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Buying A Second Home? 8 Things To Consider

Buying a second home is a major expense. You might have several reasons for wanting to buy a second house. Perhaps, you’re buying a second home for vacations or weekend getaways. Or, it might be that you want to use it as a rental property for rental income. However, there are things to consider before buying a second home.

The benefits of buying a second home

If you’re buying a second home for rental income, you’ll benefit from many perks, especially tax advantages.

For example, you will be able to deduct interest, property taxes, homeowners insurance and other expenses against the property’s income.

Even if the value of the property declines, you will still be able to deduct depreciation from your taxes.

While these benefits are great, the mortgage requirements for a second home are much stricter than for a mortgage on your primary residence. So, make sure you can afford it.

8 Things To Consider When Buying A Second Home

1. Financing options: When you bought your first home, you had available to you what’s called an FHA loan – a government loan program.

FHA loans are an appealing and favorite choice among first time home buyers due to their relatively low down payment requirement.

FHA loans require a 3.5% down payment and a relatively low credit score of 580. However, FHA loans are not available to second home buyers.

That is because FHA requires the home to be the borrower’s primary residence. So, if you’re thinking of buying a second home, you will need to either use a conventional loan or financing it with your own cash.

2. A larger down payment: If you’re using a conventional loan for your second home, you will need to come up with a larger down payment.

Lenders for a conventional loan usually requires a 20% down payment of the home purchase price.

But for a second home which will be used as a rental property or vacation home, expect lenders to ask for 30% or even 35%.

3. A higher credit score. For an FHA loan, you only need a credit score of 580 to qualify. But for a conventional loan on a second home, you will need much higher credit score — usually 750 or higher.

4. Expect a Higher Interest Rate: Lenders will likely charge you a higher interest rate on your second home than your primary residence.

The reason is because they see a second home — be it a vacation home or a rental property — as riskier. They feel that you are more likely to default on a mortgage on your second home than on your primary residence.

5. Do your research: Just as you did your homework when you bought your place to live in, buying a second home is no different.

In fact, you’ll need to spend more time researching rental property. That means researching the neighborhood you will want to invest in, knowing the zoning laws for a particular area, the sales price for the homes in the area.

You will need to know if the area has adequate public transportation, schools, grocery shopping, etc,– things that potential tenants will need.

6. Be prepared to be a landlord: if you’re buying a second home to rent, be prepared to be a landlord.

And be prepared to deal with all of the headaches that come with being a landlord. Do you have sufficient time? Can you deal with problems?

Owning a rental property and being a landlord is time consuming. It is also hard hard work and you have to do your due diligence.

You can hire a property manager to run the property for you. But if that is not feasible, you’ll have to do it yourself.

That means, screening new tenants, collecting rent, dealing with delinquent tenants, fixing problems in the property, such as a broken pipe.

So before buying a second home, make sure you have sufficient time and make sure you can deal with the day-to-day headaches that come with being a landlord.

7. Do you have a stable income? Dealing with a second mortgage on your second home is doable.

While you may be able to afford upfront costs, if you don’t have a stable income, you may have to think twice about whether it is a good idea.

Plus, you still have to consider the additional expenses of owning a second home such as insurance, property taxes, maintenance, repairs, property management fees, etc.

8. Are you out of credit card debt? If you have paid off outstanding and high interest credit card debts, then purchasing a second home may make sense.

But if you’re still struggling to pay your debt, you may need to put buying a second home on hold. 

The bottom line

If you’re thinking about buying a second home, whether it is for investment or vacation, be prepared to save some money, budget for expenses, and come up with a bigger down payment.

More importantly, spend as much time, if not more, researching for the home just as you did when your purchased your primary home.

Speak with the Right Financial Advisor

  • If you have questions about your finances, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
  • Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

Source: growthrapidly.com

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Why Refinance Rates Are Higher Than Purchase Loan Rates

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Personal Financial Improvement With The Fruit Of The Spirit

It’s easy to judge others by their actions as we judge ourselves by our intentions.

Character development can prove to be a challenging and uphill climb. We want to do well but sometimes find it difficult to do so.

Some days we are living a life of victory and other days we’re too ashamed to look ourselves in the mirror!

There are days when we’re crushing our financial goals and other days when our budget is busted and we’re disgusted. Such is life.

Thankfully we’ve been given the fruit of the spirit.

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message that I delivered recently that explains it in greater detail.

Make friends of money but do not love it.

#2 – Joy

The Fruit Of The Spirit - Joy

The Fruit Of The Spirit - Joy

Joy is not based on our circumstances or situations – that would be happiness. James encouraged us to count it all joy when we fell into trying situations.

We can choose joy or misery.

It’s impossible to avoid difficult financial situations. Each of us will face a situation that tests our faith and at times our sanity. During those times, count it all joy. I know it’s easier said than done but it can be done.

Let them shout for joy and be glad, who favor my righteous cause; and let them say continually, “Let the Lord be magnified who has pleasure in the prosperity of His servant” (Psalm 35:27, NKJV).

It’s okay to win at wealth. According to Psalm 35:27 God takes pleasure in it! I am convinced that we could shout for joy a bit more.

#3 – Peace

The Fruit Of The Spirit - Peace

The Fruit Of The Spirit - Peace

Money fights are one of the leading causes of marital friction and ultimately divorce.

I know that things can get nasty when a couple fights about money. Egos are bruised, weaknesses are exposed, dreams are shattered, and hope is deferred.

Peace, as mentioned in the fruit of the spirit, is the absence of or the end of strife. It’s a state of untroubled and undisturbed well being. Doesn’t that sound cozy & comfy?

Let the peace of Christ rule in your hearts, since as members of one body you were called to peace. And be thankful (Colossians 3:15, NIV)

Sounds as though we have a part to play. It’s up to us to allow the peace to rule in our hearts.

Yes, it’s much easier to lash out in anger but that is not peaceful. Our fallen nature wants to cast blame, point fingers, and make sweeping accusations. Those behaviors do not produce peace.

Be thankful. The budget is challenging and sometimes there is more month than money. We all still have reasons to be thankful.

I’ve realized that I am often thinking about things I do not have rather than the countless blessings that I do have. There are billions of people who would gladly trade their problems for mine. When the budget is tough, take some time to truly be thankful for what God has already done.

Allow the peace of God to rule in your heart and family.

#4 – Patience

The Fruit Of The Spirit - Patience

The Fruit Of The Spirit - Patience

I totally expected you to skip this one. Few people like to talk about patience. Furthermore, many Christians are superstitious about it. They are convinced that if they mention it, all kinds of crazy things will happen to them. Not true. Yes, we must overcome but God is not a despotic dictator.

Before we go deeper, a definition of patience would be helpful. It’s not having a sunny disposition while waiting at the DMV for half a day. It’s much more than that.

Patience is the quality that does not surrender to circumstances or succumb under trial. A person operating in patience is consistently constant.

My brethren, count it all joy when you fall into various trials, knowing that the testing of your faith produces patience. But let patience have its perfect work, that you may be perfect and complete, lacking nothing (James 1:2-4, NKJV). 

Bad things, challenging things, and difficult circumstances will find you. You can run but you cannot hide. When these circumstances hit, it’s time to adjust our perspective.

Crying about how life is unfair won’t solve the problem. Actually, it might be prolonged.

When these tests happen count it or consider it joyfully. Why? God is still at work in us both to will and to do of His good pleasure. He has not give up on us. He’s still working on us! (That’s actually good news!)

I know that it’s difficult. I’m in a season of life where it seems that I have the anti-Midas touch. I feel like Andy in The Office when Michael gave him all of the largest accounts as a going away present. “I’m going to lose them all!”.

Yet, when I fall into these trials I know God is working in me. Patience is being developed and God will reward it.

#5 – Kindness

The Fruit Of The Spirit - Kindness

The Fruit Of The Spirit - Kindness

Kindness, regrettably, does not carry the same gravitas as some of the other fruit of the spirit. Perhaps it is misunderstood. Hopefully after today you will have a newfound appreciation of the persimmon of the fruit of the spirit known as kindness.

The fruit of kindness is having the harmlessness of a dove without the wisdom of the serpent. I chalk it up to that feeling you get when you want to be generous but before your brain kicks and talks you out of it. You simply want to be a blessing.

It’s also the mellowing of our character. As we get older we’re often less antagonistic and more apt to give a person the benefit of the doubt. We’re generally kinder after surviving this thing called life.

#6 – Goodness

The Fruit Of The Spirit - Goodness

The Fruit Of The Spirit - Goodness

Goodness is character energized and expressing itself in action. It’s the desire to DO something. Kindness supplies the idea to be a blessing and goodness puts the plan to action.

Earning money is awesome but we all eventually realize that there is more to life than collecting another dollar. Some desire to change their financial, family tree.

Others want to use resources to start a scholarship or feed children or to start a hospital.

Goodness energizes our kindness and makes things happen.

#7 – Faithfulness

The Fruit Of The Spirit - Faithfulness

The Fruit Of The Spirit - Faithfulness

Sadly, faithfulness is not the word I would choose when discussing the money habits of most people.

Almost 80% of Americans are living paycheck to paycheck. Nearly 40% of Americans could not cover a $400 emergency with cash.

However, these same people have luxuries that people just twenty years ago did not enjoy.

The average car payment is now over $550 per month. Car loans are easy to get. I know many twenty + year olds who are driving cars that are new – and they have the payment to prove it. They have little discretionary income as much of it spent before it is earned.

Moreover it is required in stewards that one be found faithful (I Corinthians 4:2, NKJV).

Financial faithfulness is not a mere suggestion. The language Paul uses is quite strong. Faithfulness is required.

# 8 – Gentleness

The Fruit Of The Spirit - Gentleness

The Fruit Of The Spirit - Gentleness

Gentleness gets a bad rap just like kindness.

In some translations the word meekness is used instead of gentleness. Yep, not much better. However both words are powerful!

We’re told that Moses was meek. Moses marched into Pharaoh’s palace and bossed him around! We read in the Psalms and in the Sermon on the Mount that the meek shall inherit the earth. Not too shabby.

Jesus described Himself as gentle. Gentle doesn’t mean soft. A gentle person is not a pushover.

The one who has fully developed the fruit of gentleness is powerful and is fully aware of the power. Jesus entered Jerusalem on the colt of a donkey – lowly and gentle. He was fully aware of who He was and the power at His disposal. At His disposal, were legions of angels who could have wiped out humanity. He chose the route of gentleness.

There is no need to brag about money or wealth. No need to use wealth as weapon against others.

Exalting ourselves based on financial scorekeeping is bad form and quite tacky. Remain humble. We’re simply managing God’s resources. He is trusting you with it. Run it like He would run it – gently.

For who makes you differ from another? And what do you have that you did not receive? Now if you did indeed receive it, why do you boast as if you had not received it? – I Corinthians 4:7

#9 – Self Control

The Fruit Of The Spirit - Self Control

The Fruit Of The Spirit - Self Control

I’m a firm believer in living a life free from debt. The Bible never mentions debt in a positive manner. The borrower is slave to the lender.

Living a life free of debt can be challenging because debt is a ubiquitous method of financing a life style we cannot afford. Willingly going into debt (bondage) could be viewed as being discontent with God’s provision.

We feel as though we deserve a European vacation but the cash is not available. The siren song of Visa and MasterCard can be seductive. Before we know it we’re charging coffee and croissants at a bistro in the Latin Quarter of Paris.

Self-control is the fruit of the spirit that requires us to roll up our sleeves. This is the one that takes discipline. Jesus said if we wanted to be His disciple we would need to deny ourselves daily. Easy? Nope. Worth it? Yes.

Conclusion

Gifts of the Spirit are given but the fruit of the spirit must be developed.

If we dig deep we could witness dramatic financial results simply by developing the fruit of the spirit in our lives. These traits are inside each of us.

Let’s ensure they blossom.

Personal Financial Improvement With The Fruit Of The Spirit

Source: biblemoneymatters.com

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How to Make $30,000 a Month Flipping Houses

I have flipped more than 200 houses in my career and while I love flipping, it is not easy! We have flipped 26 houses per year multiple times, and I can truly say that the more houses you flip, the more problems you have. Now, when I say house flipping, I am talking about buying houses, remodeling them, and selling them. Some people say they “flip houses” when they are wholesaling, which is buying and selling houses very quickly without remodeling them. Over the years, I have made $30,000 a month flipping houses and even more. It takes money, a team, and thick skin to make that kind of money, but it is not impossible by any means.

How much can you make on a single house flip?

I have written articles like this before and I love to break down the numbers to see how to actually do this, not just live in a fantasy world where good thoughts allow money to fall into your lap. I am also a fan of good thoughts, but that is not all it takes! The last article I wrote in this format was how to make $10,000 a month with rental properties. I love rentals and to be honest, I prefer rentals over flips, but flips allow me to buy more rentals.

I buy flips from $100,000 to $300,000 and they tend to make me from $20,000 to $50,000 per flip. I have made $100,000 or more on a flip before and I have also lost money on flips before. For the most part, I want to make at least $30,000 on every flip I do. That also makes this article really easy to write. If you want to make $30,000 a month flipping houses, flip one house a month. There the article is done!

While that math is simple, the task of flipping one house a month is not simple. Flipping one house can be tough let alone 12 ina year. We have done more and will continue to do more but it was not easy to get to this point. You can see a video of one of my best and most interesting flips below:

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Why is flipping houses hard?

A lot of people watch the house flipping television shows and think flipping is like what they see on TV. You buy a house, change the floorplan, decide what are the best design choices, and boom you make $50,000 or $100,000. The reality of flipping is much different from the television shows. Here is a break down of how it actually works:

  • Line up financing: Most people do not have the cash to flip houses so they borrow money from hard money lenders, friends, or the bank.
  • Find the deals: There are a lot of people who want to flip houses. The deals are not just sitting there for anyone to buy who wants to make $50,000. It takes a lot of work and patience to find the deals from the MLS, wholesalers, auctions, direct marketing, etc.
  • Find contractors: I do not do any of the work on house flips myself. I use contractors and subcontractors to handle it all. If you want to make $30,000 a month flipping houses you will need to hire contractors as well. Finding decent people to work on the houses is one of the toughest parts of the business.
  • Decide on what to repair: On TV, they usually go all out making tons of repairs to properties because that is what gets attention. In reality, the goal is to make only the repairs that are needed to sell the house. The bigger the remodel, the longer it takes and usually the less money you make.
  • Manage the repair process: Things rarely go as planned so someone has to manage the repair process and make sure the work is being done on time and the right way. Some of the biggest disasters come when a flipper trusts their contractor without oversite and huge mistakes are made or no work is being done.
  • Sell the house: It is not always easy to sell flips either. I am a real estate broker and list my flips for sale on the MLS. It is in almost everyone’s best interest to use an agent to sell their houses which cost money. You also need to make sure the home is clean, the work is completely done, and possibly stage the home.

Many things can go wrong during a flip and even experienced flippers like myself sometimes lose money. You have to stay on top of things and constantly tweak the business model. Materials are always getting more expensive as is labor and other costs. We are always finding new ways to get better deals in order to keep that same amount of profit.

To get that $30,000 average profit on a house everything needs to run smoothly and you need to assume there will be extra costs along they want that you are not accounting for.

My book Fix and Flip Your Way to Financial Freedom (197 reviews) goes over the ins and outs of flipping and how to actually do what I talk about in this article. It is on Amazon as an ebook, paperback, and audiobook. 

How much money do you need to flip houses?

Another roadblock for many investors is finding enough money to flip houses, especially if they have a lot of deals at once. There are lenders who will finance flips but the investors almost always need some of their money as well. You may be able to finance 90% of the deal but it is tough to finance all of it. There are also carrying costs, and financing costs while you own the property. The more money you borrow the more that money will cost you. We tend to need $50,000 or more per flip we do. If we have 10 flips going at once, that means we have at least $500,000 of our own cash tied up in those deals when we use loans. If we used all cash we would have $3,000,000 tied up in those ten deals!

It takes a lot of flips going at once to make $30,000 a month because it takes a while to flip a house.

How long does it take to flip a house?

I would love to say it takes three months to flip a house but in reality it takes much longer. We have a lot going at once so we cannot always start working on them right away. It may be a month or two before we can start the work, then it takes time to complete the work, and it takes time to sell the house once it is done as well.

Our fast flips take from 3 to 6 months to complete but may take from 6 to 10 months and a few take over a year from the time we buy them to the time we sell them. I would say our average has been around 8 months from beginning to end.

Because it takes so long to flip houses we need to have a lot of flips going at once to flip 10, 20 or even 26 houses a year which we have done a few times.

How many flips do you need going to make $30,000 a month?

If you want to make $30,000 a month flipping houses and you make $30,000 per flip that is pretty easy math. You need to flip 1 house a month or 12 houses a year. If it takes us from 6 to 10 months to flip a house that means you would need to have from 6 to 12 house flips going at once.

It took me many years to get the point where I could do that many flips, but we usually have from 15 to 20 flips going at one time and that equates to 20 to 26 flips a year selling.

Just remember this is all theory and reality can be much different! You might have some flips that lose money or take way longer than you think that drag down all of your averages. It may take more flips to make that goal or less if you manage to increase your profit margins.

If you decide to build a business like I have where you hire people to help you must factor in those costs as well. I have a project manager, bookkeeper, and other people who help with the flips as well. I also have many other things going on like this blog, my real estate brokerage, my rentals, and more!

If you want to see all of our flips in action be sure to subscribe to the InvestFourMore YouTube channel!

Source: investfourmore.com

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What’s the Difference Between 401(k) and 403(b) Retirement Plans?

Investing in your retirement early is the best way to ensure financial stability as you age, especially when it comes to understanding various retirement options. Getting started may feel overwhelming — luckily we’re here to help. We help break down the difference between 401(k) and 403(b) accounts, and how they can impact your financial life.

You may already know the value in adjusting your budget to make saving for a rainy day a priority. But are you also prioritizing your retirement savings? If you’re just getting started in the workforce and looking for ways to invest in yourself, 401(k) and 403(b) plans are great options to know about. And, the main difference between a 401(k) and a 403(b) is the company who’s offering them.

401(k) accounts are offered by for-profit companies and 403(b) accounts are offered by nonprofit, scientific, religious, research, or university companies. To understand the similarities and differences between plans in depth, skip to the sections below or keep reading for an in-depth explanation.

How a 401(k) Works
How a 403(b) Works
The Difference Between 401(k) and 403(b)
The Similarities Between 401(k) and 403(b)
5 Ways to Grow Your Retirement Savings
What is a 401(k) and 403(b)

How a 401(k) Works

A 401(k) is a retirement account set up by for-profit employers for employees to contribute before-tax earnings. Employer-sponsored 401(k) accounts give employees the opportunity to build retirement savings in different forms — including company stocks, before-tax earnings, and exchange-traded funds (ETFs).

Each company’s retirement plans may vary on benefits like employee matching, stock options, and more. In addition, you’re able to choose how much you’d like to contribute on a monthly basis. Keep in mind, both 401(k) and 403(b) plans have a yearly limit of $19,500 with your employer matches. Plus, most retirement funds have required minimum distributions (RMDs) by the time you turn 70. This essentially means you have to take a minimum amount of money out each month whether you want to or not.

In most cases, employers will offer 401(k) matching to encourage consistent contributions. For example, your employer match may be 50 cents of every dollar you contribute up to six percent of your salary. For example, with this employer match on a $40,000 salary, you would contribute $200 and your employer would contribute an additional $100 each month. This pattern would continue until your annual contributions hit $2,400 and your employer contributes $1,200.

Employee matching is essentially free money. You’re monetarily rewarded for your retirement payments. Be sure to pay attention to vesting periods when setting up your employer match. Vesting periods are an agreed amount of time you need to work at a company before you receive your 401(k) benefits. For example, some companies may require you to work for their team for a year before earning retirement benefits. Other employers may offer retirement benefits starting the day you start working with them.

How a 403(b) Works

A 403(b) is a retirement account made by employers for tax-exempt, charitable nonprofit, scientific, religious, research, or university employees. Organizations that qualify for 403(b) accounts include school boards, public schools, churches, hospitals, and more. This type of account is also known as a tax-sheltered annuity plan — they allow pre-tax income to be invested until taken out.

Employers that offer 403(b) retirement plans may offer a pool of provider options that undergo nondiscrimination testing. This allows employers that qualify for this account to shop around for plans that offer the best benefits and don’t discriminate in favor of highly compensated employees (HCEs). For instance, some 403(b) accounts may charge more administrative fees than others.

Employers are able to offer employee matching on 403(b) accounts if they decide to. To cut costs for nonprofit companies, 403(b) retirement plans generally cost less than 401(k) accounts. Costs associated with starting up these accounts may not affect you, but it may affect your employer.

Account Type 401(k) 403(b)
Yearly Contribution Limit $19,500 $19,500
Employer-Issued Packages For-profit employers:
Corporations, private establishments, etc. and sole proprietors
Non-profit, scientific, religious, research, or university employers:
School boards, public schools, hospitals, etc.
Minimum Withdrawal Age 59.5 years old 59.5 years old
Early Withdrawal Fees 10% penalty, tax, and additional fees may vary 10% penalty, tax, and additional fees may vary
Source: IRS.org

The Differences Between 401(k) and 403(b)

Both a 401(k) and 403(b) are similar in the way they operate, but they do have a few differences. Here are the biggest contrasts to be aware of:

  • Eligibility: 401(k) retirement plans are issued by for-profit employers and the self employed, 403(b) retirement plans are for tax-exempt, non-profit, scientific, religious, research, or university employees. As well as Hospitals and Charities.
  • Investment options: 401(k)s offer more investment opportunities than 403(b)s. 401(k) accounts may include mutual funds, annuities, stocks, and bonds, while 403(b) accounts only offer annuities and mutual funds. Each employer varies in retirement benefits — reach out to a trusted financial advisor if you have questions about your account.
  • Employer expenses: 401(k) accounts are generally more expensive than 403(b) accounts. For-profit 401(k) accounts may pay sales charges, management fees, recordkeeping, and other additional expenses. 403(b) plans may have lower administrative costs to avoid adding a burden for non-profit establishments. These costs vary depending on the employer.
  • Nondiscrimination testing: This form of testing ensures that 403(b) retirement plans are not offered in favor of highly compensated employees (HCEs). However, 401(k) plans do not require this test.

The Similarities Between 401(k) and 403(b)

Aside from their differences, both accounts are set up to aid employees in retirement savings. Here’s how:

  • Contribution limits: Both accounts cap your annual contributions at $19,500. In the event you contribute over this limit, your earnings will be distributed back to you by April 15th. If you’re under your retirement contributions by the time you’re 50 years old, you’re allowed to make catch-up contributions. This means that, if you’re eligible, you can contribute $6,500 more than the yearly contribution limit.
  • Withdrawal eligibility: You must be at least 59.5 years old before withdrawing your retirement savings. In the case of an emergency, you may be eligible for early withdrawal. However, you may be charged penalties, taxes, and fees for doing so.
  • Employer matching: Both retirement account options allow employers to match your contributions, but are not required to. When starting your retirement fund, ask your HR representative about potential benefits and employer matching.
  • Early withdrawal penalties: If you choose to withdraw your retirement savings early, you may be penalized. In most cases, you need a valid reason to withdraw your funds early. Eligible reasons may include outstanding debt, bankruptcy, foreclosure, or medical bills. In addition, you may be charged a 10 percent penalty fee, taxes, and other fees. During a downturned economy, as we’ve seen with the COVID-19 pandemic, fees may be waived.

5 Ways to Grow Your Retirement Savings

5 Ways to Grow Your Retirement Savings

Contributing to a 401(k) or 403(b) can help grow your investments at a reduced risk. You’re able to grow your non-taxed income to put towards your future goals. The more you contribute, the more you may have by the time you retire. Here are a few tips to get ahead of the game and invest in your financial future.

1. Create a Retirement Account Early

It’s never too late to start a retirement account. If you’re currently employed, but haven’t set up your retirement account, reach out to your HR representative. Ask about retirement plan options and their benefits. When employers offer retirement matches, consider contributing as much as you can to meet their match.

2. Set up Monthly Automatic Contributions

Save time and energy by setting up automatic contributions. You may feel less interested in contributing to your retirement as your payday approaches. Taking time to set up a retirement fund and budgeting for this change may be holding you back. To meet your retirement goals, consider setting up automatic payments through your employer. After a while, you may not even notice the slight budget adjustment.

3. Leverage Employer Matching

Employer matching is essentially free money. Employers may put money towards your future for nothing but your own contribution. This encourages employees to consistently put money towards their retirement savings. Not only are you able to earn extra money each month, but this “free money” will grow with interest over time. If you can, match your employer’s contribution percentage, if not more.

4. Avoid Early Withdrawal

Credit card balances, student loans, and mortgages can be stressful. Instead of withdrawing early from your retirement fund to pay for these, consider other debt payoff methods. If you’re eligible to withdraw from your retirement early, you may face penalty fees, taxes, and administrative expenses. This may hinder your savings potential or push back your desired retirement date.

5. Contribute Your Future Raises and Bonuses

If you’re saving less than $19,500 to your retirement fund this year, consider contributing more. If you earn a bonus or a raise, stick to your current budget and consider increasing your contributions. Ask your employer to increase your retirement payments right before you receive a bonus or raise. The more you contribute, the more interest you’ll accrue over time.

Whether your retirement funds are established through a 401(k) or a 403(b), these accounts offer you the chance to build your financial portfolio. Consistently funding your retirement account may better your financial plan and set you at ease. As your contributions age, so do your interest earnings. You’ll be able to make money on your pre-taxed income and set your future self up for success. Get started by checking in on your budget and carving out a specific amount to put towards your retirement each month.

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Source: mint.intuit.com

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My Parents Can’t Afford College Anymore – What Should I Do?

When most parents offer to fund their child’s tuition, it’s with the expectation that their financial circumstances will remain relatively unchanged. Even with minor dips in income or temporary periods of unemployment, a solid plan will likely see the child through to graduation.

Unfortunately, what these plans don’t tend to account for is a global pandemic wreaking havoc on the economy and job market.

Now, many parents of college-age children are finding themselves struggling to stay afloat – much less afford college tuition. This leaves their children who were previously planning to graduate college with little or no debt in an uncomfortable position.

So if you’re a student suddenly stuck with the bill for your college expenses, what can you do? Read below for some strategies to help you stay on track.

Contact the University

Your first step is to contact the university and let them know that your financial situation has changed. You may have to write something that explains how your parent’s income has decreased.

Many students think the federal government is responsible for doling out aid to students, but federal aid is actually distributed directly by the schools themselves. In other words, your university is the only institution with the authority to provide additional help. If they decide not to extend any more loans or grants, you’re out of luck.

Ask your advisor if there are any scholarships you can apply for. Make sure to ask both about general university scholarships and department-specific scholarships if you’ve already declared a major. If you have a good relationship with a professor, contact them for suggestions on where to find more scholarship opportunities.

Some colleges also have emergency grants they provide to students. Contact the financial aid office and ask how to apply for these.

Try to Graduate Early

Graduating early can save you thousands or even tens of thousands in tuition and room and board expenses. Plus, the sooner you graduate, the sooner you can get a job and start repaying your student loans.

Ask your advisor if graduating early is possible for you. It may require taking more classes per semester than you planned on and being strategic about the courses you sign up for.

Fill out the FAFSA

If your parents have never filled out the Free Application for Federal Student Aid (FAFSA) because they paid for your college in full, now is the time for them to complete it. The FAFSA is what colleges use to determine eligibility for both need-based and merit-based aid. Most schools require the FAFSA to hand out scholarships and work-study assignments.

Because the FAFSA uses income information from a previous tax return, it won’t show if your parents have recently lost their jobs or been furloughed. However, once you file the FAFSA, you can send a note to your university explaining your current situation.

Make sure to explain this to your parents if they think filing the FAFSA is a waste of time. Some schools won’t even provide merit-based scholarships to students who haven’t filled out the FAFSA.

Get a Job

If you don’t already have a job, now is the time to get one. Look at online bulletin boards to see what opportunities are available around campus. Check on job listing sites like Monster, Indeed and LinkedIn. Make sure you have a well-crafted resume and cover letter.

Try to think outside the box. If you’re a talented graphic designer, start a freelance business and look for clients on sites like Upwork or Fiverr. If you’re a fluent Spanish speaker, start tutoring other students. Look for jobs where you can study when things are slow or that provide food while you’re working.

Ask anyone you know for suggestions, including former and current professors, older students and advisors. If you had a job back home, contact your old boss. Because so many people are working remotely these days, they may be willing to hire you even if you’re in a different city.

It may be too late to apply for a Resident Advisor (RA) position now but consider it as an option for next year. An RA lives in the dorms and receives free or discounted room and board in exchange for monitoring the students, answering their questions, conducting regular inspections and other duties.

Take Out Private Loans

If you still need more money after you’ve maxed out your federal student loans and applied for more scholarships, private student loans may be the next best option.

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Private student loans usually have higher interest rates and fewer repayment and forgiveness options than federal loans. In 2020, the interest rate for federal undergraduate student loans was 2.75% while the rate for private student loans varied from 3.53% to 14.50%.

Private lenders have higher loan limits than the federal government and will usually lend the cost of tuition minus any financial aid. For example, if your tuition costs $35,000 a year and federal loans and scholarships cover $10,000 a year, a private lender will offer you $25,000 annually.

Taking out private loans should be a last resort because the rates are so high, and there’s little recourse if you graduate and can’t find a job. Using private loans may be fine if you only have a semester or two left before you graduate, but freshmen should be hesitant about using this strategy.

Consider Transferring to a Less Expensive School

Before resorting to private student loans to fund your education, consider transferring to a less expensive university. The average tuition cost at a public in-state university was $10,440 for the 2019-2020 school year. The cost at an out-of-state public university was $26,820, and the cost at a private college was $36,880.

If you can transfer to a public college and move back home, you can save on both tuition and housing.

Switching to a different college may sound like a drastic step, but it might be necessary if the alternative is borrowing $100,000 in student loans. Remember, no one knows how long this pandemic and recession will last, so it’s better to be conservative.

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Source: mint.intuit.com

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Which Student Loan Should You Pay First?

This post may contain affiliate links. Please read my disclosure for more information.

The financial camps are divided between paying off your smallest first vs. your highest interest student loan. So who’s right?

Finance people can agree on a few things. Some debts like payday loans and IRS back taxes are worse than others and ideally, you should get rid of all debt that keeps you from having a positive net worth.

But how do you decide what goes first? This is something I stressed over when we started out. I had a large high-interest student and a small low-interest car loan while my husband had a moderate student loan with moderate interest. A total conundrum.

Also read: Is Being Debt Free Worth it?

So if you’re struggling to figure out where to start here’s a look at my theoretical friend and her theoretical $60,000 of student loan debt. She took out federal and private loans and doesn’t have a career that qualifies her for any student loan forgiveness. (Or this could be a couple’s student loans combined, however you want to look at it.)

Her theoretical student loans are:

a. $20,000 @ 4% interest with minimum payment of $150 p/m
b. $40,000 @ 6.5% interest with minimum payment of $300 p/m

I wanted to keep monthly payments as similar as possible so I adjusted the number of months for payment of the first loan accordingly keeping the total repayment for both at 36 months.

Pay off the Smallest Loan First

a. $1574.60 per month for 13 months. Total interest paid= $469.77
+$300 p/m for the minimum payment of other loan= $1874.60 total monthly payment for first 13 months.

b. After 13 months of minimum payments, the balance is now $38,879.74 with $2,780.72 of interest paid during this time.
The new monthly payment becomes $1,802.44 for 23 months and we end with $2,577.18 more in interest paid.

Total interest paid over 36 months: $5,827.67

Pay off the Highest Interest Loan First

b. $1653.49 per month for 26 months. Total interest paid= $1,803.49
+$150 p/m for the minimum payment of other loan= $1,803.49 total monthly payment for first 26 months.

a. After 26 months of minimum payments, the balance is now $17,763.60 with $1,641.55 of interest paid during this time.
The new monthly payment becomes $1,809.03 for 10 months and we end with $327.28 more in interest paid.

Total interest paid over 36 months: $4,959.65

Difference= $868.02 saved by tackling higher interest loan first.

To compare, I calculated paying both at the same time.
Monthly Payment= $1,816.44 for 36 months
Total Interest Paid= $5,391.83 Less than option 1, more than option 2

I then further calculated to see what the difference would be if my friend paid off her loans in 5 or 10 years:

5 years= $9,058.59 in interest paid (There’s that car she just financed)

10 years= $18,801.86 in interest paid (There’s that down payment on a house she said she couldn’t afford!)

The moral of the story is that if $800 keeps you up at night you should pay off higher interest loans first, especially if they’re big behemoths.

But if $18,000 keeps you up at night you need to get out of bed and start hustling.

Paying $1800 a month on student loans looks like a big number but maybe your loan is smaller, maybe you have the means to move in with more roommates or cut the cable and eating out.

Also Read: How to Make Paying off Debt not Suck

If you have smaller loans within your student loan pay those off in order of smallest to largest or break it down into milestones. Rewarding yourself with attainable benchmarks will help keep you motivated.

Whatever it is it’s time to start looking into the future and think about what you want to be doing with your money instead of giving it to the bank. Because the one thing everyone in the world can agree on is that it’s not fun to give away your money to banks when you don’t have to.

<img data-attachment-id="1309" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/which-loan-first/" data-orig-file="https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=400%2C693&ssl=1" data-orig-size="400,693" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Which debt should I pay off first?" data-image-description="

Which debt should I pay off first?

” data-medium-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=173%2C300&ssl=1″ data-large-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=346%2C600&ssl=1″ loading=”lazy” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” class=”aligncenter size-full wp-image-1309 jetpack-lazy-image” src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.png” alt=”Choosing which debt to pay off first was so stressful! This article really put it into perspective.” width=”400″ height=”693″ data-recalc-dims=”1″ srcset=”data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7″>

<img data-attachment-id="1309" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/which-loan-first/" data-orig-file="https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=400%2C693&ssl=1" data-orig-size="400,693" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Which debt should I pay off first?" data-image-description="

Which debt should I pay off first?

” data-medium-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=173%2C300&ssl=1″ data-large-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=346%2C600&ssl=1″ loading=”lazy” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” class=”aligncenter size-full wp-image-1309″ src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.png” alt=”Choosing which debt to pay off first was so stressful! This article really put it into perspective.” width=”400″ height=”693″ data-recalc-dims=”1″>

<img data-attachment-id="4998" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/mf-which-student-loan-should-you-payoff-first_-highest-interest-rate-or-largest-balance__/" data-orig-file="https://i2.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/MF-Which-Student-Loan-Should-You-Payoff-First_-Highest-Interest-Rate-or-Largest-Balance__.jpg?fit=735%2C1102&ssl=1" data-orig-size="735,1102" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="Should you go debt snowball or debt avalanche for student loans?" data-image-description="

If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials

” data-medium-file=”https://i2.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/MF-Which-Student-Loan-Should-You-Payoff-First_-Highest-Interest-Rate-or-Largest-Balance__.jpg?fit=200%2C300&ssl=1″ data-large-file=”https://i2.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/MF-Which-Student-Loan-Should-You-Payoff-First_-Highest-Interest-Rate-or-Largest-Balance__.jpg?fit=400%2C600&ssl=1″ loading=”lazy” width=”400″ height=”600″ data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.jpg” alt class=”wp-image-4998″ srcset=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.jpg 400w, https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first-2.jpg 200w, https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first-3.jpg 735w” sizes=”(max-width: 400px) 100vw, 400px” data-recalc-dims=”1″>

Jen Smith is a personal finance expert, founder of Modern Frugality and co-host of the Frugal Friends Podcast. Her work has been featured in the Wall Street Journal, Lifehacker, Money Magazine, U.S. News and World Report, Business Insider, and more. She’s passionate about helping people gain control of their spending.

Source: modernfrugality.com

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A Debt Consolidation Loan Will Not Fix Your Bad Money Habits

This page may include affiliate links. Please see the disclosure page for more information.

If you have a lot of debt or different types of debt, then a debt consolidation loan might sound like a good idea. However, if you have low credit, you may not have many options.

The good news is, you can still get a debt consolidation loan, even with bad credit. In this article, you will learn about the ins and outs of a debt consolidation loan, the pros and cons of getting one, and what your alternatives are if you aren’t ready to get a debt consolidation loan.

In This Article

What is a Debt Consolidation Loan?

A debt consolidation loan is a new loan that you take out to cover the balance of your other loans. A debt consolidation loan is a single, larger piece of debt, usually with better payoff terms than your original, smaller debts. When you receive a consolidation loan, your other loan balances are paid off. This allows you to make one monthly payment rather than multiple.

For example, if you had one student loan for each semester of your four-year college degree, then you’d have taken out eight loans. This can be cumbersome to manage, so you could take out a debt consolidation loan to pay off all your eight loans and only make one monthly payment instead.

Get A Debt Consolidation Loan with Bad or Average Credit

If you have poor or average credit, then it might be difficult for you to get approved for a consolidation loan or to get a loan with favorable terms. A bad or average credit score is typically anything under 670. You will need to take steps to get a debt consolidation loan for bad credit.

Step 1: Understand Your Credit Score

The first step toward getting a personal loan or a consolidation loan is to understand your financial standing. Your credit score is one of the main factors that a lender will evaluate when deciding to give you a debt consolidation loan. Therefore, take the time to look up your credit score and what events have caused your score. Sometimes, years of bad habits contribute to a low score.

Continue to monitor your score over time. You can learn what contributes to a good score as well as what causes your score to decline, and act accordingly.

Step 2: Shop Around for a Debt Consolidation Loan

If you have a poor credit score, you might be inclined to take the first loan offered to you. However, you may have multiple options for lenders to work with, so be sure to shop around for a good interest rate and term. You might want to investigate online lenders as well as brick and mortar lenders such as your local credit union.

Be sure to carefully review all the fees associated with taking out a personal loan. This might include an origination fee or a penalty for paying back your loan early. Understanding your fees can save you hundreds of dollars over the life of your loan.

Step 3: Consider a Secured Loan

Most personal loans used for debt consolidation are unsecured loans. This means that they do not require collateral. However, if you’re having a tough time getting approved for a loan, you might want to consider a secured loan.

Forms of collateral include a vehicle, home, or another asset. The collateral must be worth the amount of the loan if you default on the loan. Even if you can qualify for an unsecured loan, you may want to compare the interest rates of a secured loan to see if you can get a better rate.

Step 4: Improve Your Credit Score

Finally, if you can’t get a loan right away, you may want to take some time to evaluate your credit score and see where your areas of opportunity lie. If you have small glitches on your score that caused it to decrease significantly, then you might be able to raise your score quickly.

For example, one missed payment or forgotten bill can cause your score to plummet. If this is the case, you may be able to pay off that small bill and raise your credit score quickly.

How to Qualify for a Debt Consolidation Loan

To get a debt consolidation loan, you must be 18 years or older and a legal U.S. resident. You must also have a bank account and not be in bankruptcy or foreclosure. These are the basics of qualifying for a debt consolidation loan.

In addition to these basics, you’ll want to try to improve your financial standing as much as possible. Borrowers with good or excellent credit and a low debt-to-income ratio typically have no problem getting a debt consolidation loan. However, if you have bad credit, you will want to work to improve your credit score and decrease your debt-to-income ratio.

If you have bad credit and are considering a debt consolidation loan, you might already be in a financial rut. This can make it difficult to improve your financial standing. If this is the case, you can search for lenders that specialize in helping people with bad or average credit and be sure to shop around for the best rates and terms that you can get.

Personal Loans for Debt Consolidation

If you have poor credit and need a personal loan, you may want to check out these providers. They will offer high-interest loans to people with poor credit.

Fiona

Fiona is an online marketplace that connects potential borrowers with multiple lenders. Borrowers simply fill out a quick application, and they are matched with the lenders most likely to approve them. This saves time and money, as you can be matched with a lender without needing to visit a bunch of sites.

Fiona is ideal for borrowers with a 580 credit score or higher, and that doesn’t want to have to waste time filling out a bunch of applications. A nice feature of Fiona is their initial application requires just a soft credit check, so making a quick application won’t hurt your credit score.

Since Fiona is a marketplace and not a direct lender, the terms of offers and the number of offers borrowers receive may vary. Some borrowers report being bombarded with offers, which we feel is potentially a benefit as multiple offers help ensure you get the best deal.

LendingPoint

Lending Point will typically lend up to $25,000 with an interest rate of 15.89% to 35.99% APR and a 36-month term. You can check your rate for free on their website. If you qualify, you can receive your personal loan in as little as 24 hours. LendingPoint takes your credit score, job history, and income into consideration when you apply for a loan.

SoFi

SoFi will lend up to $100,000 with an interest rate of up to 17% on a 24-month term. There are no origination fees or early payment penalties and no overdraft fees. You can apply online for free and will typically receive your funds in a few days.

Upstart

Upstart will lend up to $50,000 with an interest rate of 7% to 35.99% on a 36 or 60-month term. Funds are provided as early as the day after approval, but they have a high origination fee of 8%.

OneMain Financial

OneMain will lend up to $20,000 with an interest rate of between 18% and 35.99% on a 24 to 60-month term. They do have small origination fees and late payment fees, but they typically range up to $30 per payment. You can apply for a loan online and have it funded as early as a day after you apply. The company also has almost 1,500 branches across the country for those who prefer to apply for a loan in-person.

Should I Get A Debt Consolidation Loan?

If you’re in a pinch and need to consolidate your loans to make them more manageable, then your best option may be to get a personal loan or a debt consolidation loan.

Pros

There are plenty of benefits of a debt consolidation loan. Some of them are:

  • Simplified finances. When you consolidate your debt, you will pay off multiple debts and only have one loan. This means you’ll make one monthly payment instead of multiple to keep track of.
  • Lower interest rates. If you have a bunch of credit cards or other high-interest debt, the interest rates might vary and be high. Personal loans typically have lower interest rates depending on your credit score, the loan amount, and term length.
  • Fixed repayment schedule. Instead of having multiple payments each month that vary by amount, interest rate, and term, you will have a fixed schedule each month.
  • Boost your credit. By eliminating the risk of forgetting to make payments or letting your loans get away from you, paying a set amount on a consolidated loan can help you to boost your credit score.

Cons

Debt consolidation isn’t for everyone. Be sure that you understand the risks you take on as well. Some of the things to watch out for include:

  • You need to change your behavior with money. A debt consolidation loan won’t fix your bad habits with money. Often taking out a consolidation loan leads to more debt, because many people don’t fix the underlying overspending behaviors, or start a cash saving for emergencies. Not fixing your money behaviors leads to that same old cycle and could cause you to take on more new debt.
  • Upfront costs. Some personal loans have upfront fees, including an origination fee, closing costs, or annual fees. If you pay a lot of fees over time, it might not be beneficial to consolidate your loans.
  • Higher interest rates. If you have poor credit, you will not get a favorable interest rate on your consolidated loan. Therefore, you may have a higher interest rate on your consolidated loan than on your existing loans. If this is the case, it likely will not make sense to consolidate.

The Bottom Line

Having poor credit does not mean that you can’t get a debt consolidation loan. However, it might be more difficult for you to get a loan right away or to get one at a favorable rate. If you decide to apply for a debt consolidation loan, be sure to shop around for the best rates and do your best to improve your credit.

This post originally appeared on Your Money Geek

   

Source: debtdiscipline.com

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How to Manage Your Debt Effectively

Love it or hate it, debt is an integral part of modern life in the United States. And, when you think about it, debt in itself really isn’t a bad thing. Neither are credit cards or loans.

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They only become a potentially negative thing when they’re misused or mismanaged. And once they get out of control, they can head down a long spiral and bring you down with them.

The wise use of debt — whether it’s revolving (like credit cards and lines of credit) or fixed (like a secured car loan or mortgage) — is like the skillful use of the right tool at the right time for the right purpose.

So, it’s important to realize that avoiding debt isn’t really the answer. In fact, trying to go through life without incurring any debt or using credit can be unnecessarily difficult and troublesome. It can even impact non-credit-related situations like renting an apartment. The skill Americans truly need to focus on developing is how to manage debt effectively.

Following are 7 tips to help you manage your debt more effectively:

1. Think Before You Sign

Banks, retailers, and many other organizations make credit very easy to obtain if you have a good credit score.

Nearly every department store or specialty shop has its own credit card that you can sign up for instantly while you’re making a purchase, and it often comes with the enticement of an immediate discount off your purchase.

Even if your credit score isn’t very good, there are many lenders who are willing to offer credit at high interest rates, from 25% APR credit cards to 33% payday loans.

The point to keep in mind is that lenders and retailers want you to spend money with them. They’re not concerned in the least with what more debt is going to do to your budget, your lifestyle, or your future.

So, the first tip is simple:

2. Avoid Applying for Credit Impulsively

Don’t sign up for additional credit as an impulse buy or based on desperation. It’s always going to be a bad idea under those circumstances.

However, if you frequent a certain store and routinely spend money there anyway, and you’re confident you can be responsible with a new credit line, it may be beneficial to sign up. The point is, that needs to be a conscious decision, not a second thought for the sake of a one-time 15% discount.

3. Educate Yourself About Your Credit Score

Your credit score is a 3-digit number calculated by credit reporting agencies based on a number of factors, many of which the average American couldn’t even name. While it may seem somewhat arbitrary, that doesn’t change the fact that that 3-digit number can determine:

  • Whether you qualify for a 0% introductory interest rate or have to settle for a rate that fluctuates at “prime plus 23%”.
  • Whether you’re considered financially trustworthy or not, and therefore whether a landlord will rent to you or certain employers will hire you.
  • Whether or not you can afford to buy your own house one day.
  • And much more…

There are numerous situations that are partially or fully out of your control that can result in damage to your credit score. However, much of the damage done could be avoided if consumers simply understood the basic factors that affect their credit score. Then, they could actively work to improve a bad score or maintain a good one.

So, our second tip is: Seek out reliable information about managing debt effectively and educate yourself, so you’re equipped to take strategic action.

4. Assess Your Current Debt Situation

As you learn more about managing debt and understanding your credit score, you’ll begin learning terms like credit utilization ratio and debt-to-income (DTI) ratio. These simple calculations have a huge impact on your score, and on how willing lenders may be to offer you favorable terms or to offer any credit at all.

  • Credit utilization ratio is the percentage of your currently available credit that you’re already using. (A simple example: If you own one credit card with a $1,000 credit limit, and it has a current balance of $200, you have a credit utilization ratio of 20%.)
  • Debt-to-income ratio is the percentage of your monthly or annual income that goes toward paying off debt you’ve already incurred. (Another simple example: If you earn $6,000 per month and the combined total of your existing car loan, mortgage, and minimum credit card payments amount to $2,000, you have a debt-to-income ratio of 33%.)

There are other important factors as well, but these two figures form a significant part of the calculation when determining your credit score. If they’re going to offer you the best possible terms, lenders want to be relatively confident you’re able to easily afford to pay for the credit they’re offering you.

They can make that decision based, in part, on how much of your current reliable income is already going toward other debt you’ve incurred in the past, as well as how much of your available credit you’ve taken advantage of thus far.

5. Keep Your Credit Utilization Ratio Low

If you already have four credit cards and they’re all maxed out, when you apply for a new credit card, it’s a pretty good bet you’re going to max that one out too. You already have a 100% credit utilization ratio.

This shows you’re probably not great at managing debt, and there’s a good chance you’ll eventually overdraw your ability to pay. So, the credit card company may decline your application, or they may offer a lower credit limit and/or a higher interest rate to help mitigate their risk.

Of course, if your income is such that, even with all those maxed-out cards, you’re having no trouble at all making the monthly payments, (your DTI ratio is still low,) they may not worry about your utilization at all. And that’s where debt tends to snowball quickly and dangerously.

To sum up, here’s the tip: To improve your credit score and make sure you’re managing your debt effectively, you should shoot to maintain a credit utilization ratio and a DTI ratio of no more than 30%. In other words, you’re taking advantage of available credit, but you’re coming nowhere near the maximum you can afford to spend on it.

6. Make and Keep a Budget

This one requires very little explanation. Everyone realizes that creating a budget is necessary if you’re going to manage your spending. The more formal your budget, the better.

If you’re currently in good shape, your credit score is high and your debt is low, A strategic budget can help keep it that way while improving important tools like emergency savings and investments.

If you’re on the other end of the spectrum, your credit score is low and/or your debt is getting out of control. A budget can be the lifeline you need to slowly but surely pull yourself out of that downward spiral one penny at a time.

The formula is very simple: Income > Expenses.

Of course, putting it into practice is a little more challenging. There are plenty of tools available, from a pile of envelopes with cash set aside for various expenses to smartphone apps, but the real value of budgeting depends on your own self-discipline and willingness to stick to the plan you create.

So, for this tip: Make a budget that consistently keeps your income above your expenses, and do everything you possibly can to stick to it.

7. Get Professional Help with Credit Repair If It’s Needed

While all of the above tips are self-serve actions you can take right now to make a difference in your debt management, many Americans are already in a situation where it may not be possible to turn it around completely on their own.

For instance, if the loss of a job, divorce, military deployment, or other major life events caused you to unexpectedly rely on credit cards for months, you may be in a desperate situation that isn’t really even your fault.

Likewise, if you’re like so many Americans who grew up, finished school, and left home without ever learning the basics of financial responsibility, you may have gotten in over your head in debt without even realizing that was possible.

No matter what the reason is for your current situation, you don’t have to go it alone.

Hire a Credit Repair Company

Get in touch with a reputable credit repair agency and discuss your situation with a professional who can help. For a small fee, they can take the reins on your situation by:

  • Investigating your credit report to confirm its accuracy and completeness
  • Working with creditors on your behalf to negotiate payment plans or better terms
  • Disputing errors and eliminating inconsistencies on your report
  • Setting up a realistic budget and debt reduction plan
  • Guiding you through the challenges that will inevitably rise as you resolve your situation

So, the final tip is this: If you need help getting out of snowballing debt and getting yourself to the point that you can effectively manage it going forward, don’t hesitate. Get the help you need.

In modern America, completely avoiding debt is not only difficult, it’s potentially harmful. However, incurring debt without managing it effectively can be even worse. Follow the tips above, and you’re sure to get a solid handle on debt and use it skillfully.

Source: crediful.com

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Debt Settlement vs Bankruptcy: Which is Best?

  • Get Out of Debt

You’ve tried debt payoff strategies, balance transfers, consolidation, and even debt management; you’ve begged your creditors, liquidated your assets, and pestered your friends and families for any money they can afford, but after all of that, you still have more debt than you can handle.

Now what?

Once you reach the end of your rope, the options that remain are not as forgiving as debt management and they’ll do much more damage to your credit score than debt payoff strategies. However, if you’ve tried other forms of debt relief and nothing seems to work, all that remains is to consider debt settlement and bankruptcy.

Debt settlement is a very good way to clear your debt. It’s one of the cheapest and most complete ways to eradicate credit card debt and can help with most other forms of unsecured debt as well. Bankruptcy, on the other hand, is a last resort option for debtors who can’t meet those monthly payments and have exhausted all other possibilities.

But which option is right for you, should you be looking for a debt settlement company or a bankruptcy attorney?

Similarities Between Bankruptcy and Debt Settlement

Firstly, let’s look at the similarities between bankruptcy and debt settlement, which are actually few and far between. In fact, beyond the fact that they are both debt relief options that can clear your debt, there are very few similarities, with the main one being that they both impact your credit score quite heavily.

A bankruptcy can stay on your credit report for up to 10 years and do a lot of damage when it is applied. It may take several years before you can successfully apply for loans and high credit lines again, and it will continue to impact your score for years to come.

Debt settlement is not quite as destructive, but it can reduce your credit score in a similar way and last for up to 7 years. Accounts do not disappear in the same way as when you pay them in full, so future creditors will know that the accounts were settled for less than the balance and this may scare them away.

In both cases, you could lose a couple hundred points off your credit score, but it all depends on how high your score is to begin with, as well as how many accounts you have on your credit report and how extensive the settlement/bankruptcy process is.

Differences Between Bankruptcy and Debt Settlement

The main two types of bankruptcy are Chapter 7 and Chapter 13. The former liquidates assets and uses the funds generated from this liquidation to pay creditors. The latter creates a repayment plan with a goal of repaying all debts within a fixed period of time using an installment plan that suits the filer.

Debt settlement, on the other hand, is more of a personal process, the goal of which is to offer a reduced settlement sum to creditors and debt collectors, clearing the debts with a lump sum payment that is significantly less than the balance.

Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

When people think of bankruptcy, it’s often a Chapter 7 that they have in mind. With a Chapter 7 bankruptcy, all non-exempt assets will be sold, and the money then used to pay lenders. There are filing costs and it’s advised that you hire a bankruptcy attorney to ensure the process runs smoothly.

Chapter 7 bankruptcy is quick and complete, typically finishing in 6 months and clearing most unsecured debts in this time. There is no repayment plan to follow and no lawsuits or wage garnishment to worry about.

Chapter 13, on the other hand, focuses on a repayment plan that typically spans up to 5 years. The debts are not wiped clear but are instead restructured in a way that the debtor can handle. This method of bankruptcy is typically more expensive, but only worthwhile for debtors who can afford to repay their debts.

Filing for bankruptcy is not easy and there is no guarantee you will be successful. There are strict bankruptcy laws to follow and the bankruptcy court must determine that you have exhausted all other options and have no choice but to file.

Bankruptcy will require you to see a credit counselor, which helps to ensure that you don’t make the same mistakes in the future. This can feel like a pointless and demeaning requirement, as many debtors understand the rights and wrongs and got into a mess because of uncontrollable circumstances and not reckless spending, but sessions are short, cheap, and shouldn’t cause much stress.

How Debt Settlement Works

The goal of debt settlement is to get creditors to agree to a settlement offer. This can be performed by the debtor directly, but it’s often done with help from a debt settlement company.

The debt specialist may request that you stop making payments on your debts every month. This has two big benefits:

1. More Money

You will have more money in your account every month, which means you’ll have more funds to go towards debt settlement offers. 

The idea of making large lump sum payments can seem alien to someone who has a lot of debt. After all, if you’re struggling to make $400 debt payments every month on over $20,000 worth of debt, how can you ever hope to get the $5,000 to $15,000 you need to clear those debts in full?

But if you stop making all payments and instead move that money to a secured account, you’ll have $4,800 extra at the end of the year, which should be enough to start making those offers and getting those debts cleared.

2. Creditor Panic

Another aspect of the debt settlement process that confuses debtors is the idea that creditors would be willing to accept reduced offers. If you have a debt worth $20,000 and are paying large amounts of interest every month, why would they accept a lump sum and potentially take a loss overall?

The truth is, if you keep making monthly payments, creditors will be reluctant to accept a settled debt offer. But as soon as you start missing those payments, the risk increases, and the creditor faces the very real possibility that they will need to sell that debt to a collection agency. If you have a debt of $20,000, it may be sold for as little as $20 to $200, so if you come in with an offer of $10,000 before it reaches that point, they’ll snap your hand off!

Types of Debt

A debt settlement program works best when dealing with credit card debt, but it can also help to clear loan debt, medical bills, and more. Providing it’s not government debt or secured debt, it will work. 

With government debt, you need specific tax relief services, and, in most cases, there is no way to avoid it. With secured debt, the lender will simply take your asset as soon as you default.

Debt settlement companies may place some demanding restrictions on you, and in the short term, this will increase your total debt and worsen your financial situation. In addition to requesting that you stop making monthly payments, they may ask that you place yourself on a budget, stop spending money on luxuries, stop acquiring new debt, and start putting every penny you have towards the settlement.

It can have a negative impact on your life, but the end goal is usually worth it, as you’ll be debt-free within 5 years.

Pros and Cons of Debt Settlement and Bankruptcy

Neither of these processes are free or easy. With bankruptcy, you may pay up to $2,000 for Chapter 7 and $4,000 for Chapter 13 (including filing fees and legal fees) while debt settlement is charged as a fixed percentage of the debt or the money saved. 

As mentioned already, both methods can also damage your credit score. But ultimately, they will clear your debts and the responsibilities that go with them. If you’ve been losing sleep because of your debt, this can feel like a godsend—a massive weight lifted off your shoulders.

It’s also worth noting that scams exist for both options, so whether you’re filing bankruptcy or choosing a debt settlement plan, make sure you’re dealing with a reputable company/lawyer and are not being asked to pay unreasonable upfront fees. Reputable debt settlement companies will provide you with a free consultation in the first instance, and you can use the NACBA directory to find a suitable lawyer.

Bankruptcy and Debt Settlement: The End Goal

For all the ways that these two options differ, there is one important similarity: They give you a chance to make a fresh start. You can never underestimate the benefits of this, even if it comes with a reduced credit score and a derogatory mark that will remain on your credit report for years to come.

If you’re heavily in debt, it can feel like your money isn’t your own, your life isn’t secure, and your future is not certain. With bankruptcy and debt settlement, your credit score and finances may suffer temporarily, but it gives you a chance to wipe the slate clean and start again.

What’s more, this process may take several years to complete and in the case of bankruptcy, it comes with credit counseling. Once you make it through all of this, you’ll be more knowledgeable about debt, you’ll have a better grip on your finances, and your impulse control. 

And even if you don’t, you’ll be forced to adopt a little restraint after the process ends as your credit score will be too low for you to apply for new personal loans and high limit cards.

Other Options for Last Ditch Debt Relief

Many debtors preparing for debt settlement or bankruptcy may actually have more options than they think. For instance, bankruptcy is often seen as a get-out-of-jail-free card, an easy escape that you can use to your advantage whenever you have debts you don’t want to pay.

But that’s simply not the case and unless you have tried all other options and can prove that none of them have worked, your case may be thrown out. If that happens, you’ll waste money on legal and filing fees and will be sent back to the drawing board.

So, regardless of the amount of debt you have, make sure you’ve looked into the following debt relief options before you focus on debt settlement or bankruptcy. 

Debt Consolidation

A debt consolidation loan is provided by a specialized lender. They pay off all your existing debts and give you a single large loan in return, one that has a lower interest rate and a lower monthly payment. 

Your debt-to-income ratio will improve, and you’ll have more money in your pocket at the end of the month. However, in exchange, you’ll be given a much longer-term, which means you’ll pay more interest over the life of the loan.

A Debt Management Plan

Debt management combines counseling services with debt consolidation. A debt management plan requires you to continue making your monthly payment, only this will go to the debt management company and not directly to the creditors. They will then distribute the money to your creditors.

You’ll be given a monthly payment that you can manage, along with the budgeting advice you need to keep meeting those payments. In exchange, however, you’ll be asked to close all but one credit card (which can hurt your credit score) and if you miss a payment then your creditors may back out of the agreement.

Balance Transfer Card

If all your debts are tied into credit cards, you can use a balance transfer credit card to make everything more manageable. With a balance transfer credit card, you move one or more debts onto a new card, one that offers a 0% APR for a fixed period. 

The idea is that you continue making your monthly payment, only because there is no interest, all the money goes towards the principal.

Home Equity Loans

If you have built substantial equity in your home then you can look into home equity loans and lines of credit. These are secured loans, which means there is a risk of repossession if you fail to keep up your payments, but for this, you’ll get a greatly reduced interest rate and a sum large enough to clear your debts.

Bottom Line: The Best Option

Debt settlement and bankruptcy are both considered to be last resort debt-relief options, but they couldn’t be more different from one another. Generally speaking, we would always recommend debt settlement first, especially if you have a lot of money tied up in credit card debt.

If not, and you can’t bear the idea of spending several months ignoring your creditors, missing payments, and accumulating late fees, it might be time to consider bankruptcy. In any case, make sure you exhaust all other possibilities first.

Source: pocketyourdollars.com

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