Fathers Can Pass Down Financial Knowledge To Their Children

Fathers Can Pass Down Financial Knowledge To Their Children

Fathers are an important influence on their children. The lessons they offer can shape their children’s lives in both positive and negative ways.

Father’s Day presents a time for dads everywhere to reflect on the lessons they’ve given to their kids. Typically, these lessons involve good manners, work ethic, self-discipline and the like. But money management and financial literacy are crucial skills that should rank high on every father’s list of skills to impart.

Many people may expect that kids will pick up financial skills in formal classroom settings, but that’s not usually the case. Our friends at the NFCC have completed financial literacy surveys, and they show the #1 source of knowledge about personal finance comes from one’s parents. That means moms and dads need to teach good financial skills and habits, as their kids are not going to learn those lessons elsewhere.

Those NFCC surveys we mentioned also show that nearly half of people don’t give themselves an A or B grade when it comes to financial knowledge.

With so many people feeling they lack the necessary knowledge to manage their own personal finances, it’s no surprise their children aren’t getting the education they need either.

Financial illiteracy is a cycle that can be broken. If parents feel they don’t have the skills they need, then it’s time to fix that. And in the process, they can pass those skills down to their kids.

Father’s Day is a time to celebrate the joys of parenting, but should also be a time to acknowledge the responsibilities that come with being a dad. That starts with self-improvement. The first, best way for fathers to influence their kids is by example.

There are free sources of online learning, and they’re available any time. One can read an educational guide, take an online course, or chat with or call a financial coach who can answer questions and offer expert guidance.

Here are some essential ways to help kids gain financial knowledge while helping one’s self:

  • Budgeting: Learn about budgeting, and work to create your own written budget. It will include income, expenses, and goals. These are things your kids can have, too. Put them on an allowance and teach them how to save a portion of that allowance for goals, and to set aside funds for short-term expenses they might face. Make sure you teach them to put their budget in writing, and to write their goals down.
  • Handling money: kids need the experience of handling and spending money. They will watch how you handle purchases, so be mindful that they’re learning from you even when you’re not actively teaching them.
  • Banking: just as you manage your own account, guide your kids by setting up a custodial account for them. This will give them a place to store their savings and learn how banking works, while giving you some oversight over their finances. These are great tools that good banks offer to develop better future accountholders.
  • Saving and interest: you can teach your kids how compound interest works using their custodial bank account; the idea is to impart on them the importance of saving early and letting money accumulate value over time. It’s hard for kids to see forward to retirement needs, but if they want to be able to drive when they’re 16, you can guide them to save up for gas & insurance money in advance.
  • Credit and debt: you won’t want to get your kids started on credit card debt, but be sure to explain to them what it means when you use a credit card. They need to understand that credit transactions are a loan that must be repaid. You can also take some time to explain to them how credit reports work.
  • Your child’s credit report: speaking of credit reports, your kids may already have one. Credit reports aren’t limited to a particular age, and if your kids have ever been listed on an account, they may have a report. The CFPB (Consumer Financial Protection Bureau) offers more info in their article “How do I check to see if my child has a credit report?
  • Holidays: The holidays are a great time to teach your kids personal finance lessons. They’ll be saving for gifts and making spending decisions that you can oversee. There’s also a good chance to teach them to save any money they receive as a gift. Help them set savings goals so they can have an even better holiday season the next year.
  • ID Theft: security is important, and only getting more so every day. Your kids need to learn early to protect their finances and their data. Teach them to manage passwords and online logins as you help them set up their first email accounts. Kids today are very connected via technology; that’s a good thing in many ways, but means you have to be more diligent to help them avoid scams and identity theft and to protect access to their accounts.

No father needs to be told that parenting is a huge responsibility. There are plenty of free resources available to make teaching financial literacy to your kids a bit easier. And there are professionals waiting to help you manage your debts, credit and personal finances so you can provide for your family with fewer worries.

Remember, you can’t expect your kids to be good stewards of their money if you are not leading by example. And you don’t have to go it alone. Reach out for help today and get started on achieving financial freedom.

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Credit Score vs. Credit Limit

Credit Score vs. Credit Limit

When helping people to manage their credit, we often want people to know what their credit score is, and what their credit limit is, so they can gauge how well they’re doing as they work to improve their personal finances.

It’s important to start by understanding the meaning of a credit score vs. credit limits. Then we can examine how the two are related and how they impact each other.

Credit Score Definition

A credit score is number created buy a credit rating agency based on information in your credit report. The score assesses your credit risk—the lower your score, the riskier it is for a lender to give you a loan. The most common credit scores used are generated by FICO, and range from 300 to 850.

To learn more about what constitutes a good credit score, see “What is a good credit score?” And to learn more about how credit scores work, read “Credit Scores – How Do They Work?

Credit Limit Definition

A credit limit is the maximum amount of money a lender offers to a borrower. If you have a credit card with a $10,000 maximum balance, then your credit limit is $10,000. If you have two such cards, you would have a total credit limit of $20,000. To get to your total credit limit, you need to add up all of the total available balances you have.

For more in-depth information about credit limits, read “What is a Credit Limit?

Credit Scores vs. Credit Limits

How your score impacts your credit limit

Like we said earlier, the credit score is a measure of your credit risk. If you are a safe risk, creditors will be willing to lend more to you. If you are a higher risk, they will offer you less, and charge you more in interest.

That’s not the only factor, of course. Creditors will look at your income level too, and your income is not included at all in your credit score. So even if you have absolutely perfect credit, lenders won’t offer you more debt than you can handle based on your earnings.

But better credit scores do usually lead to higher credit limits. Creditors will see a solid payment history and offer you more money than they might to another borrower with the same income but a lower score.

Sometimes, a high credit limit might accompany a high credit score by coincidence. If you have an account in good standing for many years, creditors will typically adjust your terms and raise your rate from time to time. So what started as an introductory card with a low limit could grow into your primary account with the highest credit limit over many years. Similarly, your score will rise over the years if you’ve been managing your credit responsibly. So you might start with a modest credit score and low credit limit today, and years down the road have a high credit limit and high score, but the two are both the result of your good payment history over time.

How your credit limit impacts your score

One of the most significant factors in your credit score is your utilization rate. You can read more about it in depth in our “What is Credit Utilization?” post, but briefly, utilization is how much of your available credit limit you are using. So if you have a $10,000 credit limit and currently owe $5,000, your utilization rate is 50%.

Your utilization rate is the second most important factor to your credit score, after your payment history. If your utilization rate goes up, your score will go down, and vice versa.

To get the best impact to your credit score, you should strive to get your utilization rate below 10% and keep it there. We don’t know the exact formulas used—those are FICO’s trade secrets—but it’s been said that an optimal utilization rate is above zero. The idea is that you need to use credit actively to generate a good score. So you want a utilization rate that isn’t zero, but keep it under 10% for the best impact to your credit score.

Conversely, if anything happens that shoots up your credit utilization rate, your score will drop. Sometimes this is as simple as maxing out a card, but it can also happen if you close an open account. In that case, you lose that part of your available credit limit immediately, and your utilization will suffer.

For example, suppose you have two cards with $10,000 credit limits. That’s a total credit limit of $20,000. You owe $5,000, for a utilization rate of 25%. That’s not terrible, but could be better. But then if you close one of those two credit card accounts, your credit limit is now $10,000, and the $5,000 you owe means your utilization rate shoots up to 50%. That’s a big drop change at once, and your credit score will suffer.

You can also get a similar impact if your creditor closes the account or lowers your credit limit. FICO writes on their myFICO site. “It doesn’t matter to your FICO score who closed your account—you or the lender.”

And when it comes to closing accounts, it’s not just your utilization rate that has an impact. Part of your credit score is based on the length of your credit history, and if you’ve had an account for a while, it is benefitting you in that area. Close the account, and you will eventually lose that benefit when the account is removed from your credit report.

Getting Your Credit Score

We talked about calculating your credit limit, and that’s pretty straightforward. But getting your credit score isn’t as simple—you typically have to pay for the score.

Yes, the credit report is free, and you can learn how to get a free report here. But to get the score, you’ll be asked to pay extra.  Buying a score at the annualcreditreport.com site will get you a VantageScore, and getting a score from myFICO.com will get you your FICO score. If you have to pay for a credit score, you can get a better deal by combining that purchase with fraud protection from a third party.

There are some free sources of credit scores, from sites like Quizzle, CreditKarma, and CreditSesame. We urge people to be careful when getting free scores anywhere—be sure you’re not signing up for any subscriptions that will be hard to cancel later. Often, it’s better to just pay up front to get the info you need.

It’s Not About Income

We want to reiterate something important—your credit score is not based on your income. The actual credit limits you’ve been granted aren’t in your score. The utilization is a percentage of your total limit. It doesn’t matter how high or low that limit is, it’s how much you are currently using that matters.

Now, naturally, it’s easier to maintain a healthy 10%-or-lower utilization ratio when you have a very high credit limit, but it’s not impossible for people with modest incomes to keep their utilization rate low and their credit score high. We help people do that all the time. A credit report review is the place to start, as it helps you figure out where you stand and gives you a concrete plan of attack when it comes to improving your score over time.

Obviously, getting a 10% utilization rate isn’t going to be simple for everyone. Paying down debt to that level might take work and planning. A credit coach can help you manage debts, leading to a better score and success in achieving financial freedom.

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Understanding Down Payment Assistance

Understanding Down Payment Assistance

Down payment assistance is available for people who want to become homeowners but need a little extra help.

In the NFCC’s latest financial literacy survey, they found that one in two Americans who have tried to purchase a home have faced barriers. One of the top barriers people always cite is lack of funding for a down payment or closing costs.

Sometimes this barrier to homeownership is real and needs to be overcome, with budgeting, debt counseling, or some other kind of assistance. But sometimes it’s only the borrower’s perception that there is a barrier. The truth is, being short on funds for a down payment may not be as big a problem as home buyers think.

Understanding down payment assistance is crucial for new home buyers who are ready to take the leap into homeownership but aren’t sure they can afford that initial investment of down payment and closing costs.

Down payment assistance takes many forms

Help with a down payment may be available to borrowers from multiple sources, and eligibility guidelines can vary with different program:

  • Government—Your local, city or state government might have special housing programs to help you. They have access to programs from HUD, like the HOME Investment Partnerships Program and the Community Development Block Grant Program. You might be able to get help from the USDA if your home is in an eligible rural area, or get a VA loan with as little as 0% down if you are a veteran. There are also programs like the Section 184 Indian Home Loan Guarantee Program that can lower the down payment for certain buyers.
  • Community Service Workers—if you work in a particular community service profession, like firefighter or public school teacher, you may be able to get special down payment assistance to live in the community you serve. HUD’s Good Neighbor Next Door is one example of this kind of program, and your local community might offer more options.
  • Your Employer—some employers, like educational institutions and government, offer down payment assistance for their employees. Check with your benefits or human resources department to see if your employer has any kind of home buying assistance program. Some private employers may also offer relocation incentives to new hires to get them to move to a new city.
  • Gifts From Family—if your lender allows it, you may be able to accept a gift from family to help finance your down payment. It must be a gift and not a loan, however, and the giver must be approved by the lender for the funds to be used toward your mortgage.

The way the down payment assistance is delivered to you varies as well.

  • Reduced down payment—instead of providing funds to cover part of your down payment, some assistance programs lower the down payment required, making it easier for you to get into homeownership without needing as much cash up front.
  • Loans—some down payment assistance comes in the form of a loan that you repay along side your primary mortgage
  • Deferred mortgages—some assistance loans come as a kind of second mortgage that you don’t have to make payments toward until you’ve paid off the first mortgage, or move, refinance or sell your home.
  • Grants—are simply gifted to you, with no need to repay. There will be conditions on how the funds are used—in fact, they will likely just go straight to your lender to cover all or part of your down payment.
  • Tax Credits—You might be eligible for a mortgage credits toward your taxes. The reduced tax burden frees up funds to apply to your down payment.

First-Time Homebuyers

Most down payment assistance is targeted at first-time homebuyers. That doesn’t necessarily mean you can’t get assistance if you’ve never owned a home before. Many circumstances can make you a first-time homebuyer:

  • Returning to home ownership—if you used to be a homeowner but haven’t owned in the past 3 years, you are considered a first-time homebuyer by the FHA.
  • Divorced—If you are a single parent who recently got divorced and the only home you’ve ever owned was with your ex-spouse, then you might be considered a first-time homebuyer.
  • “Displaced Homemaker”—similar to recent divorcees, a displaced homemaker can be considered a first-time homebuyer if they’re coming out of a particular situation, like they were providing live-in care for an ailing family member, or have lost the financial assistance of family, or have been having difficulty finding gainful employment.
  • Your home was not a permanent structure—if you only owned a mobile home or RV that was not attached to a permanent foundation, then you would be considered a first-time homebuyer.
  • Damaged property—if the only home you’ve ever owned was severely damaged (it’s not currently livable and the cost to repair would exceed the cost to build a new home), then you could qualify.

While most down payment assistance is directed at first-time homebuyers, that’s not always the case. It’s always worth looking into available options and programs to make getting into a home easier.

Accessing Down Payment Assistance

Because there are potentially thousands of local down payment assistance programs across the US, it’s important that you get help accessing everything that is available to you.

  • Home Buyer Education—start with a first-time homebuyer education course. This will make you eligible for certain kinds of home buyer assistance, but more importantly, you will learn how to take the right steps to be a successful homeowner from the very beginning. You’ll learn where to go and whom to ask for assistance when you need it.
  • Home Buyer Coaching—get one-on-one assistance from an experienced professional so you can identify the special loans and down payment assistance that are the best fit for your situation.
  • HUD and FHA (FHA.com is not a government agency), access a nationwide list of potential assistance programs. Be sure to discuss these options with a home ownership counselor or coach before you apply. Talk to a housing counselor at a HUD-approved housing counseling agency to get information about what is available in your area.
  • Your lender—some lenders have expertise in down payment assistance programs. Ask if your lender does, and remember it’s always a good idea to comparison shop.  Lenders will want to see you succeed as a borrower, so it’s in their interest to pair you up with the programs that can help you the most. They will want to know that you’ve completed home buyer education and gotten a certificate of completion, as that will give you access to the best FHA and other loan options.

The most important thing about understanding down payment assistance is that you shouldn’t go it alone. There are programs targeting different regions, cities, and types of properties, and they’re always changing. An internet search is likely to show you information that is outdated and could lead you down the wrong path.

Your best bet is to work with a professional. Talk to a housing counselor or ask your lender about down payment assistance. Ask your realtor, too. Don’t wait for anyone to offer you access to an assistance program; be proactive and ask everyone you work with. If you don’t know whom to talk to or what questions to ask, then get first-time homebuyer education before you start the home buying process.

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12 Tips for College Grads and Parents of Grads

12 Tips for College Grads and Parents of Grads

These days, an increasing number of college graduates move back home after they’re done with school. Parents of recent graduates might not have anticipated they’d have roommates again so soon but with the crushing weight of student loans, most grads aren’t in a financial position to strike out on their own.

Beyond living with their parents, many graduates get ongoing financial help from mom & dad; this puts a strain on the family, as parents of recent grads are probably the prime age to be aggressively saving for retirement.

With the average grad from public colleges carrying over $25,000 in student loans, and the average grad from a private college carrying over $32,000 in debt, that’s quite the burden (source). On top of that, the typical graduate owes over $12,000 in other debt like credit cards (source). That brings their total average debt to around $40,000.

With all of this debt to contend with, recent grads need to be careful to get started on the right foot. With that in mind, here are 6 Financial Tips for Recent Graduates:

  1. Create a budget. Really plan where you are going to spend your money, and don’t spend on impulse when your discretionary funds are gone. When creating a budget, devote a month tracking what you spend so you know what your obligations and expenses are, and when those bills are due each month.
  2. Save! Even if it’s a small amount, start saving now and build the habit. Have some amount automatically deducted from your paychecks and deposited directly into savings. If you have a job that offers a retirement plan, contribute there to your retirement account and be sure to take advantage of any matching contributions your employer offers.
  3. Create a fund specifically for emergency savings. Your goal should be to have enough money to get through three months without any income—this will give you time to find another job without having to resort to credit card debt to survive. Never, ever use credit as a substitute for income!
  4. Don’t miss any payments. Make sure you pay all of your bills on time, as you’re just establishing a lifetime of credit history, and you want to have the strongest start possible. Use your bank’s smartphone app or web site to get bill reminders and use online bill pay to ensure you’re never late.
  5. Keep your debts paid off. If you have credit card debt already, stop borrowing and focus on paying off what you owe. Learn to live on a cash basis so you’re always able to live debt free.
  6. Monitor your credit. Check your reports & scores regularly. You can get a free report at annualcreditreport.com. You typically will have to pay for a credit score, though. If you have any concerns about identity theft of anything strange appears on your report, consider credit monitoring to ensure that your report is accurate and free from damaging fraud or other mistakes.

Parents of grads will have their own challenges, and should heed these 6 Tips for Parents of Recent College Graduates:

  1. Don’t let your kids’ college derail your retirement. You spent a lifetime building up the funds you need to retire, so don’t spend it all toward your kids’ degrees. Keep your retirement savings intact while helping your kids get through college.
  2. Help your kids to be financially literate. Help them create a budget, set goals, manage their own finances. Offer as much oversight as they’re comfortable with. If you can track their spending for a while, you can help guide them toward true financial freedom, but be careful you don’t get sucked into bailing them out financially—that’s a bad habit to start.
  3. Talk with your student about college loans. If your kids are going to finish college, it’s likely some form of student loans will be in the mix. Work with them to understand exactly what their future financial obligation will be, and make sure they create a plan to meet this obligation after graduation.
  4. Make any help temporary. If you must financially assist them or let your kids move back in with you after school, make it clear this is a temporary arrangement until they get established. You might set a deadline after which you will start charging rent & utilities. Make this deadline clear and predictable for them, and stick with it. This is your time to teach real financial responsibility, and that’s something most college degrees don’t impart.
  5. Don’t sacrifice yourself for your college grad. You shouldn’t go bankrupt helping your kids. They have fresh college degrees and a whole lifetime ahead of them to find a career and sort out their finances. Don’t put yourself in financial danger helping them get through a temporary transition to adult responsibilities.
  6. Encourage them to hit the ground running. College grads might naturally want to take the summer off—they’ve likely been doing that all of their lives. But to get started on a career, they need to get out there and get hired, not wait until fall. And even if they don’t have the perfect job waiting for them, that’s no reason not to get started developing their career. Most people only stay in a job for a few years, so they should get started in the world of work right away and plan to move to their dream job after they’ve built up their resume.

If you’re recently graduated or have kids who just finished college, then stop and take some time to get a clear financial plan for the future. If you don’t know where to start or have questions, credit coaching can help you create a plan that works, and will be tailored to your unique situation.


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How to Stay Qualified for a Home Loan

How to Stay Qualified for a Home Loan

Here’s a warning a lot of people wish they’d heard earlier:

You can lose your home loan pre-qualification and even your loan approval midway through the loan process.

Not only that, but you can lose your approval right up until the last minute – when you’ve got your household boxed up and you’re ready to move. You can even lose it after you’ve signed loan papers and are waiting to get word that the bank has distributed funds to the seller. Here’s what I mean…

Jan Little was very excited about the condo she was buying. It was going to be her first home. She was looking forward to new independence and having her own piece of real estate. Everything was going along great, right up until the signing. Then, she got a call from her loan officer:

I’m sorry, Jan, but we have a problem. It looks like your financing has fallen through.”

At first, Jan couldn’t believe her ears. How could this happen?  Jan wasn’t the only one. The Sanchez family was packed and ready to move out of their rental into their first house. They were scheduled to sign in two days. Suddenly, their loan fell apart. It happened to Billie Baker too.  In her case, she’d already signed the loan papers. She was told they were just waiting for a response from the county recorder before the house would be hers.

Can they do that?

When something unexpected like this happens, the first question the home buyer usually asks is, “Can they do that? Can they take away my loan after I’ve already received a commitment letter in writing?”   The answer is, yes. Here’s why. More importantly, here’s what you can do to prevent it from happening to you.

 Why Good Loans Go Bad

When your loan is approved, and a lender makes a commitment, that approval and commitment come with a list of requirements called, “conditions.” And, unless each and every one of these conditions is met, they can withdraw the loan offer at any time. Let’s look at the three examples we just talked about in more detail, because one of these could apply to you or to someone you know:

It took Jan Little a couple of months to find the right condo. When she finally did, her Purchase and Sale Agreement stipulated a 30-day closing. For most applicants this is considered a typical expectation, but here’s the catch: just before the bank was ready to have the loan papers drawn up for signing, the lender pulled an updated credit report.  This is a very standard practice. To everyone’s surprise, an old unpaid cell phone bill suddenly popped up as an $87 collection account, causing her credit score to drop by 50 points. With the new, lower credit score, Jan no longer qualified for the loan and she lost her condominium. The lesson here is that you must keep your credit qualified. If there’s an “old skeleton” in your credit closet, it could show up on your report. You can’t afford to ignore those old bills like Jan did.

The Sanchez family lost their financing because it was discovered that their loan application wasn’t 100% accurate. Mr. Sanchez started his own business, and on the loan application where it asks how long you’ve been at your business, he rounded up to “two years.” One of the conditions on the loan was for a business license, which is standard for self-employed people. Mr. Sanchez didn’t get around to sending a copy of his business license until the last minute. That’s when the surprise occurred. He’d actually been in business for a year-and-a-half. Loan denied! In most cases, a self-employed person must have been in business for a minimum of two years. The lesson here is to get your lender what they need as fast as possible. That way, any potential issues can be addressed upfront when there is time to deal with them.

Billie Baker’s case was especially frustrating. There was no reason in the world that she should have lost her loan and her house after signing final loan papers, except that she made one fatal decision. Unfortunately, Billie couldn’t stand her job. She had a mean boss and couldn’t wait to get away from him, so she was looking for another position. The day after she signed loan papers her boss pushed her buttons and Billie quit.

Just a couple hours later, an assistant working for the lender picked up the phone and called her now former boss to verify employment.

“She just quit,” said her boss. Now the bank had a home buyer with no income. The underwriter called the escrow company and let them know the loan was denied.

All of these stories are true. These are real people who lost their financing.  The lesson in Billie Baker’s case is that your loan isn’t done until the funds for the home are paid to the seller or their escrow. They can still deny your loan, even if there’s one minute to go. Had Billie known this, she could have waited to change her employment.

There are other situations where you could lose your loan at any point in the process. The good news is that you have the power to prevent yourself from being a victim. Below are some general tips that apply to almost everyone and can help you keep your qualification status secure: 

12 Tips for Keeping Your Qualification Status: 

1. Keep on top of your credit status

Don’t let a nasty surprise like an unpaid bill or erroneous information show up on your credit report. Protect yourself by keeping a close eye on your credit report. The best way to do this is with automated credit monitoring and alerts. This is your first best line of defense.

2. Don’t apply until you are confident you have the right lender

Avoid the temptation to second-guess yourself and continue applying for loans online. Even if it’s “just to check,” fight the impulse once you receive an offer. Multiple credit inquiries spread out over a few weeks could cause your score to go down. At least there is some good news on this front. If you are shopping specifically for a home or auto loan, you receive a 30-day “shopping” period to apply for loans without being penalized by credit report inquiries.

3. Don’t hide your skeletons

If you’ve had some negative credit in your past, such as an old judgment or lien that could appear on your credit report, discuss it with your loan officer. They have a vested interest in making sure your financing goes through. And they will likely have suggestions for you. However, your loan officer can’t help you if they don’t know about it.

4. Report accurate income

Let your loan officer know if your income changes. An increase in income could, in some cases, qualify you for better interest rates.

5. Keep your pay stubs and tax returns

You’ll need your most recent income documentation, so be sure to file everything and make copies. Never give away your only original.

6. Locate your bankruptcy papers

In some cases, if you have a bankruptcy in your past, the lender will ask for documentation. You’ll need your final discharge and schedule of accounts that were included in the bankruptcy.

7. Don’t let those bills slide

A new late payment is one of the worst things that can happen to your credit. Paying your bills on time can affect your credit score by as much as a whopping 40% percent.

8. Stay on top of your checking account

Too many non-sufficient funds (NSF) or overdrafts on your checking account can cause a denial, even if you have overdraft protection. Some people think it’s okay to write NSF checks because their bank protects them. The NSF checks still show up on your statement and lenders don’t like this. It may weigh heavily against you.

9. Maintain your employment

It’s OK to accept a better job or better position, but lenders don’t like to see gaps in employment. In general, a two-week gap is okay, but six months is too long. Avoid looking for or changing jobs while you are shopping for loans.

10. Pay your rent with a check

If you’re a first-time home buyer, you’ll probably be asked to show that you have paid your rent on time for the past 12 months. The best way to do that is with canceled checks. Paying with cash may be perceived as a problem and can force you into a higher interest rate sub-prime loan.

11. Avoid new debt

This is another common reason people lose their home loan before it closes. New home buyers with an approval for a home loan sometimes start purchasing items for the house on credit. Sometimes they get caught up in the new beginning they are expecting and will even finance a new car! A new auto loan or other obligation can push your debt ratio out of the appropriate range needed for your home loan approval. Wait until after your new home loan has been funded before you seek auto financing or other loans. Just like the examples we’ve discussed, if the lender sees you’ve been applying for credit, your debt ratio can come into question. How do they know? By looking at the inquiries on your credit report.

12. Save money like crazy

Most home loans will require you to prove you have a certain amount of money in your bank account for rainy days. These are commonly called “reserves.” Better to save like crazy than to go crazy because you’ve lost your pre-qualification status.

It’s easy to get caught up in the excitement of a new home, but make sure you are in good credit shape before you apply. Don’t forget that the bank can deny the loan seconds before signing if they notice last minute changes in your credit or employment. And always monitor your report and activity with the expectation that something wonderful may be around the corner, and you may want to leverage your good credit.

© 2019 Identity Intelligence Group, LLC


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Give the Gift of Financial Literacy this Mother’s Day

Give the Gift of Financial Literacy this Mother’s Day

The National Foundation for Credit Counseling (“NFCC”)  previously surveyed peoples’ opinions of their mother’s personal finance skills in a Financial Literacy Survey (“FLS”).  An overwhelming majority, 65 percent, saw their mother as either someone who is intimidated by money, views managing money as a necessary evil, or has never managed money.

What mothers may not realize is that a lack of financial skills has the potential to negatively impact not only their future, but also that of their children, as negative habits are picked up as readily as positive ones. Mothers have the opportunity to influence multiple generations by improving their own personal financial abilities.

Consider the following statistics:

  • According to Career Builder, nearly 81 percent of American working women say they’re living paycheck to paycheck.
  • The typical single parent is the mother; therefore the sole responsibility is placed on her to demonstrate and teach sound financial habits.
  • Fewer than half of the states require a course in personal finance for graduation from high school.  Accordingly, only five percent of FLS respondents indicated schools were their main source of personal finance skills.
  •  It can be difficult to think about putting any money aside. According to a study conducted by the Federal Reserve Board, 40 percent of Americans could not come up with $400 to cover an emergency expense, or would do so by borrowing money or selling something.

These survey results underscore the importance of financial education in the home. Fortunately, there is no lack of personal finance education materials available.  The bookshelves are filled with financial self-help information and solid advice can be found online at no-cost at credit.org’s FIT (Financial Instructional Training) Academy.  This Mother’s Day plan a gift to yourself and your children by participating in a lesson in personal finance.

It’s never too late to start. The first ste p is for mothers to take advantage of the opportunities available to improve their grasp of personal finance; then look for teachable moments to demonstrate those new skills to the children.  After all, the gift of financial literacy is a gift that lasts a lifetime.

The actual poll question and answer choices are below:

Thinking of my mom and personal finance, I’d say she:

  1. Is pretty savvy managing money, and enjoys it = 35%
  2. Is intimidated by financial matters, and avoids them = 21%
  3. Sees managing money as a necessary evil, and doesn’t enjoy it = 26%
  4. Has never managed money on her own =18%

Note: The NFCC’s April Financial Literacy Opinion Index was conducted via the homepage of the NFCC Web site. A portion of content for this post was courtesy of the NFCC: www.nfcc.org.


The content for this post was sourced from www.Credit.org

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The Top 4 Barriers to Homeownership

The Top 4 Barriers to Homeownership

As Financial Literacy Month is recognized throughout the nation, credit.org and the National Foundation for Credit Counseling® (NFCC®) are working together to spotlight the results of the 2019 Consumer Financial Literacy Survey. This year’s survey, conducted online by Harris Poll in March 2019 among 2,086 U.S. adults ages 18 and older, reveals prominent barriers to home ownership for Americans who have attempted to buy a home.

The survey reveals that many Americans face increasing barriers to homeownership despite the good news about the economy. In fact, one out of every two U.S. adults who have taken steps to purchase a home of their own say they have faced barriers.

Challenges have always existed along the road to homeownership, but it is clear that some obstacles can lead people to abandon the pursuit of their goal. Purchasing a home in today’s market requires a greater level of knowledge and preparedness than ever before. Credit.org is a resource available to educate and prepare all individuals and families before they enter the homebuying process.

Top homeownership barriers reported in this year’s survey include:

Lack of Funding for Down Payment

A lack of funding for down payment or closing costs tops the list this year as the most common challenge. Savings has been a common challenge for some who have difficulty managing debt while balancing a household budget. Fortunately, most have non-retirement savings. More than half with non-retirement savings are keeping their funds in a standard savings account. Regardless of where someone may be in their journey to grow personal savings, nonprofit housing counselors can be assistive toward identifying ways to help make homeownership possible while growing personal savings.

Existing Debt

Three in five U.S. adults have had credit card debt in the past 12 months, and nearly two in five indicate their household carries such debt from month-to-month. Not surprisingly, more than half struggle to minimize their debt, primarily due to unexpected financial emergencies. Credit cards are known to be among the costliest forms of debt to manage and can be equally challenging to repay. Credit card interest rates for people with average credit scores are nearly 18% APR. Knowing credit cards are frequently used to cover emergency expenses in the absence of savings, makes it easy to understand how some may feel as though they are spinning their wheels trying to reduce the balances they owe.

Personalized credit counseling assistance can help people who want to take back control of their debt without turning to risky, get-out-of-debt-quick schemes.

Limited Budget Options

The survey revealed that about two in five U.S. adults, a proportion that has held roughly steady since 2007, say they have a budget and keep close track of how much they spend on such things as food, housing, and entertainment. On the one hand, it is encouraging to see that the number who regularly save has not diminished over time, but it is also disappointing that there continue to be more who do not follow these healthy financial habits. Nonprofit credit coaching is also a resource to help everyone succeed in reaching their savings goals, no matter their starting point.

Poor Credit History or Low Credit Score

A low credit score due to lack of credit history or an unsatisfactory record of debt repayment can be a major setback, especially when hoping to qualify for a mortgage. In either scenario, there are a range of options for restoring credit health while staying on track for home ownership. A credit report review or other credit coaching might be the best way to start when getting one’s credit ready for homeownership.

The survey clearly demonstrates the need for financial counseling and education for potential homeowners, but it also reveals the level of awareness of such resources. If they were to have financial problems related to debt, 23 percent of adults, or almost 56 million Americans[1], indicate they would reach out to a professional non-profit credit counseling agency for assistance. Taking that important step is as easy as reaching out to a counselor by calling 1-800-294-3896.

About the Survey

The 2019 Financial Literacy Survey was conducted online within the United States by The Harris Poll on behalf of the NFCC (National Foundation for Credit Counseling) between March 8th and March 13th, 2019 among 2,086 U.S. adults ages 18+. For complete research method, including weighting variables and subgroup sample sizes, please contact the NFCC at press@nfcc.org.



[1] Calculation based on U.S. Census Bureau’s 2016 Current Population Survey (CPS), which estimates there are 244.81 million adults ages 18+ residing in the United States: 244.81M x 0.24 = 58.75M.


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APR on a Credit Card

APR on a Credit Card

Understanding interest rates on a credit card is harder than it seems. What is the real interest rate? How often is it applied, and what does it really cost? Credit cards are usually advertised by their APR (Annual Percentage Rate). What does that mean?

Interest is the cost of having access to credit—it’s the fee you pay for using the bank’s money instead of your own. The longer you go without repaying the balance owed, the more it will cost you in interest.

APR on a credit card refers to the yearly interest rate on a card. But it’s not quite that simple. Interest is typically calculated every day, and you are charged every month. The “annual” rate is not something you’d ever pay, because if you only made one payment per year, you’d be paying lots of late fees on top of the balance and interest (plus the debt would have defaulted after x-amount of days and probably have been transferred to a collection agency, severely impacting your credit score in the process).

Calculating interest from your APR

The average APR on a credit card in the US last year was 16.86% (according to the Federal Reserve). If you owed $1,000, what would that APR really cost you?

First you divide the annual rate by 365 to come up with a daily rate. So .1686 ÷ 365 = .0004619178. That is the percentage of interest you’d be charged each day.

Confused yet? You also have to remember that the balance is good throughout a monthly billing period. So on day 1 of the month you owe $1,000 on a card with 16.86% interest. Then you are charged approximately .46¢ in interest. ($1,000 x 0.0004619178% daily percentage rate).

Then the balance on the card for day 2 is $1,000.46, and the balance on day 3 would be $1,000.92, and so on. By the end of the month, you’d have a balance of $1,013.34. If your debt is compounded monthly, starting on day 1 of month 2, you’re charged .0004619178% of the new higher balance.

That’s assuming you didn’t use the card at all during the month. If you did, you might increase the interest charged every day, because many credit card companies base your interest on your average daily balance. So if you spent $30 on top of the $1,000 you started with, the average daily rate would be $1,001, and that’s what your daily periodic rate would be charged against.

Grace Periods

All of this complex calculation can be moot if you pay off the debt quickly. Credit cards may have a grace period, wherein you are charged no interest if you pay off the balance in full. Usually that can range from 21-30 days. If you use a card all month long and pay it off completely before the payment due date, there is no interest charged, and you’ve essentially gotten to use the credit for free.

This is a great way to use credit cards. You get the benefits of convenience, security, and the ability to use your credit card transaction history for budgeting purposes. You also earn potential credit card rewards, and have the positive credit history associated with using a credit card responsibly*. But if you pay off the charges before the grace period, you are charged nothing extra for all of these benefits. Go one day past the grace period, and then all of those interest charges kick in and you’re charged for the whole month, calculated against your average daily balance.

By paying off your credit card in a timely fashion, you are keeping your credit utilization rate lower, improving your score. You also avoid late fees and late payments, which would lower your score.


Back to the tricky math of credit card APRs. Creditors may compound interest daily or monthly, and this will change the calculation.

What this means is, are you paying interest on the extra debt you incurred yesterday through interest? Sometimes the “real” interest rate is calculated to include the compounding, and is called the effective annual rate, or EAR. Wikipedia has an example with a credit card with a 12.99% APR that becomes 13.87% when compounding is considered.

Fixed vs. Variable APRs

If the math isn’t confusing enough, some cards will have APRs that change every month. A fixed APR is going to stay the same, unless something major happens, like you ask for a reduced rate from the creditor, or a low introductory rate expires. A variable APR is often tied to the prime rate.

The Prime Rate, usually based on the federal funds rate set by the Federal Reserve, is currently 5.25%. So a credit card might have an interest rate of 10%+ prime, giving you a rate of 15.25%. If the prime rate goes up, so does your credit card rate.

For more about these rates and other kinds of interest, see our article and infographic “What Does That Interest Rate Really Mean?”

Different APRs for different balances

To add more complexity to all of this, you might have different APRs depending on what kind of balance you incurred. You might have a purchase APR that is charged on balances incurred through regular shopping, dining, travel, etc. This is usually the credit card APR you see advertised.

Then there will be a different APR for cash advances. This is usually much higher than the purchase APR, and there will be no grace period.

Then you might have a lower APR for balance transfers, to incentivize you to move balances from other cards to a different lender.

Penalty APRs might kick in if you miss payments, go over your credit limit, or make a credit card payment that is returned for some reason. This rate is much higher than your regular APR, and can reset a low introductory rate. You’ll need to make payments on time for six months in a row to get your rate reset back down to the regular APR.

All of this is pretty complicated, and every credit card agreement is different, so your real interest charges will depend a lot on the fine print of your agreement plus your borrowing and repayment behavior.

Key takeaways:

  • APR is a rough snapshot of the interest you would pay annually, but the real percentage is going to be higher due to compound interest charges.
  • Interest is charged monthly, not annually, and may be compounded daily or monthly.
  • Grace periods allow you to pay off credit cards and avoid interest charges altogether.
  • You’ll have a different APR for different kinds of balances, like cash advances, balance transfers, and purchases.
  • Interest rates might change under certain circumstances. Read the credit card agreements before applying for a card to know what might change your APR.

There is no need to carry a balance, your credit score will benefit from positive repayment habits. It’s a common credit card myth that many people believe it’s necessary to carry a balance over from one month to the next to help them build credit, that’s incorrect and could be costing you money. The best way to respond to a high APR is to pay off the card in full each month and reduce your borrowing. A certified financial coach can help you create a plan to pay off your debts and achieve financial freedom. Contact credit.org to get started.

If all the APRs you’re being offered seem sky high, talk to a credit coach about what you can do to improve your credit and qualify for better terms.


The content for this post was sourced from www.Credit.org

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This Financial Literacy Month, Brush Up With Some “Test Prep”

This Financial Literacy Month, Brush Up With Some “Test Prep”

Every April, we celebrate financial literacy month. It’s an important time for everyone to make sure they’re staying knowledgeable about financial topics and using that knowledge to better manage their money.

We want everyone to put aside some time to evaluate his/her own level of financial literacy and to try to learn something new.

The Council for Economic Education has an excellent Economic Literacy Quiz that we think would be a great exercise for Financial Literacy Month. Before you head over there to take the quiz, read on for some “test prep” to help you brush up on your financial literacy.

Here are some basic concepts that form a good foundation for improving economic and financial literacy:

  • Interest
    • Interest the amount of money a balance earns over time. It is calculated on a balance on some kind of compounding schedule. For example, if your interest compounds monthly, then the interest you have earned every month is added to the balance and you earn more over time. Debt you repay also carries an interest rate that costs you more over time as that interest compounds.
    • Read more about interest here
  • Supply and Demand
    • This is a central concept in economics. Supply is how much of a good or service available, and demand is how much of that good or service people want. If you have too much supply, prices go down. If you have too much demand, prices go up.
    • Read more about supply & demand here
  • Incentives
    • In economics, incentives matter. Lowering prices or subsidizing any activity will result in more of it. Raising prices or taxes on an activity will result in less of that activity. Entrepreneurs create businesses (and the jobs that come with them) because of the financial incentives at stake.
    • Read more about incentives here
  • Competition
    • When sellers in a market compete, consumers win. Each seller will offer better products, better service, and lower prices in an effort to win the consumers’ business.
    • Read more about economic competition here
  • Trade
    • When two people (or countries) trade with each other, both parties win. If you buy something from a store, you wanted the item more than the money you gave them, and they wanted the money more than the item. In this sense, trade is not a zero-sum game where there is a winner and a loser—both parties to a trade can benefit.
  • Investing
    • People use a stock market to buy and sell stocks, which are shares of ownership of businesses. The market brings willing buyers and sellers together so they can invest in businesses that they expect to grow or hold their value. When investing, diversification is important. That means spreading your money out over a number of different companies, rather than risking all of your money on one single investment vehicle.
    • Read more about investing here
  • Currency
    • Any kind of money that is acceptable as a medium of exchange is currency. Currency doesn’t hold its value very well, so it’s better to save money in an interest-bearing investment rather than just storing cash.
    • Read more about currency here
  • Inflation
    • Over time, prices of goods and services tend to go up. Typically, the “inflation rate” in the U.S. is 1-3%. That means money is worth less in real value over time. That also means anyone living off of savings or a fixed income suffers as their dollars are affected by inflation. People who borrow at a fixed interest rate, like most home owners, benefit as the real cost of their outstanding loans actually go down due to inflation.
    • Read more about inflation here
  • Insurance
    • Insurance is how people mitigate risk. You pay a premium to an insurance company, and if something bad happens, the insurance company pays you to compensate. The cost of insurance is based on how risky the insured person or property is. Therefore, it will cost more to insure property in a neighborhood with higher crime, or to provide health care to someone who is more likely to get sick.
    • Read more about insurance here
  • Banking
    • Different kinds of banks provide financial services and accounts to accountholders (or in the case of credit unions, their members). Consumers should evaluate banks based on their security (are they FDIC insured?), expenses (how much does it cost to maintain an account?), and convenience (do they have accessible locations and business hours?). One might also evaluate a bank based on its reputation for charitable giving, treatment of employees, etc.
    • Read more about banking here
  • Saving
    • Saving is critical to one’s financial well-being. It’s important to have an emergency fund saved in an easily accessed account, and long-term savings in some kind of account that earns interest. Most people save for retirement in long-term IRA (individual retirement accounts) or 401(k) accounts offered by their employers.
    • Read more about saving here
  • Taxes
    • This is an important subject for Financial Literacy Month, because tax time is in April. Taxes are collected from people when they conduct economic activity; income taxes are collected from your paycheck, sales taxes when you buy goods, etc. There are ways for people to reduce their taxable income, and if people overpay their taxes, they are entitled to a refund of the overage.
    • Read more about taxes here

There’s a lot more to know, but this should be a good quick overview. Head over to the Council for Economic Education’s economic literacy quiz and see how you do!

And be sure to set aside some time this year during financial literacy month to read up and learn a little more about your finances. Get started here on credit.org’s blog, and be sure to look through our archives for the latest articles about credit, debt, and personal finance.


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Don’t Let Student Loans Keep You From Purchasing A House

Don’t Let Student Loans Keep You From Purchasing A House

There’s a generation of people who may be avoiding or delaying homeownership because they’re already facing an overload of student loan debt.

Today’s recent college graduates carry more student loan debt than any generation before them. Even people who finished college a decade ago are still working to pay down what seems like an insurmountable debt load. This debt load can make buying a house seem like an impossibility.  However, considering that as a renter you are likely paying someone else’s mortgage, homeownership may be more attainable than you believe.

Good Debt vs. Bad Debt

We often talk about “good” debt. That seems counterintuitive, we know. What kind of debt could possibly be good? Well, it’s pretty simple; “good debt” is any debt that helps you build wealth.

That’s why so many people have borrowed thousands of dollars to go to college—statistically, having a college degree means one could earn nearly an extra million dollars over their lifetime (source).

Similarly, some people could justify borrowing money for a car, if that car is essential to getting them to work every day. If losing access to transportation would mean losing your job, then borrowing money to buy a reliable car might qualify as good debt.

The best kind of good debt is a mortgage. Borrowing money to buy a house gets you started toward a lifetime of building wealth and security. We urge everyone to make homeownership part of their financial plans both in the short and long term.  If for example you own your home when you retire and your loan is paid off, not having a rent or house payment will make living on a fixed income vastly easier.

Managing Student Loans & Mortgage

While getting into a mortgage is a positive thing, many people simply feel like they just can’t make it work especially when facing tens of thousands of dollars in student loan debt.

First, it’s important to ensure that your overall credit and credit scores are strong.  Make payments on time, keep balances as low as possible, and don’t do anything to shorten the length of your credit history (i.e., don’t close your old accounts, even when you pay them off).

Then, you have to figure out your debt-to-income ratio. Read up on The Basics of Debt-to-Income-Ratios, and do some math. If your student loans, coupled with a potential mortgage, would lead to a debt ratio that a mortgage lender wouldn’t approve, talk to a mortgage coach or a student loan counselor about what you can do to get your debt-to-income ratio under control.

Some things you might consider will include increasing your income, consolidating your federal student loans, reviewing the Department of Education’s (DOE) website for a number of federal loan repayment options, or working to eliminate your other debts, like credit cards.

Another step at this stage is first-time homebuyer education. This will help to ensure you are aware of special down payment assistance programs and take all the right steps throughout the homebuying process.

When you are ready, talk to a mortgage broker or lender about getting pre-qualified for a loan. Then you’ll know how much you can afford to buy before you start shopping for a home.

Saving up for a Down Payment

You don’t need a huge down payment to buy a house. Sure, it’s great to have 20% of the home’s price saved up before borrowing, but if your credit score is good enough, you can get an FHA (Federal Housing Administration) loan with as little as 3.5% down. Mathematically, you’re better off getting into a mortgage now and starting to earn equity than to wait until you’ve accumulated a full 20% down payment.

Even saving up 3.5% of a home’s purchase price can be a challenge, and it will be a good test of whether you are ready for homeownership. If you can keep making your student loan payments, pay your current rent, and save up 3.5% toward a mortgage, then you’re probably financially ready to tackle homeownership.

Start Small

It’s very important to bear in mind that your first home doesn’t have to be your dream home. You might sell your first home and move up to something bigger in 6-10 years. Don’t expect the first home you ever buy to have everything. After a few years of building equity, developing your career, and paying down student loans, you’ll be in a great position to make your second home one you’ll want to live in for decades.

Should I Wait?

Some people may advise you to put off buying a home until your student loans are completely repaid. We think it’s important to point out that approach has some disadvantages.

First, you lose the potential equity you would start building. As soon as you start making house payments, you start building wealth. And as property values rise, your home will be worth even more. It’s important not to think of homeownership as a short-term investment—the idea isn’t to get rich quick, it’s to build financial security over a lifetime.

If you are in your thirties and you put off homeownership for another ten years, you’ll make it less likely that you will be able to pay off that mortgage by the time you retire. Having high housing expenses when you transition to a fixed income is a situation you want to avoid.

Second, being a homeowner brings some serious tax advantages that you would be forgoing if you wait to buy a house. Get into homeownership now and start reaping the tax benefits, along with the equity building.

Third, you cannot know what the future holds. Interest rates are reasonable, and while they could go a little lower, it’s much more likely that they will go up. As this article is being written, the average fixed rate mortgage rate is 4.28%. Ten years ago, the average was 6.03%, and ten years before that,10.34%. The lowest we’ve seen in recent decades was 3.65%, so yes it could go down a bit, but the historical averages are much higher than what we see today. So now is a good time to consider getting into a home, and waiting a few years could cost you even more in increased interest rates.

It’s important not to worry too much about fluctuations in the market—home buying is a long-term endeavor, so if values rise or fall in the short term, it shouldn’t concern you. You could be in the home for 10 years, and over that time, you’re much more likely to see an increased property value while you build up significant equity from your regular mortgage payments.

When Waiting is the Right Move

Waiting to become a homeowner can be a good idea if you aren’t in a place in your life where you can settle down. If you think your career is likely to have you moving within a few years, then it makes less sense to get into a long-term mortgage now.

Whether or not to wait is a lifestyle decision—will you be having kids soon? Are you where you want to be for the foreseeable future? While those are valid considerations, student loans should not be the factor that makes you wait to become a homeowner.

It bears repeating—you borrowed money to get a degree so you could build a better life for yourself. Homeownership should be part of that life, and you shouldn’t let student debt keep you from purchasing a house.

Don’t forget, you don’t have to go it alone. If you’ve got student loan debt that is making you doubt your ability to buy a home, get nonprofit homebuyer coaching so you’ll know exactly what you need to do become a successful homebuyer.


The content for this post was sourced from www.Credit.org

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