Should You Pay Down Debt or Save for Retirement?

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While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If You Have High-Interest Debt, Pay it Down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If You’re Nearing Retirement, Start to Save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for Both Goals by Improving Income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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How to Overcome Your Personal Finance and Credit Fears

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Personal finance isn’t limited to money in your bank account or your credit card statement: it’s an emotional subject. Your financial standing and creditworthiness affect everything in your life, from the home you live in and the food you eat to your family’s well being. When life feels unstable, the sum of these factors is often avoidance. If this sounds familiar, consider these tips to help you overcome your fears and improve your lifestyle.

Fear #1: Checking Your Credit Report

A credit report can feel like a grade school report card you’d rather forget. It includes current and past information like your mortgage balance, credit card balances, late payments, collections, judgments, and more. If your past was rocky, it’s natural to feel hesitant about reviewing it.

The Fix: Focus on Your Potential. Sure, you never want to think about that collection account again, but summoning the strength to check your credit reports can actually change things for the better. For example, the credit bureaus—TransUnion, Experian and Equifax—recently issued a statement saying that certain information will no longer appear on credit reports, including settled tax liens and civil judgments. Verifying your credit reports’ accuracy and adherence to new standards is the best way to ensure positive change.

Fear #2: Checking Your Credit Scores

Credit scores…plural? Already, you’re feeling overwhelmed, and it’s true, the average consumer has about 50 credit scores grading their financial prowess, and it isn’t always clear which one a potential lender will use.

The Fix: Go Straight to the Source. Educational credit scores are helpful when you want a general idea of your creditworthiness. That said, it’s a good idea to go straight to the source—FICO—for the credit score used by 90 percent of lenders.

Fear #3: Debt

Believe me, I get it. Outstanding debts can take over your life and cause unwanted stress. Whether it’s a high credit card balance, student loans, an expensive mortgage, or medical bills, it can be tempting to adopt an out-of-sight, out-of-mind philosophy. That said, the problem with this strategy is compounding interest that can accrue over time on your existing balances, causing them to become more overwhelming and unmanageable.

The Fix: Financial Counseling. Take a deep breath and meet this challenge head-on. Consult a financial planner or a credit repair professional for a fresh perspective. They will help you clarify the situation, prioritize and create a repayment strategy.

Fear #4: Savings

If you don’t have enough savings, you aren’t alone. According to a recent Equifax survey, 42 percent of Americans don’t have the liquid funds to cover a $1,000 emergency.

The Fix: Start Small. You don’t need an enormous income to make saving a priority. Cutting as little as 5-10 percent of your monthly budget could help you invest for retirement and build a liquid account for emergencies. If you need some motivation, check out our example of how $5 a day could add up to millions over time.

Fear #5: A Lack of Knowledge

Outwardly successful people seem to have all the answers, and you might feel too intimidated to ask your family and friends financially-centered questions. Credit and financial knowledge isn’t intuitive, and no one has the answers without doing some research.

The Fix: Make Learning a Habit. We may be biased, but learning about credit and finance can be fun. There are so many free resources available (including this blog) for those who want to brush up on the factors of credit scoring, learn how to save for retirement, pay off student loans and generally live a better life. Consider dedicating some time each week to the pursuit of education. Not only can it alleviate your fears, it can help you make well-informed financial choices.

If you want to start repairing your credit click here. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Making a Six-Figure Income Doesn’t Mean You Won’t Have Credit Issues

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During the 1980’s, when I was growing up, knowing someone who made a six-figure salary was like knowing royalty. It was that number that made you think of owning fancy cars, living in a huge house, and going on lavish vacations. Fast forward to the 21st century and making $100,000 plus does not really seem like all that much money anymore. Still, according to recent Census Bureau data, only a little over 20 percent of American households even break into that six-figure number.

But doesn’t making a six-figure salary pretty much guarantee you will have a good credit rating? Not necessarily. Your salary is not factored into your FICO score, but lenders will consider it when approving you for a loan. Loan and/or credit approval is based on your income and your FICO score. But how can someone who makes over $100,000 a year possibly have credit issues? There are some interesting factors which play into why someone who makes a decent income has bad credit. Let’s see what they are and how these factors affect their credit scores.

Feeling the Pressure to Keep up with the Joneses

This is cliché but true. Let’s say you have graduated from college and landed your first real job. Gone are your grungy pals from college only to be replaced with well dressed, sophisticated work colleagues and/or neighbors. They all drive BMW’s and have a garage full of “toys” and you feel the need to join in the fun. These extravagant purchases require applying for auto loans and/or credit cards and opening new lines of credit all at once. This could be lowering your FICO score. Why?

Two categories used by FICO when calculating your credit score is “New Credit” and “Credit Mix.” In fact, 10% of your FICO score is based opening new credit lines and another 10% is based on the mix of credit you use. According to myfico.com, FICO’s official website, “Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.” Not only does FICO look at how many new accounts you open, but also what types of credit you apply for. So, trying to keep up with your neighbors by applying for a lot of credit in a short period of time may negatively affect your credit score. In addition, each time you apply for a loan or credit card, an inquiry shows up on your credit score. Each inquiry can ding your score up to 5 points apiece.

Large Student Loans

When you were in high school, I am sure you thought a lot about what you wanted to be when you grew up. Achieving that goal probably meant going to college, which in turn meant taking out student loans to pay for college. After graduating from college, you landed a good paying job but your six-figure salary doesn’t go very far when paying a large monthly student loan payment. Add that payment to your rent/mortgage payment, car payment, food, and utilities and you have the problem of possibly not being able to make your payments on time.

Why is this important? Making on-time payments makes up the largest portion of your credit score, 35 percent to be exact. To quote FICO, “This is one of the most important factors in a FICO® Score.” So, even though you are making a six-figure salary, paying one or more of your bills late may cause your credit score to decrease.

How to Avoid Credit Issues Making a Six-Figure Salary

Touching on a few reasons why someone making over $100,000 is capable of having credit issues is great – but how can one avoid damaging their credit rating? Get yourself on a monthly budget plan and you will see the following improvements:

  • You will pay your bills on time (35% of FICO is based on payment history)
  • You will lower the amounts owed on your outstanding debts (30% of FICO is based on amounts owed)
  • You will lengthen your current credit history by paying these timely (15% of FICO is based on length of credit history)
  • You will curb the need to apply for new credit (20% of FICO is based on new credit and a mix of credit)

Knowing some of the reasons why a person making a six-figure salary can have credit issues can be helpful to the person who is making half of that salary. Living beyond your means and getting into debt can happen to us all, not just the wealthy. We all need to be mindful of what we spend our money on and making a budget is the best way to keep you and your family on track. Teaching your children about money management will help them avoid credit issues when they become a wage earner. Hopefully, they will look back and realize that no matter how much money they make, they can live within their means, have excellent credit, and be able to save money for their future.

If you find yourself having credit issues despite your salary, you can start your credit repair journey here. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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What Happens To Your Credit When You Withdraw Cash From Your Credit Card

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Credit is an important part of financial health. It can help you buy a car or home, pay for college, and even qualify for a new job. While credit can be used as a tool of success, it can also lead to unwise and damaging choices.

Money trouble can be stressful, especially when you need it fast, and you might be considering a cash advance to cover your needs. Is it the right choice? Read on for all the details.

Can I Withdraw Cash from a Credit Card?

Probably. While it depends on your issuer’s policies, most credit cards provide a cash advance option, allowing you to withdraw liquid funds from your account.

Is a Cash Advance a Regular Charge?

No. Cash advances usually come with their own terms and conditions, and you can expect to pay more in:

  • Fees: Most credit card issuers impose a cash advance fee: either a flat rate or a percentage of the cash amount. For example, the Chase Freedom card charges $10 or 5% of the transaction amount.
  • APR Interest Rates: The same Chase Freedom card charges 23.99% on cash advances (the standard rate for all other charges varies between 15.49%-24.24%). Cash advances also have no grace period, which means that interest immediately begins accruing on the balance.

Will It Hurt My Credit?

A cash advance won’t damage your credit on its own, but the aftermath is another story. For example, suppose you use your Chase Freedom card to withdraw a $1,000 cash advance. Your account is immediately charged a 5% transaction fee of $50. You need the money to cover emergency car repairs, and you cannot repay the balance at the end of the month. In fact, six months pass before you have the funds to tackle your debt. By this point, your balance has ballooned from $1,050 to $1,184, increasing your credit utilization ratio. Unfortunately, you must use emergency savings to repay it, once again putting you at risk for surprise expenses and credit damage. If improving your credit score is a top priority, think carefully before pursuing a cash advance.

Are There Other Ways to Secure Cash?

Relying on credit for cash isn’t a wise choice, and should only be used as a last resort. If you need money fast, there are a few ways to get it without going into debt.

  • Quick Delivery Jobs: Delivery services like Amazon Prime Now and DoorDash are always looking for new employees nationwide, and you can earn as much as $25 per hour making simple deliveries.
  • Clean Out Your Closet: Take advantage of unused electronics, clothing, jewelry, etc. by selling it online for a quick profit.
  • Lessen Your 401(k) Contribution: Saving for retirement is a wise choice, but you might consider temporarily changing your 401(k) contributions if you need liquid funds. Talk to your employer’s HR department about how to make changes to your direct deposit accounts.
  • Use Home Equity: If you’re a long-time homeowner, you may qualify for a home equity loan or line of credit. This strategy allows you to borrow against the value of your home and pay it back over time with a variable rate (i.e., home equity line) or fixed interest rate based on your FICO score (i.e., home equity loan). Talk to a financial planner about which choice is right for your situation and credit score.

If you want your credit situation to improve, learn how you can start repairing your credit here. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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The Dos and Don’ts of Dealing With a Collection Agency

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No one is immune from credit-related woes—I speak from experience. This week I received a call from a collection agency in Chicago. They claimed I owed $863 in unpaid medical bills, and the representative was eager to get his hands on payment. The call itself was a mistake—I paid the bill months ago—and yet, I was being asked to provide my credit card number over the phone to avoid a vague threat of “further action.”

It’s difficult to know how to move forward in a stressful situation that involves credit. Whether you receive a collection call in response to overwhelming debt, a forgotten bill, or by clerical error, it’s important to take it seriously. An account in collection status can severely damage your credit score and remain on your credit reports for up to seven years. Thankfully, the Fair Debt Collection Practices Act (FDCPA) provides federal guidelines for debt collectors to follow—a law that protects consumers from unfair, deceptive, and abusive actions. Exercise your rights by practicing these do’s and don’ts. They will help you navigate the debt collection process.

Do Ask for a Validation Notice

Debt collectors are required to provide a validation notice within five days of making contact with you. The notice must include several important pieces of information:

  • The name of the creditor you owe
  • The remaining balance owed
  • How to respond to pay the debt
  • How to respond if you plan to contest the debt

Debt collectors that cannot provide this information don’t have the power to collect unpaid funds from you. Learn more about debt validation here.

Don’t Provide Payment Over the Phone

Identity theft is a common occurrence in today’s world, and it’s easy to fall victim to a scammer posing as a debt collector. While you may feel pressured to pay the mysterious balance immediately, don’t provide your credit card number or other sensitive information over the phone. Instead, tell the representative that you’d rather communicate by mail. A legitimate collection agency is required to provide written correspondence when asked, and verifying their legitimacy is your first priority.

Do Assert Your Contact Preferences

The FDCPA provides provisions for consumers dealing with collection agencies, including your preference for how they should contact you. While most people believe harassing phone calls are unavoidable, you actually have the right to communicate by mail only, and a debt collector cannot contact you by phone again if you notify them in writing to stop. They also cannot contact you before 8 a.m. and after 9 p.m. local time or harass you at your place of work. If you receive an unwanted call, make it clear that you would rather communicate via mail or email only.

Don’t Be Intimidated by Threats 

Collection agencies aren’t allowed to threaten you in order to recoup debt, but that doesn’t mean some won’t skirt the law with intimidation. Don’t be fooled. Regardless of your financial situation, debt collectors cannot have you arrested, publish your name in the newspaper as an unpaid debtor, use profane language, threaten violence, seize your property without a court judgment, etc. Restate your contact preference and write down any threats you receive before ending the call.

Do Consider Working with a Lawyer 

Every consumer has the right to represent themselves in credit-related matters, but if you’re feeling overwhelmed, it might be beneficial to seek legal advice. In addition to working with the collection agency on your behalf, a trained credit repair lawyer can assess the merits of the debt collector’s claims, draft responses, and help you minimize credit damage in the process. You have rights and you have options. When it comes to financial health, choosing the best course could make a huge difference.

If you have questions about collections, or are worried about your credit, learn how you can start repairing your credit here.  You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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