Life in the military offers some distinct experiences compared to civilian life, and that includes your budget and finances. The pre-deployment process can feel overwhelming, especially when youâre organizing your money and bills.Â
Itâs important you provide your family with everything they need to keep you and any dependents comfortable and stable. This means gathering paperwork, making phone calls to service providers, creating new budgets, and organizing your estate. The more you prepare ahead of time, the less you have to worry about the state of your investments and finances when you return home.Â
To help make the process easier, weâve gathered everything you need to know for deployment finances. Read on or jump to a specific category below:
Review Your Estate
Reassign Financial Responsibilities
Update Your Services
Build a Budget
Prepare a Deployment Binder
Protect Yourself From Fraud
Adjust Your Savings
Update Your Budget
Pay Off Debt
Review Legal Documents
Before Your Deployment
Thereâs a lot of paperwork and emotions involved in preparing for deployment. Make sure you take plenty of time for yourself and your loved ones, then schedule time to organize your finances for some peace of mind.Â
investments, and dependents. Itâs an important conversation to have with your partner and establishes:
Power of attorney
Last will and testament
Anyone with property, wealth, or dependents should have some estate planning basics secured. These documents will protect your wishes and your family in the event you suffer serious injury. There are several military resources to help you prepare your estate:
Defense Finance And Accounting Servicesâ Survivor Benefit Plan and Reserve Component Survivor Benefit Plan
Department Of Defenseâs Military Funeral Honors Pre-arrangementÂ
Service Memberâs Group Life Insurance
Veterans Affairs Survivorâs Benefits
The Importance Of Estate Planning In The Military
Survivor Benefits Calculator
Servicemembers Civil Relief Act (SCRA) allows you to cancel a housing or auto lease, cancel your phone service, and avoid foreclosure on a home you own without penalties. Additionally, you can reduce your debt interest rates while youâre deployed, giving you a leg up on debt repayment or savings goals. Learn more about the SCRA benefits below:
Terminating Your Lease For Deployment
SCRA Interest Rate Limits
SCRA Benefits And Legal Guidance
Build a Deployment Budget
Your pay may change during and after deployment, which means itâs time to update your budget. Use a deployment calculator to estimate how your pay will change to get a foundation for your budget.Â
Typically, we recommend you put 50 percent of your pay towards needs, like rent and groceries. If you donât have anyone relying on your income, then you should consider splitting this chunk of change between your savings accounts and debt.Â
Make sure you continue to deposit at least 20 percent of your pay into savings, too. Send some of this towards an emergency fund, while the rest can go towards your larger savings goals, like buying a house and retirement.Â
Use these resources to help calculate your goals and budgets, as well as planning for your taxes:
My Army Benefits Deployment Calculator
My Army Benefits Retirement Calculator
Mint Budget Calculator
IRS Deployed Veteran Tax Extension
IRS Military Tax Resources
Combat Zone Tax Exclusions
Prepare a Deployment Binder
Itâs best to organize and arrange all of your documents, information, and needs into a deployment binder for your family. This will hold copies of your estate planning documents, budget information, and additional contacts and documents.Â
Make copies of your personal documents, like birth certificates, contracts, bank information, and more. You also want to list important contacts like family doctors, your petâs veterinarian, household contacts, and your power of attorney.Â
Once you have your book ready, give it to your most trusted friend or family member. Again, this point of contact will have a lot of information about you that needs to stay secure. Finish it off with any instructions or to-dos for while youâre gone, and your finances should be secure for your leave.Â
While Youâre Deployed
Though most of your needs are taken care of before you deploy, there are a few things to settle while youâre away from home.Â
Romance and identity scams are especially popular and can cost you thousands.Â
Social Media Scams To Watch For
Romance Scam Red Flags
Military Scam Warning Signs
Adjust Your SavingsÂ
Since you wonât be responsible for as many bills, and you may have reduced debt interest rates, deployment is the perfect time to build your savings.
While youâre deployed, you may be eligible for the Department of Defenseâs Savings Deposit Program (SDP), which offers up to 10 percent interest. This is available to service members deployed to designated combat zones and those receiving hostile fire pay.
Military and federal government employees are also eligible for the Thrift Savings Plan. This is a supplementary retirement savings to your Civil Service Retirement System plan.
Savings Deposit Program
Thrift Savings Plan Calculator
Civil Service Retirement System
Military Saves Resources
Additional Resources for Financial Assistance
Deployment can be a financially and emotionally difficult time for families of service members. Make sure you and your family have easy access to financial aid in case they find themselves in need.Â
Each individual branch of the military offers its own family and financial resources. You can find additional care through local support systems and national organizations, like Military OneSource and the American Legion.Â
Family Readiness System
Navy-marine Corps Relief Society
Air Force Aid Society
Army Emergency Relief
Coast Guard Mutual Assistance
Military Onesourceâs Financial Live Chat
Find Your Military And Family Support Center
Emergency Loans Through Military Heroes Fund Foundation Programs
The American Legion Family Support Network
After You Return Home
Coming home after deployment may be a rush of emotions. Relief, exhaustion, excitement, and lots of celebration are sure to come with it. Thereâs a lot to consider with reintegration after deployment, and that includes taking another look at your finances.Â
Update Your Budget
Just like before deployment, you should update your budget to account for your new spending needs and pay. Itâs time to reinstate your car insurance, find housing, and plan your monthly grocery budget.Â
After a boost in savings while deployed, you may want to treat yourself to something nice â which is totally okay! The key is to decide what you want for yourself or your family, figure if itâs reasonable while maintaining other savings goals, like your rainy day fund, and limit other frivolous purchases. Now is not the time to go on a spending spree â itâs best to invest this money into education savings, retirement, and other long-term plans.
In addition to your savings goals, make sure youâre prepared to take care of yours and your familyâs health. Prioritize your mental health after deployment and speak with a counselor, join support groups, and prepare for reintegration. Your family and children may also have a hard time adjusting, so consider their needs and seek out resources as well.Â
FTC | NFCCÂ
The post Guide to Managing Finances for Deploying Service Members appeared first on MintLife Blog.
Debt comes in all shapes and sizes. You can owe money to utility companies, banks, credit card providers, and the government. Thereâs student loan debt, credit card debt, mortgage debt, and much more. But what are the official categories of debt and how do the payoff strategies for these debts differ?
Categories of Debt
Debt is generally categorized into two simple forms: Secured and Unsecured. The former is secured against an asset, such as a car or loan, and means the lender can seize the asset if you fail to meet your obligations. Unsecured is not secured against anything, reducing the creditorâs control and limiting their options if the repayment terms are not met.
A secured debt provides the lender with some assurances and collateral, which means they are often prepared to provide better interest rates and terms. This is one of the reasons youâre charged astronomical rates for credit cards and short-term loans but are generally offered very favorable rates for home loans and car loans.
If the debtor fails to make payments on an unsecured debt, such as a credit card, then the debtor may file a judgment with the courts or sell it to a collection agency. In the first instance, itâs a lot of hassle without any guarantee. In the second, theyâre selling the debts for cents on the dollar and losing a lot of money. In either case, itâs not ideal, and to offset this they charge much higher interest rates and these rates climb for debtors with a poorer track record.
There is also something known as revolving debt, which can be both unsecured and secured. Revolving debt is anything that offers a continuous cycle of credit and repayment, such as a credit card or a home equity line of credit.Â
Mortgages and federal student loans may also be grouped into separate debts. In the case of mortgages, these are substantial secured loans that use the purchase as collateral. As for federal student loans, they are provided by the government to fund education. They are unsecured and there are many forgiveness programs and options to clear them before the repayment date.
What is a Collection Account?
As discussed above, if payments are missed for several months then the account may be sold to a debt collection agency. This agency will then assume control of the debt, contacting the debtor to try and settle for as much as they can. At this point, the debt can often be settled for a fraction of the amount, as the collection agency likely bought it very cheaply and will make a profit even if it is sold for 30% of its original balance.
Debt collectors are persistent as thatâs their job. They will do everything in their power to collect, whether that means contacting you at work or contacting your family. There are cases when they are not allowed to do this, but in the first instance, they can, especially if theyâre using these methods to track you down and they donât discuss your debts with anyone else.
No one wants the debt collectors after them, but generally, you have more power than they do and unless they sue you, thereâs very little they can do. If this happens to you, we recommend discussing the debts with them and trying to come to an arrangement. Assuming, that is, the debt has not passed the statute of limitations. If it has, then negotiating with them could invalidate that and make you legally responsible for the debt all over again.
Take a look at our guide to the statute of limitations in your state to learn more.
As scary as it can be to have an account in collections, itâs also common. A few years ago, a study found that there are over 70 million accounts in collections, with an average balance of just over $5,000.
Can Bankruptcy Discharge all Debts?
Bankruptcy can help you if you have more debts than you can repay. But itâs not as all-encompassing as many debtors believe.
Chapter 7 bankruptcy will discharge most of your debts, but it wonât touch child support, alimony or tax debt. It also wonât help you with secured debts as the lender will simply repossess or foreclose, taking back their money by cashing in the collateral. Chapter 13 bankruptcy works a little differently and is geared towards repayment as opposed to discharge. You get to keep more of your assets and in exchange you agree to a payment plan that repays your creditors over 3 to 5 years.
However, as with Chapter 7, you canât clear tax debts and you will still need to pay child support and alimony. Most debts, including private student loans, credit card debt, and unsecured loan debt will be discharged with bankruptcy.
Bankruptcy can seriously reduce your credit score in the short term and can remain on your credit report for up to 10 years, so itâs not something to be taken lightly. Your case will also be dismissed if you canât show that you have exhausted all other options.
Differences in Reducing Each Type of Debt
The United States has some of the highest consumer debt in the world. It has become a common part of modern life, but at the same time, we have better options for credit and debt relief, which helps to balance things out a little. Some of the debt relief options at your disposal have been discussed below in relation to each particular type of long-term debt.
The Best Methods for Reducing Loans
If youâre struggling with high-interest loans, debt consolidation can help. A debt consolidation company will provide you with a loan large enough to cover all your debts and in return, they will give you a single long-term debt. This will often have a smaller interest rate and a lower monthly payment, but the term will be much longer, which means youâll pay much more interest overall.
Debt management works in a similar way, only you work directly with a credit union or credit counseling agency and they do all the work for you, before accepting your money and then distributing it to your creditors.
Both forms of debt relief can also help with other unsecured debts. They bring down your debt-to-income ratio, leave you with more disposable income, and allow you to restructure your finances and get your life back on track.
The Best Methods for Reducing Credit Cards
Debt settlement is the ultimate debt relief option and can help you clear all unsecured debt, with many companies specializing in credit card debt.Â
Debt settlement works best when you have lots of derogatory marks and collections, as this is when creditors are more likely to settle. They can negotiate with your creditors for you and clear your debts by an average of 40% to 60%. You just need to pay the full settlement amount and the debt will clear, with the debt settlement company not taking their cut until the entire process has been finalized.
A balance transfer can also help with credit card debt. A balance transfer credit card gives you a 0% APR on all transfers for between 6 and 18 months. Simply move all of your credit card balances into a new balance transfer card and then every cent of your monthly payment will go towards the principal.
The Best Methods for Reducing Secured Debts
Secured debt is a different beast, as your lender can seize the asset if they want to. This makes them much less susceptible to settlement offers and refinancing. However, they will still be keen to avoid the costly foreclosure/repossession process, so contact them as soon as youâre struggling and see if they can offer you anything by way of a grace period or reduced payment.
Most lenders have some form of hardship program and are willing to be flexible if it increases their chances of being repaid in full.
Different Types of Debt is a post from Pocket Your Dollars.
Refinancing your student loans can make good financial sense, and thatâs especially true if your current loans are stuck at a high-interest rate. With a new loan at a lower APR, you could save a bundle of money on interest each month and ultimately pay your student debt off faster. Consolidating several loans into one new one can also simplify your financial life and make keeping up with bills a lot easier.
College Ave and Earnest topped our list, but since student loan refinancing is an incredibly competitive space, youâll also want to spend time comparing student loan companies to see who offers the best deal. Many lenders in this space offer incredibly low APRs, flexible payment options, borrower incentives, and more. This means itâs more important than ever to shop around so you wind up with the best student loan for your needs.
Compare rates from dozens of loan providers with Credible
What You Should Know About Refinancing Federal Student Loans with a Private Lender
The lenders on this list can help you consolidate and refinance both federal student loans and private student loans. However, there are a few details to be aware of before you refinance federal loans with a private lender.
Switching federal loans to private means giving up federal protections like deferment and forbearance. You also give up your chance to qualify for income-driven repayment plans like Pay As You Earn (PAYE) or Income Based Repayment (IBR). Income-driven repayment plans let you pay a percentage of your discretionary income for 20 to 25 years before ultimately forgiving your remaining loan balances, so this perk isnât one you should give up without careful thought and consideration.
Best Student Loan Refinancing Companies of 2021
As you start your search to find the best student loan for your lifestyle, take the time to compare lenders and all they offer their customers. While there are a ton of reputable companies offering high-quality student loan refinancing products on the market today, there are also companies you should probably steer clear of.
To make your search easier, we took the time to compare most of the top lenders in this space in terms of interest rates offered, fees, borrower benefits, and more. The following student loan companies are the cream of the crop, so you should start your search here.
Our Top Picks:
PenFed Credit Union
Student Loan Refinancing Company Reviews
1. Splash Financial
Splash Financial may be a newer company in the student loan refinancing space, but their offerings are competitive. This company lets you check your rate online without a hard inquiry on your credit report, and their variable rates currently start at just 2.25% APR.
Not only are interest rates offered by Splash Financial industry-leading, but the company has a 95% customer satisfaction rate so far. Their cutting-edge technology also lets you apply for your loan and complete the loan process online, meaning less hassle and stress for you as the borrower.
Check Out Splash Financialâs Low Rates
2. College Ave
College Ave offers student loan refinancing products that can be tailored to your needs. They offer low fixed and variable interest rates, for example, and youâll never pay an application fee or an origination fee. You can even qualify for a discount if you set your loan up on autopay, and a wide range of repayment schedules are available.
College Ave also offers a wide range of online calculators and tools that can help you figure out how much student loan refinancing could help you save and whether the move would be worth it in the end. Considering their low variable rates start at just 2.74% APR, thereâs a good chance you could save money by refinancing if you have excellent credit or a cosigner with great credit.
Get Started with College Ave
Earnest is another online lender that focuses most of its efforts on offering high-quality student loans. This company lets you consolidate debt at a lower interest rate than you might find elsewhere, and you get the option to pick a monthly payment and repayment period that works with your budget and your lifestyle.
While youâll need excellent credit to qualify for the lowest interest rates, loans from Earnest come with variable APRs starting at 1.81% and low fixed rates starting at just 3.45%. To qualify for student loan refinancing with Earnest, youâll need a minimum credit score of 650 and a strong employment and income history. You also need to be current on all your bills and cannot have a bankruptcy on your credit profile.
Refinance and Save with Earnest
Also make sure to check out student loan refinancing company SoFi as you continue your search. This online lender offers some of the best student loan refinancing products available today, including loans with no application fee, origination fee, or hidden fees.
SoFi lets you apply for and complete the entire loan process online, and they offer live customer support 7 days a week. You can also check your rate online without a hard inquiry on your credit report, which makes it easier to see how much you could save before you commit.
Get Pre-Approved with SoFi in Less than 2 Minutes
Commonbond is another online student lender who lets you check your rate online without a hard inquiry on your credit report. With student loan refinancing from Commonbond, you could easily save thousands of dollars on interest with a new fixed interest rate as low as 3.21%. Repayment terms are offered for 5 to 20 years as well, letting you choose a new monthly payment and repayment timeline that works for your needs.
You can apply for your new loan online and note that these loans donât come with an origination fee or any prepayment penalties. Your loan could also qualify for forbearance, which means having up to 24 months without payments during times of financial hardship.
Apply Online with Commonbond
LendKey offers private student loans and flexible student loan refinancing options to serve a variety of needs. You can repay your loan between 5 and 20 years, and their refinance loans donât charge an origination fee.
You can use this companyâs online interface to check your rate without a hard inquiry on your credit report, and variable APRs start at just 2.01% for graduates with excellent credit. LendKey loans also receive 9.3 out of 10 possible stars in recent reviews, meaning their customers are mostly happy with their decision to go with this company.
Save Thousands by Refinancing with LendKey
7. Wells Fargo
While Wells Fargo is mostly popular for their banking products, home mortgage products, and personal loans, this bank also offers student loan refinancing products. These loans let you consolidate student debts into a new loan with a low variable or fixed interest rate, and you can even score a discount for setting your loan up on autopay.
Terms for Wells Fargo loans are available anywhere from 5 to 20 years, meaning you can choose a repayment schedule and monthly payment that suits your needs. Wells Fargo also lets you check your rate online without a hard inquiry on your credit report.
Get Started with Wells Fargo
8. PenFed Credit Union
PenFed Credit Union offers unique student loan products powered by Purefy. You might be able to qualify for a lower interest rate that could lead to enormous interest savings over time, and PenFed lets you choose a repayment term and monthly payment that fits with your budget and lifestyle.
You can apply for student loan refinancing on your own, but PenFed Credit Union also allows cosigners. Low fixed interest rates start at just 3.48% APR, and you can check your rate online without a hard inquiry on your credit report.
Learn More about PenFed Credit Union
What To Look For When Refinancing
If you decide you want to refinance your student loans, youâll be happy to know the refinancing market is more robust than ever. A variety of lenders offer insanely attractive loan options for those who can qualify, although you should know that student loan companies tend to be very finicky about your credit score. Some also wonât let you refinance if you didnât graduate from college, or even if you graduated from an âunapprovedâ school.
While you should be aware of any lender-specific eligibility requirements before you apply with any student loan company, there are plenty of other factors to look out for. Hereâs everything you should look for in a student loan refinancing company before you decide to trust them with your loans.
Low Interest Rate
Obviously, the main reason youâre probably thinking of refinancing your loans is the potential to save money on interest. Lenders who offer the lowest rates available today can potentially help you save more, although itâs important to consider that you may not qualify for the lowest rates available if you donât have excellent credit.
Also consider that most lenders will offer better rates and loan terms if you have a cosigner with better credit than you have. This is especially true if your credit isnât great, so make sure to ask family members if theyâre willing to cosign on your new student loan if you hope to get the best rate. Just remember that your cosigner will be jointly liable for repayment, meaning you could quickly damage your relationship if you default on your loan and leave them holding the bag.
Low Fees or No Fees
Student loans are like any other loan in the fact that some charge higher fees or more fees than others. Since many student loans come with an application fee or an origination fee, youâll want to look for lenders that donât charge these fees. Also check for hidden fees like prepayment penalties.
Some student loan companies let you qualify for discounts, the most popular of which is a discount for using autopay. If youâre able and willing to set up automatic payments on your credit card, you could save .25% or .50% off your interest rate depending on the lender you go with.
Rate Check Option
Many of the top student loan refinancing companies on this list make it possible to check your interest rate online without a hard inquiry on your credit report. This is a huge benefit since knowing your rate can help you figure out if refinancing is even worth it before you take the time to fill out a full loan application.
Flexible Repayment Plan
Also make sure any lender you go with offers some flexibility in your repayment plan and your monthly payment. Youâll want to make sure refinancing aligns with your long-term financial goals and your monthly budget, and itâs crucial to choose a new loan with a monthly payment you can live with.
Most lenders in this space offer repayment timelines of up to 20 years, which means you could spread your payments over several decades to get a monthly payment that makes sense with your income. Keep in mind, however, that youâll pay more interest over the life of your loan when you take a long time to pay it off, so you may want to consider prioritizing a faster payment plan.
The Bottom Line
Student loan refinancing may not sound like a lot of fun. However, taking the time to consider all your loan options could easily save you thousands of dollars. This is especially true if you have a lot of debt at a high interest rate. By consolidating all your student loans into a new one with a lower APR, you could make loan repayment easier with a single payment and save a ton of money that would otherwise go to straight to interest without helping you pay off your loans.
The first step of the loan process is the hardest, however, and thatâs choosing a student loan refinancing company that you trust. The lenders on this list are highly rated, but they also offer some of the best loan products on the market today.
Work with College Ave, our top pick, to refinance your student loan.
Start your search here and youâre bound to wind up with a student loan you can live with. At the very least, you’ll have a better idea of the loans that are available and how much you might save if you decide to refinance later on.
The post The Best Student Loan Companies For Refinancing appeared first on Good Financial CentsÂ®.
The post How to Avoid Filing for Bankruptcy appeared first on Penny Pinchin' Mom.
The biggest obstacle to someone with a crushing debt burden is a lack of knowledge of how to get their arms entirely around the problem, and know how to go about making it right.
They do not understand what options are available to them, and if they do, they are unsure as to what the right first step for them is.Â While many think bankruptcy is the answer, some alternatives may work better.
I can relate to the soul-crushing feeling of debt. I declared bankruptcy in 2010.Â While it wasn’t my finest moment, I was able to learn from my mistakes and now live the financial life I want.Â But, it wasn’t easy.Â I had issues with my credit for years, and it followed me everywhere I went.
Had I known about some of these bankruptcy alternatives, I could have saved myself a lot of headaches.Â Take the time to research your options before you pick up the phone to call an attorney.
HOW TO AVOID FILING FOR BANKRUPTCY
Debt Management Programs
Debt management programs, also called debt consolidation programs or credit counseling, is a way for people to pay off their unsecured debt using a third party debt relief company. A debt management program (DMP) works like this:
Customer enrolls in a DMP with a debt relief company providing them with information regarding the accounts to include in the program.
The debt relief provider negotiates a monthly payment and reduced interest rate with the creditor that results in the elimination of the debt in 3-5 years.
The customer makes a single payment to the debt relief provider, including a monthly administration fee based upon the amount of debt enrolled in the program. This fee usually ranges between $10 and $50 per month. The debt relief provider then disperses the agreed upon payment amounts to each creditor.
In exchange for a fixed monthly payment and reduced interest rate, creditors close the accounts soÂ that you do not accumulate additional debt. While the act of enrolling in a debt management program does not affect your credit score, the closing of accounts will affect your debt to income ratio, as well as your credit history likely causing your credit score to dip in the beginning. However, by making consistent payments to the DMP, as well as to other financial commitments, a customer’s credit score usually rebounds quickly.
DMPs generally work well for people who are current with their payments but cannot make any progress on the balances due to high interest rates. By closing the accounts to avoid future debt, and having negotiated monthly payment and lowered interest rate, DMP customers can repay their unsecured debt within 3-5 years.
Debt Settlement Programs
A Debt Settlement Program (DSP) involves legal representation and for people who have a dier financial situation, but who still would like to try to avoid bankruptcy. People who enroll in a DSP go through the following process:
Customers stop paying the creditors enrolled in the program
Customers make monthly payments to the debt relief provider to fund an escrow account.
Over time, the customer’s accounts become severely delinquent. The lawyer assigned to the account will then reach out to creditors to negotiate a settlement of the account for less than the full amount.
The agreed-upon settlement is paid from the escrow account.
Debt settlement will have an adverse effect on a customer’s credit score since payments to the creditors are halted. Customers may also begin to receive collection calls from the creditor, at which time they are to inform the caller of the legal representation now handling the account. By law, this should stop the phone calls. There may also be tax implications for the amount of debt forgiven through a DSP.
DSPs are generally used by people who cannot meet all their monthly financial commitments and need to lower their monthly payments but want to avoid bankruptcy. By having the debt relief provider negotiate a settlement of less than the amount owed, customers can make progress on getting creditors off their backs in 3-5 years and then focus on rebuilding their financial future.
Negotiate directly with your creditors
Your creditor would much rather work with you than deal with bankruptcy.Â If you have assets you can liquidate and use to pay down the debt, they may be willing to accept a lower amount.Â Reach out and talk to your creditors to negotiate rates or even the balances to a more manageable amount.
If your creditors are harassing you, that is illegal and you can stop it.Â Read more about how to stop collectors from calling you.
Just Keep Trying
If you are getting by and your budget works, there may not be a reason to give bankruptcy much thought.Â Instead, work to create a debt repayment plan you can follow.Â It may mean getting a second job or selling items, but there are many ways you can come up with more money to throw at your debt
The worst thing that will happen is your credit score will drop.Â But, if you aren’t trying to get new credit for any reason, I would not stress about it in the short term.Â Once your debt is paid down, you can do many things to increase your score quickly.
Check with your lender to see if there is a way you can consolidate your debts into a more manageable payment.Â You usually need to provide collateral, such as your vehicle.Â Alternatively, you might be able to tap into the equity in your home by getting a new mortgage for the balance owed PLUS the equity (where you can use the equity to pay off your loans).
If you’ve tried everything, but can’t see any other way but bankruptcy, make sure you know what you are getting into before you file.Â It affects you and your family.
The post How to Avoid Filing for Bankruptcy appeared first on Penny Pinchin' Mom.
You probably donât need us to tell you that the earlier you start saving for retirement, the better. But letâs face it: For a lot of people, the problem isnât that they donât understand how compounding works. They start saving late because their paychecks will only stretch so far.
Whether youâre in your 20s or your golden years are fast-approaching, saving and investing whatever you can will help make your retirement more comfortable. Weâll discuss how to save for retirement during each decade, along with the hurdles you may face at different stages of life.
How Much Should You Save for Retirement?
A good rule of thumb is to save between 10% and 20% of pre-tax income for retirement. But the truth is, the actual amount you need to save for retirement depends on a lot of factors, including:
Your age. If you get a late start, youâll need to save more.
Whether your employer matches contributions. The 10% to 20% guideline includes your employerâs match. So if your employer matches your contributions dollar-for-dollar, you may be able to get away with less.
How aggressively you invest. Taking more risk usually leads to larger returns, but your losses will be steeper if the stock market tanks.
How long you plan to spend in retirement. Itâs impossible to predict how long youâll be able to work or how long youâll live. But if you plan to retire early or people in your family often live into their mid-90s, youâll want to save more.
How to Save for Retirement at Every Age
Now that youâre ready to start saving, hereâs a decade-by-decade breakdown of savings strategies and how to make your retirement a priority.
Saving for Retirement in Your 20s
A dollar invested in your 20s is worth more than a dollar invested in your 30s or 40s. The problem: When youâre living on an entry-level salary, you just donât have that many dollars to invest, particularly if you have student loan debt.
Prioritize Your 401(k) Match
If your company offers a 401(k) plan, a 403(b) plan or any retirement account with matching contributions, contribute enough to get the full match â unless of course you wouldnât be able to pay bills as a result. The stock market delivers annual returns of about 8% on average. But if your employer gives you a 50% match, youâre getting a 50% return on your contribution before your money is even invested. Thatâs free money no investor would ever pass up.
Pay off High-Interest Debt
After getting that employer match, focus on tackling any high-interest debt. Those 8% average annual stock market returns pale in comparison to the average 16% interest rate for people who have credit card debt. In a typical year, youâd expect aÂ $100 investment could earn you $8. Put that $100 toward your balance? Youâre guaranteed to save $16.
Take More Risks
Look, weâre not telling you to throw your money into risky investments like bitcoin or the penny stock your cousin wonât shut up about. But when you start investing, youâll probably answer some questions to assess your risk tolerance. Take on as much risk as you can mentally handle, which means youâll invest mostly in stocks with a small percentage in bonds. Donât worry too much about a stock market crash. Missing out on growth is a bigger concern right now.
Build Your Emergency Fund
Building an emergency fund that could cover your expenses for three to six months is a great way to safeguard your retirement savings. That way you wonât need to tap your growing nest egg in a cash crunch. This isnât money you should have invested, though. Keep it in a high-yield savings account, a money market account or a certificate of deposit (CD).
Tame Lifestyle Inflation
We want you to enjoy those much-deserved raises ahead of you â but keep lifestyle inflation in check. Donât spend every dollar each time your paycheck gets higher. Commit to investing a certain percentage of each raise and then use the rest as you please.
Saving for Retirement in Your 30s
If youâre just starting to save in your 30s, the picture isnât too dire. You still have about three decades left until retirement, but itâs essential not to delay any further. Saving may be a challenge now, though, if youâve added kids and homeownership to the mix.
Invest in an IRA
Opening a Roth IRA is a great way to supplement your savings if youâve only been investing in your 401(k) thus far. A Roth IRA is a solid bet because youâll get tax-free money in retirement.
In both 2020 and 2021, you can contribute up to $6,000, or $7,000 if youâre over 50. The deadline to contribute isnât until tax day for any given year, so you can still make 2020 contributions until April 15, 2021. If you earn too much to fund a Roth IRA, or you want the tax break now (even though it means paying taxes in retirement), you can contribute to a traditional IRA.
Your investment options with a 401(k) are limited. But with an IRA, you can invest in whatever stocks, bonds, mutual funds or exchange-traded funds (ETFs) you choose.
If you or your spouse isnât working but you can afford to save for retirement, consider a spousal IRA. Itâs a regular IRA, but the working spouse funds it for the non-earning spouse.Â
Avoid Mixing Retirement Money With Other Savings
Youâre allowed to take a 401(k) loan for a home purchase. The Roth IRA rules give you the flexibility to use your investment money for a first-time home purchase or college tuition. Youâre also allowed to withdraw your contributions whenever you want. Wait, though. That doesnât mean you should.
The obvious drawback is that youâre taking money out of the market before itâs had time to compound. But thereâs another downside. Itâs hard to figure out if youâre on track for your retirement goals when your Roth IRA is doing double duty as a college savings account or down payment fund.
Start a 529 Plan While Your Kids Are Young
Saving for your own future takes higher priority than saving for your kidsâ college. But if your retirement funds are in shipshape, opening a 529 plan to save for your childrenâs education is a smart move. Not only will you keep the money separate from your nest egg, but by planning for their education early, youâll avoid having to tap your savings for their needs later on.
Keep Investing When the Stock Market Crashes
The stock market has a major meltdown like the March 2020 COVID-19 crash about once a decade. But when a crash happens in your 30s, itâs often the first time you have enough invested to see your net worth take a hit. Donât let panic take over. No cashing out. Commit to dollar-cost averaging and keep investing as usual, even when youâre terrified.
Saving for Retirement in Your 40s
If youâre in your 40s and started saving early, you may have a healthy nest egg by now. But if youâre behind on your retirement goals, now is the time to ramp things up. You still have plenty of time to save, but youâve missed out on those early years of compounding.
Continue Taking Enough Risk
You may feel like you can afford less investment risk in your 40s, but you still realistically have another two decades left until retirement. Your money still has â and needs â plenty of time to grow. Stay invested mostly in stocks, even if itâs more unnerving than ever when you see the stock market tank.
Put Your Retirement Above Your Kidsâ College Fund
You can only afford to pay for your kidsâ college if youâre on track for retirement. Talk to your kids early on about what you can afford, as well their options for avoiding massive student loan debt, including attending a cheaper school, getting financial aid, and working while going to school. Your options for funding your retirement are much more limited.
Keep Your Mortgage
Mortgage rates are historically low â well below 3% as of December 2020. Your potential returns are much higher for investing, so youâre better off putting extra money into your retirement accounts. If you havenât already done so, consider refinancing your mortgage to get the lowest rate.
Invest Even More
Now is the time to invest even more if you can afford to. Keep getting that full employer 401(k) match. Beyond that, try to max out your IRA contributions. If you have extra money to invest on top of that, consider allocating more to your 401(k). Or you could invest in a taxable brokerage account if you want more flexibility on how to invest.
Meet With a Financial Adviser
Youâre about halfway through your working years when youâre in your 40s. Now is a good time to meet with a financial adviser. If you canât afford one, a financial counselor is typically less expensive. Theyâll focus on fundamentals like budgeting and paying off debt, rather than giving investment advice.
Saving for Retirement in Your 50s
By your 50s, those retirement years that once seemed like they were an eternity away are getting closer. Maybe thatâs an exciting prospect â or perhaps it fills you with dread. Whether you want to keep working forever or retirement canât come soon enough, now is the perfect time to start setting goals for when you want to retire and what you want your retirement to look like.
Review Your Asset Allocation
In your 50s, you may want to start shifting more into safe assets, like bonds or CDs. Your money has less time to recover from a stock market crash. Be careful, though. You still want to be invested in stocks so you can earn returns that will keep your money growing. With interest rates likely to stay low through 2023, bonds and CDs probably wonât earn enough to keep pace with inflation.
Take Advantage of Catch-up Contributions
If youâre behind on retirement savings, give your funds a boost using catch-up contributions. In 2020 and 2021, you can contribute:
$1,000 extra to a Roth or traditional IRA (or split the money between the two) once youâre 50
$6,500 extra to your 401(k) once youâre 50
$1,000 extra to a health savings account (HSA) once youâre 55.
Work More if Youâre Behind
Your window for catching up on retirement savings is getting smaller now. So if youâre behind, consider your options for earning extra money to put into your nest egg. You could take on a side hustle, take on freelance work or work overtime if thatâs a possibility to bring in extra cash. Even if you intend to work for another decade or two, many people are forced to retire earlier than they planned. Itâs essential that you earn as much as possible while you can.
Pay off Your Remaining Debt
Since your 50s is often when you start shifting away from high-growth mode and into safer investments, now is a good time to use extra money to pay off lower-interest debt, including your mortgage. Retirement will be much more relaxing if you can enjoy it debt-free.
FROM THE RETIREMENT FORUM
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Re-locating 1/5/21 @ 2:53 PM
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Saving for Retirement in Your 60s
Hooray, youâve made it! Hopefully your retirement goals are looking attainable by now after working for decades to get here. But you still have some big decisions to make. Someone in their 60s in 2021 could easily spend another two to three decades in retirement. Your challenge now is to make that hard-earned money last as long as possible.
Make a Retirement Budget
Start planning your retirement budget at least a couple years before you actually retire. Financial planners generally recommend replacing about 70% to 80% of your pre-retirement income. Common income sources for seniors include:
Social Security benefits. Monthly benefits replace about 40% of pre-retirement income for the average senior.
Retirement account withdrawals. Money you take out from your retirement accounts, like your 401(k) and IRA.
Defined-benefit pensions. These are increasingly rare in the private sector, but still somewhat common for those retiring from a career in public service.
Annuities. Though controversial in the personal finance world, an annuity could make sense if youâre worried about outliving your savings.
Other investment income. Some seniors supplement their retirement and Social Security income with earnings from real estate investments or dividend stocks, for example.
Part-time work. A part-time job can help you delay dipping into your retirement savings account, giving your money more time to grow.
You can plan on some expenses going away. You wonât be paying payroll taxes or making retirement contributions, for example, and maybe your mortgage will be paid off. But you generally donât want to plan for any budget cuts that are too drastic.
Even though some of your expenses will decrease, health care costs eat up a large chunk of senior income, even once youâre eligible for Medicare coverage â and they usually increase much faster than inflation.
Develop Your Social Security Strategy
You can take your Social Security benefits as early as 62 or as late as age 70. But the earlier you take benefits, the lower your monthly benefits will be. If your retirement funds are lacking, delaying as long as you can is usually the best solution. Taking your benefit at 70 vs. 62 will result in monthly checks that are about 76% higher. However, if you have significant health problems, taking benefits earlier may pay off.
Use Social Securityâs Retirement Estimator to estimate what your monthly benefit will be.
Figure Out How Much You Can Afford to Withdraw
Once youâve made your retirement budget and estimated how much Social Security youâll receive, you can estimate how much youâll be able to safely withdraw from your retirement accounts. A common retirement planning guideline is the 4% rule: You withdraw no more than 4% of your retirement savings in the first year, then adjust the amount for inflation.
If you have a Roth IRA, you can let that money grow as long as you want and then enjoy it tax-free. But youâll have to take required minimum distributions, or RMDs, beginning at age 72 if you have a 401(k) or a traditional IRA. These are mandatory distributions based on your life expectancy. The penalties for not taking them are stiff: Youâll owe the IRS 50% of the amount you were supposed to withdraw.
Keep Investing While Youâre Working
Avoid taking money out of your retirement accounts while youâre still working. Once youâre over age 59 Â½, you wonât pay an early withdrawal penalty, but you want to avoid touching your retirement funds for as long as possible.
Instead, continue to invest in your retirement plans as long as youâre still earning money. But do so cautiously. Keep money out of the stock market if youâll need it in the next five years or so, since your money doesnât have much time to recover from a stock market crash in your 60s.
A Final Thought: Make Your Retirement About You
Whether youâre still working or youâre already enjoying your golden years, this part is essential: You need to prioritize you. That means your retirement savings goals need to come before bailing out family members, or paying for college for your children and grandchildren. After all, no one else is going to come to the rescue if you get to retirement with no savings.
If youâre like most people, youâll work for decades to get to retirement. The earlier you start planning for it, the more stress-free it will be.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
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.
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So, you thought 2020 was bad? Just wait!
OK, weâre kidding. Obviously, 2021 should turn out way better than 2020 did, right?
Thereâs no way it could be worse, right?
Welllllllllâ¦ we hate to sound like pessimists, but if thereâs one thing life has taught us, itâs that things can always get worse.
Maybe COVIDâs sequel shows up. Maybe the economy crashes again. Maybe our weird politics get even weirder. Maybe aliens land in Times Square.
Just in case, weâve got some proactive moves you should make to protect your bank account in case things go south. Before the next crisis gets going, letâs get started with the protective measures:
1. Save Up An Emergency Fund
This past year has taught us the hard way that everyone should have an emergency fund. You need a place where you can safely stash your savings away â but still earn money on it.
Under your mattress or in a safe will get you nothing. And a typical savings account wonât do you much better. (Ahem, 0.06% is nothing these days.)
But a debit card called Aspiration lets you earn up to 5% cash back and up to 16 times the average interest on the money in your account.
Not too shabby!
Enter your email address here to get a free Aspiration Spend and Save account. After you confirm your email, securely link your bank account so they can start helping you get extra cash. Your money is FDIC insured and they use a military-grade encryption which is nerd talk for âthis is totally safe.â
2. Stop Overpaying for Stuff
Your bank account will be in better shape in 2021 if you stop overpaying for things. For instance, wouldnât it be nice if you got an alert any time youâre shopping on Walmart and are about to get ripped off?
Thatâs exactly what a free service called Capital One Shopping does. (No need to be a Capital One customer to use it!)
Capital One Shoppingâs free alerts can be added to your browser. Before you check out, itâll check other websites, including Amazon, Target, eBay and others to see if your item is available for cheaper. It will also show you coupon codes, set up price-drop alerts and even let you see the itemâs price history.
Letâs say youâre shopping for a new TV. Youâre ready to check out, and you assume youâre getting the best price. Hereâs when Capital One Shopping will pop up and let you know if youâre about to overpay. It will even automatically apply any known coupon codes to your order.
So far, Capital One Shopping has saved users more than $70 million.
You can get started with Capital One Shopping in just a few minutes to see if youâre overpaying online.
3. Get Paid Every Time You Buy Toilet Paper
Grocery shopping was never exactly pleasant. But these days, itâs a downright struggle. Fighting crowds; keeping six feet of space â just buying toilet paper is a feat. Shouldnât you have something to show for it?
A free app called Fetch Rewards will reward you with gift cards just for buying toilet paper and more than 250 other items at the grocery store.
Hereâs how it works: After youâve downloaded the app, just take a picture of your receipt showing you purchased an item from one of the brands listed in Fetch. For your efforts, youâll earn gift cards to places like Amazon or Walmart.
You can download the free Fetch Rewards app here to start getting free gift cards. Over a million people already have, so they must be onto somethingâ¦
4. Knock $540/Year From Your Car Insurance in Minutes
Car insurance is another thing you shouldnât overpay for in 2021. Whenâs the last time you checked car insurance prices?
You should shop your options every six months or so â it could save you some serious money. Letâs be real, though. Itâs probably not the first thing you think about when you wake up. But it doesnât have to be.
A website called Insure.com makes it super easy to compare car insurance prices. All you have to do is enter your ZIP code and your age, and itâll show you your options.
Using Insure.com, people have saved an average of $540 a year.
Yup. That could be $500 back in your pocket just for taking a few minutes to look at your options.
5. Stop Paying Your Credit Card Company
If things go south financially, the last thing you want to be saddled with is credit card debt. And the truth is, your credit card company doesnât really care. Itâs just getting rich by ripping you off with high interest rates. But a website called AmOne wants to help.
If you owe your credit card companies $50,000 or less, AmOne will match you with a low-interest loan you can use to pay off every single one of your balances.
The benefit? Youâll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.49% APR), youâll get out of debt that much faster. Plus: No credit card payment this month.
AmOne keeps your information confidential and secure, which is probably why after 20 years in business, it still has an A+ rating with the Better Business Bureau.
It takes two minutes to see if you qualify for up to $50,000 online. You do need to give AmOne a real phone number in order to qualify, but donât worry â they wonât spam you with phone calls.
6. Cut Your Food Budget by Planning Ahead
Even if youâre gainfully employed and not in imminent danger of being evicted, youâre probably struggling with bills like most of us are. Groceries are a huge part of everyoneâs budget these days, so theyâre a big target for savings.
Try preparing for the week ahead with some meal planning. This goes beyond just making a shopping list. Real meal planning helps you save money because it helps you use what you buy, preventing food and money waste. It also prevents you from spending extra cash on emergency lunches or late-night takeout.
First, figure out how many meals youâre responsible for making every week. If itâs just you, your answer might be 21: seven breakfasts, lunches and dinners. If you have a family, count meals per person â a dinner for three people counts as three dinners, even if you all eat the same thing.
Now figure out how much food youâll need to buy to make it until your next grocery trip. If you buy the same items repeatedly, you know which ones to stock up on when they go on sale. Stocking up on sale items also helps you freeze meals for the future. If thereâs a way to buy in bulk and prep the foods you eat the most often, do it!
7. Add $225 to Your Wallet Just for Watching the News
Itâs been a historic time for news, and weâre all constantly refreshing for the latest updates. You probably know more than one news-junkie who fancies themselves an expert in respiratory illness or a political mastermind.
And research companies want to pay you to keep watching. You could add up to $225 a month to your pocket by signing up for a free account with InboxDollars. Theyâll present you with short news clips to choose from every day, then ask you a few questions about them.
You just have to answer honestly, and InboxDollars will continue to pay you every month. This might sound too good to be true, but itâs already paid its users more than $56 million.
It takes about one minute to sign up, and start getting paid to watch the news.
Mike Brassfield (email@example.com) is a senior writer at The Penny Hoarder. Heâs got his game face on and is ready for 2021, come hell or high water.
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.
Credit card debt is on the rise. Millions of Americans are in over their heads. Theyâre losing sleep, losing control, and worried about what the future will hold. But there are solutions, and consolidation is one of the best.
Consolidation works by âconsolidatingâ multiple debts into one. Itâs the perfect solution for mounting debt, one that doesnât destroy your credit score, liquidate your assets, or make it difficult to acquire mortgages and personal loans in the future.
With that said, letâs look at some of the best ways to consolidate credit card debt.
Option 1: Do It Yourself
The idea of debt consolidation essentially boils down to acquiring a large, low-interest loan and using that to repay multiple high-interest debts. If your credit score is high enough, you can get that loan yourself, clear your credit card debts, and then focus on repaying the loan.
Do It Yourself Consolidation Explained
The average credit card APR is close to 20%. If you have a balance of $10,000 and a monthly payment of $300, this APR will cost you over $4,700 in total interest and your debt will be repaid in just over 4 years. If you were to acquire a $10,000 personal loan at a respectable rate of 8% over the same 4 years, youâll pay just under $1,800 in interest.
Thatâs a saving of nearly $3,000 over 4 years, and itâs based on an 8% rate (lower rates are available) and on the assumption that you donât accumulate any credit card penalty fees or penalty APRs, which are very common on rolling balances.
You Will Save Money: As noted above, this process could save you a lot of money over the long-term and will also free up some additional cash in the short-term.
Complete Control: You donât have to worry about company fees and service charges; you donât need to concern yourself with hidden terms. With this credit card consolidation option, you are in complete control.
Easy on Your Credit Score: While your credit score will take an initial hit because of the loan inquiry and the new account, as soon as you use that loan to clear your credit card debts you should see an improvement. Just remember to keep those cleared cards active, otherwise, your credit utilization ratio will drop.
Good Credit Needed: For this option to be viable, you will need an excellent score. Anything less and you may struggle to be accepted for a low-interest loan. Letâs be honest, if youâre struggling with growing credit card debt, the odds of you having a flawless credit score are pretty slim.
On Your Own: While there are benefits to doing everything by yourself, it can also be a little time consuming, and if you donât know what youâre doing, it can be intimidating.
Option 2: Work with a Debt Management Company
Credit counseling agencies can help you manage your debt by working with your creditors. A new payment structure will be created, and your money will go straight to the agency, after which it will be released to your creditors.
Debt Management Consolidation Explained
To begin the process, search for reputable debt management services in your area. They will assess your situation and determine if you are a good fit for the program. Some charge fees, some donât, but all will serve as an intermediary between you and your creditors.
Every month you will make a single payment and the money will then go to your creditors. The agency will negotiate reduced payments by bringing the interest rates down and removing fees, therefore making these debts cheaper and more manageable.
Professional Help: Get quality support from an experienced debt management company, one that will assume control and take the stress away.
Cheap: This is one of the cheapest and most cost-effective ways to clear your credit card debt, greatly reducing your total interest repayments.
Fees: Some debt management companies charge fees for their services, although these tend to be nominal and youâll still save more money in the long-term.
Canceled Contract: If you fail to make one of the agreed-upon repayments, your creditors may cancel the improved contract and revert back to the previous terms, erasing all the agencyâs hard work.
Option 3: Balance Transfer
A balance transfer is a promotion offered on new credit cards. It invites you to move your balance from your current card to a new one, and in exchange, it offers a period of 0% interest.Â
You will need to pay a balance transfer fee, and this is typically charged at between 3 and 5% of the total transfer amount, but itâs often one of the cheapest and easiest ways to consolidate credit card debt.
Balance Transfer Consolidation Explained
As an example of how balance transfers work, letâs imagine that you have three credit cards, each with a maxed-out balance of $10,000 and an APR of 20%. If youâre repaying $300 a month, thatâs $900 a month and in 4 years and 2 months, youâll pay around $14,000 in interest to clear the full $30,000.
Alternatively, you can move all three balances onto a single balance transfer card with a $30,000 limit. Immediately, that balance could grow to $31,500. If you continue paying $900 a month and the balance transfer period lasts for 18 months, the balance will be just $15,300 when interest begins to accrue again. And if you use that 18-month period to initiate a debt repayment strategy, you could clear it in full and avoid paying any interest.
Multiple Balances Can be Consolidated: You can consolidate multiple credit card balances, providing youâre not moving them to the same creditor.
No Interest Repayment: If you plan it properly, you can repay your balance in full before accruing any interest.
Available to Everyone: Credit cards are generally easier to acquire than low-interest personal loans and you wonât need an excellent credit score to get a good one.
Higher Interest: The interest rate and fees may be higher once the 0% balance transfer period ends. If you use the intro period to avoid repayments and not to clear your debt, you could find yourself in serious trouble when interest begins to accumulate again.
Large Limits May be Difficult: The bigger your current credit card balances are, the harder it will be to get a balance transfer card with a large enough limit.
Fees: Although itâs a great option for consolidating credit card debt, itâs not completely free, as youâll pay an initial balance transfer fee.
Option 4: Debt Consolidation Loans
Some companies offer specific loans tailored toward debt consolidation. These options work a lot like personal loans, as they are large loans designed with consolidation in mind. However, there are a few key differences, including the fact you donât need an excellent credit score.
Debt Consolidation Loans Explained
The ultimate goal of debt consolidation loans is not to save you money in the long-term or to reduce the debt period. In fact, it does the opposite. The goal is to reduce your monthly payment and give you a smaller rate of interest, but it does this while increasing the loan period, which means you ultimately pay more money over the term.
More Money Every Month: Your monthly payments will be reduced, freeing up some extra cash to use every month.
Cleared Debts: Your credit card debts will be cleared in one fell swoop, potentially giving you some financial breathing space.
Longer Period: The total length of your debt will be extended, which means youâll be stuck with the debt for a prolonged period.
Cost: While youâll save some money every month, youâll do so at the cost of an increased overall balance. Depending on your credit score, you could find yourself paying thousands more in total repayments.
Other Credit Card Debt Consolidation Solutions
If you have a supportive and financially-free family, you can ask them for the money to clear your debts and then promise to repay them in time.Â
Of course, this option isnât without its problems. Firstly, thereâs the old adage that you should never lend money to friends or family. It may seem pretty heartless, but itâs a saying steeped in experience. It causes problems, as that debt is right at the bottom of the borrowerâs list of priorities and if theyâre skipping payments and begging for relief, while at the same time buying new clothes and going out every night, it can anger the borrower.
To avoid these issues, agree to pay them in monthly installments, offer a little interest, and get everything in writing. Make that debt your priority, because by skipping your payments youâll be hurting your finances and your relationships.
Donât guilt-trip a friend or family member into lending you money. Donât ask them unless you have a very close relationship with them, have known them a long time, and know they can easily afford to lend you money. The last thing you want is for them to leave themselves short or to acquire debt just to help you out.
Alternatively, if you own a significant amount of home equity, you can opt for a home equity loan. This will give you a sizeable loan charged at a small rate of interest. It will take longer to repay your mortgage, but by reducing your debt demands youâll save more money in the long-term.
How to Consolidate Credit Card Debt is a post from Pocket Your Dollars.
In a recession itâs common for many people to rely on credit cards and loans to balance their finances. Itâs the ultimate catch-22 since, during a recession, these financial products can be even harder to qualify for.
This holds true, according to historical data from the Federal Reserve Bank of St. Louis. It found that during the 2007 recession, loan growth at traditional banks decreased and remained deflated over the next four years.Â
Credit can be a powerful tool to help you make ends meet and keep moving forward financially. Hereâs what you can do if youâre struggling to access credit during a weak economy.
Lending becomes riskier in a weak economy. Does this mean youâre completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.
How Does a Financial Downturn Affect Lending?
Giving someone a loan or approving them for a credit card carries a certain amount of risk for a lender. After all, thereâs a chance you could stop making payments and the lender could lose all the funds you borrowed, especially with unsecured loans.
For lenders, this concept is called, âdelinquencyâ. Theyâre constantly trying to get their delinquency rate lower; in a booming economy, the delinquency rate at commercial banks is usually under 2%.
Lending becomes riskier in a weak economy. There are all sorts of reasons a person might stop paying their loan or credit card bills. You might lose your job, or unexpected medical bills might demand more of your budget. Because lenders know the chances of anyone becoming delinquent are much higher in a weak economy, they tend to restrict their lending criteria so theyâre only serving the lowest-risk borrowers. That can leave people with poor credit in a tough financial position.
Before approving you for a loan, lenders typically look at criteria such as:
Co-signers, if applicable
Down payment size (for loans, like a mortgage)
Does this mean youâre completely out of luck if you have bad credit? Not necessarily, but you might need to take the time to understand all of your alternatives.
5 Ways to Help Get Your Credit Application Approved
Although every lender has different approval criteria, these strategies speak to typical commonalities across most lenders.
1. Pay Off Debt
Paying off some of your debt might feel bold, but it can be helpful when it comes to an application for credit. Repaying your debt reduces your debt-to-income ratio, typically an important metric lenders look at for loans such as a mortgage. Also, paying off debt could help improve your credit utilization ratio, which is a measure of how much available credit youâre currently using right now. If youâre using most of the credit thatâs available to you, that could indicate you donât have enough cash on hand.
Not sure what debt-to-income ratio to aim for? The Consumer Financial Protection Bureau suggests keeping yours no higher than 43%.
For those with poor credit, a trusted cosigner can make the difference between getting approved for credit or starting back at square one.
When someone cosigns for your loan theyâll need to provide information on their income, employment and credit score â as if they were applying for the loan on their own. Ideally, their credit score and income should be higher than yours. This gives your lender enough confidence to write the loan knowing that, if you canât make your payments, your cosigner is liable for the bill.
Since your cosigner is legally responsible for your debt, their credit is negatively impacted if you stop making payments. For this reason, many people are wary of cosigning.
In a recession, it might be difficult to find someone with enough financial stability to cosign for you. If you go this route, have a candid conversation with your prospective cosigner in advance about expectations in the worst-case scenario.
3. Raise Your Credit Score
If your credit score just isnât high enough to qualify for conventional credit you could take some time to focus on improving it. Raising your credit score might sound daunting, but itâs definitely possible.Â
Here are some strategies you can pursue:
Report your rent payments. Rent payments arenât typically included as part of the equation when calculating your credit score, but they can be. Some companies, like Rental Kharma, will report your timely rent payments to credit reporting agencies. Showing a history of positive payment can help improve your credit score.Â
Make sure your credit report is updated. Itâs not uncommon for your credit report to have mistakes in it that can artificially deflate your credit score. Request a free copy of your credit report every year, which you can do online through Experian Free Credit Report. If you find inaccuracies, disputing them could help improve your credit score.Â
Bring all of your payments current. If youâve fallen behind on any payments, bringing everything current is an important part of improving your credit score. If your lender or credit card company is reporting late payments a long history of this can damage your credit score. When possible speak to your creditor to work out a solution, before you anticipate being late on a payment.
Use a credit repair agency. If tackling your credit score is overwhelming you could opt to work with a reputable credit repair agency to help you get back on track. Be sure to compare credit repair agencies before moving forward with one. Companies that offer a free consultation and have a strong track record are ideal to work with.
Raising your credit isnât an immediate solution â itâs not going to help you get a loan or qualify for a credit card tomorrow. However, making these changes now can start to add up over time.
4. Find an Online Lender or Credit Union
Although traditional banks can be strict with their lending policies, some smaller lenders or credit unions offer some flexibility. For example, credit unions are authorized to provide Payday Loan Alternatives (PALs). These are small-dollar, short-term loans available to borrowers whoâve been a member of qualifying credit unions for at least a month.
Some online lenders might also have more relaxed criteria for writing loans in a weak economy. However, you should remember that if you have bad credit youâre likely considered a riskier applicant, which means a higher interest rate. Before signing for a line of credit, compare several lenders on the basis of your quoted APR â which includes any fees like an origination fee, your loanâs term, and any additional fees, such as late fees.
If youâre trying to apply for a mortgage or auto loan, increasing your down payment could help if youâre having a tough time getting approved.
When you increase your down payment, you essentially decrease the size of your loan, and lower the lenderâs risk. If you donât have enough cash on hand to increase your down payment, this might mean opting for a less expensive car or home so that the lump sum down payment that you have covers a greater proportion of the purchase cost.
Loans vs. Credit Cards: Differences in Credit Approval
Not all types of credit are created equal. Personal loans are considered installment credit and are repaid in fixed payments over a set period of time. Credit cards are considered revolving credit, you can keep borrowing to your approved limit as long as you make your minimum payments.
When it comes to credit approvals, one benefit loans have over credit cards is that you might be able to get a secured loan. A secured loan means the lender has some piece of collateral they can recover from you should you stop making payments.
The collateral could be your home, car or other valuable asset, like jewelry or equipment. Having that security might give the lender more flexibility in some situations because they know that, in the worst case scenario, they could sell the collateral item to recover their loss.
The Bottom Line
Borrowing during a financial downturn can be difficult and it might not always be the answer to your situation. Adding to your debt load in a weak economy is a risk. For example, you could unexpectedly lose your job and not be able to pay your bills. Having an added monthly debt payment in your budget can add another challenge to your financial situation.
However, if you can afford to borrow funds during an economic recession, reduced interest rates in these situations can lessen the overall cost of borrowing.
These tips can help tidy your finances so youâre a more attractive borrower to lenders. Thereâs no guarantee your application will be accepted, but improving your finances now gives you a greater borrowing advantage in the future.
Have you ever applied for a credit card, car loan or mortgage? If so, then one of the first things the lender looked at was your FICO score. It has a major impact not only on getting approved in the first place, but also on the interest rate you will receive after approval.
On August 7, FICO announced some pretty major changes in how they will be calculating that ever-important number. Before you can understand how the changes will or won’t impact you, you need to have a firm grasp of the basics.
What is my FICO score?
Your FICO score, or credit score, is a number ranging from 300-850 that shows lenders how reliable you will be in repaying your debts. A bad score is anything below 560, not very good is 560-659, good is 660-724, very good is 725-759, and anything above 760 is classified as great. While it is best to be in the great range, you can sometimes qualify for the best available interest rates with 720 or above.
In order to calculate your credit score, FICO pulls information from your credit reports from the three major reporting agencies: Experian, TransUnion, and Equifax. When banks and other lending institutions consider your application, they look at several factors. The first is usually your FICO score, which will either get you in the door or get it slammed in your face, but after that they consider other aspects of your finances, such as income and the detailed history on the credit report itself.
What are the changes, and how will they affect me?
There will be four notable changes to how FICO evaluates your credit score once the announced new model is released. Some of them will be very good for some people, some of them will be bad for others, and some of them may prove to show negligible changes.
The first, and biggest, is that medical debts will no longer be considered when calculating your score. This is a huge relief. Many otherwise fiscally responsible people go into massive debt when a medical emergency happens. Others don’t even know they owe money on medical bills in the first place, as they thought their insurance was going to cover their costs. When they realize they owe money, the responsible consumers pay it back, but it still leaves a scar on their credit report and, therefore, their FICO score.
With this new change, your FICO score will not be impacted. In fact, if you have no other negatives on your credit report (which would mean you most likely have a halfway decent score), you can expect to see your FICO score increase by up to 25 points.
Changes will also be made in considering debts that you have paid off. Currently, after you’ve paid off a debt, it stays on your credit report for seven years. That will continue to be the case after FICO’s updates go into effect, but FICO will no longer look at those debts, even though they show up on your credit report. If you have consumer debts that you have paid off, and they’re the only thing holding you back, you may see your score improve, as well.
There will also be an update to consider the creditworthiness of people who do not have an extensive report, taking into consideration things beyond just paying your month-to-month bills on time. (A lot of times, the people you are paying those bills to don’t even report that anyways.) Depending on how this is done, it could be a boon for those who are unable to get credit not because they are irresponsible, but simply because they have never chosen to borrow money before.
The final update is not good news for those who hold consumer debt. If you owe money and it isn’t paid in full, you can expect to see your credit score take a hit.
Hold your horses – and your enthusiasm.
While FICO has announced that it will make these changes, the new model has not gone into effect. It will not be ready to release to lenders until late 2014 or early 2015. Even then, banks have to choose to adopt it. Thismodel will be FICO 9. FICO 8 was introduced in 2009, and some lending institutions still have not updated since FICO 7. Just because they are releasing a new model doesn’t mean that your lending institution will apply it to their evaluation process.
Another thing to remember is that while your FICO score gets you in the door, banks will look at your credit report. All of those things FICO ignores will still show up. If your medical debts are deemed too oppressive for you to possibly be able to pay for a mortgage on top of them, you may still be denied. And while FICO will ignore debt that has been paid off and closed, it will still stay on that pesky credit report for seven years for all of your potential lenders to see.
While these changes could be a great way to get your foot in the door with lenders, they’re not a holy grail to your credit problems. The same tried and true wisdom will still apply: Spend responsibly, make sure the information on your credit report is accurate and pay off any debts as quickly as possible.
Femme Frugality is a personal finance blogger and freelance writer. You can find more of her writing onÂ her blog, where she shares both factual articles and esoteric ruminations on money.
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