Tag Archive Pay Off Debt

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

401k Early Withdrawal: What to Know Before You Cash Out

When it comes to making a 401k early withdrawal, there are a number of reasons why it might be tempting. With millions still unemployed due to the pandemic, unexpected expenses are taking a particularly hard toll. One reason why early withdrawal isn’t uncommon in the U.S. might be because it’s easy to assume you’ll have time to rebuild your 401k nest egg.

However, is the benefit of withdrawing your retirement savings early truly worth the cost? For many people, their 401k is their primary method of investing in their financial future. Before making a decision about early withdrawal, it’s important to consider the penalties and fees that could impact you. Read on to learn exactly what happens when you decide to dip into your 401k so you won’t be surprised by the repercussions.

How Much Are You Penalized for a 401k Early Withdrawal?

On the surface, withdrawing funds from your 401k might not seem like a bad option under extenuating circumstances, but you could face penalties. Young adults are especially prone to early withdrawals because they figure they have plenty of time to replace lost funds.

 

401k early withdrawal penalties

 

If you’re not experiencing a significant hardship, 401k early withdrawal probably isn’t the right choice for you. Ultimately, you could lose a substantial portion of your retirement savings if you choose to withdraw your 401k early to use the money to make other risky financial moves. Below, let’s delve further into the penalties that usually apply when you withdraw early.

1) Your Taxes Are Withheld

When you prematurely withdraw from your retirement account, your first consideration should be that you’ll have to pay normal income taxes on that money first. This means you’re losing at least roughly 30 percent of your savings to federal and state taxes before additional penalties.

Even if you only have $10,000 you want to withdraw, consider that you’re automatically giving $3,000 of your cash to the government. In the best case scenario, you might receive some money back in the form of a tax refund if your withholding exceeds your actual tax liability.

2) You Are Penalized by the IRS

If you withdraw money from your 401k before you’re 59 ½ , the IRS penalizes you with an extra 10 percent on those funds when you file your tax return. If we use the example above, an additional $1,000 would be taken by the government from your $10,000 — leaving you with just $6,000. If you’re 55 or older, you could try to get this penalty lifted by the IRS through the Rule of 55, which is designed for people retiring early.

Also, there are exceptions under the CARES Act, which is designed to help people affected by the pandemic. There are provisions under the act that state individuals under the age of 59 ½ can take up to $100,000 in Coronavirus-related early distributions from their retirement plans without facing the 10 percent early withdrawal penalty under certain conditions.

3) You Lose Thousands in Potential Growth

Even if you’re not deterred by tax penalties, think twice before you sabotage your long-term retirement savings goals. When you withdraw money early, you’ll miss out on potential future savings growth because you won’t gain the perks of compound interest. Compounding is the snowball effect resulting from your savings generating more earnings — not only on your principal investment but also on your accrued interest.

Also, if you make a 401k early withdrawal while the market is down, you’re doing yourself a disservice because you’ll be leaving thousands on the table. It’s unlikely you’ll fully recover the lost years of compound interest you would have benefited from. You might need to get creative with a passive income stream to help support you later in life.

 

tips to minimize 401k withdrawal penalties

 

When Does a 401k Early Withdrawal Make Sense?

In certain cases, it actually might be strategic to move forward with 401k early withdrawal. For example, it could be smart to cash out some of your 401k to pay off a loan with a high-interest rate, like 18–20 percent. You might be better off using alternative methods to pay off debt such as acquiring a 401k loan rather than actually withdrawing the money.

Always weigh the cost of interest against tax penalties before making your decision. Some 401k plans do allow for penalty-free early withdrawals due to a layoff, major medical expenses, home-related costs, college tuition, and more. Regardless of your strategy to withdraw with the least penalties, your retirement savings are still taking a significant hit.

401k Early Withdrawal, Hardship, or Loan: What’s the Difference?

Knowing the differences between a 401k early withdrawal, a hardship withdrawal, and a 401k loan is crucial. Due to the many obstacles to make a 401k early withdrawal, you may find you want to keep it untouched. If you’re convinced you still need to use your 401k for financial assistance, consult with a trusted financial advisor to figure out the best option.

When Does This Apply?

Taxes and
Penalties

Early Withdrawal

Your funds are withdrawn to pay off large debts or finance large projects. Your 401k fund is typically subject to taxes and penalties.

Hardship Withdrawal

You’re only eligible for this type of withdrawal under circumstances such as a pandemic or natural disasters. Withdrawals can’t exceed the amount of the need and the funds are still subject to taxes and penalties.

401k Loan

The loan must be paid back to the borrower’s retirement account under the plan. The money isn’t taxed if the loan meets the rules and the repayment schedule is followed.

Additional Considerations

If you’ve left a job and don’t know what to do with your Roth IRA, a 401k transfer is a good option. Most likely, you will save money and have a wider range of investment options when you transfer your funds. 401k fees can be high, and rolling over your funds to a Roth IRA account could be wise in the long run. Also, be aware that the process is more complicated for indirect rollovers. 

In Summary:

  • If you’re one of the millions of Americans who rely on workplace retirement savings, early 401k withdrawal may jeopardize your future financial stability.
  • There are very few instances when cashing out a portion of your 401k is a smart move.
  • In most cases, any kind of early 401k withdrawal is detrimental to your retirement plans.
  • Stick to your budget and bulk up your emergency fund to stay one step ahead.

In short, 401k early withdrawals are usually counterproductive. Prevent compromising your hard-earned savings by using a free budgeting tool that will set you up for success. After all, being prepared and informed are two of the most important parts of maintaining financial health.

Source: SEC

The post 401k Early Withdrawal: What to Know Before You Cash Out appeared first on MintLife Blog.

Source: mint.intuit.com

ByCurtis Watts

Mint Money Audit: Making the Most of a Side Hustle

This week’s Mint audit introduces us to Selena, 48, a mom of two living in San Antonio, Texas. She is a community college director and her husband, 51, is a full-time graphic designer who also manages a booming side hustle in the same industry.

Selena and her husband have already achieved some impressive financial accomplishments, thanks to tracking their finances on Mint, leveraging coupons and shopping at thrift stores. They’ve paid off $52,000 in student loans and invested in a piece of land next door for $26,000, which they believe has appreciated by nearly 40% since purchasing it a few years ago.

But with retirement looming and two children (currently ages 9 and 12) to possibly put through college, Selena wants to learn about additional money moves that could better prepare them for future expenses. She would also love to pay off the family’s 30-year mortgage before she retires in the next 10 to 12 years. Currently they’re on track to pay it down by 2030.

First, a breakdown of their finances:

NET INCOME

  • Hers: $56,000
  • His: $40,000 plus an additional $40,000 in freelance work
  • Total: $136,000 per year

DEBT

  • Just paid off student loans and a property loan (for the lot next door)
  • Credit Card Debt: $0
  • Mortgage: $163,000 (Monthly payment, including real estate tax, is $1,985)
  • Car note: $5,300 (should be paid off within the year)

RETIREMENT SAVINGS

  • Selena’s teacher pension: Roughly $5,000 per month at retirement if she retires in 12 years ($3,800 if she retires in 6 years).
  • Various IRAs between the two of them: $65,000
  • Estimated social security payments: $2,500 to $3,000 (combined)
  • Husband does not have a 401(k)

RAINY DAY SAVINGS

In an emergency, the family has at least six months of expenses saved up or roughly $35,000.

COLLEGE SAVINGS

Selena and her husband haven’t specifically saved for their children’s college education. They’re concerned that a 529-college savings plan might limit their children’s options, if they didn’t choose to attend a traditional college program.

Recommendations

Leverage the Side Hustle

All in all, I think the family’s finances are in solid shape. But if they’re interested in further securing their future, I would suggest investing the annual side hustle income (which currently sits in a bank account earning no interest) to advance retirement savings and carve out an account for their two children.

Starting that side hustle was a very smart money move because it effectively boosted the family’s net income by 40%. And according to Selena, the business, which they operate out of their living room, is only growing, with profits expected to grow another 30% in the future.

Income from side hustles is how I managed to pay off debt in my 20’s and boost savings. Today, it’s more prevalent among working Americans. More than 44 million Americans have a side revenue stream, according to a recent survey by Bankrate. “Having a side hustle is fiscally responsible,” says Susie Moore, founder of the program Side Hustle Made Simple and the new book, “What If It Does Work Out: How a Side Hustle Can Change Your Life.” “It’s an economic hedge that mitigates disruption to wealth building and future planning. There is no such thing as a fixed income,” she says.

So, let’s do some math and see how far this $40,000 per year side revenue stream can go using a compound interest calculator.

Retirement

The couple’s retirement nest egg is not too shabby. Not including their existing IRAs, the couple has about $8,000 a month coming to them in retirement between social security and Selena’s pension. That amount, alone, basically replaces their current full-time income. (And I do recommend Selena wait 12 years before retiring so that she can take advantage of the maximum pension payment.)

But with all the uncertainty around social security and future health care costs, it can’t hurt to save a little more, right? By placing $6,500 in a Roth IRA each year for the next, say, 15 years (Selena’s husband can qualify for the catch-up contribution since he is 5- years old), they’ll have an additional $142,000 for retirement that won’t be subject to taxes. This assumes an average annual return of 4%. They can open a Roth IRA at any bank.

Future Savings for Children

While a 529 plan may not be the best fit for this family, Selena still would like to carve out savings for her kids’ future endeavors, be it to start a business or attend an alternative school. For this, I’d recommend opening a 5-year certificate of deposit or CD and placing $25,000 in it this year. The going yield right now for a 5-year CD at that deposit level is averaging a little more than 2%.

Then, every year, as income rolls in from the side hustle, create a new 5-year CD and deposit $25,000 in it. Do this for the next four or five years. All CDs will have matured by the time her youngest is starting college (or pursuing something else). And they’ll have at least $100,000 plus interest reserved for their kids. If they do choose to go to college, the family’s prepared to help pay for in-state tuition at one of the fine Texas universities.

Mortgage Payoff

After funding the Roth IRA each year ($6,500) and the annual CD contribution ($25,000), the family’s left with $8,500. They could choose to put this toward the mortgage principal to knock a few years off their payoff schedule. Or, they may want to just hold onto it for that annual family vacation. And if I’m being honest, I’d say, go for the vacation! They deserve it!

The post Mint Money Audit: Making the Most of a Side Hustle appeared first on MintLife Blog.

Source: mint.intuit.com

ByCurtis Watts

The Baby Steps Explained, And Why They Work!

These are the steps that introduced me and my husband to what financial independence is and for that I am eternally grateful. But a lot of important considerations get looked over if you just find a list of the steps…

The post The Baby Steps Explained, And Why They Work! appeared first on Modern Frugality.

Source: modernfrugality.com