Personal Loans: Everything You Need to Know
A personal loan is a relatively flexible loan to be used for short-term financial needs when you don’t want to dip into your savings. Keep reading to learn exactly how they work and what you can afford to do with this type of loan.
What is a personal loan?
A personal loan is money borrowed from a financial institution (think bank, credit union or online lender) that you pay back in fixed monthly payments.
This type of loan typically lasts between two to seven years. It’s a good option if you don’t want to rely on your savings account to cover unexpected expenses or for any non-discretionary purposes, such as debt consolidation.
How do personal loans work?
Personal loans can be relatively easy to qualify for and are based off of your credit history and income.
The money can be used for almost anything, including expensive purchases or medical bills. You might also see them referred to as signature loans or unsecured loans because there is usually no collateral required to secure one (but more on that later).
Once you receive the loan, the money is typically given in one lump-sum that you repay with fixed monthly payments, plus interest (of course@!)
The interest rate — or Annual Percentage Rate (APR) — is determined by your credit score. Higher credit scores will give you better interest rates, since your risk as a borrower is calculated using your credit score.
The interest rate is typically fixed throughout the payment period. However, some lenders have different rules so be sure to check your terms to confirm that your rate won’t change in the repayment process.
Secured vs. Unsecured personal loans
The majority of personal loans are unsecured, meaning they aren’t backed by collateral and a lender decides whether or not to give you the loan based on your credit score, history, and income.
Collateral can be any asset that is able to be seized and sold to repay the loan (if necessary). If you can’t get an unsecured loan, your next option is a secured loan, which is backed by collateral, like your car or house.
What can I use a personal loan for?
Personal loans are very flexible in terms of what you can use them for. Here are a few examples:
- Debt consolidation (most commonly for credit card debt)
- Home improvement projects
- Medical bills
- Refinancing existing loans, or repaying family and friends
- Special occasions such as weddings or funerals
- Small business expenses
- Vacations and holiday shopping
- Divorce costs
- Moving expenses
How to get a personal loan
The process of applying for a personal loan usually involves three steps.
- First, pre-qualify for the loan with multiple lenders. This way, you can compare interest rates and repayment plans. You’ll need to provide information regarding the loan’s purpose, how much you want the loan to be, your ideal monthly payment, and your personal financial information (credit score, history, income, etc.).
- Then, select the best offer. Once you decide what’s best for you, you’ll submit a formal application with the lender. This includes a photo ID, proof of address and employment, your financial information and Social Security number.
- Once approved, you’re all set! And your lender could give you the money as early as the same day as applying.
If you have bad credit:
A strong credit score will give you a better chance of qualifying for a personal loan, having a simpler time applying for one, and give you a better interest rate.
That said, there are lenders who cater to people with bad credit profiles. If you don’t have time to improve your credit before applying for a personal loan, talk to your lender to see if they offer a fair credit or bad credit loan. These will have higher rates, but they’re available to people in a sticky financial situation.
Do personal loans affect my credit score?
Yes, just like any other kind of loan! If you make your personal loan payments in full and on time, this will help improve your credit score. Late or missed payments, on the other hand, will significantly damage your score.
How many personal loans can you have at once?
It depends on the lender. With some lenders, you can have multiple personal loans with them or even across different lenders. But, a lender could limit the amount of money they’ll give you because you may already have too much existing debt. Generally speaking though, there is no law against having a certain number of personal loans at once.
Can you refinance a personal loan?
Yes, it’s possible to refinance a personal loan. When you do this, you replace the existing loan with a new one to hopefully save money and qualify for a lower interest rate than you originally had.
Can you transfer a loan to another person?
Because a personal loan is determined by a person’s credit score and financial history, they generally cannot be transferred to another person. If your loan has a cosigner or guarantor, it is possible for that person to become responsible for the loan if you default. Doing so though would cause a lot of damage to your credit score.
What happens to personal loans when the borrower dies?
If a personal loan is still not paid off by the time the borrower dies, then the borrower’s estate is responsible for the remaining balance of the loan. If the loan had a co-signer, then that person would be in charge of paying off the loan.
The Hidden Traps within HELOC’s and Equity Loans
“Home equity is a means of accumulating wealth, not a piggy bank”.Todd Emerson, Founder & CEO – Credit & Debt
I have been a homeowner for over two decades, and I have seen the worst and the best of the housing market. Without a doubt, the 2008 financial/housing crisis was the worst of the worst.
Reverse engineering the market crash
From Wall Street to Main Street, and throughout the banking industry, the federal government spent hundreds of billions of dollars trying to sidestep a financial catastrophe, and I had a front row seat.
At that time, I was spending a lot of time in Washington DC and worked with some of the smartest and most dedicated people trying to help consumers stay in their homes and helping the US Treasury disseminate billions of dollars to financial institutions on behalf of consumers who wanted to keep their home.
There are many reasons for what happened in 2008, and the years leading up to this point, but in the end, I truly believe it was greed – both by the banks and the consumers.
Housing prices were rising at such a rapid pace and creating so much perceived wealth, it felt like everyone who owned a home became the millionaire next door overnight.
There were only a few who made it out
Now, that may be true for a lot of people; the conservative ones that stayed the course either didn’t tap into home equity or became a real estate mogul/contractor overnight and attempted to buy and flip ever house they came in contact with.
And why wouldn’t most people do this?
Because living next door to them was the newly licensed mortgage representative (this was their side hustle) looking to give you an adjustable-rate mortgage and the courage to take on the world.
Since when do we take financial advice and guidance about something so serious and life altering, from our next-door neighbor, best friend or cousin, that is doing this as a second job? (No disrespect to the individuals that did it the right way).
So, is a home equity loan a good idea?
Let me be very clear about this next point:
Home equity is a means of accumulating wealth, not a piggy bank or slush fund. If not used properly, it can make it seem very easy for people to live beyond their means.
And this is the fundamental problem with homeownership and equity today. To understand this concept, we must first understand the difference between an asset and a liability.
How an equity loan works
I tend to lean towards Robert Kiyosaki’s thinking — the author of Rich Dad, Poor Dad — who says this on the matter: Your home is a liability and does not become an asset until it is sold.
The only portion that can be considered an asset is the equity (the difference between what you owe and what the home is worth), which can only be accessed through sale.
Even if you take out a HELOC (Home Equity Line of Credit) or a Home Equity Loan, you still owe on the money, which makes it not yours.
Now, of course, there are millions of people who know how to properly use these financial instruments, but there are also tens of millions who are not disciplined enough to manage their money on a daily basis, let alone have access to what feels like an unlimited supply of cash.
Financial literacy is the key to building wealth
I can remember when my wife and I bought our first home in our community in 2001. It was a very special time, and besides, this was our first home in a newly developed community. I remember being nervous about signing the loan documents because the cost of the house was more than my parents’ home that I grew up in. I wasn’t 100% sure I was doing the right thing.
Plus, if personal finance is not taught in the home, this big purchase can be over-whelming for anyone, which is why I am such an advocate for financial literacy.
As special as this memory was for me, the thing I remember most was sitting at stop lights with my wife and asking her, “How is it possible that every car beside us is the biggest luxury SUV or a brand-new Mercedes, and what are we doing wrong?”
To further confuse me, I deduced most of the drivers in those cars were stay at home moms, with some type of sticker that denoted their husband was a fireman or police officer.
I had a good job at the time, and my wife has always worked, even though she could probably stay home if she wanted to. But please don’t tell her I said that.
We watched our money very closely, didn’t live outside our means, and even took a weekly allowance. I am very proud to say, that after 20 years of marriage, we still take the same amount each week, the same that we did twenty years ago, and have never changed the amount.
A costly source of income
Remember those people I was telling you about at the stop lights? Well, it seems they could afford their lifestyles on a single income, because they had another income that I was not aware of at the time: home equity.
We knew more people who refinanced their home so many times, that eventually they owed more than their home was worth and they lost it to foreclosure or simply defaulted and walked away to try and start over. Now, I know very little about behavioral economics, but this is how I know that a large portion of consumers/humans are either inherently greedy or know very little about personal finance.
“What is infinite? The universe and the greed of men.”Leigh Bardugo, Shadow and Bone
Between 2006 and 2008, and at the height of the market crash, 1 in 6 homes in my community were in default. My community has 12,500 homes.
That is approximately 2083 homes or 17%. That’s a big number.
When my wife and I purchased the home we currently live in, back in 2009 (I would consider this to be the height of the crash), every home on this street, with the exception of the house we were purchasing, was in default.
Some of the homes were owned by the same person, and these houses were not cheap. But at that time, everyone had access to equity, and according to everyone’s neighbor that was the newly licensed mortgage representative, “the housing market is always going to increase.”
So, what is the moral of this story?
Know what you are getting yourself into, and certainly don’t bite off more than you can chew.
Don’t become a victim of home equity loans
There are many hidden traps within HELOC’s and Equity Loans. If not used properly and for the right reasons they can end up costing you more, or even worse, can cost you your home.
Here are few things to lookout for before tapping into your home equity:
- Rising interest rates affect monthly payments and total borrowing over the life of the loan or line of credit.
- Fluctuating monthly payments can cause financial instability or cause you to go to deeper into debt.
- Interest only payments can come back to haunt you, simply because you want to make the smallest payment each month.
- If you are trying to consolidate debt, going this route will more than likely cost you more in the long run. Besides, there are smarter more effective ways of getting out of debt.
Know what you are getting yourself into and be disciplined enough to use the money in a financially responsible way.
You don’t need to keep up with your neighbors. Take the time to educate yourself on all matters financial.
The Best Credit Card for Bad Credit!
Bankruptcy: Everything You Need to Know
Bankruptcy is a scary word. But it could offer the financial solace you need when a financial situation has become too overwhelming to bear. Keep reading to learn exactly what it is and how it may not be as terrifying as you think.
What is bankruptcy and how does it work?
Bankruptcy is the legal process that happens when someone or a business cannot repay their outstanding debts. It’s overseen by federal bankruptcy courts and is there to help people and businesses eliminate their debt partially or completely, or sometimes help them pay part of what they owe. This is a very complex task to undergo and shouldn’t be done without legal help!
First, you’ll need to meet the requirements to file for bankruptcy, such as showing you can’t repay your debts and also that you’ve completed financial counseling with a government-approved credit counselor. The process starts when the debtor files a petition and their debts are measured and evaluated. Then, depending on which type of bankruptcy you are filing for, the rest of the process will have its own specifications. The goal is to give you a financial fresh start, but it will stay on your credit report for many years and could make borrowing money in the future very difficult.
Types of bankruptcy
There are several different types of bankruptcy all known as chapters. They all vary in filing costs, complexities, and more.
- Chapter 7 Bankruptcy, or Liquidation, is the most common form of bankruptcy chapter. This process does not include a repayment plan, instead, the debtor’s nonexempt assets are collected and sold to pay back the creditors. Nonexempt assets include family heirlooms, second homes, cash, and stocks or bonds. This option is applicable for people who don’t have regular income or who don’t want to use Chapter 13’s plan, which we’ll get to next.
- Chapter 13 Bankruptcy, or a Wage Earner’s Plan, allows individuals with regular income to create a plan to repay all of their debts. This is the second most common chapter and typically takes debtor’s three to five years.
- Chapter 11 Bankruptcy, or Reorganization Bankruptcy, is for businesses who wish to remain open during the bankruptcy process and become profitable once again. This chapter creates new ways to increase revenue and cut costs while under court supervision. For example, a business would raise their service rates or offer more services to become profitable.
- Chapter 9 Bankruptcy is for municipalities and political subdivisions, such as hospitals, airports, and school districts, who are in financial distress. These institutions do not have to liquidate their assets or close, but must create a plan for repaying them over a period of time.
- Chapter 12 Bankruptcy is available to provide relief for family farmers and fisherman. It enables them to carry out their business while coming up with a debt repayment plan.
- Chapter 15 Bankruptcy is for when the filings involve people from multiple countries. It is typically filed in the debtor’s home country.
Who Qualifies for Bankruptcy?
Whether or not you meet the requirements to file for bankruptcy is a good way to determine if it’s a good option. The most common types of bankruptcy for an individual are Chapter 7 and Chapter 13.
To qualify for Chapter 7 bankruptcy you must:
- Have a monthly income that’s lower than the median income for the same sized household in your state
- (if the above is false) Pass a means test to decide if you have enough money to make payments to your creditors
- Not have filed for Chapter 7 bankruptcy in the past eight years
- Not have filed for Chapter 13 bankruptcy in the past six years
- Complete a credit counseling course.
To qualify for Chapter 13 bankruptcy you must:
- Have a sufficient income to make debt payments
- Your unsecured debt must be <$419,275
- Your secured debt must be <$1,257,850
- Have filed federal and state income tax returns for the past 4 years
- Complete a credit counseling course.
When is bankruptcy a good option?
Oftentimes the word “bankruptcy” rings huge alarm bells in our brains. But, if you’re unable to repay your debts and provide necessities like food and shelter for you and your family, it may be your best option. And it isn’t the end of the world. Filing for bankruptcy means an end to collection calls, wage garnishments, potential lawsuits, and the best thing–debt!
The downside of filing for bankruptcy
Declaring bankruptcy is a scary move for many people. Yes, it can help you relieve your debts, but it has a very bad reputation–and possibly for good reason. The biggest being the fact that it lowers your credit score, making it more difficult to get a credit card, loan, mortgage, rent an apartment, or buy a business in the future. (Take a deep breath here, that was a long list!) And a Chapter 7 bankruptcy will stay public record for 10 years after you file. On the other hand, most debtor’s already have poor credit scores from late and missed payments.
Alternatives to bankruptcy
Bankruptcy is just one possible solution when it comes to unmanageable debt. These are some alternatives to consider. Keep in mind, most will still affect your credit score, but maybe not as much as bankruptcy.
- Ask for help. The government offers approved credit counseling or debt management plans that can work with your creditors so you can pay back what you owe.
- Opt for a debt consolidation loan. This is the process of taking out a new loan to pay off your current debts. They typically offer better terms such as lower interest rates and monthly payment options.
- Talk to your creditors. They don’t want you to not repay your debts either, so communicate with them to see if they’re willing to renegotiate a repayment plan you can actually manage.
How to file bankruptcy
All bankruptcy cases go through the federal court system as outlined in the U.S. Bankruptcy Code. You can file for bankruptcy on your own, however, it’s best to work with a bankruptcy lawyer. There will be filing costs and legal fees, but free services are available for those who qualify. The process includes:
- Compiling your financial records. This includes listing all debts, assets, income, and expenses to give the courts and whoever’s helping you a good sense of your situation.
- Getting credit counseling within 180 days before filing. You actually can’t file for bankruptcy until you’ve gone through this requirement. It shows the courts that you’ve done everything you could before filing bankruptcy as a last resort.
- Filing the petition. And if you haven’t found a lawyer, this is the time to do it if you want one. Without legal advice, you run the serious risk of not knowing all of the federal and state laws which could affect the outcome of your case.
- Meeting with your creditors. Once your petition is accepted, the case will be assigned to a bankruptcy trustee who will set up a meeting with your creditors. This will give them the chance to ask questions about your case.
How long does it take to file bankruptcy?
The amount of time it takes to file bankruptcy and complete the process varies by chapter. It will also depend on your financial situation and the amount of debt you have. Generally, a Chapter 7 Bankruptcy can take three to seven months, and Chapter 13 Bankruptcy is anywhere from three to five years.
Can you file bankruptcy on medical bills?
Yes! But you can’t limit your bankruptcy case strictly to your medical bills. When you file, be sure to list all of your debts, and that includes medical bills. They are considered non-priority unsecured debt, meaning it can be forgiven.
How long after bankruptcy can I buy a house?
The length of time it takes to buy a house after bankruptcy depends on the type of bankruptcy you filed for and the type of mortgage loan you’re applying for.
This is because bankruptcy can severely affect your ability to obtain unsecured credit, and even if you do get it, lenders may charge you higher fees and interest rates. Another option may be to reaffirm your current mortgage during the bankruptcy proceedings so you can keep your home and continue paying that mortgage.
Do you need a lawyer to file bankruptcy?
You don’t have to have a lawyer to file for bankruptcy, but the only person that comes to mind who represented themselves in a court of law without one is Ted Bundy. (Yikes.) Bankruptcy has long-term financial and legal consequences, so it’s very important you have a qualified lawyer to guide you along the way.
Debt Consolidation: Everything You Need to Know
When you’re in over your head with student loan payments, credit cards, and more, paying off debt can seem nearly impossible.
Debt consolidation might be an option for you if you need help digging yourself out of a hole. Keep reading to learn more.
What is debt consolidation?
Debt consolidation is the process of taking out a new loan to pay off other debts you owe. This option ideally offers a better payoff deal than your old debts original terms, such as lower interest rates and monthly payments.
It’s a great way to pay back overwhelming credit card debt, student loans, and other liabilities.
How does debt consolidation work?
The first step to starting debt consolidation is to visit your bank, credit union, credit card company, or online personal loan provider to apply for a consolidation loan. If you have a good history with the institution you’re applying at, it should be easier to get the loan. If you aren’t approved, you could try private lenders or mortgage companies.
Once you have the loan, it will enable you to pay off all your debts through that single loan. Many creditors are willing to do this because it increases their chances of actually collecting the debts.
Your new loan will be refinanced with an extended repayment period, so keep in mind you will likely be in debt for a longer period of time. Plus, a lower interest isn’t’ always guaranteed, so be sure to read the fine print with your financial institution.
To sum up the debt consolidation process:
Step 1: Apply for a loan with a trusted lender
Step 2: Take out the loan with the lowest rates and best terms
Step 3: Use your loan to pay off your existing debts.
Different types of debt consolidation explained: how to consolidate debt
There are different kinds of debt consolidation loans and each have their own set of pros and cons. Learn which could be right for you.
1. Debt Management Plans
Debt management plans are a solution for anyone struggling to pay their bills every month. They work by combining all of your unsecured debts into one monthly payment that you can pay off in three to five years. The interest rates, monthly payments, and late fees are lower and you pay a credit counseling agency, who will then pay the creditors the agreed-upon amount.
2. Debt Settlement
Debt settlement is very different from debt consolidation. Like we said, consolidation is a loan that lumps all your unsecured debts into one single payment. Settlement, however, is when you work with a company to negotiate a lump-sum settlement payment with your creditors for less than the original amount you owe. These companies charge a fee for their service, and oftentimes it’s between 15-20% of your total debt. They do not make any actual payments to your credit institutions, they only try to negotiate your current debts.
3. Debt Consolidation Loans
If you’re having trouble managing all of your outstanding debts, a debt consolidation loan may be an option. Banks and private lenders offer these in two different forms: secured and unsecured. A secured loan is backed by one of your assets, like a car or house, to act as collateral. An unsecured loan is not backed by any assets and is more difficult to obtain. They also have higher interest rates and lower qualifying amounts, although the interest rate is still typically lower than what is charged by credit card companies and financial institutions.
Personal loans can be used for just about anything, including paying off your debt! The lender may ask you what you’re planning to do with the money, but most will just want to know you’ll be able to pay it back.
They aren’t secured by collateral and can be relatively inexpensive compared to other loans.
Other types of loans
We recommend exploring the options above before tapping into retirement funds and your home value. That said, it’s important to understand all of the options below.
A 401(k) loan is when you borrow money from your retirement savings account. Every employer’s plan is different, but it’s typically a fast and convenient way to get the money you need. You’ll have to pay back the borrowed money with interest within five years of taking the loan, depending on your employers terms.
Home equity lines of credit (HELOCs)
A home equity line of credit (HELOC) is a second mortgage that allows you to access cash based on your home’s value. Similar to a credit card, they’re pretty flexible in that you can borrow as much as you need up to your home’s equity. These also have flexible interest rates.
To get one, you need a credit score of 620 or higher, a home value that’s at least 15% more than what you owe, and a debt-to-income ratio that’s 40% or less.
Home equity loans
A home equity loan is when you borrow money using your home as the collateral. The money comes as a lump-sum payment and you repay the loan with a fixed-rate interest during a predetermined amount of time.
The amount of money you can borrow is usually determined by your income, market value of your home, and your credit history. A bank, credit union, mortgage company, and mortgage broker are all options to consider taking a loan from.
4. Balance Transfer Credit Cards
If you don’t want to take out a loan, you might consider consolidating all of your credit card payments onto a new credit card. This could be a good idea if the new card charges little to no interest or if there is a $0 annual fee and $0 transfer fee.
When is debt consolidation a good option?
When considering whether debt consolidation is a good idea for you or not, think about your current situation. If you’re juggling multiple bills with different payment amounts, interest rates, and due dates, consolidating everything into one lump-sum payment might be a good idea. Especially if you can get a lower interest rate than what you already have.
“What type of debt consolidation option is best for me?”
The two most common (and least risky) ways of consolidating debt both involve lumping all your current debt payments into one monthly bill.
The first is to move all your debts to a 0% interest balance-transfer credit card and be sure to pay it in full each month. You’ll most likely need a credit score of 690 or higher to qualify.
The next option is to apply for a fixed-rate debt consolidation loan at your financial bureau. Then, use that money to pay off your debt while paying off that loan in set installments. These loans don’t require an excellent credit score, but the higher the score, the lower your interest rate will probably be.
Risky debt consolidation options you should avoid:
Debt consolidation isn’t a perfect solution for overwhelmed debt and doesn’t always work. Here are two loans to be wary of because they put two very important things at risk–your home and your retirement.
A 401(k) loan allows you to borrow money against your retirement savings account, so it should be used as a last resort when you need to pay off debt.
This option is appealing because of it’s low-interest, but it could totally derail your retirement savings. The amount of money you borrow won’t be growing compound interest that could benefit you in the future. There could also be potential tax consequences and penalties for this type of loan if it’s not paid back. Plus, you’ll still have to pay back the balance of the loan if you leave the job.
Home equity lines of credit (HELOCs) & home equity loans
Using home equity lines of credit (HELOCs) or home equity loans relies on your home as collateral, so it can be a risky option to consider.
Let’s start with HELOCs — like we said, these are structured similar to credit cards in that you can access cash based on your home’s value. They have a low, variable rate but because you can take out different amounts at different times, they’re harder to budget for.
Adjustable rates also mean that your payments could increase, leading to deeper debt in the long run.
A home equity loan can be a good idea depending on your financial situation, but nonetheless, you should proceed with extreme caution. With this loan you’ll have a fixed rate and a set payment schedule, so it’s easier to budget for.
But, if you miss a payment or are late, it could put you in danger of losing your home. And if you decide to sell while the loan is still in place, you’ll have to pay the entire balance at once.
Does debt consolidation hurt my credit?
If you make your loan payments on time every month and pay more than is due, it could help improve your credit score.
But if you continue unhealthy spending habits like spending more than your line of credit, or you’re late with your payments or completely miss them, this will hurt your score.
Can I consolidate my debt before applying for a mortgage?
Yes, but patience is key. Consolidate your debt well in advance of buying a home so you’ll be more likely to be approved for a mortgage.
If you pay off your consolidation loan on time and in the full amount, your credit score will increase, which looks great to mortgage companies. It shows you will be a responsible borrower.
Can I refinance my mortgage to consolidate debt?
You can refinance a mortgage to pay off debt, but you’ll want to make sure you have enough equity. A good rule of thumb is if you’ll end up owing more than 80% of your home’s value after you refinance, hold off because you’ll have to buy mortgage insurance. You need 20% equity in your home to avoid mortgage insurance.
Can I file bankruptcy on debt consolidation?
They are two different things! Bankruptcy is a legal process overseen by the federal courts and designed to protect individuals and businesses overwhelmed by debt. It does major damage to your credit score, so another viable option is debt consolidation.
You’ll only want to file for bankruptcy if you cannot consolidate your debt. Speak with a debt coach or a lawyer before going down this path.
Watch Out! Debt Collectors Can Take Your 3rd Stimulus Check. What Can You Do?
The third round of stimulus checks for COVID-19 relief started going out this past weekend after the bill was signed on March 11th.
But will you see that precious #StimmyCheck? If you have debt in collections, your check might disappear before you even realize it ever hit your account. Keep reading to learn the latest updates.
How can debt collectors take stimulus check payments?
Debt collectors may be able to take your stimulus check depending on the type of debt you have.
While the last stimulus check was protected from garnishment by debt collectors, the 2021 Economic Impact Payment (3rd stimulus check) doesn’t have the same protections.
Unfortunately, this lack of protection could severely impact those who need it most. There are ongoing efforts to close this loophole — letters to Congress members and offices — but for now, those who may be impacted should prepare.
Is your #stimmy at risk? Here’s what to do.
Your stimulus money isn’t at risk of being taken to pay back taxes, child support, or government debts. But private debt collectors are not explicitly exempt from going after your stimmy as soon as it hits your bank account — so what can you do?
1. Pay your bills early
Start checking for your stimulus payment to hit your bank account over the next few weeks. Track your payment on the Get My Payment tool. Chances are, debt collectors will act fast — you’ll have to be diligent if you need to prioritize your spending to pay for rent, food, or other bills just in case.
However, if you are able to pay your debts, you should do that — otherwise, you are only hurting your credit score and racking up interest payments, which will cost you more money in the long run.
Break up with your debt just like Noah did.
2. Settle your debts as soon as you can!
Large amounts of debt, like loan debt or credit card debt, can be a huge distraction in these trying times. If you’re able to, we’d recommend you make a substantial payment towards your debt with this stimulus check.
While there’s a lot to consider, your #StimmyCheck can be a catalyst to help you get back on your feet!
Relieving yourself from the debt of stress is rewarding, and you don’t need to be a financial expert to get back on your feet. Reach out to a C&D financial coach, or look into debt relief solutions or credit building tactics.
3. Close your bank account
If your check hasn’t hit your account yet but it’s scheduled for direct deposit, you could close your bank account. This would cause the IRS to send your check via snail mail, which prevents it from being garnished. If you take this route, then you’re likely looking at a delay in your payment arrival so, that’s something to consider as well.
Understanding the 2021 Economic Impact Payments
Stimulus checks will pay out $1,400 to individual taxpayers that earn under $75,000 annually, and $2,800 for joint filers making up to $150,000 annually — plus an additional $1,400 for every dependent, contingent on the following:
- 2019 Taxes (if you have filed for 2020 already, they’ll use that one)
- 2020 Taxes (if you haven’t filed this year’s return yet, they’ll look at 2019 taxes, and make up for the difference in this year’s tax return)
- Number of dependants
- Amount you received in 1st and 2nd stimulus payments (read more about the Recovery Rebate Credit)
- Your income level (phased out)
- If you make more than $75,000 individually, but less than $80,000 individually, or more than $150,000 jointly, but less than $160,000 jointly, you may still be eligible for a “phased out” stimulus check.
For the latest updates on the third stimulus check and the 2021 Economic Impact Payments, visit the Get My Payment page on IRS.gov.
Credit Monitoring: Everything You Need to Know
Our worlds are more digital than ever before, which means our private information is more vulnerable to potential threats like fraud and scams. Keep reading to learn how credit monitoring can help you safeguard against these risks.
What is credit monitoring?
Credit report monitoring is when someone — either yourself or a company — monitors your credit history in order to detect any changes or suspicious activity. This is an effective way to stay diligent to potential identity theft and fraud.
Without monitoring your credit, whether you do it yourself or hire a professional company, your personal information could be compromised along with your access to credit.
What credit monitoring does
Credit monitoring does exactly what it sounds like — it monitors your credit. And whenever changes are made to your credit report, the credit monitoring service will alert you to verify the change(s).
It’s possible to do this on your own without the help of a professional service, however, these services typically have an automated and efficient method for monitoring your credit faster and more accurately.
Credit monitoring alerts may include:
- When a new account is opened in your name
- When someone applies for credit in your name
- Balances and payments on your credit
- Address or name changes
- Access to public records, such as bankruptcies
- Personal information available on the dark web, including your social security, email address, and passwords
What credit monitoring doesn’t do
Credit monitoring is a great resource for spotting and preventing potential fraud, however, it’s not a 100% guarantee of protection against identity theft or unauthorized purchases.
The service will alert you of any changes made to your credit and provide resources to help you identify possible theft, but they can’t actually promise foolproof fraud prevention. They can, however, keep you completely informed in real time so you can take action if need be.
Here are some services credit monitoring doesn’t offer:
- Keeping your personal information safe from data breaches
- Preventing someone else from applying for and opening new accounts in your name
- Stopping phishing emails
- Reporting fraud
- Fixing credit report errors
- Contacting you if someone withdraws money from your bank account
- Alerting you if someone else files a tax return in your name
How to monitor credit
Monitoring your credit requires a strong attention to detail. You’ll first want to verify that your personal information is correct. Double check your name, address, marital status, and employment information.
If you see any discrepancies, such as an address you’ve never lived at or an employer you’ve never worked for, consider these suspicious activities that should be reported as soon as possible.
You should also close any accounts you no longer use, as these are prime targets for criminal activity since they aren’t frequently monitored. Typical criminal activities may include illegal purchases made with a stolen credit card and/or filing fake Social Security or Medicare claims.
Most times, this information is used without the victim’s knowledge and it is very hard to detect after the fact.
Paid vs. free credit monitoring
Like we’ve mentioned, it’s completely possible to monitor your own credit. But we’re also full advocates of knowing yourself. If monitoring your own credit is something you’ll never make a habit of, it’s worth investing in someone else to get the job done.
Credit monitoring services might also make sense if:
- You’ve already been the victim of identity theft (or at high risk). For example, if your Social Security number has already been accessed in a data breach or you lost your Social Security card.
- You don’t want to freeze your credit.
Credit monitoring services
A credit monitoring service provides information about your credit report in a timely manner. What you do with that information is up to you. This isn’t a full-proof guard against identity theft and fraud, just a way to stay informed about what’s happening with your credit.
Here are a few tips to make credit monitoring the most effective for you:
- Avoid free trials. Companies that offer free trials are notoriously hard to cancel after you complete the trial period.
- Cater your notifications to your lifestyle. If you’re always on the go, a text message may be a better way to communicate changes than an email or phone call. Your goal should be to get the most important information as quickly as possible without interrupting your day.
- If you see something suspicious, DO something. Don’t wait to dispute incorrect changes or anything that looks incorrect. The point of credit monitoring is to catch these right away!
Free annual credit reports
Thanks to The Fair Credit Reporting Act (FCRA), everyone in the U.S. can get a free credit report from all three credit reporting agencies: Equifax, Experian, and TransUnion. This is available once every 12 months. Check out AnnualCreditReport.com to find yours.
Tips to protect yourself from identity theft and fraud
There are many other preventative measures to protect yourself from fraud in addition to credit monitoring. Here are some extra steps to consider:
- Freeze your credit report. This will make your report(s) inaccessible to anyone attempting fraud and ensure new accounts can’t be opened in your name. This is a totally free service you can do with your credit bureau.
- Stay wary of spam emails, phone calls, and advertisements. If you don’t know who’s sending the email or calling you, it’s best to just not open it or answer. And be sure to check the legitimacy of the company from any advertisement that looks too good to be true. If they’re asking for personal information right upfront, it’s a red flag.
- Safeguard your personal information. Don’t share your passwords with anyone and keep these stored in a secure app.
What is the best credit monitoring service?
The best credit monitoring service depends all on your needs. There are three types of services available:
- Do-It-Yourself. This requires the most of your time and energy. You’ll only need copies of your credit reports to check them for errors and inaccurate information.
- Free Services. There are many free credit monitoring services that can keep track of everything you could do yourself. This option saves you time and energy.
- Paid Services. This could potentially be the safest and most effective way of monitoring your credit. Companies will monitor your credit on a schedule and report any changes or potential problems immediately. It will save you energy, but cost you money.
Do credit cards have credit monitoring?
Many credit card companies are making credit report information readily available for free. In most cases, they provide a credit score from one of the three creditable bureaus, but not a full report.
Do banks offer credit monitoring?
Some banks and credit unions do offer credit monitoring, and it could be cheaper to go through them. Be sure to confirm that their service covers all three reports and how long it will take for them to notify you of any suspicious activity.
“To Plan, or Not to Plan, That is the Question.”
There is an ancient Chinese proverb that says:
“The best time to plant a tree was 20 years ago. The second-best time is now.”
The same is true for most things in life, but for saving, it means everything. There are few economic principles as powerful as compound interest, and the earlier in life you start saving and investing, the faster your understanding becomes. There is also a wise saying that goes “Do as I say, not as I do”.
Unfortunately, this was the path I started on because debt was my biggest obstacle.
My first financial plan was flawed
Armed with a degree in economics, you would think I would have a solid understanding of investing, and I did. To make matters worse, I had series 7, 6, and 63 licenses because I was starting my dream career as a stockbroker. I know, I know, its’ either ironic or laughable, but it was true. I lived under the mantra to “fake it until you make it” because that was my way of excusing my financial behavior.
I wasn’t equipped to make good decisions around personal finance, credit, debt, and investing, regardless of my degree or licenses I possessed. You see, I thought I could outsmart father time, but I lacked the basic understanding of financial planning principles, and the common sense to apply them.
I am convinced that good money habits start at home, and without them, it puts you at a serious disadvantage. Sure, my parents were savers and lived within their means, but they lacked the understanding of how the stock market worked, compound interest, and the benefits of passing this along to their children.
Mom and dad’s financial plan wasn’t sound either
My parent’s strategy was to save everything, live within your means, and pay in cash. They had zero to little debt and used savings accounts and CD’s to protect their money. You might say, “what is wrong with that?” Well, let me tell you how that plays out.
I am also convinced that my parent’s financial strategy was handed down to them, and in their minds, it served them well. I would also argue that their strategy was flawed, and would have lasting effects for years to come, for both myself and my sister. They never shared much about their finances and as I got older, I was too proud or too embarrassed to ask for advice when needed.
I had a degree in economics, I should know everything — right?
This attitude leads to living outside your means, never saving for retirement, and getting so far into debt that you feel like you can’t breathe.
The two types of wealth
In my view, there is two types of wealth: 1) Asset rich and 2) liquid. My parents were asset rich, paid for everything in cash, no debt, and started saving for retirement later in life. This sounds pretty good, but they didn’t understand the potential tax implications of mortgage interest and how to use it to your advantage, they just complained about paying taxes. In fact, one of my dad’s favorite financial moments was having enough money in his checking account to pay for a new car with his debit card.
Listen closely — this only makes sense if you treat your money like employees and require them to always be working for you. Depleting your cash position to buy assets outside of this scenario doesn’t work or make good financial sense. You will never be truly liquid.
The advantages of financial planning for retirement
By starting early with saving and investing – and avoiding debt at all costs – you’ll likely become self-sufficient and have more control over your life. You don’t want to depend on Social Security, Medicare, Medicaid, or even relatives to take care of you in retirement. If you start saving early, the time value of money and compound interest will take care of you.
Both of these principles are beautiful things. It will help grow your money while you are sleeping (think of this as your side hustle when first starting out). All you have to do is invest small amounts of money over the long run and leave it alone. Sounds simple, because it is simple.
A long term financial plan begins with time
You can find several calculators online that can demonstrate these principles, but here is one scenario that puts it in perspective:
Take two people saving for retirement, one is age 22 and the other is 52. If they both start saving for retirement on the same day, and saving the same amount, $475.00 per month, and assuming only 8% interest, the results are staggering — at age 67, the 52-year-old has accumulated $167,148 dollars, and the 22-year-old has accumulated $2,379,328. Not too shabby, and more than likely the 22-year-old has other investment accounts and could call themselves a millionaire by age 45 or 50. If that type of thing is important to you, then remember that this is what being liquid looks like.
Remember: financial freedom is possible!
Anyone can possess assets or have the appearance of wealth, but to have the ability to purchase what you want, when you want, and without depleting your cash position or having the fear of getting further into debt, that’s financial freedom and being liquid.
And I am here to tell you, it’s possible. So do as I say, and not what I did!
Start saving early, avoid getting into debt at all costs, and never be too embarrassed to ask for help if needed. Like I always tell my daughters, there are two approaches to life: an easy way or a hard way. The easy way may be harder in the beginning, but it always pays greater dividends over time.
Money Doesn’t Grow on Trees
I have a love/hate relationship with one of the most popular parent quotes on personal finance.
If you are under the age of 18 you probably hate it, and if you are a parent like me, well, I am confident it is your “go-to” when your children ask for money. If you haven’t guessed it yet, let me tell you;
“Money doesn’t grow on trees.”
Now, with this basic principle out in the open, let’s assume for now, that it doesn’t. Another day, another article, I will argue the opposite.
Talking to kids about money is important but not always easy
My two daughters mean the world to me, and there isn’t anything I wouldn’t do for them. Of course, there are boundaries and rules, but I am still a sucker for any request, and I will move mountains to make it happen on their behalf.
We have a great relationship, and we speak openly about most matters. I started discussions around money with them, as far back as I can remember, and no topic was off-limits. We talked about credit, debt, savings, investment, and why all of these items were important, and what role they would play during their life.
As with any two people, they are very different in how they act, think, and their approach to life.
In my last post, we talked about my oldest and her lessons on hard money lending and interest working against you. I am happy to say at age 17, she is a saver by nature, an active investor, and understands most financial principles.
But my youngest — well, that’s a different story. As hard as she tries, and she is only 13, money still burns a hole in her pocket. Another “oldie but a goodie” financial saying from the past.
How to teach your child the value of money (maybe)
She talks a good game, but she is still under the belief that my money is her money, and well, that tree outback, it is evergreen and always will be. My focus today will be on her, and helping her understand the value of money, the cost of money, and the time value of money. And of course, that money doesn’t grow on trees.
This past Christmas all she wanted was an e-bike, which seemed manageable, and it was the obvious craze in our community due to Covid 19 restrictions. It seemed at times, there were more e-bikes on the road than cars. On the face, it seems to be a reasonable request, but that has to be measured against the other requests from her and then ensuring a proportional balance to my oldest requests. We like to keep things balanced in our home, which leads to less arguing about who got more, or who is the favorite in the family. Funny how kids think sometimes. And in case you were wondering, the cost of the bike was $999. Remember that, I’ll reference that number again.
Compared to other bikes on the road, this seemed beyond reasonable for my youngest, and to be honest, I had kind of a “proud papa” moment because she had chosen one of the least expensive models, which is NEVER her style.
Remember, she still firmly believes my money is her money. What I can afford, she should be able to buy. But I truly thought this was a break-through moment, and I happily purchased the bike she wanted, put it together Christmas eve, and had it waiting under the tree the following morning.
Problem solved, lesson learned; I’m the greatest Dad ever…right?
Then that little voice inside my head said, “Slow your roll big guy. Just wait, it’s coming.”
And it did.
It didn’t take long…
Less than three weeks on the road — and after all the discussions around safety — my youngest drives into a parked car on the opposite side of the road she was supposed to be on, at top speed (20 mph), and smashes the driver’s side tail-light and back panel.
Now, to her credit, her immediate thought was to inform the owner, and not her own health (she had a few scratches), and not the condition of her new bike. It had a few busted items as well.
Once she was through with her hysterical stage, wait for it, she then inquired about how fast I could get her bike up and running, and when I could pay for the car she hit, so that she could feel better about riding again.
Our conversation went like this:
Me: “How much money do you have?”
Me: “Not even Christmas money?”
Her: “No, I wanted to buy more hoodies and vans.”
Me: “Great, you haven’t learned anything.”
Does money grow on trees?
After much discussion around the cost of the bike, her safety, and the fact that money doesn’t grow on trees, I had to go speak to the owner of the car she hit, which happened to be a brand new 2021 BMW, that he had leased for his wife.
He was grateful that we owned up to it, and he would provide me with quotes to fix the damage. He was gracious in speaking with my daughter, and she of course said thank you, and “my dad will be happy to cover it.”
Yeah, you heard me, I would be “happy” to pay. As much as I wanted to talk about cash, credit, debt, and what I could do with that extra money, I waited until I had the final quote in my hands.
The final quote arrived: $1,500. My daughter’s response? “That’s good, I thought it would be more than that.”
I then walked her outside and asked her to tell me which tree she would like me to pick the $1,500 hundred from, and if she didn’t one, how would she like to pay for it.
My youngest currently receives $15 a week for allowance, and if her chores are completed. And if I am being honest, she should receive it at most, five times a year, but I am softy, and she gets paid each week.
Now at $15 a week, per year, it would take her two years to pay it off. So, I made an offer to lend her the fifteen hundred at 3%, which would be my minimal cost if I took the funds from a savings account, never-mind losing 25% in the market on that money in the current market.
I thought it was more than fair, and besides, she never found any money outside on any of the trees. She didn’t agree with any of my logic and said she would figure it out.
Fast forward a few weeks. Of-course I paid the gentlemen for the damage she caused, and I would never make her pay. It was an accident, and she was healthy. That’s all I cared about. Money can be replaced, but she cannot.
But she needed to learn the importance of not having money when you need it, not having to borrow and paying interest, going into debt, and that my money is not her money. I am confident she didn’t learn much, but at least she is thinking about it, and she now knows the new cost of her bike is $2,500, versus the original $999 price.
An expensive money-lesson for kids
But a lesson none-the-less. I will continue to teach my children about money because it’s important and foundational to growing up. It might take her a little longer, but she will always be worth it, and in the end, everything worked out — almost.
I would be remised if I didn’t tell you how the story ends. Two weeks after paying for the damage and repairing her bike (I managed to fix it, and the cost was a few hours of my time), I caught her riding her bike with 2 passengers and no helmet.
I told her to immediately ride home, park the bike and hand me the keys. She had violated the most important rule on the road, and she knew the penalty. I’m happy to say my wife is the proud new owner of an e-bike, and that my youngest is protected from doing any damage to herself because she was too cool to wear a helmet.
My only hope is she is plotting to earn more money and saving for a new e-bike to call her own.
Repairing Bad Credit: Everything You Need to Know
Good credit is the en tryway to those big-ticket financial decisions that make a difference in your life. Renting an apartment, getting a loan, buying a car, and getting a good travel rewards credit card, are all determined by the good-ole credit score.
If your credit score could use a pick-me-up but you’re not quite sure how to do it, it might be time to initiate the credit repair process.
Keep reading to learn more about how it works and exactly how to get it done!
What is credit repair?
Credit repair is the process of fixing, restoring, or improving your credit score by communicating with your lenders and the credit bureaus about inaccurate information in your credit report.
You can take care of credit repair on your own or hire a third-party company. Some third parties are often called credit repair companies and they dispute information with the credit agencies, undoing damage from inaccurate information, identity theft, and harmful spending habits.
Does credit repair work?
Yes, credit repair can work. There are just a few things to keep in mind, including:
- There are a lot of scams out there. Lots of illegitimate credit repair companies charge illegal fees and use shady business practices to promise positive results they might not deliver. Continue reading to learn about how to choose a legitimate company.
- It takes time. And when it comes to dealing with credit bureaus and reports, it can feel overwhelming. But with the right resources, either with support from an outside organization or composure on your end, you can see results.
- You can do this yourself! If you’re someone who believes a job is done better if you do it yourself, it’s totally possible to comb through your own reports to look for inaccurate information. And this option is also free. We like free stuff.
Can you fix bad credit quickly?
First off, let’s define bad credit: Bad credit is a credit history that includes negative remarks that are damaging to your credit score, like late payments or charge-off accounts. myFICO, the official consumer division of FICO — the company that invented the FICO credit score — states that a poor or bad credit score falls between 300 and 579 out of a possible 850. Believe it or not, a one-point difference in your score, like 579 vs a 580, can make the difference in whether you qualify for the loan you want.
While the timeline for credit improvement can vary based on your credit profile, there are often opportunities to make improvements within 30-60 days. There are actions you or a credit repair company can take to repair your credit more quickly.
How to repair credit scores
Repairing a poor credit score takes time and patience, so be sure to keep this in mind if (and when) things get frustrating!
Start by reviewing your credit report and looking for any inaccurate information. You can then use a credit repair company to dispute these claims or do so yourself. You’ll also want to catch-up on any bills you haven’t paid and create a budget for all your expenses. We know budgeting isn’t the most fun thing to do, so rather than spending time to DIY, consider using a smart budgeting app or calling the pros.
You can often use a secured credit card and other types of credit cards (responsibly!) to start building or rebuilding a positive credit history. Once you begin, be sure to check your credit score regularly.
What do credit repair companies do?
Credit repair companies take the DIY out of credit repair. They offer to improve or fix your poor credit score for a fee. The process starts when you share a copy of your credit report, typically from each of the major consumer credit bureaus: Equifax, Experian, and TransUnion.
The credit repair company will review your report for inaccurate information and negative marks like bankruptcies, tax liens, and charge-offs… bleh. Then, they will create a plan to dispute any identified errors and advocate on your behalf with the company that reports your credit information to the bureaus.
The credit repair process may include validating information with creditors, disputing the negative marks altogether, and/or sending cease-and-desist letters to the debt collectors. Debt validation letters are important because if your creditors can’t prove you owe the debt, you aren’t responsible for it.
Do it yourself credit repair – is it worth it?
To determine whether or not it’s worth working with a credit repair company, ask yourself: “How much time and effort do I have available to put into fixing my credit score?”. If you’re a major DIYer, credit repair might be right up your alley. If you’d rather stop thinking about your credit score until it looks a little better – trust us, we get it – then hire the pros.
If you’re willing to put the energy into going through your report for inaccurate information and remove it, it’s definitely possible. But a credit repair company could save you a lot of time by doing most of the heavy lifting. Plus, the best pros have access and direct connections to the credit bureaus that the average DIYer just doesn’t.
How long does it take to fix bad credit?
It could take a just few weeks or several months to fix a bad credit score and it all depends on the severity of the negative history and quantity of errors bringing down your score.
Here are other things to consider when figuring out your timeline:
- The type of negative information on your credit report and how much of it there is
- The age of your negative information
- Your credit profile and history has a major impact on the way a credit issue affects your score
For example, a foreclosure or bankruptcy will most likely be more difficult to recover from than a one-time late payment.
How long does a repo stay on your credit?
“Repo” stands for repossessions, which are negative items listed on your credit report that can hurt your credit score. When someone comes to take your car because you aren’t making your loan payments, that damage goes a lot farther than you might think.
It takes seven years for a repossession to come off your credit report. That countdown begins from the date of your first missed payment that led to the repossession in the first place.
Is credit repair legit?
There are legit credit repair companies out there that can help you improve a poor credit score, however, be aware of scams.
Any company that demands money up front is typically making promises they won’t be able to keep. Plus, charging fees for credit repair upfront is ILLEGAL.
Other warning signs for scams include:
- They promise to remove all negative information from your credit report. Unfortunately, no company will be able to remove accurate information, good or bad. So anyone who claims they can is probably a fraud.
- They suggest you dispute all information, even when it’s accurate. YIKES! This would just be fraudulent in the eyes of law. Don’t do it.
- They want you to pay upfront. No legitimate credit repair company will ask for money before any work has been done. It’s actually illegal to do so under the federal Credit Repair Organizations Act.
Is credit repair legal?
Credit repair is legal at the federal level. The Credit Repair Organizations Act was enacted in 1996 and regulates how a credit repair company must operate under federal law. It protects consumers from receiving untrue or misleading information from credit repair companies and requires certain disclosures in regards to the sale of “credit repair” services.
According to the Federal Trade Commission, the following practices are not allowed under the CROA:
- Suggesting customers make false statements to credit reporting agencies
- Advising credit repair customers to change their identify to dissociate with their credit information
- Charging fees for any services that have not been fully rendered
- Promising the removal of information from their customer’s credit reports
The CROA also protects credit repair customers by requiring companies to disclose the following information:
- Customers have the right to dispute their own credit report information
- Customers can sue the credit repair company if they violate the CROA
- Credit repair companies cannot force you to sign anything that would waive any of the mentioned rights in this list
- Credit repair companies cannot hide any of the following information listed above
Many states have their own laws about credit repair. A legitimate credit repair service should be diligent about the various laws at the federal level and those specific to your state but it doesn’t hurt to ask upfront.
What’s the best way to repair credit?
The best way to rebuild your credit score is to use your credit card responsibly (and by that, we mean only purchasing things you know you can afford and pay off in full every month). This ensures positive information is sent to your credit bureau every month.
If you’re not at this point quite yet, start by reviewing your credit reports for errors. You might even notice suspicious activity such as identity theft. Then, make an effort to make payments on time and pay all that is due. You’ll also want to avoid getting too close to your credit limit and applying for new credit cards if you don’t need them.
Pro Tip: Never use more than 30% of your credit card limit. For example, don’t allow your balance to go over $300 if your credit limit is $1,000.
How much does it cost for credit repair?
There are a couple ways a credit repair company could charge you for their services. And again, remember that a company:
- Can’t charge up-front fees
- Can’t charge for services until they’re delivered
A company could have you pay a one-time setup fee, which could range anywhere from $20-$90. Typically, that’s combined with a monthly service fee, which can run from $30-$130 a month depending on the services provided. Other companies may use “pay per delete,” which is when they only charge you after an item on your credit report is deleted.