The markets fell again last week, although they remain positive for the last month. The week had started strong – what happened? On Friday, Fed Chairman Jerome Powell spoke at the Fed’s annual Jackson Hole meeting. Many economists and financial professionals expected him to take a dovish, or accommodative, stance on the economy and interest rates. This means they thought rates would grow slowly, or not at all, or even begin to come down later this year. Instead, Chairman Powell took a hawkish, or tightening, stance. The labor markets remain strong, and the Fed is determined to bring inflation back down to its 2% goal.
Tech company stocks are especially sensitive to interest rate increases, and their declines led the market to drop. At the same time, inflation dropped from 4.8% in June to 4.6% in July, using the Fed’s preferred metric, the core personal consumption index.[1] Powell further indicated the Fed will wait to see more economic data before deciding how much to raise rates in September.
As interest rates rise, your credit score becomes even more important. But what happens inside that black box to calculate your score?
There are two main credit score providers, FICO and VantageScore. FICO is the preferred score for most lenders, while those free credit scores you get with your credit card or bank account are usually through VantageScore. While not exactly the same, those two scores should be similar. Both range between 300 and 850, with anything over 670 classified as good, and 800 and above as excellent.
There are four main factors that determine your score: payment history, credit utilization percentage, length of credit history, and recent inquiries. Your payment history drives about 40% of your score[2]. Payments that are 30 days late are reported to the credit bureaus and stay on your record for seven years. The later the payment, the worse the hit.
Credit utilization is the amount of credit you use and determines about 30% of your score.[3] To calculate it, divide your balance by your credit limit. Less than 30% is good and less than 10% is ideal.
The length of credit history is also important, as are credit checks, indicating that you are looking to take on more debt. Working to pay down your credit card debt, and paying on time, are the most important things you can do to increase your credit score. Oddly enough, paying extra on a mortgage or car loan doesn’t improve your score, and you may see a temporary drop in your score when you pay those loans off.
Your action item this week is to give some money away. Giving money to a cause you believe in is one of three ways money really can buy happiness. Find a charity that’s near and dear to your heart, buy coffee for a stranger, drop off food at the food bank. Personally, I love Pip’s Standby Dogs, where you can pre-purchase a hot dog for anyone who’s hungry and can’t afford a meal. Grab one of their burgers, a hot dog, or a cheesesteak, and leave one for someone else.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.
[1] Dow Drops After Powell’s Jackson Hole Speech, Barron’s, by Jacob Sonenshine and Jack Denton, 08/26/22
[2] "VantageScore 3.0: Better Predictive Ability among Sought-after Borrowers." VantageScore White Paper Series. VantageScore Solutions, LLC, December 2013. https://vantagescore.com/wp-content/uploads/2022/01/VantageScore3-0_WhitePaper.pdf.
[3] "VantageScore 3.0: Better Predictive Ability among Sought-after Borrowers." VantageScore White Paper Series. VantageScore Solutions, LLC, December 2013. https://vantagescore.com/wp-content/uploads/2022/01/VantageScore3-0_WhitePaper.pdf.