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Debt Settlement vs Bankruptcy: Which is Best?

You’ve tried debt payoff strategies, balance transfers, consolidation, and even debt management; you’ve begged your creditors, liquidated your assets, and pestered your friends and families for any money they can afford, but after all of that, you still have more debt than you can handle.

Now what?

Once you reach the end of your rope, the options that remain are not as forgiving as debt management and they’ll do much more damage to your credit score than debt payoff strategies. However, if you’ve tried other forms of debt relief and nothing seems to work, all that remains is to consider debt settlement and bankruptcy.

Debt settlement is a very good way to clear your debt. It’s one of the cheapest and most complete ways to eradicate credit card debt and can help with most other forms of unsecured debt as well. Bankruptcy, on the other hand, is a last resort option for debtors who can’t meet those monthly payments and have exhausted all other possibilities.

But which option is right for you, should you be looking for a debt settlement company or a bankruptcy attorney?

Similarities Between Bankruptcy and Debt Settlement

Firstly, let’s look at the similarities between bankruptcy and debt settlement, which are actually few and far between. In fact, beyond the fact that they are both debt relief options that can clear your debt, there are very few similarities, with the main one being that they both impact your credit score quite heavily.

A bankruptcy can stay on your credit report for up to 10 years and do a lot of damage when it is applied. It may take several years before you can successfully apply for loans and high credit lines again, and it will continue to impact your score for years to come.

Debt settlement is not quite as destructive, but it can reduce your credit score in a similar way and last for up to 7 years. Accounts do not disappear in the same way as when you pay them in full, so future creditors will know that the accounts were settled for less than the balance and this may scare them away.

In both cases, you could lose a couple hundred points off your credit score, but it all depends on how high your score is to begin with, as well as how many accounts you have on your credit report and how extensive the settlement/bankruptcy process is.

Differences Between Bankruptcy and Debt Settlement

The main two types of bankruptcy are Chapter 7 and Chapter 13. The former liquidates assets and uses the funds generated from this liquidation to pay creditors. The latter creates a repayment plan with a goal of repaying all debts within a fixed period of time using an installment plan that suits the filer.

Debt settlement, on the other hand, is more of a personal process, the goal of which is to offer a reduced settlement sum to creditors and debt collectors, clearing the debts with a lump sum payment that is significantly less than the balance.

Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

When people think of bankruptcy, it’s often a Chapter 7 that they have in mind. With a Chapter 7 bankruptcy, all non-exempt assets will be sold, and the money then used to pay lenders. There are filing costs and it’s advised that you hire a bankruptcy attorney to ensure the process runs smoothly.

Chapter 7 bankruptcy is quick and complete, typically finishing in 6 months and clearing most unsecured debts in this time. There is no repayment plan to follow and no lawsuits or wage garnishment to worry about.

Chapter 13, on the other hand, focuses on a repayment plan that typically spans up to 5 years. The debts are not wiped clear but are instead restructured in a way that the debtor can handle. This method of bankruptcy is typically more expensive, but only worthwhile for debtors who can afford to repay their debts.

Filing for bankruptcy is not easy and there is no guarantee you will be successful. There are strict bankruptcy laws to follow and the bankruptcy court must determine that you have exhausted all other options and have no choice but to file.

Bankruptcy will require you to see a credit counselor, which helps to ensure that you don’t make the same mistakes in the future. This can feel like a pointless and demeaning requirement, as many debtors understand the rights and wrongs and got into a mess because of uncontrollable circumstances and not reckless spending, but sessions are short, cheap, and shouldn’t cause much stress.

How Debt Settlement Works

The goal of debt settlement is to get creditors to agree to a settlement offer. This can be performed by the debtor directly, but it’s often done with help from a debt settlement company.

The debt specialist may request that you stop making payments on your debts every month. This has two big benefits:

1. More Money

You will have more money in your account every month, which means you’ll have more funds to go towards debt settlement offers. 

The idea of making large lump sum payments can seem alien to someone who has a lot of debt. After all, if you’re struggling to make $400 debt payments every month on over $20,000 worth of debt, how can you ever hope to get the $5,000 to $15,000 you need to clear those debts in full?

But if you stop making all payments and instead move that money to a secured account, you’ll have $4,800 extra at the end of the year, which should be enough to start making those offers and getting those debts cleared.

2. Creditor Panic

Another aspect of the debt settlement process that confuses debtors is the idea that creditors would be willing to accept reduced offers. If you have a debt worth $20,000 and are paying large amounts of interest every month, why would they accept a lump sum and potentially take a loss overall?

The truth is, if you keep making monthly payments, creditors will be reluctant to accept a settled debt offer. But as soon as you start missing those payments, the risk increases, and the creditor faces the very real possibility that they will need to sell that debt to a collection agency. If you have a debt of $20,000, it may be sold for as little as $20 to $200, so if you come in with an offer of $10,000 before it reaches that point, they’ll snap your hand off!

Types of Debt

A debt settlement program works best when dealing with credit card debt, but it can also help to clear loan debt, medical bills, and more. Providing it’s not government debt or secured debt, it will work. 

With government debt, you need specific tax relief services, and, in most cases, there is no way to avoid it. With secured debt, the lender will simply take your asset as soon as you default.

Debt settlement companies may place some demanding restrictions on you, and in the short term, this will increase your total debt and worsen your financial situation. In addition to requesting that you stop making monthly payments, they may ask that you place yourself on a budget, stop spending money on luxuries, stop acquiring new debt, and start putting every penny you have towards the settlement.

It can have a negative impact on your life, but the end goal is usually worth it, as you’ll be debt-free within 5 years.

Pros and Cons of Debt Settlement and Bankruptcy

Neither of these processes are free or easy. With bankruptcy, you may pay up to $2,000 for Chapter 7 and $4,000 for Chapter 13 (including filing fees and legal fees) while debt settlement is charged as a fixed percentage of the debt or the money saved. 

As mentioned already, both methods can also damage your credit score. But ultimately, they will clear your debts and the responsibilities that go with them. If you’ve been losing sleep because of your debt, this can feel like a godsend—a massive weight lifted off your shoulders.

It’s also worth noting that scams exist for both options, so whether you’re filing bankruptcy or choosing a debt settlement plan, make sure you’re dealing with a reputable company/lawyer and are not being asked to pay unreasonable upfront fees. Reputable debt settlement companies will provide you with a free consultation in the first instance, and you can use the NACBA directory to find a suitable lawyer.

Bankruptcy and Debt Settlement: The End Goal

For all the ways that these two options differ, there is one important similarity: They give you a chance to make a fresh start. You can never underestimate the benefits of this, even if it comes with a reduced credit score and a derogatory mark that will remain on your credit report for years to come.

If you’re heavily in debt, it can feel like your money isn’t your own, your life isn’t secure, and your future is not certain. With bankruptcy and debt settlement, your credit score and finances may suffer temporarily, but it gives you a chance to wipe the slate clean and start again.

What’s more, this process may take several years to complete and in the case of bankruptcy, it comes with credit counseling. Once you make it through all of this, you’ll be more knowledgeable about debt, you’ll have a better grip on your finances, and your impulse control. 

And even if you don’t, you’ll be forced to adopt a little restraint after the process ends as your credit score will be too low for you to apply for new personal loans and high limit cards.

Other Options for Last Ditch Debt Relief

Many debtors preparing for debt settlement or bankruptcy may actually have more options than they think. For instance, bankruptcy is often seen as a get-out-of-jail-free card, an easy escape that you can use to your advantage whenever you have debts you don’t want to pay.

But that’s simply not the case and unless you have tried all other options and can prove that none of them have worked, your case may be thrown out. If that happens, you’ll waste money on legal and filing fees and will be sent back to the drawing board.

So, regardless of the amount of debt you have, make sure you’ve looked into the following debt relief options before you focus on debt settlement or bankruptcy. 

Debt Consolidation

A debt consolidation loan is provided by a specialized lender. They pay off all your existing debts and give you a single large loan in return, one that has a lower interest rate and a lower monthly payment. 

Your debt-to-income ratio will improve, and you’ll have more money in your pocket at the end of the month. However, in exchange, you’ll be given a much longer-term, which means you’ll pay more interest over the life of the loan.

A Debt Management Plan

Debt management combines counseling services with debt consolidation. A debt management plan requires you to continue making your monthly payment, only this will go to the debt management company and not directly to the creditors. They will then distribute the money to your creditors.

You’ll be given a monthly payment that you can manage, along with the budgeting advice you need to keep meeting those payments. In exchange, however, you’ll be asked to close all but one credit card (which can hurt your credit score) and if you miss a payment then your creditors may back out of the agreement.

Balance Transfer Card

If all your debts are tied into credit cards, you can use a balance transfer credit card to make everything more manageable. With a balance transfer credit card, you move one or more debts onto a new card, one that offers a 0% APR for a fixed period. 

The idea is that you continue making your monthly payment, only because there is no interest, all the money goes towards the principal.

Home Equity Loans

If you have built substantial equity in your home then you can look into home equity loans and lines of credit. These are secured loans, which means there is a risk of repossession if you fail to keep up your payments, but for this, you’ll get a greatly reduced interest rate and a sum large enough to clear your debts.

Bottom Line: The Best Option

Debt settlement and bankruptcy are both considered to be last resort debt-relief options, but they couldn’t be more different from one another. Generally speaking, we would always recommend debt settlement first, especially if you have a lot of money tied up in credit card debt.

If not, and you can’t bear the idea of spending several months ignoring your creditors, missing payments, and accumulating late fees, it might be time to consider bankruptcy. In any case, make sure you exhaust all other possibilities first.

Debt Settlement vs Bankruptcy: Which is Best? is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

How to Get Out Of Debt Fast When You Don’t Have Much Money

The post How to Get Out Of Debt Fast When You Don’t Have Much Money appeared first on Penny Pinchin' Mom.

How do you get out of debt when you are broke? After all, if you had the money,  you would not be in debt in the first place.  Right?

I hear this from people, just like you.  It is often not how much money you make, but the debt payoff plan you are using that is not working.  It is possible to get out of debt with no money; you just need to learn how.

get out of debt

There are plenty of inspiring stories of people sharing how they got out of debt, despite not making much money. In fact, you may feel you relate.  But yet, you don’t think you can do it. For whatever reason, you think you can’t get out of debt as they did.  It is impossible.

Or is it?

My husband and I were living on one income when we decided it was time to get out of debt.  It took us nearly 2 1/2 years but were able to pay off more than $37,000 in debt.  There are countless other stories of our readers who have paid off similar amounts in even less time.

I am here to tell you that you CAN (and should) get out of debt – no matter how little money you may make!!

 

HOW CAN YOU GET OUT OF DEBT WITH NO MONEY?

I am going to share the steps anyone can follow to learn how to get out of debt – no matter your income level.  If you struggle to make ends meet, you already know how to make the most of a dollar, and I’ll give you additional tips so that you can pay down that debt.

I have asked this on Facebook all of the time, and some of the comments include:

“There is no way I can do this. Not with my medical bills.”

“Sure, that only works or some people – not me.”

Many of you may be thinking similar things, and I completely understand that way of thinking. I was there myself and know that it seems like an unattainable goal.  That is why you are reading this right now – to find out how to make this dream a reality.

Debt is NOT a Good Thing.

If you are in debt, it could be because of your own decisions or even those you can’t control (such as health, job loss, etc.).  No matter how it happened, you need to get rid of it. Period.

The reason you need to eliminate your debt is that it genuinely is holding you back. How can you move forward financially with this obstacle standing in your way?  If you found that you needed to buy a new car, you would find a way, correct?  For most, that would probably mean an additional monthly payment – but you would do it because you needed to.  You need to look at debt the same way:

“Getting out of debt is not a desire – it is a need.”

MY STORY

I remember in 2009 when my husband and I thought there was no way we could get ever get out from under our debt.  It was an impossible dream. At that time, I was not working at that time, and so we had one income and two young children to feed.  I initially thought that there was no way at all that we could do this.  It was just not possible.

We started by looking at our finances (oh – they were awful).  Our goal was to live a great life.  We could have kept on and kept just getting by, but that was not how we wanted to live. Just “getting by” was no longer an option.

Knowing our kids would be watching us, we knew the importance of being a good role model for them.  We wanted them to learn how to handle money by following our example.

We both agreed that not having debt was pivotal in having a positive financial future. We wanted this not only for ourselves but also for our children as well. It was also essential for our marriage.  We needed to remove anything that could potentially cause stress – money, and finances being a big one.  Our relationship was good, but we knew we could even make it better.

To begin our journey, we read Dave Ramsey’s Total Money Makeover. We followed much of his advice but figured out some things that worked for us as well. Being debt free is a fantastic feeling that no one can describe.  You have to live it.

 

THE FIRST STEP TO GET OUT OF DEBT

The very first step to getting out of debt is to decide you want to do it.  That was the change both my husband, and I made.  Once we were ready and committed to getting out of debt, we began our journey.

You might be saying that you can’t do that though.  I’m here to say that you can – when you really, truly want to make it happen.

Getting out of debt doesn’t require you to be rich. Anyone can do it.  Even if you have a low income or don’t have much money. Like I said above, knowing that you want to make the changes and pay off your debt is only one small part.  The more significant issue is how in the world you actually can do this.

 

1. Face YOUR Reality

According to CNN Money, the average American family made around $59,000 in 2017. While that is the average, it is also true that many Americans make much less than this.

With a lower income, it is even more critical that you have no debt at all. After all, you are already stretching every dollar to cover your bills. You don’t need additional payments causing more financial stress.

Unless you win the lottery, a wealthy relative leaves you a small fortune, or you find a better job, you know your income won’t change.  That is the truth. You can’t change that.

However, what you can and must do is take the steps you can to work yourself out from under the mountain of debt you may be facing. You need to first create a budget, determine how much debt you have and then the steps to pay it off, no matter how much money you make.

 

2. Fully Commit

If you are not 100% ready to make changes, then you are destined for failure. It may be blunt, but it is true. If you can’t “go all in” and fully commit to making whatever difficult changes necessary (trust me, it will be challenging), then you need to stop reading right now.

If you are ready to make this lifestyle change, then read on. You’ve already made huge strides to make changes in your life.

 

3. Create (and use) a Budget and Debt Snowball Form

Knowing where your money goes is paramount to getting out of debt, no matter how much you make. Without your budget, you can’t even consider getting out of debt.

If you have never created a budget, it can be overwhelming.  But, it will also be eye-opening.  In addition to your budget, you should create a debt snowball, start using the envelope system and take better control of your money.  By doing this, you will get a better picture of your debts and how you can tackle them.

Look at paying off debt like a football team.  Each part of your finances is involved in the game:

Home Team – This is you and your family
Visiting Team – These are your debts and expenses
Your End Zone – This is where you will be debt free
PlayBook – Budget and debt snowball forms
Football – Your money
Refs and Penalties – Unexpected instances which set you back in reaching your goals

You would never expect a team to run onto the field and play the game without having the proper plays in mind. The same is true for you;  If every one of the members of your family has a different idea as to how to get your money down the field to pay off your debts, you will never make it there.

Instead, you design smart plays and work together to get there.  You work to get your money past all of the expenses you need to dodge.  There may be setbacks, and you may have to move back before you can get forward.  However, with hard work, you will get there.  You will get onto the scoreboard – and end up claiming victory!

 

4. Find extra money

Before you jump in to try to pay off your debts, you need to have savings.  The reason is that if an emergency comes up, you need to pay for it – in cash.  You do not want to run to your credit card to cover the expense.  It is best to have at least $1,000 in the bank before you get started.

So, before you jump in to pay off those debts, you listed above, make sure you’ve got money in the bank to cover your unforeseen expenses by creating an emergency fund.

Once you have that done, then you are going to have to find a way to squeeze everything you can out of every cent.  For some, it may mean no longer dining out.  For others, it could be shutting off cable television.  Where there is a will, there will always be a way to make this happen.  You just have to do what you can!

I share this true story in our budget post, but I’m putting it here again for you!  My husband and I gave up dining out. No joke. We ate dinner out very infrequently.

While I look back and think it might have been once every couple of weeks, I asked my husband recently, and he said that we were lucky to eat out once a month! It was painful, but now that we’ve cut down out all of our debts, we have income freed up so we can have dinner out more frequently (if we so desire).

For even more inspiration and ideas, you may have to find some radical ways you can get cash to help you get out of debt.  Do whatever it takes (legally and within reason, of course), to help you get out of debt.

Read More:  60 Creative Ways to Save or Make Money

 

5. Find ways to get more money (i.e. side hustle and selling items)

To be honest, if you are struggling to make ends meet on a low income, you won’t be able to just cut enough out of your budget to pay off your debt.  Like my mom use to say – “You can’t get blood out of a turnip” – which means if it isn’t there-there is nothing you can do about it.

That is the truth, and I’m not trying to lie to you. I am realistic and know that if you are making barely enough to cover your expenses, you won’t have any extra money for your debt.  I get that.

You can’t save enough money on your budget to eliminate your debt.  Well, I guess you could, but that is going to take a very, very, VERY long time.  So, what do you do when you’ve saved all you can and still can’t pay off your debts?  Well, you just have to get creative.

For some this may mean finding items you no longer need, which you can sell to raise money.  When we did this step, we had the same issue.  We could not cut anything more from our budget.

For us, this meant selling items we no longer needed. We did a large cleanout and got rid of furniture and other things we were holding onto, just in case we needed them. By doing this, we were able to come up with several thousand dollars — 100% of which went immediately towards our debt.

If that isn’t an option, you might want to consider getting a second job or side business to bring in income to indeed help you get out of debt.  We also did this. I started my website.  Now, let me be Frank in saying that this is not a great way to make money.  Most blogs make little to nothing in the first couple of years.  I was lucky, and we did pretty well, and I was able to bring a bit more each year – all of which helped us to pay off our debts.

It may not be a blog, but perhaps babysitting, or cleaning houses, raking leaves, shoveling snow — there are all sorts of ways that you can make money.

Read More:  Unique Ways to Make Money From Home

It is not the income that is holding most people back, it is the understanding and knowing even where to start.  You might have to scale back on various spending aspects of your life, but when you get to scream from the rooftops — WE’RE DEBT FREE!!!! — it will be worth it all.  I promise you!!!

 

get out of debt

The post How to Get Out Of Debt Fast When You Don’t Have Much Money appeared first on Penny Pinchin' Mom.

Source: pennypinchinmom.com

How to Avoid Racking Up Debt During the Holidays

The holidays bring a lot of excitement and cheer. But is also a time characterized by a lot of spending. Statistics show that holiday spending goes up every year in the last few years. Unfortunately, holiday expenditure can take a big chunk out of your credit card. It may feel great while the holidays last […]

The post How to Avoid Racking Up Debt During the Holidays appeared first on Credit Absolute.

Source: creditabsolute.com

What is Credit Card Churning? Dangers and Benefits

Credit card issuers have consumers right where they want them, lending money at high-interest rates and earning money from many different fees. Even reward cards benefit the issuers, because all the additional perks and rewards they provide are covered by the increased merchant fees, which essentially means the credit card company offers you extra money to incentivize you to spend, and then demands this money from the retailers.

It’s a good gig, but some consumers believe they can beat the credit card companies and one of the ways they do this is via something known as credit card churning.

What is Credit Card Churning?

Many reward cards offer sign-up bonuses to entice consumers to apply. Not only can you get regular cash back, statement credit, and air miles, but you’ll often get a reward just for signing up. For instance, many rewards credit cards offer a lump sum payment to all consumers who spend a specific sum of money during the first three months.

Credit card churning is about taking advantage of these bonuses, and getting maximum benefits with as little cost as possible.

“Churners” will sign up for multiple different reward cards in a short space of time, collect as many of these bonuses as they can, clear the card balance, and then reap the rewards.

Does Credit Card Churning Work?

Credit card churning does work, to an extent. Reward credit cards typically don’t require you to spend that much money to receive the sign up bonus, with most bonuses activated for a spend of just $500 to $1,000 over those first three months. This is easily achievable for most credit card users, as the average spend for reward cards is over $800 a month.

If you have good credit, it’s possible to sign up to multiple credit cards, collect bonus offers without increasing your usual spend, and get everything from hotel stays to free flights, cash back, gift cards, statement credit, and more.

However, it’s something that many credit card companies are trying to stop, as they don’t benefit from users who collect sign-up bonuses, don’t accumulate debt, and then pay off their balance in full. As a result, you may face restrictions with regards to how many bonuses you can collect within a specified timeframe. 

What’s more, there are several things that can go wrong when you’re playing with multiple new accounts like this, as all information is sent to the credit bureaus and could leave a significant mark on your credit report.

Dangers of Churning

Even if the credit card companies don’t prevent you from acquiring multiple new credit cards, there are several issues you could face, ones that will offset any benefits achieved from those generous sign-up bonuses, including:

1. You Could be Hit with Hefty Fees

Many reward credit cards have annual fees, and these average around $95 each, with some premium rewards cards going as high as $250 and even $500. At best, these fees will reduce the amount of money you receive, at worst they will completely offset all the benefits and leave you with a negative balance.

Annual fees aren’t the only fees that will reduce your profits. You may also be charged fees every time you withdraw cash, gamble, make a foreign transaction or miss a payment,

2. Your Credit Score Will Drop

Every time you apply for a new credit card, you will receive a hard inquiry, which will show on your credit report and reduce your FICO score by anywhere from 2 to 5 points. Rate shopping, which bundles multiple inquiries into one, doesn’t apply to credit card applications, so credit card churners tend to receive many hard inquiries.

A new account can also reduce your credit score. 15% of your score is based on the length of your accounts while 10% is based on how many new accounts you have. As soon as that credit card account opens, your average age will drop, you’ll have another new account, and your credit score will suffer as a result.

The damage done by a new credit card isn’t as severe as you might think, but if you keep applying and adding those new accounts, the score reduction will be noticeable. You could go from Excellent Credit to Good Credit, or from Good to Fair, and that makes a massive difference if you have a home loan or auto loan application on the horizon.

Your credit utilization ratio also plays a role here. This ratio is calculated by comparing your total debt to your available credit. If you have a debt of $3,000 spread across three credit cards with a total credit limit of $6,000, your credit utilization ratio is 50%. The higher this score is, the more of an impact it will have on your credit score, and this is key, as credit utilization accounts for a whopping 30% of your score.

Your credit utilization ratio is actually one of the reasons your credit score doesn’t take that big of a hit when you open new cards, because you’re adding a new credit limit that has yet to accumulate debt, which means this ratio grows. However, if you max that card out, this ratio will take a hit, and if you then clear the debt and close it, all those initial benefits will disappear.

You can keep the card active, of course, but this is not recommended if you’re churning.

3. You’re at Risk of Accumulating Credit Card Debt

Every new card you open and every time your credit limit grows, you run the risk of falling into a cycle of persistent debt. This is especially true where credit card rewards are concerned, as consumers spend much more on these cards than they do on non-reward credit cards.

Very few consumers accumulate credit card debt out of choice. It’s not like a loan—it’s not something they acquire because they want to make a big purchase they can’t afford. In most cases, the debt creeps up steadily. They pay it off in full every month, only to hit a rough patch. Once that happens, they miss a month and promise themselves they’ll cover everything the next month, only for it to grow bigger and bigger.

Before they realize it, they have a mass of credit card debt and are stuck paying little more than the minimum every month. 

If you start using a credit card just to accumulate rewards and you have several on the go, it’s very easy to get stuck in this cycle, at which point you’ll start paying interest and it will likely cost you more than the rewards earn you.

4. It’s Hard to Keep Track

Opening one credit card after another isn’t too difficult, providing you clear the balances in full and then close the card. However, if you’re opening several cards at once then you may lose track, in which case you could forget about balances, fees, and interest charges, and miss your chance to collect airline miles cash back, and other rewards.

How to Credit Churn Effectively

To credit churn effectively, look for the best rewards and most generous credit card offers, making sure they:

  • Suit Your Needs: A travel rewards card is useless if you don’t travel; a store card is no good if you don’t shop at that store. Look for rewards programs that benefit you personally, as opposed to simply focusing on the ones with the highest rates of return.
  • Avoid Annual Fees: An annual fee can undo all your hard work and should, therefore, be avoided. Many cards have a $0 annual fee, others charge $95 but waive the fee for the first year. Both of these are good options for credit card churning.
  • Don’t Accumulate Fees: Understand how and why you might be charged cash advance fees and foreign transaction fees and avoid them at all costs. The fees are not as straightforward as you might think and are charged for multiple purchases.
  • Plan Ahead: Make a note of the bonus offer and terms, plan ahead, and make sure you meet these terms by the due dates and that you cover the balance in full before interest has a chance to accumulate.
  • Don’t Spend for the Sake of It: Finally, and most importantly, don’t spend money just to accumulate more rewards. As soon as you start increasing your spending just to earn a few extra bucks, you’ve lost. If you spend an average of $500 a month, don’t sign up for a card that requires you to spend $3,000 in the first three months, as it will encourage bad habits. 

What Should You do if it Goes Wrong?

There are many ways that credit card churning could go wrong, some more serious than others. Fortunately, there are solutions to all these problems, even for cardholders who are completely new to this technique:

Spending Requirements Aren’t Met 

If you fail to meet the requirements of the bonus, all is not lost. Your score has taken a minor hit, but providing you followed the guidelines above, you shouldn’t have lost any money.

You now have two options: You can either clear the balance as normal and move onto your next card, taking what you have learned and trying again, or you can keep the card as a back-up or a long-term option. 

Credit card churning requires you to cycle through multiple issuers and rewards programs, never sticking with a single card for more than a few months. But you need some stability as well, so if you don’t already have a credit card to use as a backup, and if that card doesn’t charge high fees or rates, keep it and use it for emergency purchases or general use.

Creditor Refuses the Application

Creditors can refuse an application for a number of reasons. If this isn’t your first experience of churning, there’s a chance they know what you’re doing and are concerned about how the card will be used. However, this is rare, and in most cases, you’ll be refused because your credit score is too low.

Many reward credit cards have a minimum FICO score requirement of 670, others, including premium American Express cards, require scores above 700. You can find more details about credit score requirements in the fine print of all credit card offers.

Your Credit Score Takes a Hit

As discussed already, credit card churning can reduce your credit score by a handful of points and the higher your score is, the more points you are likely to lose. Fortunately, all of this is reversible.

Firstly, try not to panic and focus on the bigger picture. While new accounts and credit length account for 25% of your total score, payment history and credit utilization account for 65%, so if you keep making payments on your accounts and don’t accumulate too much credit card debt, your score will stabilize.

You Accumulate Too Much Debt

Credit card debt is really the only lasting and serious issue that can result from credit card churning. You’ll still earn benefits on a rolling balance, but your interest charges and fees will typically cost you much more than the benefits provide, and this is true even for the best credit cards and the most generous reward programs.

If this happens, it’s time to put credit card churning on the back-burner and focus on clearing your debts instead. Sign up for a balance transfer credit card and move your debt to a card that has a 0% APR for at least 15 months. This will give you time to assess your situation, take control of your credit history, and start chipping away at that debt.

What is Credit Card Churning? Dangers and Benefits is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

How Unemployment Can Affect Your Plans To Buy a Home—Now and Later

unemploymentthianchai sitthikongsak / Getty Images

The coronavirus pandemic has led to record-high unemployment rates not seen since the Great Depression. And this is particularly worrisome for would-be home buyers.

If you were among the 23.1 million Americans who were laid off or furloughed, you might be worried about your financial future. And if you were hoping to buy a house—either now or in the next few years—you might also wonder how your current jobless status might affect those plans.

While the situation might seem dire, unemployment does not mean that home-buying plans have to be put on hold for long. Here’s how to navigate a period of unemployment so that it doesn’t derail your hopes to buy a home.

Can you buy a home if you’re unemployed?

For starters: If you lose your job while in the midst of home shopping or after you’ve even made an offer, you might have to put the purchase on hold.

The reason: Given your reduced income, the odds of lenders loaning you money for a property purchase are slim, unless your spouse or partner has a sizable income that can carry the mortgage alone.

And even if you’re getting unemployment checks every week, that money is considered temporary income, so it can’t be used to qualify for a mortgage, says Jackie Boies, senior director of housing and bankruptcy services at Money Management International, a nonprofit providing financial education and counseling.

In short, “unemployment could have an effect on your ability to purchase a home in the short term,” Boies says.

But the good news is that once you find a new job, you can likely resume home shopping without trouble, Boies adds. “Unemployment shouldn’t have a long-term effect on being able to buy a home.”

How long after unemployment can you buy a home?

But even once you do find a new job, that doesn’t mean you can easily buy a house just yet. That’s because lenders like to see a steady history of employment before loaning someone money.

“Regular employment must be reestablished as stable, reliable, and dependable,” says Karma Herzfeld, mortgage loan originator at Motto Mortgage Alliance in Little Rock, AR.

So how long is enough? Lenders typically require borrowers to have six months of employment at their current job, and two years of continuous employment. Breaks in employment older than two years shouldn’t affect getting a mortgage.

How unemployment affects your credit score

While unemployment doesn’t jeopardize future home-buying hopes per se, financial experts warn that what can put those plans at risk is how you handle your finances while jobless. Unemployment, after all, can stress your budget in ways that can damage your credit history and credit score.

Lenders check your credit score to assess how well you’ve managed past debts. Scores between 650 and 700 range from fair to good; scores below 650 are considered subpar, which could limit which lenders are willing to loan you money for a house. (You can check your score for free on sites like Credit Karma.)

Credit scores can be damaged in a variety of ways during unemployment. For one, if you get behind on paying bills, this will put some blemishes on your credit history and drag your score down.

Unemployment can also lower your credit score by negatively affecting your debt-to-income ratio, a calculation used by mortgage lenders to compare how much you make against how much you owe.

If you’re unemployed, you may face a double whammy as your income is lower and you’re charging more to your credit cards, thus increasing your debt. Both moves can negatively affect your debt-to-income ratio, which may make lenders leery of loaning you money.

“Any factor that affects income or debt may affect the debt-to-income ratio,” Herzfeld explains.

In sum, hopeful home buyers should be careful not to take on too much debt, even while unemployed. You need to preserve cash as best you can.

“I recommend, if on unemployment, [you] cut back on all discretionary spending and make every effort to keep bills current so that the credit score may not get negatively impacted,” Herzfeld says.

Debt-to-income ratio will likely rebalance once you return to work, as long as you haven’t racked up too much debt during the period of unemployment, Boies says.

How to handle your finances while unemployed

“My recommendation is to always try as best as you can to pay at least the minimum required payment on all monthly debt obligations, otherwise credit may be negatively affected,” Herzfeld says.

Boies suggests reaching out to landlords, credit card companies, utilities, auto lenders, and others to find out what options you have, such as payment plans, deferments, or forbearance. You might also be able to reduce some bills, such as insurance, by reviewing your policy.

“Don’t think that if you can’t pay that bill, you just can’t do anything about it,” Boies says. “You need to reach out to see what options they have available to you.”

How to bounce back from unemployment

If your credit score is negatively affected while you’re unemployed, it’s not the end of the world—but it will take time to repair.

Six months to a year or more of positive credit rebuilding could get you on track to buy a home, Herzfeld says.

“The sooner past-due debts can be remedied, the sooner the score may begin to improve,” she says.

The post How Unemployment Can Affect Your Plans To Buy a Home—Now and Later appeared first on Real Estate News & Insights | realtor.com®.

Source: realtor.com

Tips for Building Your Credit

A woman wearing a brown coat and scarf smiles as she throws fall leaves around herself

Your credit
score can affect many aspects of your life—from getting a loan to getting a
job or getting a house. Good credit is necessary for sound finances and many
major purchases. But there are no quick fixes or shortcuts to building good
credit. You must start by establishing credit, then embrace responsible credit
habits over time. This helps you create a record that shows lenders you’re a
low risk and a desirable customer.

The following tips for building your credit help you understand and improve on the key factors that the three major credit bureaus use to calculate your credit score. By following these smart financial guidelines, you can demonstrate your credit worthiness. That makes you a more desirable customer and borrower for many businesses and lenders.


1. Review Your Credit Report

In order to build your credit, you have to understand it. Start by regularly reviewing your credit reports. You can request your free annual credit report from each of the three credit bureaus and assess your credit as it stands right now. Review the following:

  1. Payment history
  2. Amount of credit you’re using
  3. Credit age
  4. Mix of credit account types
  5. Credit inquiries

Our free Credit Report Card can help you understand what is in your credit report and how those things affect your credit score. Our report card will help you identify areas that need improvement and help you make a plan to address these issues.

2. Dispute Errors and Inaccuracies

As you review your reports, keep an eye out for any errors. Credit report errors are not uncommon. In fact, a Fair Credit Reporting study found that one in four consumers found mistakes on their reports that can hurt their scores. You have the right to dispute those errors and fix your credit report. You can do credit repair on your own or hire a credit repair company to help you.

3. Keep Credit Accounts Open and In Good Standing

If you already have available credit, keep the accounts
open. Older credit accounts help assign a credit
age, which makes up 15% of your score. Closing an old account makes it look
like you didn’t start establishing credit until later, which can lower your
credit score.

And if you close a credit card, you also lose valuable
available credit for your utilization rate. It may be better to keep the card
open to support a lower debt-to-credit ratio—just don’t run up the balance.
Make small purchases two to three times per year and pay them off during the
following billing cycle.

4. Make On-Time Payments

Making on-time payments is one of the most important
things you can do to build your credit. Your payment
history accounts for 35% of your credit score. It tells lenders and
potential employers how reliable you are. Missed payments are serious signs of
trouble. Charge offs and defaulted accounts say you can’t be trusted to repay
your debts as promised.

If you are newly establishing credit, avoid late payments
and other poor payment habits. This is one of the two most impactful factors
for building good credit. If you already have a poor payment history, commit to
changing now. Over time, those old payments will have less impact. Eventually,
they’ll even fall off your report.

5. Use a Maximum of 30% of the Credit Available to You

Ironically, lenders would rather not give you credit if
it looks like you need it or you like using it too much. That may seem
counterproductive, since they make their money off loan interest and fees. But
using too much of your available credit is a warning sign.

Maxing out your cards and lines of credit may point to
problems with spending, debt and income. That worries creditors, since it means
you may stop paying your loans. That’s why your utilization rate is a vital
part of your credit score—accounting for 30% of the calculation in most scoring
models.

The most
desirable utilization rate is less than 10% of your available credit. At
most, keep it under 30%. If you make any large purchases on your revolving
credit accounts, pay them off as quickly as possible to keep your utilization
rate low.

6. Open Different Types of Credit Accounts

Having a mix of credit types is a good demonstration of
creditworthiness. This factor contributes 10% to your credit score. There are three
types of credit accounts to consider:

  1. Revolving accounts—credit cards and lines of credit. They have a credit limit and require regular payments.
  2. Installment accounts—student loans, car loans, mortgages and personal loans. The lender provides a lump sum, and you make payments until the debt is paid off.
  3. Open credit—charge cards, utilities and cellphone services. With charge cards, you have a credit limit, and you can make purchases and cash advances, but you don’t carry a balance. With open credit accounts, you need to pay off your charges each month.

To build credit, work toward maintaining an account
from each of these categories—as long as you can afford them.

7. Open a Secured Line of Credit

It may be difficult to build credit if you haven’t
established a credit history yet. If you have poor or fair credit, it may also
be hard to get approval for traditional credit cards or loans. However, secured
lines of credit—like secured
credit cards and secured
personal loans—can help you get started on your path to good credit.

OpenSky® Secured Visa® Credit Card

Apply Now

on Capital Bank’s secure website

Card Details
Intro Apr:
N/A


Ongoing Apr:
17.39% (variable)


Balance Transfer:
N/A


Annual Fee:
$35


Credit Needed:
Fair-Poor-Bad-No Credit

Snapshot of Card Features
  • No credit check necessary to apply. OpenSky believes in giving an opportunity to everyone.
  • The refundable* deposit you provide becomes your credit line limit on your Visa card. Choose it yourself, from as low as $200.
  • Build credit quickly. OpenSky reports to all 3 major credit bureaus.
  • 99% of our customers who started without a credit score earned a credit score record with the credit bureaus in as little as 6 months.
  • We have a Facebook community of people just like you; there is a forum for shared experiences, and insights from others on our Facebook Fan page. (Search “OpenSky Card” in Facebook.)
  • OpenSky provides credit tips and a dedicated credit education page on our website to support you along the way.
  • *View our Cardholder Agreement located at the bottom of the application page for details of the card

Card Details +

To get a secure line of credit, you will need to put up
some form of collateral—usually cash, a savings account, or other personal
property. With this credit option, you may get a decent interest rate. The
lender’s risk is lowered due to your secured asset. This means they don’t need
to charge a much higher interest rate, as is common with poor credit.

8. Limit Credit Inquiries

Be careful when applying for new credit. You don’t want
more than two hard
inquiries every six months or so. Too many requests for credit can look bad
to potential lenders. These inquiries account for 10% of your score. Only apply
for credit if it can help improve your score through one of the methods
discussed above or is necessary for making a large purchase such as a home or
car.

When you do apply, comparison shop. Carefully weigh all
the terms and the chances that you will qualify for the card or loan on offer.
Then, choose only one or two and apply. If you’re turned down, don’t try again
for at least six months.

Build Your Credit

These personal tips can help you build credit and work on improving poor or fair credit. Building good credit habits can have a bit impact on your credit score. Start by signing up for Credit.com’s free Credit Report Card to get personalized advice for your unique credit situation.

Sign up for the Free Credit Report Card.

The post Tips for Building Your Credit appeared first on Credit.com.

Source: credit.com