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ByCurtis Watts

Debt Relief & Credit: What You Need to Know

A person stands on the edge of a cliff overlooking greenery and a blue sky, holding their arms aloft and their fingers making peace signs

There’s no single way to get out of debt that’s best for everyone. Each individual case is as unique as you are.

It’s important to consider your situation when deciding which debt relief plan is the best option for you. To help you weigh those options, we have provided an overview of some of the major options here:

  • Debt avalanche and debt snowball
  • Debt consolidation
  • Credit counseling
  • Debt management plan (DMP)
  • Debt settlement and debt negotiation
  • Bankruptcy

How Debt Relief Programs Affect Credit

The debt that you carry (your credit utilization rate) makes up roughly one-third of your overall credit score. When you pay off debt, your credit score typically improves. This is especially true with revolving credit lines—such as credit cards—where your balance is approaching or hovering around the maximum limit. You want to keep your utilization rate below 30% to avoid negative effects to your credit score.

However, reducing your debt can also lower your credit score—even when it’s a good thing! For example, paying off a loan and closing that account may reduce your credit age or mix of accounts, which account for about 15% and 10% of your credit score, respectively.

The type of debt relief program you use can also positively or negatively affect your credit score. Debt settlement, for example, utilizes some tactics that generally have a more negative effect than other types of debt relief programs. Keeping in mind your current credit standing, the program itself and your credit needs will help you make the best choice.

Start by signing up for the free credit report card from Credit.com. This handy tool provides a letter grade for each of the five key areas of your credit for a quick snapshot of where you stand. You can also dig deeper into each factor to monitor what’s happening with your credit and find areas for improvement.

→ Sign up for the free Credit Report Card now.

The Main Approaches to Debt Relief

Once you have a clear picture of your credit history, you can choose one of the six main approaches to debt relief to help you get out of debt. These include the snowball/avalanche option, debt consolidation, credit counseling, debt management plans, debt negotiation/debt settlement and bankruptcy. Each option has its own advantages and drawbacks as well as its own impact on your credit score, both short term and long term.

Debt Relief Option Immediate Credit Impact Long-Term Credit Impact
Debt Snowballs and Avalanches None Reliably Positive
Debt Consolidation Small impact (positive or negative) Minimal
Credit Counseling None expected None expected
Debt Management Plan (DMP) Moderate impact (positive or negative) Minimal
Debt Negotiation or Debt Settlement Severe damange Slow recovery
Bankruptcy Severe damage Slow recovery

Debt Snowball and Debt Avalanche

  • Immediate Credit Impact: None
  • Long-Term Credit Impact: Reliably Positive

The debt snowball and debt avalanche approaches are simply methods of repaying your debts. The choice between snowball or avalanche often comes down to a matter of personal choice.

The debt snowball is when you pay off your debts one at a time, starting with the ones that have the lowest balance. This eliminates those debts from your credit record quickly.

The debt avalanche is when you pay off your debts one at a time, but you start with those that have the highest balances instead. While it takes longer to clear debt from your credit history, the debt you clear takes a larger chunk out of your overall balance owed.

As long as you stick to the minimum payments needed on all of your other credit accounts while you work to pay down your debt, this method has little immediate impact on your credit report and a reliably positive one long term.

Debt Consolidation

  • Immediate Credit Impact: Small (positive or negative)
  • Long-Term Credit Impact: Minimal

Debt consolidation loans and balance transfer credit cards can help you manage your debt by combining multiple lines of credit under one loan or credit card. While this helps by making one payment out of several, it’s not a strategy that actually gets you out of debt. It’s more like a tool to help you get out of debt faster and easier.

Consolidation loans often offer lower interest rates than the original credit lines themselves, which enables you to pay off your debt faster. In addition, having one lower monthly payment makes it easier to avoid late or missed payments.

Balance transfer credit cards let you transfer debt from other cards for a minimal fee. These cards sometimes require that you pay off the balance transfer balance within a certain timeframe to avoid being charged interest. If you choose a balance transfer card, be sure you choose one with terms favorable to your situation and needs.

This form of debt relief has its own set of pros and cons. While it can improve your credit utilization ratio by paying off balances that are close to the credit limit, simply moving balances from one creditor to another doesn’t do a lot for your immediate scores. Transferring multiple debts to one balance transfer card may make your utilization rate higher, which could drop your score as well.

At the same time, opening a new account will require a hard inquiry, which will slightly negatively impact your credit score. A debt consolidation loan adds a new account to your credit report, which most credit scoring models count as a risk factor that may drop your score in the short term as well. On the other hand, adding a loan or credit card to your credit history could improve your credit mix. You’ll need to keep all these factors in mind when determining whether a debt consolidation loan or balance transfer credit card is right for you.

Credit Counseling

  • Immediate Credit Impact: None expected
  • Long-Term Credit Impact: None expected

A credit counselor is a professional adviser that helps you manage and repay your debt. Counselors may offer free or low-cost consultations and educational materials. They often lead their clients to enroll in other debt relief programs such as a debt management plan, which generally require a fee and can affect your credit (see below for more information). Bes ure you fully understand the potential impact of any debt relief program suggested by a credit counselor before you sign up. They’re here to help, so don’t be afraid to ask your counselor how a new plan could affect your credit.

Credit counseling can also help you avoid accumulating debt in the first place. By consulting a credit counselor about whether or not a line of credit is advisable given your current situation, for example, you can avoid taking on debt that will affect you adversely. Choosing a good credit counselor for your situation is essential for positive results.

Debt Management Plan

  • Immediate Credit Impact: Moderate (positive or negative)
  • Long-Term Credit Impact: Minimal

A Debt Management Plan is typically set up by a credit counselor or counseling agency. You make one monthly payment to that agency, and the agency disburses that payment among your creditors. This debt management program can affect your credit in several ways, mostly positive.

While individual lenders may care that a credit counseling agency is repaying your accounts, FICO does not. Since FICO is the leading data analytics company responsible for calculating consumer credit risk, that means a DMP will not adversely affect your credit score. Of course, delinquent payments and high balances will continue to bring your score down even if you’re working with an agency.

When you agree to a DMP, you are required to close your credit cards. This will likely lower your scores, but how much depends on how the rest of your credit report looks. Factors such as whether or not you have other open credit accounts that you pay on time will determine how much closing these lines of credit will hurt your score.

Regardless, the negative effect is temporary. In the end, the impact of making consistent on-time payments to your remaining credit accounts will raise your credit scores.

Debt Negotiation or Settlement

  • Immediate Credit Impact: Severe damage
  • Long-Term Credit Impact: Slow recovery

Some creditors are willing to allow you to settle your debt. Negotiating with creditors allows you to pay less than the full balance owed and close the account.

Creditors only do this for consumers with several delinquent payments on their credit report. However, creditors generally charge off debts once they hit the mark of being 180 days past due. Since charged-off debts are turned over to collection agencies, it is important to try to settle an account before it gets charged off.

Debt settlement companies negotiate with creditors on your behalf, but their tactics often require you to stop paying your bills entirely, which can have a severe negative impact on your credit score. In general, debt settlement is considered a last resort and many professionals recommend bankruptcy before debt settlement.

Bankruptcy

  • Immediate Credit Impact: Severe damage
  • Long-Term Credit Impact: Slow recovery

Filing for bankruptcy will severely damage your credit score and can stay on your credit report for as long as 10 years from the filing date. However, if you are truly in a place of debt from which all other debt relief programs cannot save you, bankruptcy may be the best option.

Moreover, by working diligently to rebuild your credit after bankruptcy you have a good shot at improving your credit scores. Depending upon which type of bankruptcy you file for—Chapter 7, Chapter 11 or Chapter 13—you will pay back different amounts of your debt and it will take varying timelines before your credit can be restored.

Learning the difference between the three main types of bankruptcy can help you choose the right one. A qualified consumer bankruptcy attorney can help you evaluate your options.

Getting Debt Free

Whichever method of debt relief you choose, the ultimate goal is always to pay off your debt. That way, you can save and invest for your future goals. For some, taking a hit to credit temporarily is worth it if it means being able to finally get their balances to zero.

By monitoring your credit with tools like our free Credit Report Card and keeping your financial situation in perspective, complete debt relief is not only possible but within reach.

The post Debt Relief & Credit: What You Need to Know appeared first on Credit.com.

Source: credit.com

ByCurtis Watts

How to Get Debt Consolidation Loans When You Have Bad Credit

Debt consolidation is one of the most effective ways to effectively manage debt. It can greatly improve your debt-to-income ratio and help you get back on your feet. You will have more money in your pocket and less debt to worry about, and while your options are a little more limited if you have bad credit, you can still get a consolidation loan.

In this guide, we’ll look at the ways that a debt consolidation loan will impact your credit score, while also showing you the best ways to consolidate credit card payments and find a credit card consolidation plan that suits your needs.

What is a Debt Consolidation Loan and How Does it Work?

A debt consolidation loan can help you to manage credit card debt and other unsecured debts by consolidating them into one, manageable monthly payment. You get a large loan and use this to clear all your current debts, swapping several high-interest debts for one low-interest loan.

You’ll consolidate multiple payments into a single monthly payment, and, in most cases, this will be much less than what you’re paying right now.

The problem is, creditors aren’t in the business of helping you during your time of need. They’re there to make money, and in exchange for your reduced monthly payment, you’ll get a loan that extends your debt by several years. So, while you may pay a few hundred dollars less per month, you could pay several thousand dollars more over the lifetime of the loan.

Why Consider Debt Consolidation for Bad Credit?

You can use a debt consolidation loan to consolidate credit card debt, clear your obligations, reduce the risk of penalties and fees, and ultimately improve your credit score. What’s more, you may still be accepted for a debt consolidation loan even if you have a poor credit score and a credit report with several derogatory marks.

It’s an option that was tailormade for borrowers with lots of unsecured debt, and it stands to reason that anyone with a lot of debt will have a reduced credit score. Of course, it still helps if you have a high credit score as that will increase your chances of getting a low-interest debt consolidation loan, but even with bad credit, you can get a loan that will reduce your monthly payment.

How Does Debt Consolidation Affect Your Credit Score?

A debt consolidation loan can impact your credit score in a number of ways, all of which will depend on what option you choose:

  • A balance transfer can reduce your score temporarily due to the maxed-out credit card and a new account.
  • If you use a consolidation loan to clear credit card balances, you will diversify your credit report, which can benefit up to 10% of your credit score.
  • If you continue to use your credit cards after clearing them, your credit utilization will drop, and your credit score will suffer.
  • A new consolidation loan account will reduce your credit score because it’s a new account and because the average age of your accounts has decreased.
  • Debt management will reduce your credit utilization score by requiring you to cancel credit cards. This accounts for 30% of your total credit score. 

The good news is that all of these are minor, and the short-term reductions should offset in the long-term. After all, you’re clearing multiple debts, and that can only be a good thing. 

A debt consolidation loan will not impact your score in the same way as debt settlement or bankruptcy.

Alternatives to a Debt Consolidation Loan 

A debt consolidation loan isn’t your only option for escaping debt. There are numerous options for bad credit and good credit, all of which work in a similar way to a debt consolidation loan.

These may be preferable to working with a consolidation loan company, especially if you have a lot of unpaid credit card balances or you’re suffering from financial hardship.

How Does a Debt Management Program Work?

Debt management is provided by credit unions and credit counseling agencies and offered to individuals suffering financial hardship and struggling to repay their debts. A debt management plan typically lasts three to five years and works with unsecured debt only, which includes medical debt, private student loans, and credit cards, but not mortgages or car loans.

A debt management plan ties you to a credit counseling agency, which acts as the middleman between you and your creditors. The agency will help to find a monthly payment you can afford and then negotiate with your creditors. You make your monthly payment through the debt management program and they distribute this to your creditors.

Debt management specialists are experts in negotiation and know how to get creditors to bend to their ways. They understand that lenders just want their money and are keen to avoid defaults and collections, so they remind them that failing to negotiate may increase the risk of such outcomes.

Debt management programs are not free. You will be charged a small up-front fee in addition to a monthly fee. However, the amount of time and money they save you is often worth the small charge.

The only real downsides to a debt management plan is that you’ll be required to cancel most of your credit cards, which will impact your credit score, and if you miss a single payment then creditors will revert to previous terms and your progression will be lost.

A Balance Transfer

You don’t need a debt consolidation loan to consolidate your debt. You can also use something known as a balance transfer credit card. 

A balance transfer allows you to consolidate credit card debt onto a single card. These cards offer you 0% interest for up to 18 months and allow you to transfer multiple credit card balances.

As an example, let’s assume that you have the following credit card balances:

  • Card 1 = $5,000
  • Card 2 = $2,000
  • Card 3 = $3,000
  • Card 4 = $5,000

That gives you a total credit card balance of $15,000. If we assume an APR of 20% and a minimum payment of $500, you will repay over $20,000 in 42 months, with close to $6,000 covering interest alone.

If you use a balance transfer credit card, you will be charged an initial balance transfer rate of between 3% and 5%, after which you will not be required to pay any interest for up to 18 months. Continue making those same monthly payments, and you’ll repay $9,000 before that introductory period ends, which means your debt will be reduced to just $6,000 and can be cleared in 14 months with less than $800 in total interest.

This is a fantastic option if you have a strong credit score, otherwise, you may struggle to find a credit limit high enough to cover your debts. However, it’s worth noting that:

  • Your credit score may take an initial hit due to the new account and maxed-out credit card.
  • The interest rate may be higher, so it’s important to clear as much of the balance as you can before the introductory period ends.
  • You may be charged high penalty fees for late payments.
  • You can’t move credit card debt from cards owned by the same provider.

What About Debt Settlement?

Debt settlement works in a similar way to debt management, in that other companies work on your behalf to negotiate with your creditors. However, this is pretty much where the similarities end.

A debt settlement specialist will request several things from you:

  • You pay a fee (charged upon settlement).
  • You move money to a secure third-party account.
  • You stop meeting your monthly payments.

They ask you to stop making payments for two reasons. Firstly, it will ensure you have more money to move to the third-party account, which is what they use to negotiate with creditors. They will offer those creditors a lump sum payment in exchange for discharging the debt, potentially saving as much as 90%, on top of which they will charge their fee. 

Secondly, the more payments you miss, the more unlikely it is that your account will be settled in full, at which point the lender will be more inclined to accept a sizable settlement.

Debt settlement is not without its issues. It can reduce your credit score, increase the risk of litigation and take several years to complete. However, it’s the cheapest way to clear your debts without resorting to bankruptcy.

You can do debt settlement yourself by contacting your creditors and negotiating reduced sums, but you will need to have a large sum of cash prepared to pay these settlements and you’ll also need a lot of patience and persistence. There are also companies like National Debt Relief that can help, as well a huge number of lesser-known but equally reputable options. 

Who is Eligible for a Personal Loan for Debt Consolidation?

In theory, you can use a personal loan as a debt consolidation loan. In other words, instead of working with a debt consolidation company and allowing them to set the rates and find suitable terms, you just apply for a personal loan, use it to pay off your debts, and then focus your attention on repaying that loan.

This can work very well if you’re using it to repay credit card debt. The average credit card APR in the US is 16% to 20%, while the average personal loan rate is closer to 6%. A personal loan acquired for this purpose will give you more control over the total interest and repayment term. 

However, while you may pay less over the term, it’s unlikely that you’ll reduce your monthly payments. A debt consolidation loan is designed to provide an extended-term so that the monthly payment will be reduced, and unless you choose a loan with a long term, you won’t get the same benefits.

The biggest issue, however, is that you need a very good credit score to get a loan that is big enough to cover your debts and has interest that is low enough to make it a viable option. This is easier said than done, and if you’re drowning in debt there’s a good chance your credit score will not be high enough to make this feasible. 

Is it Time for Bankruptcy?

If you have mounting credit card debt, personal loan debt, and private student loans, and you’re struggling to make the repayments or clear more than the minimum amount, you may want to consider bankruptcy.

It should always be seen as the last resort, as it can have a seriously negative impact on your credit score and make it difficult to get a home loan, car loan, or low-interest credit card for many years. However, if you’re not confident that debt settlement will work for you and believe you’re too far gone for debt management and consolidation, speak with a credit counselor and discuss whether bankruptcy is the right option.

You can learn more about this process in our guides to Filing for Bankruptcy and Rebuilding your Credit After Bankruptcy.

Debt Consolidation for Bad Credit Homeowners

If you own your home, you have a few more options for debt consolidation. When you use your home as collateral against a loan it’s known as a secured debt. It means the lender can repossess your home if you fail to meet the repayments. This also eliminates some of the risks associated with lending, which means they offer more favorable interest rates and terms.

Home Equity Loan and HELOC

An equity loan is a large personal loan secured against the value tied-up in your home. You can acquire an equity loan when you own a large share of your property, in which case you’re using that share as collateral.

Interest rates are very favorable, and you can receive a consolidation loan that clears all your debts and leaves only a small monthly payment and easily manageable debt in their place.

A home equity line of credit (HELOC), works in much the same way, only this time you’re given a line of credit similar to what you’d get with a credit card. You can use this credit to repay your debts, after which you just need to focus on repaying the HELOC.

An equity loan and a HELOC provide the lowest possible interest rates of any debt consolidation loan. However, failure to meet your monthly payments will damage your credit score and place your home at risk.

Cash-Out Refinancing for Consolidation

Cash-Out refinancing replaces your current mortgage with a new, larger mortgage. The difference between these two home loans is then released to you as a cash sum, allowing you to clear your debts in one fell swoop. 

Cash-Out refinancing is often used to fund a child’s college education or a new business, but it’s becoming increasingly common as a form of debt consolidation, helping American homeowners to clear credit card debt and other unsecured debts.

Reverse Mortgages

Reverse mortgages work in a similar way to home equity loans, but with a few key differences. Firstly, they are only offered to homeowners aged 62 or older. Secondly, there is no monthly payment and no other recurring obligations.

A reverse mortgage is only repaid when you sell the home or die. There are also some obligations with regards to maintaining the home and living in it full time, but you don’t need to pay any fees and can use the money gained from this mortgage to clear your debts.

Summary: Consider Your Options

A debt consolidation loan is a great option if you’re struggling with debt. You can try a debt management plan if you have bad credit, a balance transfer if you have great credit, and debt consolidation companies if you’re somewhere in the middle.

But as discussed already, these are not the only options. The debt relief industry is vast and caters for every type and size of debt. Do your research, take your time, and make sure you understand the pros and cons of each option before you decide.

How to Get Debt Consolidation Loans When You Have Bad Credit is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

ByCurtis Watts

FHA Loan Requirements – Guideline & Limits

FHA loan requirements are simple; they’re different than conventional loan requirements. For a conventional loan, for example, you will need a good credit score. However a FHA loan credit score is only 580.

If you’re a first time home buyer and need a first time home buyer loan to purchase your dream home, then keep reading to find out how an FHA loan is right for you.

Click here to compare the rates if you’re thinking of applying for an FHA loan. It’s totally FREE.

In this article, we will cover several topics around the FHA loan requirements. As a first time home buyer, you will need to be aware of these requirements so that your home-buying process can go as smoothly as possible.

Here’s what we will cover: FHA loan limits, FHA loan rates, FHA loan credit score, FHA lenders, and so many others. In addition, we will address the difference between conventional loan requirements versus FHA loan requirements.

Click here to apply for a FHA loan.

FHA Loan Requirements – Guideline & Limits:

Buying a house through an FHA loan, while exciting, can be daunting, especially as a first time home buyer. Taking a few moments to familiarize yourself with the FHA loan requirements can save you from costly mistakes during the home buying process. Below is an overview of FHA loan process

FHA loan definition

What is an FHA loan? Simply stated, an FHA loan is a loan that is insured by the Federal Housing Administration. These type of loan are popular among first time home buyers because they allow them to put as low as 3.5% down payment and require a very low credit score.

So if you’re a first time home buyer with a bad credit, then an FHA loan makes more sense.


Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisorSmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.


FHA loan limits

FHA loan limits refers to the maximum amount of loan the FHA will give you. For 2019, for example, in low cost areas, FHA loan requirements have been set in place allowing the maximum amount for a single family home to be $314, 827. Whereas for a four-plex, the maximum amount is $605,525.

FHA loan limits – low cost areas
Single Duplex Triplex Fourplex
$314,827 $403,125 $487,250 $605,525

 

For high cost areas, the FHA loan limits for a single family home is $726, 525 and for a duplex, the FHA limit is $930, 300. Those limits, of course vary depending on your states and they are update annually. So visit your state to determine what the FHA mortgage lending limits are.

FHA loan limits – high cost areas
Single Duplex Triplex Fourplex
$726,525 $930,300 $1,124,475 $1,397,400

Click here to compare current FHA loan mortgage rates

FHA loan vs conventional

When it comes to get a home loan for presumably the biggest purchase you’ll ever make in your life, you certainly have to know the key differences between an FHA loan and a conventional loan. While it’s easier to get approved for an FHA loan, it’s important so that you can make the best decisions.

FHA loan requirements

fha loan requirements
FHA credit score loan requirement

The FHA loan requirements are fairly simple and straightforward. Here’s what they require: 1) You must have a credit score of at least 580.

2) A 3.5% down payment is required. (*note, if your FICO score is between 500 and 579, then you will have to put 10% down payment). 3) You will have to pay Private Mortgage Insurance (PMI);

4) Your debt to income ratio must be < 43%. Your debt to income ratio is the percentage of your income that you spend on debt, including mortgage, car loan, student debt, etc..

5) The home you intend to purchase must be your primary residence. You must also occupy the property within 60 days of closing.

Click here to shop for FHA mortgage rates in your area

It can’t be an investment property. However, you can buy a duplex or triplex, live in one unit and rent the other units. As long as you reside in the property, you will satisfy that requirement. Also, the house must meet FHA loan limits (see above).

6) Finally, and of course, you must have a steady income and proof of employment. I will discuss later whether a FHA loan is better than a conventional loan. For more information about FHA loan requirements in general, visit the FHA website.

Conventional loan requirements

The requirements for a conventional loan, however, are much stricter. By the way a conventional loan or traditional loan is not insured by the Federal Housing Administration. But instead it is guaranteed by a private lender such as a bank, credit union, mortgage companies, etc…

Of course whether you will qualify for a conventional loan vary from lenders to lenders, but the following are required:

1) A credit score of at least 680 (of course the higher the score is, the more likely you will get qualified, and the lower your interest rate on the loan will be.

2) A down payment of at least 20% of the house purchase price. If you have less than 20%, you still can get the loan. But the problem is, you will have to take out private mortgage insurance, pay its premiums until you achieve at least 20% equity in the house.

3) Your debt to income ratio needs to be around 36% and no more than 43%.

Should you apply for an FHA loan or conventional loan?

As you can see above, the FHA loan requirements are less strict than the conventional loan requirements. However, which one you choose to apply to depends on your personal circumstances.

But if you are a first time home buyer, there are a lot of good reasons why an FHA loan would seem more appealing to you. For one, the down payment is only 3.5% (compare that with a 20% down payment a conventional loan requires). A down payment is the upfront money you need to to make when buying a home.

As a first time home buyer, saving for a 20% down payment on a house can be a big burden. Homes are expensive. For example, saving for $450,000 home can take you years to accomplish, especially if you have other debt like student debt, credit card debt, car loan, etc… So a 3.5% down payment makes it easier for you to buy your own home.

Second, the FHA loan credit score is only 580. Although, you should always take steps to raise your credit score, sometimes certain changes in your life may leave you with a low credit score. Perhaps, you had to file for bankruptcy which resulted in a low credit score.

Or maybe you never had a credit card, which means that you don’t have an established credit history. Or maybe you’re a victim of identity theft which lowered your credit score. So there are several reasons why you could have a low credit score.

However, that shouldn’t mean you can’t buy a house. That’s why the FHA loan requirements make it easier for folks who otherwise would not have been qualified for a conventional loan.

Related Articles:

5 Signs You’re Not Ready To Buy A House

The Biggest Mistakes Millennials Make When Buying a House

How Much House Can I afford

Buy a home with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals. 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.

The post FHA Loan Requirements – Guideline & Limits appeared first on GrowthRapidly.

Source: growthrapidly.com

ByCurtis Watts

How Many Credit Cards Should You Have for Good Credit?

Have you ever wondered, "How many credit cards should I have? Is it wise to have a wallet full of them? Does having multiple credit cards hurt my credit score?"

If you’ve been following this blog or the Money Girl podcast, you know the fantastic benefits of having excellent credit. The higher your credit scores, the more money you save on various products and services such as credit cards, lines of credit, car loans, mortgages, and insurance (in most states).

Even if you never borrow money, your credit affects other areas of your financial life.

But even if you never borrow money, your credit affects other areas of your financial life. For instance, having poor credit may cause you to get turned down by a prospective employer or a landlord. It could also increase the security deposits you must pay on utilities such as power, cable, and mobile plans.

Credit cards are one of the best financial tools available to build or maintain excellent credit scores. Today, I'll help you understand how cards boost your credit and the how many credit cards you should have to improve your finances.

Before we answer the question of how many credit cards you should have in your wallet, it's important to talk about using them responsibly so you're increasing instead of tanking your credit score.

5 tips for using credit cards to build credit

  1. Make payments on time (even just the minimum)
  2. Don’t rely on being an authorized user
  3. Never max out cards
  4. Use multiple cards
  5. Keep credit cards active

A common misconception about credit is that if you have no debt you must have good credit. That’s utterly false because having no credit is the same as having bad credit. To have good credit, you must have credit accounts and use them responsibly.

Having no credit is the same as having bad credit.

Here are five tips for using credit cards to build and maintain excellent credit scores.

1. Make payments on time (even just the minimum)

Making timely payments on credit accounts is the most critical factor for your credit scores. Your payment history carries the most weight because it’s an excellent indicator of your financial responsibility and ability to pay what you owe.

Having a credit card allows you to demonstrate your creditworthiness by merely making payments on time, even if you can only pay the minimum. If the card company receives your payment by the statement due date, that builds a history of positive data on your credit reports. 

I recommend paying more than your card’s minimum. Ideally, you should pay off your entire balance every month so you don’t accrue interest charges. If you tend to carry a balance from month-to-month, it’s wise to use a low-interest credit card to reduce the financing charge.

2. Don’t rely on being an authorized user

Many people start using a credit card by becoming an authorized user on someone else’s account, such as a parent’s card. That allows you to use a card without being legally responsible for the debt.

Some credit scoring models ignore data that doesn’t belong to a primary card owner.

Some card companies report a card owner’s transactions to an authorized user’s credit report. That could be an excellent first step for establishing credit … if the card owner makes payments on time. Even so, some credit scoring models ignore data that doesn’t belong to a primary card owner.

Therefore, don’t assume that being an authorized user is a rock-solid approach to building credit. I recommend that you get your own credit cards as soon as you earn income and get approved.

3. Never max out cards

A critical factor that affects your credit scores is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your total available credit limits. It's known as your credit utilization ratio, which gets calculated per account and on your accounts' aggregate total.

A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%.

Having a low utilization ratio shows that you use credit responsibly by not maxing out your account. A high ratio indicates that you use a lot of credit and could even be in danger of missing a payment soon. A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%. 

For example, if you have a $1,000 card balance and a $5,000 credit limit, you have a 20% credit utilization ratio. The formula is $1,000 balance / $5,000 credit limit = 0.2 = 20%.

There's a common misconception that it's okay to max out a credit card if you pay it off each month. While paying off your card in full is smart to avoid interest charges, it doesn't guarantee a low utilization ratio. The date your credit card account balance is reported to the nationwide credit agencies typically isn't the same as your statement due date. If your outstanding balance happens to be high on the date it's reported, you'll have a high utilization ratio that will drag down your credit scores.

4. Use multiple cards

If you need more available credit to cut your utilization ratio, there are some easy solutions. One is to apply for an additional credit card, so you spread out charges on multiple cards instead of consistently maxing out one card. That reduces your credit utilization and boosts your credit.

Having the same amount of debt compared to more available credit instantly reduces your utilization and improves your credit.

For example, if you have two credit cards with $500 balances and $5,000 credit limits, you have a 10% credit utilization ratio. The formula is $1,000 balance / $10,000 credit limit = 0.1 = 10%. That’s half the ratio of my previous example for one card.

Another strategy to cut your utilization ratio is to request credit limit increases on one or more of your cards. Having the same amount of debt compared to more available credit instantly reduces your utilization and improves your credit.

5. Keep credit cards active

Credit card companies are in business to make a profit. If you don't use a card for an extended period, they can close your account or cut your credit limit. You may not mind having a card canceled if you haven't been using it, but as I mentioned, a reduction in your credit limit means danger for your credit scores.

A reduction in your credit limit means danger for your credit scores.

No matter if you or a card company cancels one of your revolving credit accounts, it causes your total amount of available credit to shrink, which spikes your utilization ratio. When your utilization goes up, your credit scores can plummet.

Anytime your credit card balances become a higher percentage of your total credit limits, you appear riskier to creditors, even if you aren't. So, keep your cards open and active, especially if you're considering a big purchase, such as a home or car, in the next six months.

In general, I recommend that you charge something small and pay it off in full several times a year, such as once a quarter, to stay active and keep your available credit limit in place.

If you have a card that you don't like because it charges an annual fee or a high APR, don't be afraid to cancel it. Just replace it with another card, ideally before you cancel the first one. That allows you to swap out one credit limit for another and avoid a significant increase in your credit utilization ratio.

If you're determined to have fewer cards, space out your cancellations over time, such as six months or more. 

How many credit cards should you have to build good credit?

Now that you understand how credit cards help you build credit, let's consider how many you need. The optimal number for you depends on various factions, such as how much you charge each month, whether you use rewards, and how responsible you are with credit.

There's no limit to the number of cards you can or should have if you manage all of them responsibly.

According to Experian, 61% of Americans have at least one credit card, and the average person owns four. Having more open revolving credit accounts makes you more likely to have higher credit scores, but only when you manage them responsibly. 

As I mentioned, having more available credit compared to your balances on revolving accounts is a crucial factor in your credit scores. If you continually bump up against a 20% utilization ratio, you likely need an additional card.

You can keep an eye on your credit utilization and other important credit factors with free credit reporting tools such as Credit Karma or Experian.

Also, consider how different credit cards can help you achieve financial goals, such as saving money on everyday purchases you're already making. Many retailers, big box stores, and brands have cards that reward your loyalty with discounts, promotions, and additional services.

If you continually bump up against a 20% utilization ratio, you likely need an additional card.

I use multiple cards based on their benefits and rewards. For instance, I only use my Amazon card to get 5% cashback on Amazon purchases. I have a card with no foreign transaction fees that I use when traveling overseas. And I have a low-interest card that I only use if I plan to carry a balance on a large purchase for a short period.

There's no limit to the number of cards you can or should have. Theoretically, you could have 50 credit cards and still have excellent credit if you manage all of them responsibly.

My recommendation is to have a minimum of two cards so you have a backup if something goes wrong with one of them. Beyond that, have as many as you're comfortable managing and that you believe will benefit your financial life.

Source: quickanddirtytips.com

ByCurtis Watts

How to Invest in Stocks: A Guide to Getting Started

A tablet shows the trajectory of a stock.

In 2020, around 55% of American adults invest in the stock market. That’s down from a peak of 65% in 2007 but around the average over the past 10 years. Do you want to get a piece of the action? Before you jump all in, make sure you know the basics of how to invest in stocks. 

A quick note before we dive in: we’re not investment experts or advisors. So if you’re seriously considering investing, you should work with professional brokers, financial advisors or other knowledgeable experts when you invest. That’s especially true if you plan on investing a lot. 

1. Decide on a Budget for Investing

Start by deciding how much you want to use to invest in stocks. Here’s a good starting place—make the potential stocks you’d invest in a percentage of your portfolio. A rule of thumb that many advisors go by is to take 110 or 120 and subtract your age. That’s how much of your investment portfolio you should keep in stocks.

For example, if you’re 30, then you’d keep between 80 and 90% of your portfolio in stocks. If that feels a little aggressive for your financial goals, start with 100 and subtract your age from that.

You also need to decide how much you can invest overall. That depends on your own income, what financial obligations you have and your overall budget. While investing is important, you shouldn’t invest money at the sake of paying your bills, for example.

2. Open an Account for Making Your Investments.

Stocks aren’t like retail goods. You can’t just buy them here and there when you see one you like on display on an ecommerce site. You typically need an account to purchase your stocks through. Some options you can choose include:

  • Opening a brokerage account. This lets you buy and sell stocks through a professional service. You can opt for a brokerage where you do your own research and push the buttons on buying and selling, or you can choose a managed option where someone provides advice or handles these things on your behalf.
  • Using a robo-advisor. This is an app or software program that lets you set goals for your investments and uses machine learning, AI and algorithms to handle your investments. One popular robo-advisor is Acorns, which is an app that lets you round up your purchases with connected debit cards and put the change into investments. While you’re making many micro investments, the total can add up over time.

3. Get Help Creating an Investment Plan

An investment plan is a comprehensive approach to wealth building. Stocks may play an important part in that, but you typically want to ensure you’re well diversified. A diversified portfolio just means you have various types of investments. This way if one isn’t performing well, the others might offer some protection.

One option for getting investment advice is by signing up for an Ellevest account. You pay a monthly membership for this robo investment app, but you gain access to investment and other financial coaching and educational materials.

4. Learn More About Stocks

You don’t have to be a stock expert or financial advisor to have success investing in stocks. But you do have to know a bit about what you’re investing in, especially if you’re going to make very specific stock choices.

You might be familiar with the concept of buying and selling stocks as seen in television and movies. While you canbuy and sell specific stocks because you want to invest in a specific company, you don’t have to invest like that. You can also invest in groups of stocks via stock mutual funds. When you invest in a stock mutual fund, you’re actually buying many different stocks or pieces of stocks. That spreads your risk out over a wider range of assets.

You should also understand the trends associated with the stock market, at least in general. For example, stocks do tend to rise over time barring big economic downturns. On any particular day, the chance that stocks will rise is around 53%. The chance that they will fall is around 47%. But if you look at the long-term, such as a 12-month period, stocks typically have a chance of rising of 75%. 

5. Use Other Tools to Make Investing Easy as You Get Started

Start by getting your immediate financial house in order. Understand what your budget is, and check your credit to ensure there are no surprises looming. You can sign up for ExtraCredit to get a comprehensive understanding of where your credit score is. Once you know where you stand, you can start creating an investment plan with confidence. You can even rely on ExtraCredit’s Reward It feature for cashback offers when signing up for Credit.com partners that provide investment apps and other financial services.

Sign up for ExtraCredit today!

Start Investing in Stocks Today 

So, should you invest? Honestly, that’s up to you. Take a good look at your finances and, if you need guidance, try working with a professional. If you do decide to start investing, start easy and slow. There’s no need to jump all in right at once. Hopefully, if investing works out, you’ll reap some serious rewards. 

The post How to Invest in Stocks: A Guide to Getting Started appeared first on Credit.com.

Source: credit.com

ByCurtis Watts

How to Maximize Credit Card Rewards and Earn Cash and Perks

If you’re looking for ways to put some extra cash in your pocket, make sure to take advantage of credit card rewards programs.

Credit card companies and banks make some of their money from the merchant interchange fees that are charged when you use your card.

As an incentive for you to use their cards, many credit card issuers pass some of those funds on to the consumer in the form of credit card rewards.

If you have good credit and the ability and discipline to pay off your credit cards in full each month, you should try to maximize your credit card rewards. Otherwise you may be leaving a lot of money on the table.

But it can be challenging to navigate the world of credit card rewards. Hundreds, if not thousands, of different credit cards exist, and the type and amount of rewards vary with each card.

There are three main kinds of rewards card offers available:

  • Bank and credit card points: Chase Ultimate Rewards, American Express Membership Rewards, etc.
  • Airline miles and hotel points: Delta SkyMiles, Hilton Honors points, etc.
  • Cash back: Straight cash that can be redeemed either as statement credits or checks mailed to you.

How to Maximize Your Credit Card Rewards

You have three different ways to maximize any credit card rewards program:

  • The sign-up bonus or welcome offer: Many cards offer a large number of miles or points as a welcome bonus for signing up and using the card to make purchases totaling a specific amount within a specified time period.
  • Rewards for spending: Most rewards credit cards offer between one and five points for every dollar you spend on the card. Some cards offer the same rewards on every purchase, while others offer a greater reward for buying certain products.
  • Perks: Simply having certain credit cards can get you perks like free checked bags on certain airlines, hotel elite status or membership with airline lounge clubs and other retail partners.

Usually, the rewards for signing up are much higher than the rewards you get from ongoing spending, so you may want to pursue sign-up bonuses on multiple credit cards as a way of racking up rewards.

Consider a card like the Chase Sapphire Preferred, where you can get 60,000 Ultimate Rewards points for spending $4,000 in the first three months of having the card. That means that while you’re meeting that minimum spending requirement, you’re earning 15 Ultimate Rewards points per dollar. Compare that to the one or two points you’ll earn with each dollar of spending after meeting the minimum spending. You can see the difference.

Other than getting the welcome bonus offers for signing up for new credit cards, another great way to maximize your rewards is by paying attention to bonus categories on your cards. Some cards offer a flat 1 or 2 points for every dollar you spend.

How Applying for Credit Cards Affects Your Credit Score

It’s important to be aware of how applying for new credit cards affects your credit score.

Your credit score consists of five factors, and one of the largest factors is your credit utilization.

Credit utilization is the percentage of your total available credit that you’re currently using. If you have one credit card with a $10,000 credit limit and you charge $2,000 to that card, then your utilization percentage is 20%. But if you have 10 different cards, each with $10,000 credit limits, then that your credit utilization percentage is only 2%.

Since a lower credit utilization is better, having multiple credit cards can actually help this part of your credit score.

New credit — how recently you’ve applied for new credit cards — accounts for about 10% of your credit score. When you apply for a new credit card, your credit score usually will dip 3-5 points. However, if you’re conscientious with your credit card usage, your score will come back up in a few months.

What to Watch Out for When Using Credit Card Rewards

While it’s true that careful use of credit cards can be a boon, you should watch out for pitfalls.

The first thing is to make sure that you have the financial ability, discipline and organization to manage all of your credit cards. Missing payments and paying credit card interest and fees will quickly sap up any rewards you might earn.

Another thing to be aware of is the psychology of credit card rewards. It can be easy to justify additional spending because you’re getting rewards or cash back, but remember that buying something that you don’t need in order to get 2% cash back is a waste of 98% of your money.

Pro Tip

Credit card rewards are alluring, but what do they really cost? Here’s what you should know about the dark side of credit card rewards.

The Best Credit Cards to Get Started

Before signing up for a new credit card, it’s best to pay off your existing cards first — otherwise the fees and interest will quickly outweigh any rewards you earn.

If you’re ready to start shopping rewards offers, here are five credit cards to consider. Note that these introductory offers are subject to change:

  • Chase Sapphire Preferred – The Sapphire Preferred card earns valuable Chase Ultimate Rewards and currently offers 60,000 Ultimate Rewards if you spend $4,000 in the first three months. It comes with a $95 annual fee.
  • Capital One Venture Rewards – The Capital One Venture Rewards is offering 100,000 Venture miles, which can be used on any airline or at any hotel. It also comes with a $95 annual fee.
  • Barclays American AAdvantage Aviator Red – With the AAdvantage Aviator Red card, you’ll get 50,000 American Airlines miles after paying the $99 annual fee and making only one purchase.
  • American Express Hilton Honors – If you’re looking for a hotel card, consider the no-fee Hilton Honors card, which comes with a signup bonus of 80,000 Hilton Honors points after spending $1,000 in three months. There is no annual fee.
  • Bank of America Premium Rewards – The Bank of America Premium Rewards card comes with a bonus of 50,000 Preferred Rewards points (worth $500) after spending $3,000 in the first three months. The card has a $95 annual fee.
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The Bottom Line

The best credit card is the one that gets you the rewards that help you do what is most important to you.

If you’re looking to maximize travel credit, then pick an upcoming trip and figure out what airline miles and hotel chain points you’ll need. Then pick the credit cards that give those miles and points. If you want to maximize your cash back, look for a card with a good signup bonus that either offers cash back or bank points that can be converted into cash.

Dan Miller is a contributor to The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Source: thepennyhoarder.com

ByCurtis Watts

Skipping Renters Insurance? Why That’s a Bigger Risk Than You’d Think

As a finance writer, I am surrounded by people who know a lot about managing money. But even those with the most money know-how can still miss financial must-haves.

For instance, in a recent conversation, a few of my coworkers stated they didn’t have renters insurance. This puts them among the 59% of renters who don’t have renters insurance, according to a poll from the Insurance Information Institute. On the other hand, 95% of homeowners carry homeowners insurance.

Granted, renting comes with fewer property responsibilities than owning. But don’t assume you can skip insurance for your home simply because you’re leasing it. Go without it and you’ll expose yourself to some major risks.

See why opting for a policy is protection you can’t live without, and learn how renters insurance can help smooth over the following five major renting crises.

1. Damaged Belongings

If you’re asking yourself whether you need insurance as a renter, a better question might be, Can you afford not to have it?

If the relatively small cost of a renters insurance premium—typically between $15 and $25 per month—seems too expensive, consider the alternative, suggests John Espenschied, agency principal of Insurance Brokers Group.

“Imagine replacing all your clothes, furniture, electronics, food, personal items, and priceless personal memorabilia,” he says. With renters insurance, the insurer will cover most or part of the value of damaged items. Without this coverage, you’re completely on the hook for all those costs.

Espenschied tells a story of one of his clients, a young woman to whom he recommended rental insurance multiple times. She declined the coverage.

Months later, there was an electrical surge in the building. “It took out everything she owned that was plugged in, including the TV, computer, and several other items,” Espenschied explains. These items were permanently damaged and unusable.

Had she opted for renters insurance, Espenschied could have helped her submit a claim and get the money to replace those belongings. Unfortunately, without the policy there was nothing he could do.

Don’t put yourself in the same position—get a renters insurance policy. On top of that, take steps to document all belongings and valuables so you can prove ownership in a renters insurance claim.

2. The Temporary Loss of a Habitable Home

Some disasters—such as fires, flooding, and electrical issues—can require extensive repairs and render your rental uninhabitable. Your landlord will usually handle these repairs, but if you lose the use of your home, your landlord might only be required to refund a prorated rent for the days you can’t live in your rental.

But if you’re out of a place to live, your daily rent rate might not cover any decent hotels or other temporary housing options.

But there’s good news: “Most renters insurance policies can help you in the event something happens to your apartment or house and you have to live elsewhere while it’s repaired,” says Jennifer Fitzgerald, CEO and cofounder of insurance comparison site PolicyGenius.

Typically, you can find a hotel nearby and your renters insurance will cover the costs of your stay until you can resume habitation of your home.

3. Stolen Belongings

Renters insurance typically includes coverage for theft and burglary too. If your home is broken into or burglarized, you can file a claim with your renters insurance provider to replace any stolen or damaged items.

“It even covers your belongings when they’re not physically in your home,” Fitzgerald says. “So if you take your laptop with you to the local coffee shop or on vacation and it’s stolen, your policy could help cover the costs of getting it repaired or replaced.” Renters insurance will usually be the policy that covers theft of personal items from your car too.

If your home is broken into or your purse is stolen from your car, promptly notifying authorities is an important step—filing a renters insurance loss claim will usually require a police report of the theft.

4. Personal Liability for Legal Damages

The most important protection your renters insurance provides, however, might be personal liability protection.

“If your dog bites someone or a food delivery person slips and falls, you’re covered,” says Stacey A. Giulianti, chief legal officer for Florida Peninsula Insurance. Instead of being held personally responsible for those damages, your insurer will step in and help. “The carrier will even hire and pay for an attorney to defend any resulting lawsuit.”

This can be especially important if you are found responsible for damage to adjacent properties as well, Espenschied says. For example, renters insurance will cover you if your toilet or tub “overflows and leaks into the neighbor’s unit below, causing damage to their personal property and cost to repair the building.” You may also be covered if a kitchen fire in your apartment causes damage to the unit above you.

The damage and loss can easily add up to tens of thousands of dollars. In cases like these, renters insurance can be the difference between smooth recovery and huge financial loss or even bankruptcy.

Make sure you understand your coverage. “Every policy is different, so talk to an agent and read your policy terms,” Giulianti warns.

5. An Eviction for Violating Your Lease Agreement

Many lease agreements include a clause in which the tenant agrees to purchase a renters insurance policy. These common clauses usually clarify that the landlord’s property insurance coverage does not extend to your personal belongings.

If you sign a lease with such a clause, you are agreeing to maintain this insurance coverage throughout your residency there. If you fail to get a policy or allow it to lapse, your landlord is within their rights to serve you with a “comply or quit” notice and possibly begin eviction proceedings.

If you don’t currently have a policy, reconsider getting renters insurance. Alongside a healthy emergency fund, having the right insurance can bring vital financial security to your life. For the cost, renters insurance provides protection and peace of mind.

“Most renters can get a policy for around $20 per month,” Fitzgerald says. “That’s a small price to pay when you think about the fact that if you don’t have renters insurance, you’ll be forced to cover the cost of replacing any and all items damaged.”

Procuring a renters insurance policy is a smart step toward financial security. With the right policy, you can avoid debt in an emergency and protect your possessions and your home. If you’re ready to buy a home, learn more about the ins and outs of home mortgages in Credit.com’s Mortgage Loan Learning Center. And to be financially prepared for anything, it’s also a good idea to build your credit score so you can qualify for loans and other credit when necessary. See where you stand with a free credit score from Credit.com.

Image: istock 

The post Skipping Renters Insurance? Why That’s a Bigger Risk Than You’d Think appeared first on Credit.com.

Source: credit.com

ByCurtis Watts

Should I Refinance My Mortgage? When to Refinance

The Federal Reserve recently lowered interest rates in an effort to stimulate the economy during the coronavirus pandemic. As a result, more and more people are becoming interested in refinancing their mortgage. Depending on the situation, refinancing your mortgage can prove to be a savvy financial decision that can save you massive amounts of money in the long-term. But is it right for you? 

If you’re curious about refinancing your mortgage, this article should answer many of your questions, including: 

  1. How Does Refinancing Work?
  2. When Should I Refinance My Mortgage? 
  3. What is the Downside of Refinancing My Home? 
  4. How Do I Calculate if I Should Refinance My Mortgage? 
  5. What are My Refinancing Options? 

How Does Refinancing Work? 

“Refinancing your mortgage allows you to pay off your existing mortgage and take out a new mortgage on new terms,” according to usa.gov. So when you refinance your mortgage, you’re essentially trading in your old mortgage for a new one. The new loan that you take out pays off the remainder of the original mortgage and takes its place. That means the terms of the old mortgage no longer apply, and you’re instead bound by the terms of the new one. 

There are many reasons why homeowners choose to refinance their mortgage. They may want to secure a loan with a lower interest rate, switch from an adjustable rate mortgage (ARM) to a fixed-rate, shorten or lengthen their repayment term, change mortgage companies, or come up with some cash in order to pay off debts or deal with miscellaneous expenses. As you can see, there are a vast number of reasons why someone might be interested in refinancing. 

There are also a couple of different ways to go about refinancing. A standard rate-and-term refinance is the most common way to do it. With this method, you simply adjust the interest rate you’re paying and the terms of your mortgage so that they become more beneficial to you. 

However, you could also do a cash out refinance, where you pull equity out of your home and receive it in the form of a cash payment, or take out a new loan that’s greater than the remaining debt on the original mortgage. Even though you’ll get an influx of cash in the short-term, a cash out refinance can be a risky option because it increases your debt and it’ll likely cost you in interest payments in the long-term.


When Should I Refinance My Mortgage?

Maybe you’ve been wondering, “Should I refinance my mortgage?” If you can save money, pay off your mortgage faster, and build equity in your home by doing so, then the answer is yes. Whether you can achieve this is dependent on a variety of things. Take a look at these refinance tips in order to get a better idea of when you should refinance your mortgage. 

Capitalize on Low Interest Rates 

When mortgage rates go down, a lot of people consider refinancing their mortgage in order to take advantage of that new lower rate. And this makes perfect sense—by paying a lower interest rate on your mortgage, you could end up saving thousands of dollars over time. But when it comes to refinancing your mortgage, there are a number of other factors you should consider as well. 

Regarding interest rates, you should take a look at how steeply they drop before making any refinancing decisions. It might be a good idea to refinance your mortgage if you can lower your interest rate by at least 2 percent. It ultimately depends on the amount of your mortgage, but anything less than that amount likely won’t be worth it in the long run. 

Switch to Fixed-Rate Mortgage

It’s also very common for people to refinance in order to get out of an adjustable rate mortgage and instead convert to a fixed-rate. An adjustable rate mortgage usually starts off with a lower interest rate than a fixed-rate, but that rate eventually changes and it can end up costing you. That’s because the interest rate on an adjustable rate mortgage changes over time based on an index of interest rates. It can alter based on the mortgage market, the LIBOR market index, and the federal funds rate. 

By converting to a fixed-rate mortgage—where the interest rate is set when you initially take out the loan—before the low rates on your adjustable rate mortgage increase, you can minimize the amount you have to pay in interest. If you’re able to lock in a low fixed interest rate, you’ll be less susceptible to market volatility and more capable of devising a long-term payment strategy.   

GRAPHIC 2

When debating the question of “Should I refinance my mortgage or not?”, you should also keep in mind what lenders will look at when determining the terms of your loan. In order to come up with an interest rate and approve you for a refinancing loan, lenders will take the following factors into consideration: 

  • Payment history on your original mortgage: Before issuing a refinancing loan, lenders will review the payment history on your initial mortgage to make sure that you made payments on time. 
  • Credit score: With good credit, you’ll have more flexibility and options when refinancing. A high credit score will allow you to take out loans with more favorable terms at a lower interest rate. 
  • Income: Lenders will want to see that you generate a steady, reliable income that can comfortably cover the monthly mortgage payments.  
  • Equity: Home equity is the loan-to-value ratio of a borrower. You can calculate it by dividing the amount owed on the current mortgage loan by the home’s current value. Before you consider refinancing, you should ideally have at least 20% equity in your home. If your equity is under 20% but your credit is good, you still may be able to secure a loan, but you’ll likely be charged a higher interest rate or have to pay for mortgage insurance, which is not ideal.

What is the Downside of Refinancing My Home? 

Refinancing a mortgage isn’t for everyone. If you don’t take the time to do your research, calculate savings, and weigh the benefits versus the potential risks, you could end up spending more money on refinancing than you would have had you stuck with the original loan. 

When refinancing, you run the risk of placing yourself in a precarious financial position. This is especially true when it comes to a cash out refinance, as this can put you on the hook for even more money and bury you in interest payments. 

Don’t refinance your home and pull out equity just to get quick cash, make luxury purchases, and buy things you don’t need—doing this is an easy way to dig yourself into a deep financial hole. In reality, you should only refinance your mortgage if you know that you can save money doing it. 

How Do I Calculate if I Should Refinance My Mortgage? 

Before you refinance your mortgage, it’s crucial to crunch the numbers and determine whether it’s worth it in the long-run. To do this, you’ll first have to consider how much refinancing actually costs. 

Consider Closing Costs

So how much does it cost to refinance? One of the most significant expenses to take into account when refinancing is the closing costs. All refinancing loans come with closing costs, which depend on the lender and the amount of your loan, but average around three to six percent of the principal amount of the loan. So, for example, if you took out a loan of $200,000, you would end up paying another $8,000 if closing costs were set at 4%. 

These closing costs are most often paid upfront, but in some cases lenders will permit you to make the closing costs part of the principal amount, thus incorporating them into the new loan. While closing costs generally don’t cover property taxes, homeowner’s insurance, and mortgage insurance, they do tend to include the following: 

  • Refinance application fee
  • Credit fees 
  • Home appraisal and inspection fees 
  • Points fee
  • Escrow and title fees 
  • Lender fee

Determine Your Break-Even Point

To make an informed decision as to whether refinancing your mortgage is a sound financial decision, you should calculate how long it will take for the refinancing to pay for itself. In other words, you’ll want to determine your break-even point. To calculate your break-even point, divide the total closing costs by the amount you’ll save on a monthly basis as a result of your refinance loan. 

The basic equation for figuring out your break-even point is as follows: [Closing Costs] / [Monthly Savings] = [# of Months to Break Even] 

Taking this into consideration, you can see how the length of time you plan on staying in a home can make a big difference as to whether or not refinancing your mortgage is the right option for you. If you’re thinking of moving away and selling your house in a few years, then refinancing your mortgage is probably not the right move. You likely won’t save enough in those few years to cover the additional costs of refinancing. 

However, if you plan on remaining at the house you’re in for a long stretch of time, then refinancing could potentially save you a lot of money. To make an informed decision, you have to do the math yourself—or, to make the calculations even simpler, use Mint’s online loan repayment calculator. 

What are My Refinancing Options? 

As stated above, you have options when it comes to refinancing loans. You could refinance your mortgage in order to secure a lower interest fee and a change in the terms of your loan; or you might opt for a cash out refinance that lets you turn your home’s equity into extra income that you can use to pay for home improvement, tuition costs, high-interest debt payments, and more. 

In order to actually start refinancing your home, you’ll have to find a lender and fill out a loan application. Shop around at large and small banks alike to see who will offer you the lowest interest rates and the best terms. How long does a refinance take? The timeline depends on a few things, including the lender you borrow from and your own financial situation. But, in general, it takes an average of 45 days to refinance a mortgage. 

You might also consider forgoing the traditional banks and dealing with an online non-banking company instead. Alternative lenders often offer greater flexibility in terms of who qualifies for a loan and they can, in some cases, expedite the refinancing process. For example, Freddie Mac is a government-sponsored mortgage loan company that, in addition to offering no cash out and cash out refinancing, has a third option available for borrowers whose loan-to-value ratio is too high to qualify for the traditional refinancing routes. Learn more by visiting freddiemac.com. 

When tackling any big financial decision, it’s important that you’re informed and organized. Learn the facts, do the calculations, and research your options before beginning the refinancing process to make sure it’s the right choice for you. 

The post Should I Refinance My Mortgage? When to Refinance appeared first on MintLife Blog.

Source: mint.intuit.com

ByCurtis Watts

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.

The post Buying A Second Home? 8 Things To Consider appeared first on GrowthRapidly.

Source: growthrapidly.com

ByCurtis Watts

Should You Refinance Your Student Loans?

Due to financial consequences of COVID-19 — and the broader impact on our economy — now is an excellent time to consider refinancing most loans you have. This can include mortgage debt you have that may be converted to a new loan with a lower interest rate, as well as auto loans, personal loans, and more.

Refinancing student loans can also make sense if you’re willing to transition student loans you currently have into a new loan with a private lender. Make sure to take time to compare rates to see how you could save money on interest, potentially pay down student loans faster, or even both if you took the steps to refinance.

Get Started and Compare Rates Now

Still, it’s important to keep a close eye on policies and changes from the federal government that have already taken place, as well as changes that might come to fruition in the next weeks or months. Currently, all federal student loans are locked in at a 0% APR and payments are suspended during that time. This change started on March 13, 2020 and lasts for 60 days, so borrowers with federal loans can skip payments and avoid interest charges until the middle of May 2020.

It’s hard to say what will happen after that, but it’s smart to start figuring out your next steps and determining if student loan refinancing makes sense for your situation. Note that, in addition to lower interest rates than you can get with federal student loans, many private student lenders offer signup bonuses as well. With the help of a lower rate and an initial bonus, you could end up far “ahead” by refinancing in a financial sense.

Still, there are definitely some negatives to consider when it comes to refinancing your student loans, and we’ll go over those disadvantages below.

Should You Refinance Now?

Do you have student loan debt at a higher APR than you want to pay?

  • If no: You shouldn’t refinance.
  • If yes: Go to next question.

Do you have good credit or a cosigner? 

  • If no: You shouldn’t refinance.
  • If yes:  Go to next question.

Do you have federal student loans?

  • If no: You can consider refinancing
  • If yes: Go to next question

Are you willing to give up federal protections like deferment, forbearance, and income-driven repayment plans?

  • If no: You shouldn’t refinance
  • If yes: Consider refinancing your loans.

Reasons to Refinance

There are many reasons student borrowers ultimately refinance their student loans, although they can vary from person to person. Here are the main situations where it can make sense to refinance along with the benefits you can expect to receive:

  • Secure a lower monthly payment on your student loans.
    You may want to consider refinancing your student loans if your ultimate goal is reducing your monthly payment so it fits in better with your budget and your goals. A lower interest rate could help you lower your payment each month, but so could extending your repayment timeline.
  • Save money on interest over the long haul.
    If you plan to refinance your loans into a similar repayment timeline with a lower APR, you will definitely save money on interest over the life of your loan.
  • Change up your repayment timeline.
    Most private lenders let you refinance your student loans into a new loan product that lasts 5 to 20 years. If you want to expedite your loan repayment or extend your repayment timeline, private lenders offer that option.
  • Pay down debt faster.
    Also, keep in mind that reducing your interest rate or repayment timeline can help you get out of student loan debt considerably faster. If you’re someone who wants to get out of debt as soon as you can, this is one of the best reasons to refinance with a private lender.

Why You Might Not Want to Refinance Right Now

While the reasons to refinance above are good ones, there are plenty of reasons you may want to pause on your refinancing plans. Here are the most common:

  • You want to wait and see if the federal government will offer 0% APR or forbearance beyond May 2020 due to COVID-19.
    The federal government has only extended forbearance through the middle of May right now, but they might lengthen the timeline of this benefit if you wait it out. Since this perk only applies to federal student loans, you would likely want to keep those loans at 0% APR for as long as the federal government allows.
  • You may want to take advantage of income-driven repayment plans.
    Income-driven repayment plans like Pay As You Earn (PAYE) and Income-Based Repayment let you pay a percentage of your discretionary income each month then have your loans forgiven after 20 to 25 years. These plans only apply to federal student loans, so you shouldn’t refinance with a private lender if you are hoping to sign up.
  • You’re worried you won’t be able to keep up with your student loan payments due to your job or economic conditions.
    Federal student loans come with deferment and forbearance that can buy you time if you’re struggling to make the payments on your student loans. With that in mind, you may not want to give up these protections if you’re unsure about your future and how your finances might be.
  • Your credit score is low and you don’t have a cosigner.
    Finally, you should probably stick with federal student loans if your credit score is poor and you don’t have a cosigner. Federal student loans come with fairly low rates and most don’t require a credit check, so they’re a great deal if your credit is imperfect.

Important Things to Note

Before you move forward with student loan refinancing, there are some details you should know and understand. Here are our top tips and some important factors to keep in mind.

Compare Rates and Loan Terms

Because student loan refinancing is such a competitive industry, shopping around for loans based on their rates and terms can help you find out which lenders are offering the most lucrative refinancing options for someone with your credit profile and income.

We suggest using Credible to shop for student loan refinancing since this loan platform lets you compare offers from multiple lenders in one place. You can even get prequalified for student loan refinancing and “check your rate” without a hard inquiry on your credit score.

Check for Signup Bonuses

Some student loan refinancing companies let you score a bonus of $100 to $750 just for clicking through a specific link to start the process. This money is free money if you’re able to take advantage, and you can still qualify for low rates and fair loan terms that can help you get ahead.

We definitely suggest checking with lenders that offer bonuses provided you can also score the most competitive rates and terms.

Consider Your Personal Eligibility

Also keep your personal eligibility in mind, including factors beyond your credit score. Most applicants who are turned down for student loan refinancing are turned away based on their debt-to-income ratio and not their credit score. Generally speaking, this means they owe too much money on all their debts when you compare their liabilities to their income.

Credible also notes that adding a creditworthy cosigner can improve your chances of prequalifying for a loan. They also state that “many lenders offer cosigner release once borrowers have made a minimum number of on-time payments and can demonstrate they are ready to assume full responsibility for repayment of the loan on their own.”

It’s Not “All or Nothing”

Also, remember that you don’t have to refinance all of your student loans. You can just refinance the loans at the highest interest rates, or any particular loans you believe could benefit from a different repayment term.

4 Steps to Refinance Your Student Loans

Once you’re ready to pull the trigger, there are four simple steps involved in refinancing your student loans.

Step 1: Gather all your loan information.

Before you start the refinancing process, it helps to have all your loan information, including your student loan pay stubs, in one place. This can help you determine the total amount you want to refinance as well as the interest rates and payments you currently have on your loans.

Step 2: Compare lenders and the rates they offer.

From there, take the time to compare lenders in terms of the rates they can offer. You can use this tool to get the process started.

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Step 3: Choose the best loan offer you can qualify for.

Once you’ve filled out basic information, you can choose among multiple loan offers. Make sure to check for signup bonus offers as well as interest rates, loan repayment terms, and interest rates you can qualify for.

Step 4: Complete your loan application.

Once you decide on a lender that offers the best rates and terms, you can move forward with your full student loan refinancing application. Your student loan company will ask for more personal information and details on your existing student loans, which they will combine into your new loan with a new repayment term and monthly payment.

The Bottom Line

Whether it makes sense to refinance your student loans is a huge question that only you can answer after careful thought and consideration. Make sure you weigh all the pros and cons, including what you may be giving up if you’re refinancing federal loans with a private lender.

Refinancing your student loans can make sense if you have a plan to pay them off, but this strategy works best if you create a debt repayment plan you can stick with for the long-term.

The post Should You Refinance Your Student Loans? appeared first on Good Financial Cents®.

Source: goodfinancialcents.com