Building a Strong Credit Score

One of the most popular questions I’ve received since starting this site has to do with building and maintaining a strong credit score. For all the jingles and commercials floating around the airspace, many young people haven’t learned the basics of credit scores—how they’re calculated, how to build strong ones, and why they matter. Next week’s article will discuss why credit scores matter; this week's article tackles the prior two questions.

Did you know that there is not one universal number referred to as your credit score? In fact, there are three different major credit bureaus in the United States, whose task is to assemble information relevant to your credit rating. That information can be pieced together in different ways, potentially resulting in vastly different credit scores depending on a specific score’s algorithm. Some lenders even have their own proprietary rating formulas, which they use to assess potential borrowers. With all of this confusion about credit scores, how can young people begin to make sense of their own credit level? Fortunately, there's a way.

Meal Credits, Sports Tickets, and the Sunk Cost Fallacy

Imagine the scene: It is 1:30 a.m., and the university dining options close in half an hour. You still have a meal credit remaining for the day, and it will expire at 2 a.m. if left unused. You aren’t that hungry, and it’s drizzling a bit out, but you have already spent the money on the meal credit. There are no refunds. Do you go out to spend your credit?

Or consider this scenario that applies to non-college students (as described in an article by Hal Arkes and Catherine Blumer, then of Ohio University): You have paid for a non-refundable ticket to a football game. Just before you leave your house, however, a blizzard begins. The roads are sure to be icy and dangerous, and you know that the commute to and from the game will be far more painful than any pleasure from the game itself. Still, you don’t want to waste your money. Would you drive to the game?

Better Ways to Trade Stocks for Teens and Young Adults

Stock-picking has long been glorified by the media. Even after the financial crisis and Occupy Wall Street, analysts such as Jim Cramer still have television shows where they go on the air and dispense ‘expert advice’ for an hour at a time. Stock-traders are paid very high salaries, and people are understandably captivated by them.

Of course, most people cannot successfully emulate these traders--nor should they attempt to. In a recent article, I explained why most investors should just put their money in low-cost index funds and let it sit for a while. I stand by that advice. Still, I know that stock-picking can be tempting, and some readers will surely try it—I, too, held some stock for a bit of time this year. Because some readers will try stock-trading, it is important to understand how to trade wisely without throwing away your hard-earned money.

If you are going to trade stocks, there are a few rules that you should follow to get the most out of your investments:

Mutual Fund Madness: A Simple (and Successful) Investment Strategy

It is widely accepted that individual investors should diversify their assets so that they aren’t too prone to a downturn in one sector. For those investors, it’s hard to beat the diversification of mutual funds: Instead of individually buying up and monitoring stock in a bunch of companies to ensure that their portfolio is balanced, investors get to pool their money with others and buy into a fund that does those processes for them. Sounds simple enough, right?

Well, not quite. In trying to decide the “Best Mutual Funds for 2010,” US News and World Report assigned scores to over 4,500 different mutual funds. My Charles Schwab account (which I love, by the way—their service made it incredibly simple to start investing) lists over 9,000 matches for a broad search of mutual funds. There are a lot of options to sort through.

With all of those choices, how could a young adult, busy with school or a job, possibly comb through them all and make the best decision?

NEWS: Law-Makers Consider New Standards for Financial Advisers

The Wall Street Journal's SmartMoney site recently featured an article (posted below) about proper standards for financial advisers. At issue is whether advisers should be free to sell their clients any "suitable" investment option (and perhaps claim a larger commission at their expense), or should be fiduciaries for their clients--agents legally required to act in their clients' financial interests.

Although most young people are not yet hiring financial advisers, there are a few questions to keep in mind if you plan on hiring one in the coming years, or even in the long-term, as changes proposed now could stick around until our generation hits retirement planning: