and not a whole  lot toward principal.”

Here are Some Tips to Jump-Start Your Bank Account:

The first step to gaining financial independence is putting away $1,000 for emergencies. Other financial experts recommend an even bigger emergency fund of three to six months of expenses, to act as a buffer.
Financial experts recommend going all out to eliminate everything but the basics to build up that emergency fund. That means cutting the cable off, cooking at home, trading the high-lease cars for low-cost transportation, hosting yard sales or finding another job to supplement your income. It’s drastic, but a necessary way to get through some tough times.
“Look for ways to cut or eliminate your monthly expenses and bills,” says Schrage. “Limit personal purchases only to those that you actually need, and clip coupons to save on groceries. All of these ideas should make for the ability to save at least a modest amount each month.”
In addition to limiting spending, Vyse advises cultivating a habit of saving. “The key is to make saving easy.” He recommends having a certain percentage of deposits automatically diverted to a savings account. “This way, money is saved no matter what else happens, and it does not require a deliberate action on your part.”

Click here to view the article source, from GoBankingRates.com.

*Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC , a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free 800-369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America.