Do you know how much money you should really have in your checking account? There are many answers to this question because it’s really about personal preference, but there is a financially correct answer to this question. Here is how your account should look like if you don’t have a huge amount of expenses.

Checking account- No more than $100
Savings account that is directly linked to your checking- No more than $1000
High yield savings account that indirectly linked to your checking- The rest of the money

*eFIPO’s Rule* Try to get all your expenses¹ moved to the same week as your rent or mortgage payment. This is just for simplicity sake. You could also have them split up by paying your mortgage/rent the first week of the month then paying for your expenses the third week of the month. When you receive the bills for your monthly expenses, transfer the money from your high yield savings account to your checking account and pay your bills online.

If you use credit cards correctly this will be an extremely valuable tool. Paying for things without your own money, and receiving benefits² by paying off the credit card at the end of month is incredible.

You are actually losing money if you have all your funds sitting in your checking account. Here are the reasons why:

1. You aren’t making interest on your account. If you’re making interest on your account it’s no more than .5% which is nothing. Having most of your money in a high interest savings account is the way to go.

2. Time value of money. I know this doesn’t seem like a huge problem on a month to month basis, but it still counts.

3. You aren’t increasing your FICO. Having a lower credit score will increase your fixed expenses later on in life. So get with the program and learn how to use credit cards wisely.

4. Your missing out on some good rewards. I get 3% back on gasoline, food, groceries and receive 1% back on everything else. Not a bad deal. It’s free so why not take full advantage of it.

¹Credit Cards, utilities, ect…
²Cash back, rewards, and of course an increase in your FICO

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You need a few ways to repair or build your credit? Liz Pulliam Weston from MSN Money shows you some simple ways to get your credit “report card” from an F to an A+.

1. Check your credit report

2. Establish checking and savings accounts

3. Understand the basics of credit scoring

4. Piggyback on someone else’s good credit

5. Apply for credit while you’re a college student

6. Apply for a secured credit card

7. Get a finance company card

8. Get an installment loan

9. Use revolving accounts lightly but regularly

If you want some other ways to go get your credit score above the 700 level, check out my previous post A Quick FICO Minute.

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Here is another great question from a subscriber. “I am trying to get rid of some credit cards that I no longer use. I currently have five credit cards. The ones that I want to close have a zero balance. Which ones should I keep, or should I just keep them all?”

Even though I have an answer for your question, this is pretty much a personal issue. I will have to assume a few things on the credit cards you want to close. First, you probably no longer need or want them anymore. Second, these credit cards are not the oldest ones in your repertoire.

When you close down credit cards most people think that it will automatically increase your credit score. Well, I have some news for you. Most of the time it will actually decrease your score. The reason for the decrease can be easily explained with some simple math.

Let’s just say you have $5000.0 of credit card debt and you have four credit cards. Two credit cards with $2000.0 credit limit and the other two have a $3000.0 credit limit which means that you are using 50% of your eligible credit ($5000/10,000). If you were to close your two $2000.0 credit cards you would be left with an eligible $6000.0 credit limit, but your debt ratio just went up to 83.3% ($5000/6000). *Remember that your debt ratio plays a key role in your FICO score*

Let’s take the same situation as described above with a different issue. Let’s say your two $2000.0 credit cards were open in 1997 and the other $3000.0 ones were opened in 2001. If you decided to close both of the $2000.0 credit cards and keep the others opened your credit score would probably go down a bit just because you closed four years of credit history. This will also affect your credit score, because the length of your credit history will change.

Before you start calling the credit companies and cutting up your cards make sure you look at the downside of it. If you do have to close some down make sure they aren’t the oldest ones in your wallet/purse unless they have a yearly fee. See, there are some good reasons why having several credit cards can be beneficial.

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The score I am referring to is not your grade point average back in high school, and it’s not how many times you called in sick at work. It’s a score that will be following you around through thick and thin. Think of it like a marriage that doesn’t have a 55% divorce rate. It’s your FICO score; which is an acronym for Fair Isaac Credit Organization. The higher your FICO the less you will have to pay on any kind of credit services such as: credit cards, mortgages, and personal loans. A FICO score represents your credit history that is monitored by three separate credit bureaus (TransUnion, Experian, and Equifax).

The highest score possible is an 850 while the lowest is a 300. The FICO score is roughly put together using this formula: 35% punctuality of payment in the past, 30% capacity used: the ratio of current revolving debt (credit card balances, etc.), total available revolving credit (credit limitations), 15% length of credit history (how long credit you have been using credit), 10% types of credit used (installment, revolving,), and 10% recent search for credit and/or amount of credit obtained recently.

Knowing your score before you apply for a loan can save you hundreds of dollars monthly, and thousands yearly. Here’s a quick example of a 30 year fixed $100,000 mortgage having two different credit scores: A score of 760 and above, your avg. payment would be 632.07(using 6.5%), but having a credit score of 620-639 your avg. payment would be 740.05(using 8.09%). A difference of nearly $1300.00 a year. When you apply for a loan this score will cut your shopping time by 75% because you will know a ballpark range of the interest lenders will offer you. If you don’t know your score find it out now. Go to myFICO and start saving money!

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