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February 24, 2021

The 4 Smartest Ways to Cope With a Tax Bill You Canât Afford

Discovering that you owe the IRS money is never a good feeling. If you’re staring down a tax bill you can’t afford to pay from 2020, you’re no doubt in good company.

Countless people have turned to gig work to survive, which can result in surprise tax bills. Expanded jobless benefits have been a lifeline to millions, but even unemployment benefits are taxable. With confusion about PPP loans, the CARES Act retirement rules and the payroll tax “holiday”, it’s a safe bet that this year’s tax season will be even more migraine-inducing than ever.

4 Smart Strategies for Dealing With a Tax Bill You Can’t Afford

The most important thing to know if you owe: You do have options. But it’s essential that you take action. Here are four mistakes to avoid — and what to do instead.

Mistake #1: You don’t file a tax return because you can’t pay your bill.

The smart strategy: File a return, even if you can’t afford to pay.

The penalties for not filing a tax return are much tougher than the penalties for not paying on time. Here’s how it works:

If you don’t file a tax return: You’ll pay a 5% monthly late fee, up to 25% of the tax bill, plus interest.
If you file your tax return on time but don’t pay: Your late fee is just 0.5% per month, also capped at 25% of the bill, plus interest.

Note that filing for a tax extension only gives you more time to file. It doesn’t give you more time to pay taxes if you owe. But if you ask for an extension by April 15 and file your return by the Oct. 15 deadline, you’ll only be paying the lower late payment fee instead of the 5% monthly fee for filing a late return.

When you don’t file a tax return, the IRS can file a substitute return on your behalf. If that happens, you’ll still want to file your own return. The substitute return won’t include tax deductions and tax credits that could potentially lower your bill.

Mistake #2: Using a credit card or cash advance to pay your taxes.

The smart strategy: Apply for an IRS payment plan.

This one’s a head-scratcher because even the IRS suggests paying taxes you can’t afford with a credit card or cash advance. Apparently, the IRS doesn’t realize its own generosity as a creditor.

A much better option is to apply for an IRS installment plan. You’ll still accrue penalties and interest. But when you sign up for an installment plan, the monthly 0.5% late fee drops to 0.25%. With interest, that works out to 6% annually.

By comparison, a typical credit card APR hovers above 16%. Cash advance APRs are a gut-punching 25% on average, plus they often come with additional fees.

Typically, the IRS will automatically approve your agreement if you owe less than $10,000 and you agree to pay off your bill within three years, with no monthly payments required. If you owe more or need more time to pay, the IRS could technically ask for more financial information. But as long as your balance is $50,000 or less, odds are still high that you’ll be automatically approved. The maximum repayment time frame is 72 months, so your monthly payments can be as low as 1/72 of your balance.

Pro Tip

Agree to the lowest monthly payment the IRS will accept and then pay extra each month if you can.

You’ll pay a $31 fee if you apply online and have money automatically withdrawn from your bank account each month. The fees are higher if you set up the plan by phone, in person or by mail, or if you choose a different payment method. Setup fees can be waived if the IRS considers you low income, which means your income is below 250% of the federal poverty level for your state.

While you’re in a payment plan, any future tax refunds will be applied to your balance until you’ve paid it off. But the IRS won’t take further action, like garnishing your wages or placing a lien on your property, as long as you’re paying as agreed.

Mistake #3: Hiring a tax settlement company.

The smart strategy: Negotiating with the IRS yourself.

If you’re seriously delinquent on taxes, you may need professional help. If you fall in this camp, only an attorney, a CPA or a type of tax adviser called an enrolled agent can represent you before the IRS. But most people who owe taxes won’t need the help of a pro.

Be extremely wary of companies that claim they can stop wage garnishments or settle your debt for a fraction of what you owe. The FTC warns that the vast majority of taxpayers don’t qualify for the programs they’re hawking. Many people who use these companies don’t get tax relief. Instead, they wind up deeper in debt due to high upfront fees and unauthorized charges.

You typically don’t need assistance to set up a payment plan. But even if you can’t afford to start paying your bill or your installment agreement isn’t approved, you do have options for negotiating with the IRS.

One option is to ask for currently not collectible status, which means the IRS will pause collection efforts until your financial situation improves. You’ll still owe taxes, and interest and penalties will continue to accrue. The IRS will require you to show proof of significant hardship and document your income, spending and assets.

Another possibility is an offer in compromise, which allows you to settle your tax debt for less than you owe. You can do this either with a lump-sum payment or with monthly installment payments. The IRS rejects most applications for an offer in compromise. Typically, your tax bill has to be large enough that the IRS agrees it can’t realistically collect what you owe. Use the IRS Offer in Compromise pre-qualifying screener to determine whether this could be an option.

Mistake #4: Taking a 401(k) withdrawal.

The smart solution: If you must touch your retirement money, stick with a 401(k) loan or your Roth IRA contributions.

We’d recommend an installment plan hands-down over touching your retirement money. But if that’s not an option — or if you’re determined to get rid of this tax debt ASAP at any cost — an early 401(k) withdrawal should only be the last option..

With an early 401(k) withdrawal, you’ll be racking up more taxes just to pay your taxes. Your distribution will be taxed as ordinary income, plus you’ll pay a 10% penalty.

A 401(k) loan may be a better option since you won’t be penalized. But it’s still risky. If you left your job for any reason, you’d have to repay the loan in full when you file your tax return the next year. Otherwise, it’s treated as an early withdrawal.

If you’re using retirement money to pay taxes, start with your Roth IRA if you have one. If you can limit your withdrawals to your contributions, you won’t pay taxes or a penalty, since that money has already been taxed.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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Source: thepennyhoarder.com

February 24, 2021

What Is A Good Credit Score?

Despite the impact that credit scores can have, many people misunderstand what they are and how they are calculated.

Your credit affects every aspect of your life in ways that you may not expect. Having a good credit score unlocks lower rates for mortgages, car loans, and some types of insurance, as well as lower credit card rates.

Some employers also use credit scores for advancement and hiring decisions, so having a good credit score often impacts your earning ability over the course of your career.

This guide will cover the basics of understanding what a credit score is and is not, how to determine whether you have good or bad credit, and what you can do to improve your existing credit scores.

What is a credit score?

First, let’s talk about what a credit score is and is not. At its most basic, it’s a number that indicates how likely you are to repay your debts. Creditors use this number to decide whether or not to extend credit to you and under what terms.

For example, your bank or credit union will look at your credit score before approving you for a mortgage. If you are approved, the rates you qualify for are directly tied to your credit score. Higher credit scores mean lower interest rates and vice versa.

Your credit scores are not a direct reflection of how much money you make. People with a low income can have an excellent credit score, and high-income people can have a poor credit score.

Likewise, your credit scores are not tied to a particular bank or credit card company. Banks and credit card issuers do pull your credit scores to decide whether or not to lend to you. But, the credit scores are supplied by third-parties, not the lenders themselves.

How is your credit score calculated?

Your credit score is based on a number of different factors. Here’s how it works:

The Fair Isaac Corporation (FICO) calculate your credit scores based on their internal algorithms.

They base these credit scores on data from the credit bureaus about your past and current financial actions as reported by your current creditors. Things like length of credit history, how much you owe, and payment history are all a part of the calculation. However, the exact formulas that FICO uses are a secret.

How often does your credit score change?

Your credit score is constantly changing based on the actions you take. It’s common for it to vary month to month or even day by day as your creditors report new information.

To put it another way:

Your creditors report information about your payment history and current financial obligations to the credit bureaus.

Credit scorers then use this information along with other data about you to calculate a score.
The credit score serves as a way of “grading” your financial responsibility.
New creditors then use this grade to determine how likely you’ll pay up in the future. The higher your grade, the more likely you’ll be approved for loans, credit cards, and get the best rates.

The good news is that there are specific actions you can take that will boost your credit scores in the future if they aren’t where you want them to be today. To get an idea of where you stand, you need to know where your credit scores fall in the range of potential credit scores.

What are the different credit score ranges?

There are a few different types of credit scores available right now. In general, the only ones that really count are your FICO scores.

There are different types of FICO scores used throughout the mortgage, auto, and insurance industries, but the main thing to keep in mind is that FICO is the major player when it comes to credit scores. When your lender talks about qualifying, 9 times out of 10, they are referring to your FICO score.

The FICO score range is from 300 to 850.

Some other credit scoring models and their ranges are:

PLUS Score – Experian developed this credit score, and it only uses data found on your Experian credit report. Lenders do not use this credit score. Instead, it’s meant to educate consumers on their credit risk levels. The PLUS score ranges from 330 to 830.
TransRisk Score – as the name suggests, this score was developed by TransUnion. It is used to predict risk for new credit accounts, not your ability to pay current accounts. The TransRisk score range is from 100 to 900.
Equifax Score – this is also an educational tool, much like the PLUS score. The range is from 280 to 850.
VantageScore – the VantageScore is the only other credit scoring model used by lenders. The three major credit bureaus created it to compete with the FICO score. The current version of the VantageScore has the same range as the FICO: from 300 to 850.

What is considered a good credit score?

The answer to whether or not it’s “good” or “bad” depends on what kind of credit you are trying to obtain and the maximum interest rate that will make you happy.

For something relatively small like a personal loan or a credit card, there are a wide range of credit scores that could be considered good.

Mortgage lenders, on the other hand, typically require that your average FICO score pulled from all three credit bureaus is no less than 640 – and with a 640 credit score, you’ll be looking at high interest rates that add hundreds of dollars to your mortgage payments.

If you’re looking for general guidelines on what constitutes a good credit score versus a bad credit score, these point ranges are the typical credit scores from bad to excellent credit:

Excellent credit: 781 and above
Good credit: 661-780
Fair credit: 601-660
Poor credit: 501-600
Bad credit: 500 and below

See also: What Is the Average Credit Score in America?

If you’re looking for an idea of what kind of credit score you’ll need in various situations, read on.

What credit score is needed to rent an apartment?

Landlords typically pull your credit history to assess the risk of new tenants before offering a lease. It’s not only to assess your current financial situation; i.e., how much money you currently owe compared to your income.

It’s also to see if you have any outstanding collection accounts, including non-payment of rent from a prior apartment.

In general, you need to have a credit score of at least 620 to be granted a lease. If you can’t meet this minimum, you’ll likely need a co-signer on your rental agreement. So a person with a 615 credit score would have problems, but if you have a 635, you’re likely in the clear.

In areas where rental properties are in high demand, you may also have to pay a larger deposit. You may also have to come up with both the first and last month’s rent before your lease is approved if your credit scores are low (below 620). In extreme cases, you may be forced to agree to automatic payments taken directly from your checking account to qualify.

What is a good credit score to buy a car?

Car dealerships are famous for their “no credit, bad credit, any credit!” slogans to get people in the door to buy a new car.

However, the great deals you see advertised on TV are usually reserved for people with top-tier “super-prime” credit ratings. The general breakdown of interest rates for new car loans looks something like this:

If your credit scores fall into the deep subprime or subprime categories, there is a risk that you won’t be able to get financing at all. However, if you manage to get financing, the rates will be significantly higher, as you can see by the list above.

If you want the best rates on a new car, aim for a credit score of 680 or above. If you want to be approved for a car loan with a decent rate, aim for a credit score of at least 620.

What credit score is needed to buy a house?

As stated earlier, if you’re looking to purchase a new home, your credit will be scrutinized. Several factors go into qualifying for a home loan, and your credit score is only one of them.

That being said, if you want to qualify for a traditional mortgage, you’ll need a credit score of at least 640. The best mortgage rates are reserved for people with a 720 credit score or higher.

Some exceptions may be made for people who are getting FHA loans or VA loans. FHA loans only require a 580 credit score, and VA loans have no credit score minimum for mortgages.

However, these numbers are deceptive because neither the FHA nor the VA actually provides loans. Instead, they insure loans to the banks that do the actual lending – primarily providing risk mitigation in case of a default.

Even with this insurance in place, you most likely won’t be approved for a VA or FHA loan with a credit score that’s below 620.

What credit score is need to get a low-rate credit card?

Credit cards are the most wide-ranging of all the credit types you might qualify for. If you want a great interest rate, no annual fees, and lots of perks, you’ll need a 720 or better. If you’re just looking for a solid credit card with a good rate, you can qualify for a decent credit card with a 640 credit score.

How can I find out my credit score?

Plenty of credit card companies offer free FICO scores to customers nowadays. Some even offer a free credit score to non-customers. You can also purchase your FICO score at FICO’s website, MyFICO. Your VantageScore can be purchased from VantageScore’s website.

Keep in mind that some credit cards and banks provide credit monitoring. However, these credit scores may not be your FICO or VantageScore. Be sure to verify what kind of credit score you are getting before you pay for it.

The only other way to get your credit score is to apply for a credit card or loan. In your acceptance (or denial) letter, you will generally receive your credit score and how it factored into the decision to approve or deny your credit.

This is the least recommended way to get your credit score, as there is no way for you to improve your credit score before you are denied credit if there are problems.

How can I improve my credit score?

If your credit score isn’t where you need it to be to qualify for the types of credit you deserve, there are several things you can do to improve your credit scores over time:

Pay your bills on time. Keeping current with your payments is the best way to build credit. Even six months of on-time payments can make a significant impact.
Lower your debt to income ratio. The more debt you carry relative to your income, the lower your credit scores will be. Try to pay off credit cards and pay down loans to give yourself some breathing room.
Pay down maxed-out credit cards. Credit utilization is a big factor. Using all of your available credit is a red flag to lenders that you are high-risk. So pay down any balances until you are using one-third or less of your available credit limit.
Remove errors from your credit report. Any negative items on your credit report that aren’t accurate will hurt your chances of getting approved for credit. This includes late payments, charge-offs, collection accounts, and more. Dispute any errors you find, or hire a reputable credit repair specialist to get the job done for you.

Understanding how to get a good credit score is an important first step to taking control of your financial freedom. Keep in mind that it takes time to build credit and that you as a consumer have rights to help you preserve the accuracy of your credit scores.

February 23, 2021

How to Get Your $1,800 Stimulus Check if Youâre a Recent Grad

The first and second stimulus checks left a lot of college-age students disappointed. If your parents claimed you as a dependent on their tax returns, you didn’t qualify for the $1,200 and $600 checks.

They also disappointed plenty of parents. The $500 and $600 child stimulus credits were only available for dependents 16 and younger.

But if you graduated from high school or college in 2020 and started supporting yourself, there’s a good chance you can still claim $1,800 of stimulus money. Here’s how.

Why Recent Grads May Qualify for $1,800 of Stimulus Money

Both rounds of stimulus checks were an advance on a tax credit for 2020 that were calculated using 2018 or 2019 returns. But if you qualify based on your 2020 tax situation, you could get $1,800 of stimulus money when you file your taxes as a Rebate Recovery Credit. That’s IRS speak for: “You’ll get it as a tax refund.”

So how do you know if you’re eligible? Basically, if you provided more than half of your own financial support in 2020, your parents can’t claim you as a dependent. If you no longer qualify as their dependent, you can most likely qualify for stimulus money by filing a tax return.

If you graduated last spring, found a job right away and immediately started paying all your own bills, you would probably qualify. The same applies even if you didn’t graduate but you started supporting yourself in 2020.

Where it gets murkier is if your parents still provided some support. For example, if you got a part-time job and moved back home with your parents in 2020, you may or may not qualify.

The best solution here is to use free tax software to file a tax return. The platform you choose will ask some basic questions to determine whether or not you count as someone else’s dependent. It will then figure out whether you’re eligible for stimulus money or any other tax credits and give you the money as a refund.

The deadline to file is April 15. As long as you file online, you’ll typically receive your refund within three weeks.

What About the Third Stimulus Check?

While a third stimulus check for $1,400 is looking likely, it hasn’t passed yet. If it happens, though, it will be a 2021 credit that will be processed using 2020 returns. By filing your tax return now, you’ll ensure that the IRS has the information it needs to get you your third stimulus check ASAP.

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Source: thepennyhoarder.com

February 18, 2021

5 Pieces of Bad Financial Advice You Should Avoid

When it comes to money, everyone likes to put in their two cents.

Oh, you should definitely buy and not rent. Stay away from credit cards; they’re evil. Why are you so worried about your credit score? It doesn’t matter.

There’s a lot of — quite frankly — dumb advice floating around out there, and it can be difficult to figure out what’s up and what’s down.

Well, we’re here to set the record straight. Here’s all the dumb money advice out there — and what you should do instead.

Dumb Advice #1: Keep Money in Your Checking Account

You’ve probably heard the best way to grow your money is to stick it in a savings account and leave it there for, well, ever. That’s bad advice.

Maybe you’re just looking for a place to safely stash it away — but still earn money. Under your mattress or in a safe will get you nothing. And a typical savings account won’t 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, and link your bank account to see how much extra cash you can get with your free Aspiration account. And don’t worry. Your money is FDIC insured and under a military-grade encryption. That’s nerd talk for “this is totally safe.”

Dumb Advice #2: You Should Get 3 Auto Insurance Quotes

People love to tell you to shop around. “You should be getting three different quotes to get the best price on car insurance,” they say.

Sure, this sounds like good advice. Here’s why it’s wrong: Comparing only three companies isn’t nearly enough. We suggest comparing 40. But who has time for that?

A company called Savvy will do it for you for free. It gets people an average of $826 back in their bank accounts a year — and you’ll get the same coverage you already have.

It doesn’t matter when you last renewed; you can get a check from your old company for the time left on your previous policy. (Read: They probably owe you money.)

You don’t have to make any calls or fill out any forms. It takes two minutes to see how much Savvy can put back in your pocket.

And the best part? Because we’re driving less, some insurers are slashing prices this month.

Dumb Advice #3: You Need to Save $1,000,000,000,000,000 Before You Die

All your life, people have been telling you to save. Save for emergencies. Save for the future. Save for your family. At that rate, you’re gonna need a gazillion dollars in the bank.

Here’s the thing: You should keep a healthy amount of savings in the bank, but if you want to give your family up to $1 million, use something called term life insurance.

We suggest a company like Fabric. Maybe you’ve considered this before, but thought it was only for rich or older people. But we’re hearing that people are getting it for as little as $14 a month.

And the truth is, this is one of the smartest things you can do with your money right now.

Answer a few quick questions here and finish the form to see how much money you could leave your loved ones — it only takes minutes.

Dumb Advice #4: You Need to Be a Billionaire to Buy an Apartment Building

A neighborhood at sunset. — Getty Images

This year has been a rollercoaster. Historically, though, real-estate investing offers the best long-term returns. (Does the name Rockefeller ring a bell?)

That’s why we like investing with pros like DiversyFund. They’ll help you make long-term investments in apartments and office buildings all over the country — and you don’t have to be a millionaire. You can get started with only $500.

You can see exactly which properties are included in your portfolios — like a 200-unit apartment complex in Killeen, Texas or a 59-unit building in San Diego. And you don’t have to be the landlord — DiversyFund does all the heavy lifting.

Because they know how to ride out the market’s ups and downs, they’ve historically seen annual returns of 17% to 18%, though they can’t make any promises.

As a partial owner, you make money on rent payments and when property values go up. It takes just a few minutes to sign up and own your first apartment building.

Dumb Advice #5 You Have to Pay Your Credit Card Bill Every Month

If you have credit card debt, you know. The anxiety, the interest rates, the fear you’re never going to escape…

And the truth is, your credit card company doesn’t really care. It’s 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? You’ll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.99% APR), you’ll get out of debt that much faster. Plus: No credit card payment this month.AmOne won’t make you stand in line or call your bank, either. And if you’re worried you won’t qualify, it’s free to check online. It takes just two minutes, and it could help you pay off your debt years faster.

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Source: thepennyhoarder.com

February 18, 2021

Does Closing A Credit Card Hurt Your Credit Score?

Increasing your credit score can seem like a complicated process. After all, it’s created by an intricate algorithm that weighs each and every item on your credit report in a variety of different ways.

Many blogs and financial extremists tout that all credit cards as bad. They may have you tempted to close all of your credit cards in order to boost your credit score.

But before you do, stop what you’re doing and find out how exactly closing a credit card affects your credit score.

It’s not as cut and dry as you might think, and you might actually end up hurting your credit score by closing any or all of your credit card accounts. So take a closer look at the consequences before you choose the best next step for your situation.

Should I cancel my credit card?

Canceling a credit card is generally a bad idea, especially if it’s an old account. It’s usually better to keep it open even if you don’t use it anymore. A big part of your credit score is determined by the age of all your revolving credit accounts.

Keep reading to learn how closing a credit card can hurt your credit score.

Length of Your Credit History

The older your credit card accounts, the higher your credit score will be in this category. In fact, 15% of your score depends on how old your accounts are. This is an easy category to score high in because it’s not dependent on any other type of financial decision you’ve made — as long as you have taken the time to accrue a substantial credit history.

Consequently, when you close a credit card, you limit the number of accounts used in the calculation. It doesn’t happen automatically. In fact, each credit card account continues to age for ten years after it’s been closed before finally dropping off your credit report at the end of that period.

So your credit score won’t drop right away. Even if you close a brand new credit card, it will be ten years old by the time it falls off your report. If you’ve opened any new cards since then, your credit score will take a dip because the average age of your accounts has decreased.

Credit Utilization

Another way you can hurt your credit score is by closing a credit card is your credit utilization ratio. This term refers to the amount of debt you owe compared to the amount of credit available to you.

For example, if you owe $2,000 on a credit card, but have three different cards with credit limits totaling $10,000 then your credit utilization ratio is 20%. But if you close one of those cards that has a $3,000 credit limit, you bring your total available credit down to $7,000.

When you recalculate your credit utilization, it jumps up to 28.5%. Having a higher credit utilization negatively affects your credit. It’s also a red flag to lenders that you may not have a lot of credit left to use.

How much does closing a credit card hurt your credit score?

It could cause a pretty big drop in your credit score. It depends on how old your credit card account is, how many other credit cards you have, and how old they are.

If you have recently closed a credit card, it’s worth contacting the creditor and asking if they can re-open it.

How many credit cards should you have?

There’s no definite answer to this question, and it largely depends on how you handle your credit cards. Keep low or zero balances on your credit card accounts, particularly compared to your overall credit limits and the amount of income you earn. If you do so, having several cards won’t affect your credit too much or your ability to get a loan or mortgage.

In fact, having more than one card lowers your credit utilization rate because you have more credit available to you. This is great for your credit scores as long as you don’t charge up the cards too much.

New Credit

Having several credit cards can decrease your credit score if you open too many accounts in a short period of time. Part of your credit score is determined by “new credit,” accounting for a full 10%.

Each time you open a new credit card or apply for a loan, it shows up in the “Inquiries” section of your credit report and stays there for two years.

Your credit score will also take a dip for one year after each inquiry. If you just open one credit card account, your credit score won’t drop too much. But if you open many cards at once, you could potentially do some real damage to your credit.

Remember that retail cards at store chains also count in this section. So, be wary of opening several credit card accounts just to get a small discount or a one-time bonus at a store you rarely visit.

Credit Mix

Finally, another 10% of your credit score considers the different types of credit you have. If you have several credit cards or other types of revolving credit, but little or no installment loans like a mortgage or car payment, your credit could suffer even more.

Installment loans are weighted more favorably than revolving credit. So, it’s not good to overload on the number of credit cards you have, especially if you don’t have any installment loans at all.

Which credit card accounts are best to close?

When you cancel a credit card, there are a few things to consider to have the best effect on your credit score. First, think about closing your newest accounts. That way, your overall age of credit won’t take a big dip when the credit card comes off in ten years.

High Interest Rate Credit Cards

If you tend to carry balances on your credit cards, you can also close the card with the highest interest rates. Of course, you’ll need to pay off the credit card in full before closing it.

In the event you do have a balance, you could try doing a balance transfer to a low-interest credit card or even a card with a 0% introductory rate. Just be sure you can pay off the balance before the introductory period ends. Otherwise, you could potentially end up paying an even higher interest rate than before.

Credit Cards with Annual Fees

Other good credit card candidates to consider closing include any with an annual fee. Perhaps the first year’s fee was waived for new customers and you received some sort of rewards point bonus.

Of course, if your rewards program is lucrative enough that it more than pays for the annual fee, you don’t necessarily want to close this one. You may first want to consider calling the credit card issuer and asking if you can downgrade your credit card to one with no annual fee. You may be able to switch to another credit card from the same issuer and keep your payment history.

Credit Cards with No Rewards or Benefits

Similarly, any credit card that doesn’t offer any benefits or rewards could be a good one to close. You’ll want to consider any detrimental effects it might have on your credit utilization.

However, if you have decent credit, you should be able to find a credit card that offers some types of rewards program that could earn you cash back or free travel.

What’s the best way to close a credit card?

When you cancel a credit card, go into it with a smart strategy to minimize any damage to your credit score. If you’re closing more than one credit card account, try to space them out over time.

That way, your credit utilization ratio won’t drop overnight. The same advice applies when opening a new credit card account since each new account causes a small score drop for 12 months.

It’s also important to avoid canceling a credit card account right before you apply for a mortgage or other loan. Even if your lower credit utilization only makes your score drop by a few points, that can really make a huge difference in which interest rates you’re offered by your lender.

The cutoff point for the very best rates is typically 740. If your credit score is right on the line, even a minor change can cause you to lose the very best loan terms.

Closed at the Consumer’s Request

You should also be sure to close all credit accounts on your own terms. That means don’t wait for your bank to close an account because of payment issues. That will hurt your credit score even more.

Also, be aware that any customer service representative you speak to will likely try to convince you that another credit product would work better for you. Don’t give them personal details about your reasons for closing the account. Simply be firm about your intentions. Let them know you want your credit report to reflect that you requested the account to be closed.

You don’t need a credit monitoring service to understand how opening and closing a credit card affect your credit. You’re now armed with the knowledge you need to strategically manage your credit card accounts to get the best possible scoring in the relevant categories.

With a full 35% of your credit score affected by how you use your credit card accounts, there is certainly room for improvement no matter where your number is currently. Before you make any move regarding your credit cards, remember both the long-term and short-term effects those decisions could have on your credit.

February 17, 2021

61 Million Americans Cut Car Insurance Costs Last Year. Here’s How You Can, Too

There’s no question the pandemic was terrible — for a lot of reasons. But a silver lining managed to peek its way through the darkness for nearly 20% of the population:

Car insurance rates dropped significantly, saving 61 million people hundreds, if not thousands, of dollars each since last year.

So, why did rates drop so much?

First, fewer people were on the roads, so there was a lower chance of an accident or claim. Then, new car sales were down an estimated 40%, meaning the claims that did come through may not have been as expensive. And finally, insurance companies knew they needed to be more competitive, since it’s so easy for people to find a new, better policy.

All of those factors caused rates to drop in 2020 (and stay low). One Penny Hoarder took advantage of this situation over the summer and managed to cut her bill by more than half.

Wondering how you can cut your bill, too? It’s not too late. You just need to compare quotes.

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 it’ll show you your options.

Using Insure.com, people save an average of $540 a year.

Yup. That could be more than $500 back in your pocket just for taking a few minutes to look at your options.

Kari Faber is a staff writer at The Penny Hoarder. She’s the one who saved 50% on her car insurance bill in the midst of COVID-19.

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Source: thepennyhoarder.com

February 17, 2021

What Is Revolving Credit?

There are many different ways to get financing in the world today. Revolving credit is a great way to do this and there are many ways in which you can access this type of credit.

Ready to learn more about how revolving credit accounts can help meet your financial needs while building your credit score at the same time.

Then keep on reading.

What is revolving credit?

Revolving credit is when you have access to a line of credit from a lender and can withdraw and repay funds on your own schedule. As you pay off the outstanding balance, you then have access again to use those funds if and when you wish to do so.

One benefit of having a revolving credit account is that lenders typically report your positive payments to the major credit bureaus. So if you want to build your credit from scratch or repair it from past financial issues, then revolving credit is one way to do that.

Obviously, it’s important to use your revolving credit wisely. If you don’t pay off your balance in full each month, you’ll begin accruing interest. Depending on the types of revolving credit product you use, your interest rate could range widely.

What are some types of revolving credit available to consumers?

Examples of Revolving Credit

Credit Cards

Perhaps the most common type of revolving credit is a credit card. You have a credit limit, which is the maximum amount of credit you’re allowed to use each month. You can’t charge anymore once you hit that number. Credit card companies require a minimum payment each month, but you can set your own schedule for repaying the bulk of the balance.

Just as with any type of financing, you’ll pay interest on your outstanding credit card balance. The average APR for a credit card is around 16%, but it can also go much higher depending on your credit score and payment history on the credit card.

Home Equity Lines of Credit

Another type of revolving credit is a home equity line of credit or HELOC. If you own a home and have enough equity, you can apply to borrow funds up to a percentage of that equity. Rather than receiving a lump sum, you draw funds from your line of credit as you need them.

The benefit here is that you’re not paying interest on money you’re not using. So, for example, if you use your line of credit for a home renovation, you can withdraw funds each time you need to make a purchase or hire a contractor.

If the project is spread out over a period of time, you can save yourself money on accruing that interest. Plus, HELOC rates are typically much lower than those associated with credit cards and even personal loans.

Revolving Credit vs. Installment Credit

There’s a big difference between revolving credit and an installment loan — most notably in the way the borrowed funds are repaid. We discussed how you can pay revolving credit at your own pace while accruing interest.

With installment loans, on the other hand, you have fixed monthly payments. The principal and interest are spread out over a predetermined repayment term. For example, you may have an installment loan that lasts over the course of three years.

As long as you agreed to a fixed interest rate, your payment is due in full every month and the amount should be the same each time (assuming you’ve paid on time in the preceding months.

Variable Rates

Lines of revolving credit typically don’t have fixed interest rates but instead have variable APRs. Credit card issuers can increase your rate at certain times, including if you miss payments.

A HELOC is typically tied to the prime rate. So whatever that number is set at, you can usually expect to pay a point or two more. Depending on your lender, there may be a cap on how high the rate can go.

Used responsibly, a revolving line of credit can help strengthen your credit score. As long as you keep your available credit relatively low compared to your credit limit and make at least the minimum payment on time, you can successfully build a positive credit history.

February 16, 2021

5 Reasons Dave Ramsey Is Totally Wrong About Credit Scores

Dave Ramsey, who talks about finances, records one of his old shows in his studio.

Dave Ramsey works in his broadcasting studio in Brentwood, Tenn. Because of his wealth, Ramsey can afford to be credit invisible. But for regular people, having no credit can make life costly and difficult. Josh Anderson/AP Photo

Dave Ramsey doesn’t need a stimulus check. He has an estimated net worth of at least $200 million. He doesn’t think you need one either. Recently, the anti-debt crusader came under fire when he said he said he doesn’t believe in stimulus checks because “if $600 or $1,400 changes your life, you were pretty much screwed already.”

Nevermind the fact that no one seems to be saying a third stimulus check would change their lives. But for millions affected by COVID-19, it would help them catch up on bills.

Here’s another thing Ramsey doesn’t need: a credit score. He calls FICO scores the “I love debt scores.” He’s proud of the fact that he doesn’t have one. He says you don’t need one, either.

Ramsey has inspired countless people to pay down debt — and we love that. But the truth is, he can afford to be credit invisible. If you’re a regular person, not having a credit score makes life a lot more costly and complicated.

5 Reasons Dave Ramsey Is Wrong About Credit Scores

Here’s what Ramsey gets right about credit scores: They aren’t a reflection of your overall finances. Doubling your salary or your savings is great for your finances, but it won’t affect your credit score, because a credit score only measures how you manage debt.

If you’re like Ramsey and you don’t have a credit score, that probably means you haven’t used credit in the past 24 months. So the credit bureaus often won’t have enough data about you to give you a credit score.

But you don’t need to carry debt to have a credit score. In fact, one of the best ways to build excellent credit is to open a credit card and pay off the entire balance each month.

Here’s why everyone who’s not a multimillionaire should ignore Ramsey’s credit score advice.

1. You’ll pay deposits for everything.

Forget a three- to six- month emergency fund. If you’re going to live without a credit card, you’ll have to have a lot more saved because you’ll have to pay deposits for virtually everything. Expect to pay first and last month’s rent plus an additional security deposit, along with deposits for things like utilities, internet and cellphone service.

2. It will be difficult to get a mortgage.

Ramsey says the people who need a credit score are the ones who plan to take on more debt. That’s partially true. Having a high credit score helps you get the best financing rates for big purchases like a home, which few people can afford to pay cash for.

It’s possible to get a mortgage with no credit score through a process called manual underwriting. Smaller banks and credit unions are most likely to offer this option. But be prepared to provide more documentation and a longer approval process.

You can also expect to make a bigger down payment. This can be good if it stops you from buying too much house. But when you’re buying a house you can afford, a large down payment requirement can keep you renting for longer. That costs you in the long run because your housing payments aren’t building equity.

3. Credit cards are usually the safest way to pay.

When someone hacks your credit card account, technically, that’s your bank’s money they’re stealing when they make those fraudulent transactions. But with a debit card, they’re stealing your money. In practice, your bank will probably refund your money if a hacker drains your account, but the process could take several days. That could leave you without cash or put you behind on bills.

Credit is the safest way to pay in situations where your data is vulnerable, like when you’re shopping online or paying for gas at the pump. That doesn’t mean you need to carry debt when you make a credit card purchase. You can pay off your balance daily if you want.

4. Travel is challenging without a credit card.

You can probably check into a hotel or rent a car using your debit card. But they’ll typically put a temporary hold on whatever credit or debit account you use. It’s meant to ensure you have sufficient funds in case of damage. That’s money you can’t spend until the hold is lifted, which may not happen until several days after you’ve checked out of the hotel or returned the car.

If you’re paying with credit, that won’t be a problem as long as your card isn’t maxed out. But if you’re paying with a debit card, a hold could lock you out of funds you need for basic expenses — or worse yet, cause you to overdraft.

5. Credit can be a valuable tool in an emergency.

In a perfect world, you’d have an emergency fund that can carry you through any crisis. But in the real world, an emergency fund can take several years to build. Using credit cards to get through an emergency isn’t ideal. But in a crisis, it may be the least terrible option. Having access to a credit card can help you avoid dangerous alternatives, like payday loans.

No Credit Score? Here’s How to Get One

If you know that you’ll be tempted to rack up debt if you have access to credit, it may be best to follow Ramsey’s advice and live without a credit score. The inconvenience and additional deposits are worth it if you have a serious spending problem. But for most people, the advantages of credit far outweigh the downside.

If you don’t have a credit score, either because you’ve never used credit or you haven’t had a credit card in a long time, the easiest way to get one is to open a secured credit card. You’ll pay a refundable security deposit that will become your line of credit. After about a year of on-time payments, your odds of getting approved for a regular credit line are good.

Limit your purchases to no more than 10% of your credit limit, and pay off the bill in full each month — or even as soon as you make a purchase if you’re worried about falling into debt.

With a little discipline, access to credit won’t lead to debt. But it will make life easier and more affordable.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].

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Source: thepennyhoarder.com

February 16, 2021

What Is A Fico Score?

If you’ve ever tried to get a loan or applied for a credit card, you’ve likely heard the term “FICO score” mentioned on more than one occasion.

However, if you’re just establishing your credit, or if you’ve never really paid attention to your credit in the past, understanding what the FICO is and what it means can be challenging.

This article covers everything about FICO scores. It includes what they are, how they are calculated, the different types of FICO scores, and what they are used for. We also cover some other, less commonly used types of credit scores and how they compare to the FICO.

What is a FICO score?

FICO scores are the most commonly used credit scores by lenders to determine whether or not to approve you for a loan or a credit card.

The Fair Isaac Corporation gets information from all three credit reporting agencies (Experian, Equifax, and TransUnion). They use the information in your credit file to calculate three different FICO scores – one for each credit bureau.

As the information in each credit report changes, your FICO scores will change as well. This means they can change month by month or even day by day as your creditors report new activity on your account.

Multiple Versions of FICO Scores

FICO regularly updates the algorithm they use to calculate your FICO scores. When they do this, they update to a new ‘version’ of the FICO. Currently, the newest version is FICO 9. It has several changes to how certain items are factored into your credit score. In particular:

Paid collections no longer have a negative impact.
Medical collection accounts have less of a negative impact.
Rental history, when reported by your landlord, is now factored in. This change can help renters to establish a positive credit history even if they don’t have other forms of credit.

What are the types of FICO scores?

Beyond the regular changes that happen as their credit scoring model is updated, there are also several different types of FICO scores. Each one is designed to help lenders determine specific kinds of credit risk. The most common types are:

Auto Score – determines how likely you are to default on an auto loan or lease
Mortgage Score – determines how likely you are to default on a mortgage loan
Credit Card Score – determines how likely you are to default on a credit card or store charge card account
Installment Loan Score – determines how likely you are to default on a large installment loan
Personal Finance Score – determines how likely you are to default on a smaller installment loan

For all of these different types of credit scores, a special set of FICO scores is used, which is not on the same scale as the general FICO score.

In addition, these scores assess the likelihood that you’ll default in the next two years, but only for their specific focus. For example, an Auto FICO score will only measure the risk of your default on your auto loan, not your mortgage.

Multiple Versions of Industry-Specific FICO Scores

To further complicate matters, FICO regularly updates these special industry-specific credit scores to be more accurate. Like the general FICO score, there are multiple versions of each industry-specific FICO score.

What this means is that a typical person doesn’t just have one or two FICO scores. Instead, everyone has dozens of FICO scores.

This is one of the many reasons why one lender may decline a credit application while another approves the same application. Different versions of the same FICO score or the same type of score taken from different credit bureaus will almost always be different.

How are FICO scores calculated?

Fortunately, standard FICO scores are calculated using a fairly consistent method from one version to the next. The general breakdown of how your standard FICO scores are calculated is as follows:

Payment History – 35%
Amounts Owed – 30%
Length of Credit History – 15%
New Credit – 10%
Credit Mix – 10%

As you can see, the vast majority of it boils down to how well you pay your bills, how much debt you carry, and how long you’ve had credit in your name.

While the industry-specific scores will weight things a bit differently, these main factors will still be important in calculating your FICO scores.

Factors That Do NOT Impact Your FICO Scores

There are also several factors that Fair Isaac says are never part of the calculations that determine your FICO score. These items are:

Age
Gender
Salary
Location

Lenders may factor in how much money you make, what kind of job you have, or other outside circumstances when it comes to approving your application for credit. However, FICO does not take these into account when calculating your credit score.

How do I check my FICO score?

If you want to know what your FICO score is, you can check your score before going to a lender to have peace of mind.

The simplest way to get access to your FICO score is to order it. Unlike credit reports, you will have to pay for it, either through a third-party service or directly through Fair Isaac.

We recommend going directly through FICO if you need a full overview of the various credit scores. However, if you decide to go the third-party route, make certain the credit score you are purchasing is an authentic FICO score.

FICO Score vs. VantageScore

VantageScore is a credit score created by the three credit bureaus (Experian, Equifax and TransUnion) to compete FICO.

It has many similarities including using the same score range (300 to 850) and using past payment information to predict the risk of future defaults. However, there are a few key differences, including:

The VantageScore does not weigh paid collection accounts negatively. The latest version of the FICO also reduces the impact of paid collections. However, the new version of FICO is not widely used at the time of this writing.
The VantageScore counts late mortgage payments against your credit more than other types of delinquent payments.
If you are hit by a natural disaster, the VantageScore takes that into consideration
You have only 14 days to rate shop with a VantageScore – with a FICO, you may have up to 45 days to find the best loan.

Given that roughly 90% of lenders are still using FICO, VantageScore isn’t a major player yet. Need to know for certain whether or not a lender will approve your credit application? Check your FICO scores as these are the ones most likely to be used by any creditor you choose.

FICO vs. TransRisk

TransRisk credit scores are provided by TransUnion only, and specifically through Credit Karma. The algorithm of how the credit score is calculated and what factors into improving the credit scores isn’t well-known.

Aside from being freely available to consumers via the Credit Karma website, there is not much benefit to the TransRisk score.

It is not used by lenders or creditors, and therefore knowing your credit score isn’t useful for getting approved. It can, however, help you track the general improvement of your credit over time, so it can be useful as a monitoring aid if nothing else.

What’s a good FICO score?

What counts as a “good” depends on what you want to do with your credit. Do you want to be able to get a new home? A $25,000-limit credit card? A $5000 personal loan?

For each of these different scenarios, a different FICO score range applies when talking about a good score versus a fair one.

That being said, there are some rough and ready guidelines for determining what FICO score you need to get approved types of credit:

Mortgage – 640 is the minimum to qualify, 720+ gives the best rates
Car loan – 620 is basic rate, 740+ gives the best rates
Credit cards with low interest rates – 640 is the minimum, 720+ gives the best rates

Bear in mind that different lenders may pull your FICO score from more than one credit bureau. They may also use more than one version of the FICO to make their lending decisions alongside your personal financial history.

For those reasons, it is useful to shop around for the best rates, particularly when you know your credit scores are close to prime, or super-prime rates.

How can I improve my FICO score?

If on the other hand, your FICO scores are too low to qualify for the rates you deserve, there are several things you can do to boost your scores:

Reduce your credit card balances – Carrying a high balance can signal significant risk of default and lower your credit scores all around.
Make your payments on time consistently – a six-month history of on-time payments will raise your credit scores by several points
Remove negative accounts on your credit file – are there late payments that were actually on time? Multiple collection accounts for the same debt? Debt listed as higher than your records indicate? All of these are errors that are hurting your credit and getting them removed can help you to qualify for credit sooner rather than later.

Because there are so many different types of FICO scores, don’t be discouraged if the scores you’re seeing aren’t the same as the ones you see in the bank or the auto dealership – just be prepared to keep working at it, and building your credit over time.

February 15, 2021

What to Look for During a Self-Guided Apartment Tour

A self-guided apartment tour allows you to explore a space at your leisure, taking your time to check out all the features or amenities the apartment has to offer. Learn how to make the most out of one of these self-guided tours, and ensure you cover all your bases before you sign a lease or make a deposit!

What to look for on a self-guided apartment tour

There’s really nothing that beats the in-person experience of walking through an available unit. A self-guided apartment tour is a flexible option that works with your schedule by allowing you to select a time to see the rental all on your own. But with this solo venture comes a bit more responsibility since you won’t have an agent or property manager there by your side.

Fortunately, we’ve come up with a list of five things to look for during your self-guided tour, so you can feel prepared to make the right decision for you.

1.The condition of the appliances

Appearances can be deceiving, especially when you’re looking at expertly-retouched photos taken for the sole purpose of renting a unit. As you’re doing research online, it may be hard to tell how updated the oven is or how well that fridge has been cleaned.

When you take the tour for yourself, be sure to inspect each appliance’s condition, even opening the door or cabinets to see what’s inside. If anything looks like it’s coming up at the end of its lifecycle, it may be worth asking about getting a replacement before you move in.

Additionally, before you even start the tour, ensure that you’re looking at the available unit rather than a model. If the property manager only allows you to walk through the model, take all the glam features with a grain of salt — models are often decked out with better finishes, appliances, and views than available units.

2. The closet and storage space

If a place is listed as a two-bedroom apartment, you can probably expect it to have two closets — but are there any extra drawers, linen closets, or shelves in the hallway or bathroom? Depending on how much stuff you’re moving in with you, the amount of storage space might be a make-or-break factor in your decision-making process.

During your self-guided tour, be sure to check out the dimensions of each closet. Consider whether your belongings will fit comfortably or whether you’ll need an apartment with additional storage potential.

3. The safety or security measures

Regardless of if you’re living alone, with a romantic partner, or with a group of friends, you’ll want to feel safe inside your home and within your apartment complex. Online listings often leave out information regarding the security measures around the property, which means it’ll be up to you to make some mental notes on your tour.

Is the building located behind a gate, with a special code to get in? Does the door to your apartment lead directly outside, or is there an exterior front door you enter to access each unit? Does the unit you’re renting face the street or the apartment courtyard? Everyone’s requirements for what puts them at ease will vary, so just make sure you feel comfortable with the situation as you envision yourself living there.

4. The neighbors

It’s easy to look at a picture of a beautifully furnished model apartment and get your hopes up without seeing it in-person. But what a photo can’t tell you is what kind of activity that residence brings with it. When you’re taking a self-guided apartment tour, listen for any loud noises in the hallways or stairwells, as well as the noise from neighboring buildings or businesses.

It could be that everything is quiet and respectful, but if you hear excess commotion, it’s something to think about (especially if you work from home or tend to spend the majority of your time there).

5. The parking arrangement

If and where there’s parking available will have a significant impact on your quality of life. After all, ease of parking makes it easier to walk to your apartment on dark nights, stormy days, or whenever you’re toting six bags worth of groceries in one trip! So when you’re touring a new complex, pay attention to where the cars are parked in relation to each building.

Is there a covered garage where you’re protected from the elements, or is there a private lot for residents to use? Where can overnight guests park? And can you pay a little extra to opt-in for a closer space? If these questions can’t be answered through your own observations, you’re smart to ask the property manager for additional clarity.

What to ask when searching for an apartment

Knowing which questions to ask before signing a lease is vital to finding an apartment you’ll thrive in. The following are just a handful of things you can bring up, but of course, feel free to ask whatever applies to your unique situation.

Are the lease terms negotiable (length of commitment, adding a roommate, etc.)?
Is the available unit a different layout than the model apartment you toured?
Are furnished apartments available?
Who do you contact for maintenance issues or repairs?
What are the consequences for a missed (or late) rent payment?
Are pets allowed, and if so, are there guidelines as to their size/weight?
Are there any group activities or outings for tenants in this building?
Do they offer any discounts for signing a long-term contract?
What do tenants say they love most about living here?

Love where you live!

Finding a new apartment can be a real challenge, especially if the space you rent turns out to look nothing like the model you toured a few months back. Next time, skip the unpleasant surprises by vetting your rental options with ApartmentSearch!

ApartmentSearch can help you secure your next place with ease, so you can focus on all the fun that comes with settling in. Check out our list of city guides and apartment resources today, and start planning your move in no time!

Source: blog.apartmentsearch.com