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Monday, February 25, 2013

12 Debt Myths That Trip Up Consumers

Borrowers too often fall prey to the conventional wisdom. And it can cost them.



By RACHEL LOUISE ENSIGN
Avoid debt if you can.
If you can't, borrow carefully and conservatively.

So the conventional wisdom goes. But if you follow it blindly, you may miss out on key nuances of dealing with debt.

For instance, consider store-brand credit cards. They often offer no-interest financing, and rewards on store-bought products. Sounds great. But did you know those attractive financing terms can come back to bite if you carry a balance after a promotional period?
Then there's mortgage debt. A big down payment may be a great way to steer clear of a huge home loan. But if you get the money for the down payment from relatives, lenders may scrutinize your financials closely.
As many people look to rebuild credit or land loans, it's crucial to know when the conventional wisdom makes sense—and when it doesn't. With that in mind, here are some top myths that consumers fall victim to when borrowing today.


1. Once you marry, you're responsible for your spouse's debt.
Many couples think marrying each other means merging their debt loads, but that generally is not the case. While many couples opt to pay down debt together, neither spouse is usually legally obligated to pay off debt that the other incurred before marriage, says John Ulzheimer, president of consumer education at credit-monitoring service SmartCredit.com.
However, be aware that a spouse could lose that protection. If you refinance a loan with your significant other and put your name on the loan's promissory note, or add yourself as a joint account holder of a credit card, you'll likely become responsible for those debts, even if your spouse took them on before marriage, he says.
Brian Stauffer
Know also that you may be responsible for debt your spouse takes on after you wed, even if your name isn't on the account.

2. Credit cards from your favorite retailers are a good deal.
The pitches for store-branded credit cards can sound enticing, with lures like interest-free financing and rewards. But the deals may be much less appealing if you tend to carry a balance.
Some of the cards operate like payment plans where borrowers make a purchase from the retailer on the card and then have a number of months to pay it back, interest-free. But if you don't pay off the whole balance in the allotted time, you'll typically have to pay interest on the entire amount you initially charged retroactively—often at a higher rate than a typical credit card, says Odysseas Papadimitriou, chief executive of credit-card comparison website CardHub.com.
For instance, Apple offers customers up to 18 months interest-free on purchases on a card from Barclaycard US. But if you don't pay off that specific purchase in the interest-free period, you'll face a variable annual percentage rate that's currently about 23%, according to the Apple website.
Other cards don't offer deferred interest, but come with fairly high rates, says Ben Woolsey, director of marketing and consumer research at CreditCards.com. "Even somebody with excellent credit will be paying 20-plus percent," he says. For instance, the two cards offered through Banana Republic have variable rates recently at 24% and 25%, higher than the recent average rate of 15% on all variable-rate cards.

3. You're too rich for federal student loans.
Some well-off families figure they won't qualify for federal aid and don't apply. But that means they may have to turn to private loans instead. In recent years, as many as 41% of families earning $100,000 or more didn't file the Free Application for Federal Student Aid, or FAFSA, which is necessary to land federal loans, according to a Sallie Mae survey.
But passing up on that chance can be a mistake.
For one thing, well-off parents and students can get federal loans, as a number of them have no income limits. And private loans can come with higher rates than federal loans, or variable rates that could very well rise in coming years. Another key drawback: Private loans generally don't offer the flexible repayment plans, tied to a student's income, that federal ones may.
If that's not convincing enough, consider that even private lenders recommend that you consider federal loans in the college-funding process, no matter what your income. "We encourage students to explore Stafford loans, which may have lower rates, and to compare options, such as PLUS loans and private loans, to fill any remaining unmet need," says Patricia Nash Christel, a spokeswoman for Sallie Mae, the largest private lender.
4. Dutifully paying off your mortgage each month will do wonders for your credit score.
The typical scoring model from FICO, standard bearer of the credit score, will cut your score for missing mortgage payments. But don't expect to get a lot of points added to your score for making those monthly payments on time.
That's because, in FICO's models, missed payments say more about your riskiness than regular on-time payments do.
"Negative information can be very influential, positive information helps your score more incrementally," says Frederic Huynh, senior principal scientist at FICO.

5. Money from a family member makes an easy down payment on a home.
Even if people don't buy a home entirely with cash, they're being more careful to put down big down payments. And often that means turning to family members for money.
But those kinds of gifts may set off red flags for lenders. With much tighter lending standards than before the crash, banks are looking closely at where the money for your down payment came from, says Erin Lantz, director of real-estate firm Zillow's Z -1.60%Mortgage Marketplace.
Some lenders want to see that any gift for a down payment has been in your bank account for a significant period of time, and most want to see that its origin is documented, says Ms. Lantz. "What the lender would ask for is the whole path of that money. Where did that money come from? How did it come into your account? What has it been doing in your account? Has it been sitting there?" says Ms. Lantz. You'll also want a letter from the person who gave you the money, stating it was a gift.
And make sure you have documentation showing the money going from one account to the other, says John Prom, a mortgage banker at Real Estate Mortgage Network Inc. in New York.

6. Today's tight lending criteria apply to auto loans too.
Lending criteria for mortgages remain tight. But standards for car loans are comparatively looser. A January Federal Reserve survey of senior bank-lending officers found 16% reporting they had eased standards for making auto loans in the preceding three months—compared with 6% for prime residential mortgages.
That's in part because auto loans come with lower delinquency rates and are therefore less risky, says Greg McBride, senior financial analyst at Bankrate.com.
"For most people, the rates are the lowest they've ever been. Anyone with decent credit is going to get a loan at a lower rate than they've ever seen before," he says. But you'll want to shop around, as rates can vary widely, even for those with good credit, he says.

7. If you agree to separate your debt in a divorce, it's separate.
While a legally binding divorce decree is an important step in separating marital debts, it does not alter your agreements with lenders, says Rod Griffin, director of public education at Experian. "People think: I went through the divorce, I have the decree, why is [the joint debt] still there?" he says.
What you'll need to do is call the lender and figure out how the joint debt—whether it's a credit card, student loan or mortgage—can be placed in the name of only one ex-spouse.
Sometimes, a lender will require you to close the joint account and transfer the debt balance into a new account held by one individual. Other times, an ex-spouse may need to refinance the mortgage or other loan independently, obtaining the new loan based on his or her own financials, he says.

8. A high income and credit score means you'll be pitched the lowest interest rates on credit cards.

Credit-card companies and issuers are currently sending bevies of offers to affluent people with good credit. The rewards on some of those cards—like cash back and airline points—can look appealing. But they often come with higher interest rates than the lowest-rate cards, with or without rewards, says Mr. Woolsey of CreditCards.com.
The lowest-rate rewards cards go for around 11%, while the typical higher-end rewards card, like the Visa Black Card, carries a rate around 15%, says Mr. Woolsey. Plus, the higher-end cards usually have annual fees.
Meanwhile, the lowest-rate cards without rewards go for between 7.25% and 8.00% APR, says Mr. Woolsey. Of course, affluent folks can qualify for those low-interest cards—but card companies and issuers won't usually pitch them as hard.

9. If you've looked up your credit score, you know your credit score.
You know one credit score. The problem is that lenders may be looking at a different credit score than you are—and there's no easy way for you to know if it's better or worse.
Consider the widely used FICO score. There are actually 60 slightly different iterations of FICO, and lenders may pull a different score depending on what kind of credit you're applying for, says Mr. Huynh.
If you're applying for a mortgage backed by Fannie Mae or Freddie Mac, lenders typically pull three FICO scores available directly from each of the three major credit bureaus. But if you're applying for an auto loan or credit card, the company will likely pull a score tailor-made for that kind of credit product, says Mr. Ulzheimer.
While the various FICO scores are usually in a similar range, that's not always the case. For instance, certain scores ignore collections below $100. In some cases, a person's FICO score that falls into this category could be 100 points above a score that doesn't ignore such collections, says Mr. Huynh.

10. A late credit-card payment will damage your credit.
Late payments can bring fees and interest charges—but unless you're really late, they may not put a dent in your credit.
"There will be consequences, but they won't be on your credit report," says Mr. Griffin of Experian.
It comes down to standard practice in the credit-reporting business: companies usually don't report a late payment to a credit agency until your payment is 30 days past due.
It takes time for other kinds of late payments to hit your credit report, too. Medical debt, for instance, usually won't show up until the bill goes to collection, says Mr. Griffin.
11. All mortgage and home-equity interest is deductible.
Deducting interest is one of the big appeals of a home loan. But if your mortgage is too big, you won't be able to deduct all of the interest you paid.
The federal government has set a cap on the mortgage-interest deduction: You can generally only deduct interest on mortgages up to $1 million. So, if your mortgage is $2 million, you can typically deduct only half of the interest paid.
The typical threshold is even lower on home-equity debt: $100,000.
But if you're using some of that home equity for significant home improvements, that portion usually falls under the $1 million cap for mortgage interest instead, says Jeremy Kisner, a certified financial planner and president of SureVest Capital Management in Phoenix.

12. Buying a home with cash is the best option, if you have the money.
Covering a home purchase with cash is in vogue. With the housing market heating up, the tactic may help a buyer win a bidding war—and the idea of not living under a mortgage can be appealing.
But going with cash isn't always the best financial choice. Mortgage-interest payments can be deducted on your tax return, which can save you a bundle.
Then there's the opportunity cost of handing over that much money. Some people prefer to invest the money they would have spent on the home purchase, betting it will earn a higher return than the interest rate on the mortgage when considering the tax deduction, says Jimmy Lee, a financial adviser in Las Vegas, Nev.
Ms. Ensign is a staff reporter in The Wall Street Journal's New York bureau. She can be reached at rachel.ensign@wsj.com.

Monday, February 18, 2013

Save More $$$ This Year!!

Scott Laughlin, director of community and creditor relations for Consumer Credit Counseling Service of Buffalo, suggests setting priorities for your spending.
Scott Laughlin, director of community and creditor relations for Consumer Credit Counseling Service of Buffalo, suggests setting priorities for your spending. Derek Gee/Buffalo News
 
Resolve to save more this year, experts advise
BY:
A record 46 percent of Americans have made a money-related resolution for 2013, and spending less and saving more topped the survey, according to Fidelity Investments.
But while improving personal finance remains among the country’s top resolutions for 2013, it’s an elusive goal for many.
A TD Ameritrade survey found that the majority of respondents from 2011 failed to adhere to their money-related resolutions for 2012. Just 25 percent were able to save enough to endure a financial emergency; 33 percent fully reduced high interest-bearing debt and 30 percent actually started or increased their retirement savings, the survey reported.
But with a practical and sensible approach to personal finance management, you can beat the odds and get your financial house in order in 2013, experts say.
“It’s always important to look more at the bigger picture – would you rather work until you’re 80 and have all you want now, or save and retire at 65?,” said Scott Laughlin, director of community and creditor relations at the Consumer Credit Counseling Service of Buffalo. “You have to prioritize and decide what’s important and once you do that, a lot of these areas will fall into line.”
First, figure out and write down your money-related intentions. Identify a SMART goal, says Amy Jo Lauber, a certified financial planner and member of the Financial Planners of Western New York. SMART goals are goals that are Specific, like saving $100 a month; Measurable, look over statements; Achievable (no sense in saying “save $1 million” if you don’t earn more than $1 million); Realistic, as in identifying any obstacles that may occur; and Timely.
She then recommends doing a SWOT analysis to determine your Strengths, Weaknesses, Opportunities and Threats.
“Write your goal down and keep it or a picture of your goal where you’ll see it – in your wallet, on your phone, on your dresser mirror – to remind yourself and keep yourself motivated, and tell someone else about your goal,” said Lauber, who is also president of Lauber Financial Planning in West Seneca. “These steps have been proven to increase the likelihood of you achieving your goal.”
Whether you decide to save for emergencies or retirement, local financial advisers said crafting a budget is a key component in improving your financial situation and can aid in adhering to and eventually realizing those resolutions.
“A budget allows them to see where the money is going and what they have available,” said Michael Hardy, a certified financial planner and partner with Mollot & Hardy in Amherst. “A budget can open your eyes to over-spending, over-saving and lack of savings.”
Creating a successful budget should be balanced between “needs” and “wants,” with the ability to distinguish the two, financial experts say. Housing and utilities fall into the “needs” category, and vacations and the movies fall into “wants.” But in some cases, the categories can mingle. Phones and clothing are “needs,” but smartphones and designer duds are wants.
The budget should have some room for fun, but splurging should remain within the bounds of the plan.
There are plenty of budgeting options, and the Internet is loaded with free calculators, spending tracking analysis programs, spreadsheets and other tools, including sites like Mint.com, Hardy said.
“If they could put that into a savings that could really help them.”
Additionally, review and cut back on certain expenses. For example, savings could be found with groceries by changing your shopping list or changing where you shop. Also, conserve energy and power by lowering thermostat and unplugging electrical products when not in use.
“The TV draws a lot of power,” Laughlin pointed out. “We tend to have more than one TV in the household these days, and in most cases, we are only using one.”
Savings can also be found by cutting back on fuel costs by carpooling.
“You don’t want to drive extra miles to get gas that’s 5 cents cheaper,” Laughlin added, “Cut down on driving overall.”
On the subject of vehicles, Laughlin said review your car insurance policy every couple of years to determine whether your coverage is excessive, and to look for other areas in which to find savings. And if you are in the market for a new car, calculate the cost of repairing your current vehicle versus the monthly car payments and the higher cost of ownership.
“If it’s going to cost you a $1,000 to fix a car that will last a year, that’s better than paying $300 a month and paying extra in insurance for a new car,” he said.

Monday, February 4, 2013

The 6 Biggest Ways Bad Credit Can Mess Up Your Life

 
Bad credit is something you don’t want associated with your finances. Unfortunately, you may have less than stellar credit at some point in your life. Credit scores represent a person’s credit worthiness, designed to show a lending institution who is a good investment, and who is… not so much. Banks believe that credit scores — i.e. past financial behavior — are a good indication of an individual’s future financial behavior. Whether or not you agree with that statement, the negative effects of having bad credit are undeniable.
Here’s a list of things that can get pricey or are unattainable if you have bad credit.
1. Car insurance. Insurance carriers in 47 states check your credit score when arriving at a rate. They’re with the banks in assuming that your credit score will indicate how risky of an investment you are. This means that you may have higher than average rates for years or that you may not be approved for insurance coverage at all by a certain carrier, depending on how low your credit score is.

2. Mortgage loans. If you’re trying to buy a home you will most likely apply for a loan. You can be certain that financial institutions look at your credit score during the process. Bad credit means possibly being denied a loan or can result in being charged higher interest rates. This is because the amount of interest you pay is based on your level of risk and the current market rate. The worse your credit is, the higher your level of risk is and the higher your interest rates will be. This difference can amount to tens of thousands of dollars over the course of a mortgage’s lifetime.
3. Credit cards. If you are approved for a credit card, you can bet on having higher than average interest rates. Credit card interest rates range anywhere from 7 percent to 36 percent. With a good credit score you can expect to land somewhere between 10 percent and 19 percent. With a bad credit score, you can expect to be somewhere around 22 percent and up.
4. Car loans. You’ll likely need a loan when purchasing a vehicle as well. And banks will check your credit score before approving your financing; interest rates on your loan will sway with the results; results could vary by up to 2 percentage points.
5. Cell phone plans. Did you know that some cell phone carriers, like car insurance carriers, check your credit score? They do — another reason why it’s important to pay your bills.
6. Job hunting. Under the Fair Credit Reporting Act it is legal for a future employer to review your credit report with your written approval (they don’t check your score, however). Hiring managers can use this information when making their decision. Some states do have laws that limit the use of credit information in the hiring process.
To make sure that your credit does not interfere with your employment, interest rates, your ability to buy a cell phone or a vehicle, or your car insurance rates — make sure to take control of the situation by obtaining your free credit report from AnnualCreditReport.com, and checking your credit score, which you can do for free once a month using Credit.com’s Credit Report Card.

 
This article originally appeared on Credit.com.