When to Use Credit (and When to Avoid It)

person holding credit card and using a laptopIf used carefully, credit can be a helpful financial tool. For example, using credit to purchase a home now, rather than trying to save up the whole purchase price, makes financial sense. The home provides a place to live that will perhaps increase in value and the mortgage interest offers a tax deduction. Credit may also help you deal promptly with costly emergencies.

Many consumers turn to credit when faced with unexpected home or auto repairs, as well as medical emergencies. And credit offers convenience, enabling you to rent a car or hotel room or buy airline tickets over the phone or online. In many situations, credit offers peace of mind; there is no need to carry large amounts of cash when shopping or traveling.

Despite all the advantages and conveniences credit can provide, there are some pitfalls associated with credit use. Credit can be expensive. Interest rates (often ranging from 14% to 22%), finance charges, annual fees, and penalties can dramatically increase the cost of any purchase made on credit. Then, there is a tendency to overspend on credit. It is much easier to spend more than you can afford when all you have to do is pull out the plastic. Over-extension gets thousands of consumers into financial trouble every year.

It is possible to have the best of both worlds, though. Designing a realistic spending and savings plan so you are aware of how much credit you can afford, as well as comparing the cost of credit and shopping around for the best deals, will help you avoid credit trouble.

Here are a few more tips:
Keep your charge receipts in an envelope with a running total on the outside. If the total exceeds an amount you consider appropriate, you know it’s time to curtail your spending.
Save monthly for expenses such as auto maintenance, holiday gifts, and the kids’ school clothes. That way you don’t need to use credit to cover these expenses, or, if you do charge them, you can pay the balance in full when the bill arrives.
Monitor interest rates. Choose lower-rate financing options whenever possible.
Limit the number of open credit card accounts you have. You don’t need more than one or two credit cards, and it’s much easier to keep track of your total outstanding debt with just a couple of accounts.

How Much Debt Is OK?
As a rule, no more than 15% of your net (take home) income should be committed to consumer debt payments each month. Another way to determine how much debt is appropriate for you to carry is to first complete a family budget. The amount remaining after you deduct your monthly savings and living expenses from your net income is the most you should have going to debt repayment. If you’re sending more than that to your creditors each month, you may want to consider credit coaching to help you reduce your debt load.

Shopping for Credit
When shopping for a credit card, you should first decide how you plan to use it so you can compare the features that are important for you. It is important to understand the difference between a charge card and a credit card. The balance on a charge card must be paid in full every month. Paying only a portion of the bill will cause your account to be delinquent. A credit card allows you to carry a balance for as long as you want, provided you make at least the minimum monthly payment due.

If you will pay your credit card bill off every month, a low annual fee is important. If you usually carry a balance, look for the lowest interest rate. Shop for a grace period, the amount of time after your purchase during which finance charges are not assessed. Some banks and finance companies give you up to 30 “free” days, but it has to be at least 21 days. However, interest starts accruing immediately on cash advances; there is no grace period and the interest rate is higher than that applied to regular purchases.

Depending on your payment and credit use habits, you may also be affected by late and, possibly, over-limit fees.

If you have no credit or a bad credit history, you may be able to obtain a secured credit card. A secured card works just like a regular credit card except that you must leave a deposit—usually between $250 and $500—with the issuing bank as collateral. If you default on your payments, the bank takes the money owed out of your deposit.

The interest rate and annual fee on a secured card are often a bit higher than on a regular card. But a secured card can offer you the convenience of a regular credit card and the opportunity to improve your credit record. When comparing cards, try to find one that does not charge an application or processing fee and confirm with the issuing bank that they will report your payment performance to at least one of the three major credit reporting bureaus, Experian, Trans Union, and Equifax. Make the most of this chance to build an unblemished credit report!

Used with Permission. Published by BALANCE Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Cut These Costs TODAY

Man buying groceriesHave you ever unexpectedly found out you’re quickly going to have less income? It’s enough to throw you into a panic. But the best way to get through hard times is to take a few deep breaths and put a plan together. Check out these common targets for quick and effective expense cuts.

Food
You might find it obvious that evenings dining out at fancy restaurants probably aren’t the best idea when experiencing a budget crunch. But think about your groceries too. Consider avoiding the higher-priced stores and stocking up on the basics at the more reasonably priced spots. You might find that cooking at home and taking your lunch to work saves you lots of money and ends up being healthier too.

Cable/Movies/Rentals
If you’re like most people, your visual entertainment comes from multiple sources. You may watch movies on cable, in the theater, via rental or online. In crisis situations, it’s best to focus on watching movies at home and using one particular way to do it. In other words, if you have both Netflix and premium movie channels, it’s probably time to go with one or the other.

Phone plans
It’s nice to use a smart phone to be able to look up information on the go, but you could probably make do without the data plan if you had to. Did you know that you could also be on a prepaid smart phone plan? Call your service provider to ask them to perform an analysis on which plan is best for you. You might be paying for more than you actually need. Also consider eliminating your house phone if you have one.

Gym
It’s important to get some stress-relieving exercise during this trying time, but there’s no reason why you should have to spend money to do it. Brainstorm ways to be active without having to fork over a big chunk of your paycheck. The main thing is to just get moving!

Shopping as entertainment
One activity that could put you in the trouble zone is shopping for fun or to ease tension. “I won’t buy anything, I’ll just browse” too often can lead you down the path of unnecessary spending. Eliminate leisure shopping or other activities that put you in temptation.

Gas
Is it an option to work from home more? Can you carpool or combine your errands into fewer trips? If your family has multiple vehicles, can you sell one and share the remaining?

Insurance
With the ease of using the Internet to compare rates, the insurance business is much more competitive than it used to be. Shop around for the best deals on any type of insurance you have—auto, home, life, etc. Check into bundling these with one company to save even more. How is your credit score? This might affect the cost of certain insurances. Also be sure to ask about discounts you might apply for, and the option of raising your deductible in exchange for a lower monthly payment.

Utilities
Think of ways to stay warm or cool more efficiently. Put on more layers in the colder months and spend more time outside during the warmer times. Be conscious of turning everything off and even unplugging electrical items when you leave a room.

Habitual items
When you have a comfortable financial situation, it’s easy to buy coffee, cigarettes, alcohol and convenience store snacks without thinking too much about it. But in these tighter times, think about what you are really getting out of these purchases and if there are expenses that are more important.

Taxes
If you have more money taken out of each of your paychecks than is necessary in order to get a large income tax refund check in the spring, you are over-paying the government each month. Cut this expense by using the IRS withholding calculator to determine the appropriate amount to have withheld from each paycheck.

None of these cost-cutting measures alone is guaranteed to immediately solve all cash flow issues, but in concert they can potentially save you hundreds of dollars per month.

Used with Permission. Published by BALANCE Includes copyrighted material of BALANCE.

Useful Apps for Managing Your Expenses

Using your smartphone to be smarter about budgeting
Creating and sticking to a budget is essential if you want to get out of debt and achieve financial security, but it’s easier said than done. The proper amount of money to spend on various expenses can be difficult to calculate, and summoning the willpower required to stay true to those set amounts can prove even harder. Fortunately, there are many apps designed to keep you honest—and in the black. Here are some of the best apps available for managing your finances.

Mint
The most popular app for managing your money is Mint, a free app from Intuit, the company behind TurboTax and QuickBooks. Mint allows users to connect all of their bank and credit card accounts, as well as their monthly bill statements, into one convenient, all-in-one application for managing spending. Bill payment reminders, specific advice based on your unique spending habits and free credit scores are among the other services that Mint has to offer.

YNAB
You Need a Budget, or YNAB for short, doesn’t just document your spending—it seeks to actively improve your purchasing habits and behaviors. For $5 a month or $50 per year, this app is best for those struggling to escape from the burden of debt. In addition to designing a budget that will help you achieve solvency, YNAB also provides helpful advice and community support in the form of an online forum made up of others suffering from the constraints of living paycheck to paycheck.

Level Money
Many consumers get into the bad habit of checking their bank account, seeing a healthy balance and then spending with carefree abandon. But there’s a difference between how much you can spend and how much you should spend, and Level Money is designed to illustrate that divide. This free app factors in essential monthly costs like rent, utilities and grocery bills to show the “spendable” amount of money in your bank account. You can also program it to take into account your saving goals, which helps you better prepare for the future.

Digit
When managing your expenses, it can be hard to remember to save money; fortunately, Digit does it for you. This free app makes an analysis of your spending and income and then automatically takes small amounts from your checking account, often anywhere from $5 to $50, and banks them in an account managed by the company. The app is fee-free and comes with a no-overdraft guarantee, so there is little risk involved. No interest is earned on your savings, since Digit is not a bank, but there is a “Savings Bonus” of five cents for every $100 saved over a three-month period.

Whether you are racked by debt and searching for a way out or simply looking for a convenient way to keep track of expenses and improve your saving habits, there are many free and affordable apps that can have a positive impact on your finances.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Do You Need a Co-signer for Your Auto Loan?

If you don’t have enough income or good enough credit, you may need a co-signer

As with any type of loan, your income and credit history will be major determinants of whether you are approved for an auto loan application. If you’ve been denied for an auto loan, you may want to consider using a co-signer.

Understanding how a lender determines loan approval
According to a January 2016 article in The Balance by author of “The Everything Improve Your Credit Book” Justin Pritchard, the lending company or financial institution must have reason to believe you will pay back the loan in order for you to be deemed worthy to receive the auto loan. A financial institution looks at two factors to determine whether you are credible: your credit score and your income.

Your credit history is a true indicator of how well you repay your loans; if you’ve borrowed money through loans previously and have successfully paid them off, or are making on-time payments, the lender will be more likely to believe you are a safe bet and will approve your loan application. On the other hand, if you have a poor credit score from defaulting on loan repayments, or don’t have any borrowing history, the financial institution may not want to approve you for a loan, explains Pritchard. To the financial institution, such a person is a bad investment, as the likelihood of the financial institution being repaid decreases.

Lenders also consider the income of the individual in deciding on a loan application, says Pritchard. In fact, the financial institution often calculates a debt to income ratio to determine if you make enough income to cover the expense of the loan payment each month.

Larger vehicles are generally more expensive than smaller ones, but smaller cars can also be more costly depending on the make and the engine build. The price of the vehicle and its calculated monthly payments under a loan in comparison to your monthly income will determine whether you have a low enough debt to income ratio to afford the monthly payments.

When to bring in a co-signer on your auto loan
If you have poor or no credit history, or your debt to income ratio is deemed too high by the lender, you will likely not be approved for a loan. In essence, the financial institution has determined you are too risky and will likely struggle to repay the loan, so it is unwilling to work with you.

A co-signer can help you meet the income and credit score requirements of the financial institution, as the financial institution considers the added income and credit history of the co-signer to the loan terms, explains Pritchard.

“Co-signing happens when somebody promises to pay a loan for somebody else. This happens when a [financial institution] won’t approve a loan (or it won’t approve the original application, but it’s willing to lend if a co-signer is involved),” says Pritchard in an October 2016 article in The Balance.

To the financial institution, the co-signer acts as a backup plan to collect payment if you default on the loan repayment. And if the co-signer has good credit history, the financial institution knows that at least one person on the loan has experience borrowing and repaying loans on time, adds Pritchard.

“The co-signer (who presumably has strong credit and income) promises to ensure that the loan gets repaid by signing the loan agreement with you. In other words, the cosigner takes full responsibility for the debt — if you don’t pay off the loan, your co-signer will have to do it.

“As a borrower,” Pritchard explains, “you need to have sufficient income and good credit to qualify for a loan. Using a co-signer therefore boosts your appeal as a borrower to the financial institution if you can’t meet the loan application requirements on your own.”

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Three Things You Need to Do to Your Student Loans Right Now

Stay ahead of this big expense

Recent college graduates already have enough on their plates worrying about getting a job and supporting themselves — the last thing they want to do is stress over student loan repayment. For most, paying off student loans takes a long time, so no matter where you are in that process, there are three things you should stop and do right now.

1. Get organized
Take an inventory of your student loans. You can get a list by signing up at http://www.nslds.ed.gov/. After a short enrollment process, you will have a handy list of all guaranteed loans that were issued to you by the government, as well as those made by private lenders through June 2010. If you have a private nonguaranteed loan, those should all be present and detailed on your credit report, which you can find for free online.

Create a spreadsheet chronicling the name of each lender, the web address, your username and password (ensure your device is locked or encrypted), the loan balance, and the interest rate. The latter will be helpful if you opt to consolidate or pay off any interest early down the road. But be sure to keep your list up to date, as interest rates on student loans can be fixed or variable.

2. Know your repayment options
“The standard repayment schedule extends your loan payments over ten years, or 120 payments,” explained Maggie McGrath of Forbes. “However, if the standard monthly payments aren’t manageable on your budget — or if you’re unemployed or otherwise unable to repay your loans — the federal government has some alternative repayment plans for you, as well as some deferral options.”

Income-based repayment (IBR) and income-contingent repayment (ICR) extend your payment period to 25 years, capping your monthly payments at a fixed percentage of your income. The income on which payments are based and the actual percentage differ between the two plans. Pay-as-you-earn is a 20-year repayment period, with yet another varying percentage of your discretionary income.

You can read about other repayment options from the government here: https://studentaid.ed.gov/sa/repay-loans/understand/plans. Be wary, as these types of programs can cause your interest costs to increase over time, so always pay as close to your original amount due as you can.

3. Be aware of loan forgiveness opportunities
There are three primary programs that forgive the balance of your loan: Public service loan forgiveness, teacher loan forgiveness and Perkins loan cancellation.

“To qualify for forgiveness, your loans can’t be in default, meaning they’ve gone unpaid for more than nine months,” noted higher education expert Brianna McGurran of Nerdwallet. “Also, private student loans don’t offer forgiveness, though some lenders will let you make interest-only payments or take a temporary interest rate reduction if you’re having trouble affording your bill.”

Public service loan forgiveness requires you to have been working for a nonprofit or the government for at least 10 years in roles including, but not limited to, firefighting, teaching, the military and nursing. In the teacher-specific program, you must work full time as an educator for five consecutive years. The Perkins loan forgiveness also cancels the balance of that loan if you’ve worked as a teacher, firefighter, nurse, police officer, school librarian or public defender for about five years or more. For a complete description of eligibility requirements, visit https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation.

If you take the time to do your homework and gather yourself before — or even while — you are repaying your student loans, the process will seem a lot less scary, and a lot more manageable.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Tips for Making Safe Credit Card Purchases Online

In today’s digital age, you need to be especially careful when making online purchases

With online shopping becoming the norm, people have also become more susceptible to identity theft. It’s imperative that you be careful and mindful of how you shop online.

A November 2016 article in The Balance by contributor LaToya Irby outlines seven tips for safe online shopping:

Conduct your online shopping only on websites you trust
It may sound obvious, but using your credit card to make online purchases only on those websites you know and trust could save you from becoming a victim of fraud. Never click on links provided via email; instead, type the entire URL of the website into your browser to open the site.

Never shop from a public place
Public computers are susceptible to hacker technology, such as software that captures your keystrokes and retains your personal and credit card information. Additionally, public Wi-Fi is unsecured and, as such, could redirect your device to a fake internet connection that an identity thief can monitor and use to intercept your personal information.

Keep your devices protected from viruses
Always stay up to date with virus and spyware protection software, and make sure you are using antivirus software that is reputable, not the type for which you receive an ad via email or in a pop-up window.

Check with the BBB first
The Better Business Bureau marks websites with poor customer service records, so make sure to check out the credibility of the site in question using the BBB before making a purchase.

Use credit cards, not debit cards
Credit cards have better protection services against fraud than debit cards, so you’re liable for fewer fraudulent charges if they occur. Additionally, you could lose access to your account and your funds while the financial institution sorts out a debit card that has been compromised, whereas with a credit card the only access that’s affected is that line of credit.

Make sure the website you use is secured
Always look for the green lock symbol at the start of your URL browser, and make sure you type in the website using “https” to ensure the site is secured to encrypt your information when making online purchases.

Keep track of your purchases with receipts
Just as with in-store purchases, printing a copy of the receipt of your online transaction will help you track your credit card activity. Use the printed copy to compare against your monthly credit card statement and watch for fraud.

In a November 2016 article in the Better Business Bureau by APR, CFEE Janet C. Hart recommends checking both your credit card activity and your bank account activity once a week, rather than waiting for the monthly statement. This ensures you catch fraudulent activity shortly after it’s occurred instead of finding out weeks later.

Hart also advises that we be wary of phishing scams—emails seemingly from a business claiming an error with your order or your account and asking you to confirm personal and identifying information. Legitimate businesses do not send these types of emails.

“Beware of ‘GREAT’ deals — if you find a website offering deals that seem too good to be true, they probably are. You may get a knock-off product, a product that is not the brand you ordered, or you may get nothing at all,” adds Hart.

Lastly, Hart recommends always checking the website’s privacy policy before making purchases online, so you know exactly how your personal information will be used.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

What to Know About Trading in Your Existing Car

The steps you should be taking as you head to the dealership
Are you thinking about trading in your current car for a new one? Before rushing to the dealership and signing any papers, there are a few things you should consider.

What is your current car’s appraisal value?
“To determine [whether] you’re being offered a reasonable price on your trade-in, you first must know what your car is worth,” says Edmunds senior consumer advice editor Ronald Montoya.

You can do this via any appraisal resource, like Edmunds’ True Market Value tool or Kelley Blue Book (KBB). Be honest with yourself when assessing options and condition, or you may find yourself with a vastly inaccurate assessment.

What does the dealership say?
Next, you will want to take your current vehicle to a dealership to have the experts there appraise it and give you a trade-in amount offer. This number will not be the same at all dealerships, as it depends on various factors, including current inventory levels, probability of sale and current trade-in promotions.

How much do you still owe on your vehicle?
Find out how much you owe on your current car by requesting the payoff amount from your lender.

“This is the amount it will take to pay off your existing loan, and it may be different from any outstanding balance listed on your statement or [in your] coupon book. This difference may be because of a prepayment penalty or the way interest is calculated,” the Consumer Financial Protection Bureau website explains.

Compare that amount to the appraisal quote and the trade-in value given to you by the dealership. If you still have equity in your vehicle (that is, you are not “upside down” — owe more than your car is currently worth), you can use that to your advantage.

Can you negotiate?
As previously mentioned, don’t settle for the first number spit out at you. The first offer always starts low, as dealerships expect buyers to negotiate. Use your original appraisal from Edmunds or KBB as a basis for what is fair and see if they’ll match that number. If you are upside-down on your current car, see if they will give you a bit more for your trade-in if you plan to get your new car there that day. However, be sure to keep negotiations for your trade-in and your new car separate. In most cases, your trade-in can be used as a form of down payment and will be written into your new car contract as a credit against the price of the car.

Following these steps will set you on the right path to having a positive vehicle trade-in experience.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.