HOW EXACTLY DO CREDIT CARD COMPANIES MAKE MONEY?

/in , /by

Almost everyone out there has some experience with a credit card.  Unfortunately, some of us have been sucked into credit card companies’ business models of deception, luring customers into paying high interest rates and late fees. But while interest rates and late fees are key revenue sources for credit card companies, by and large, they’re not exactly predatory practices.

Businesses need to make money. It’s our job as consumers to understand the various incentives and disincentives of the products we use so we can make informed decisions about our own money, and whether a business’s services are worth what we pay for them. Consumers need to understand how these companies operate in order to use their credit cards conscientiously and avoid destructive behavioral spirals.

Let’s explore the facts behind how credit card companies make their money and how you can use this information to make smarter financial choices.

A CREDIT CARD COMPANY’S TOP REVENUE STREAMS (AND HOW THEY AFFECT YOU)

1. MERCHANT FEES

The revenue stream: When consumers pay for something using a credit card, they often assume that the retailer receives the entire payment. However, a small percentage of most credit card purchases (roughly 2% or more) gets gobbled up in credit card interchange fees. The bulk of that goes to the bank that issued the card used (for example, Chase or Capital One), while a portion also goes to the credit card association managing the account, such as Visa or MasterCard. (Those companies also charge their partner banks fees for their services, further adding to their revenue.)

Meanwhile, American Express issues its own cards and operates under a “closed-loop” network, meaning it acts as both the card issuer and the credit card association (as opposed to Visa or Mastercard). AmEx’s chief revenue stream is the fee it charges merchants who accept its cards, which account for a staggering 65% of the company’s revenue.

What this means for you: Interchange fees don’t really impact consumers as much as they do merchants, who receive only $97-$98 of a $100 credit card purchase. But even some very small businesses want to be able to accept credit cards to make it easier for their customers to make a purchase, so they are typically willing to pay credit card companies for their services.

While this may seem like an exploitative tactic, the credit card companies act as intermediaries for all parties involved in the transaction: issuing banks, cardholders, and merchants. They handle the complex behind-the-scenes components, including secure financial transfers and fraud monitoring, which is why they can demand these fees. As a consumer, of course, it means you don’t have to carry around a wad of cash or a checkbook to make purchases at most stores and restaurants.

What you can do about it: If you really want your local coffee shop to receive 100% of your purchase, then pay cash. One thing to keep in mind is that some retailers will add a 2%-3% surcharge on Visa and MasterCard transactions — which comprise 70% of all credit cards — to cover the interchange fees those companies charge. Luckily, merchants are required to disclose any credit card surcharges upfront and detail that extra fee on your receipt.

Keep a watchful eye out for surcharges when you pay with credit. Utility companies or government agencies such as the DMV will often add a surcharge if you use a credit card. I try to avoid using a card anywhere that adds this charge.

2. CONSUMER FEES

The revenue stream: While merchant fees make up a good portion of credit card companies’ revenue streams, they also collect fees from their cardholders — including annual, cash advance, balance transfer, and late fees.

For instance, let’s say you’d like to move your balance on one card to another with a lower interest rate. Most companies will levy a 3% balance transfer fee on your transaction — so if you want to transfer $5,000, you’ll have to pay $150 upfront.

What this means for you: Consumers who haven’t read the fine print are often shocked to discover the number of fees companies charge. Not only will they drive up your credit card bill, but incurring certain fees, like late fees, will damage your credit score, too. Keep in mind that fees can vary by card and issuer, so just because one company or one card doesn’t charge an annual fee, for example, that doesn’t mean another won’t.

What you can do about it: Make sure to find out whether there’s a fee and how much it is before you apply for a new card. Depending on your credit limit and the rewards program, that expense may outweigh the benefits.

Credit cards often come with a range of useful services such as balance transfer offers and cash advances. These can be incredibly helpful in a financial pinch, but they’re not without their costs. A cash advance might seem like the answer to your short-term money problems, but you could be paying that off for years. Talk to your credit card company about the charges, and look for alternative solutions that won’t cause you stress down the road.

If you plan to use a credit card while traveling overseas, research different companies’ foreign transaction fees. These can seriously increase your travel expenses if you’re not careful, so look for cards with low or no fees on international purchases.

Annual fees aren’t fun to pay, but they aren’t the enemy, either; some of the best rewards credit cards charge annual fees. Personally, I have about six credit cards that I use for specific purchases. When I’m deciding to open any new card, I always ask myself, “Does this offer a good return on investment?” A great rewards card might be worth a high annual fee if you use it enough.

Whatever your credit card situation — whether you pay your balances off each month or can only make the minimums for the time being — don’t ever make payments late. This is a careless consumer mistake that creditors make money off of, because they will charge late fees that can really add up on your total bill. It can also trigger an unwanted increase in your interest rate — which we’ll look at next.

3. INTEREST

The revenue stream: Interest payments undoubtedly provide credit card companies with handsome revenue — especially off of missed payments. A recent survey of 100 major U.S. credit cards found that consumers who fall two months behind on their credit card payments face an average penalty interest rate of 28.45%.

So let’s say you carry a $6,000 balance on your card charging 11.82% — the average APR. At the 28.42% penalty APR, you would have to pay nearly $1,000 extra in interest per year.

In 2014 alone, American Express made a net interest income of approximately $5.8 billion!

What this means for you: Because just a few missed payments can quickly spiral into serious debt, consumers often mistakenly assume that credit card companies want them to get in too deep. After all, that means more profits for the creditors, right?

In truth, while credit card companies do profit from the interest that accrues on overdue accounts, they don’t design their systems to trick customers. The more spending power cardholders have, the more money these businesses make, whether they carry high-interest balances or not. That’s why they provide cardholders with the options to set up automatic monthly payments and send out reminder notices ahead of their due dates.

What you can do about it: Set your account to send reminder alerts via text or email before your bill is due each month, and always pay your balance in full. And while credit card companies make it easy to pay, they can’t stop you from buying things you don’t need or can’t pay off. So every time you’re about to charge something to your credit card, ask yourself, “Can I pay this off on my next bill?”

If the answer is “no,” wait until you’re in a more comfortable financial position. Even a small purchase can quickly become a burden when you account for the interest over time. And paying the monthly minimums won’t help you once you’ve racked up enough interest on the debt. You also want to avoid maxing out your cards, because carrying high balances lowers your credit score.

Treat your credit cards like the finite amount of cash you carry in your wallet. In doing so, you won’t get sucked into the trap of buying more than you need — or can afford.

4. SALES COMMISSIONS

The revenue stream: Some credit card companies sell customers’ data to other businesses — particularly retailers that would like to garner better insights into consumer spending habits. Both American Express and MasterCard have profited off of this tactic. MasterCard sells data by ZIP code, which tells retailers what areas are more likely to make purchases. Then, online advertisers can take this data and create targeted advertisements.

What this means for you: Luckily, the data is anonymous and aggregated, meaning companies can’t single you out. However, many consumers aren’t happy to know that companies are profiting off of their personal information.

What you can do about it: This practice is, thankfully, on the decline. Make sure to read card agreements thoroughly to find out whether a specific company will profit off of your data and whether you can opt out. 

THE BOTTOM LINE

When used responsibly, credit cards offer numerous benefits. Whether you simply don’t like carrying cash or you’re trying to build credit history, they’re convenient and valuable tools.

But there’s something to be said about their ability to separate you from your money. It’s easy to get carried away with your credit lines and blame credit cards for capitalizing on fees while you’re one late payment away from the poor house.

Credit card companies are out to make money — there’s no doubt about that. But it’s important for consumers to understand how those businesses make money, and where their own responsibilities lie.

HERE ARE SIX TIPS TO KEEP SUMMER TIME SPENDING UNDER CONTROL

/in , /by

Summer isn’t for saving; it’s the season for spending. At least, that’s the message that many Americans relay when banks trot out their annual spending surveys.

For those of us already in heavy credit card debt, the summer offers many temptations to break out the plastic.  The key is to spend smart, and save where possible.

Whether you’re spending on canoes, landscaping or vacations, here are some of the common spending traps summer sets for us — and how to mitigate them.

Yard maintenance

If you do your own landscaping and lawn care, you’re going to save money. That being said, if you absolutely do not want to cut your own grass or ruin your shoes by aerating the lawn with your high heels, consider hiring a neighborhood teen.  Place an ad on-line, in a neighborhood forum, or at your local convenient store.  Teens are always looking to make some summer spending cash.

Big stuff for your big summer fun

Seasonal items such as patio furniture will go on sale later in the summer; however, your choices will be limited by what is left in stock. If you’re looking for bigger ticket items such as water skis or furniture, consider buying it used. This past week, someone just sold a fantastic glass patio table, umbrella and six plush chairs for $190 on my local Bidding Wars Facebook group.  And don’t forget to comb the house for things that you can sell yourself to recoup some cash.

Summer camp for kids

Camp is not cheap. It can be more expensive than daycare.   The first thing to do is determine how much you can spend to send kids to camp. Then decide, with your kids, where and how to divide that sum. (Don’t forget to budget for extra gear, etc. that you may need for the camp.)

To save you money, some camps offer a siblings discount, so consider sending your kids to the same camp. Also, many have early-bird or return-camper discounts. If you can’t afford the entire cost up-front, ask if the camp has a payment plan. Some camps have subsidy programs with financial applications due earlier in the year.

Vacations

The key to saving money on vacations is planning.  Search for resorts or hotels or restaurants that offer free promotions for kids. Do a Google search for Groupon deals or coupon codes for local attractions. Consider visiting hot spots such as Arizona or Florida, which can be cheaper in the summer months, or explore your own country. Opt for a road trip and find accommodations with a kitchen through Airbnb, VRBO or Homeaway.com.

Staycations

People think that by doing a staycation, they won’t be spending money. You need to have a budget for this as well. Keep a calendar of events that you want to enjoy with the family and the associated costs.

Making memories with your people

Barbecues, concerts, weddings — the events add up, but making lasting memories doesn’t have to mean creating lasting debt. It’s about making choices: saying “no” to something so you can say “yes” to something else.

Also, it’s never too late to start saving for your good times. It could be as simple as putting aside every $5 bill you see in your wallet for patio drinks. Even better, set up an automatic transfer of cash every payday for your summer expenditures.

YOU’VE BECOME DEBT FREE…NOW WHAT? FINANCIAL MOVES THAT MAKE SENSE

/in , , /by

When you’re focused on getting out of debt, most folks get caught up in the process and don’t think beyond achieving that goal.  If this happened to you – don’t worry!  It’s happened to almost everyone who’s successfully eliminated large credit card debts.  But the fact is, if you are consistent and committed to paying off your debt, it will happen. So then what? If you don’t have a plan for what to do with your money once your debt is paid off, it can be all too easy to start a cycle of over-spending that will leave you where you started. Here are several things you need to do once your credit card debt is paid off.

Bulk Up Your Emergency Fund

If you haven’t yet started to save for emergencies, you must do it now and deposit as much as you can into that account every month. If you already have an emergency fund, increase your monthly deposit. Why is this so important? It will help you avoid using credit cards to pay for a true financial emergency, such as major vehicle repairs, a new air conditioner, emergency medical bills, or everyday expenses in case of job loss. Remember, you just got out of debt. The last thing you want to do is get blindsided by an emergency and get right back into debt by having to use a credit card to pay for it.

Start Working On Your Retirement Options

The sooner you start saving for retirement the better, but it’s never too late. Look into the retirement savings options offered by your employer along with additional options such as a Roth IRA. If you’re self-employed, look into a SEP IRA, Simple IRA or Individual 401(k). No matter what how you choose to save for retirement, the important thing is to be consistent with your contributions and leave the money alone until you reach retirement age. You already know you have the discipline to pay off debt; apply that same discipline toward saving for your retirement.

Get Your Financial Life In Order

If you’ve managed to pay off all your credit card debt, there’s a good chance you’re already at least somewhat organized, but there’s always room for improvement. Set up as many bills as possible for auto-pay, so you never again have to risk paying late or missing a payment. Get all your financial documents in order and devise a filing system that works for you. Opt out of pre-screened credit card offers to minimize the temptation to overspend, not to mention cut down on annoying junk mail.

Review Your Insurance Coverage

You may have been getting by with bare minimum insurance coverage while working to pay off your debt, but now that you have more money every month, you may want to consider increasing your insurance coverage. For example, if you’ve been meaning to get life insurance but couldn’t afford it, now is the time. If you’re approaching middle age, look into long-term care insurance to add security to your senior years. Of course medical, dental and vehicle insurance coverage are all necessities, too.

Start Saving for a Major Purchase

If part of the motivation for getting out of debt was so you could start saving for a major purchase, such as a home or a new vehicle, it’s time to start making that dream a reality. Establish a savings plan solely dedicated to your goal and contribute to it regularly. You’ll be surprised by how quickly the balance grows.

BENEFITS OF DEBT RELIEF

/in , /by

Let’s say you’ve decided that debt relief is the right choice to help you pay off your debt. As you learn more about the debt relief process, you start wondering how it could affect your credit score. If it could leave a negative impact, should you still use a debt relief service? Here’s what you need to know about debt relief’s effect on your credit score, plus some tips on improving your score in the long run.

WHAT’S A CREDIT SCORE, AND WHAT IS IT USED FOR?

A credit score is a statistical number based on your credit history that evaluates your creditworthiness and allows lenders to determine how likely you are to repay debt. Your credit score includes, but is not limited to, things like your payment history, how long you’ve held your accounts, and how much available credit you’re currently using.

Credit scores generally range from 300 to 850 depending on the scoring system you’re using. To a lender, a higher score can indicate that you’re very likely to repay your debt, and a lower score could indicate you’re less likely to pay back what you owe.

Your credit score can play a large role in everyday life, and can effect the following:

  • Getting approved for a credit card or loan
  • Securing a home mortgage
  • Receiving more favorable terms on a loan (ex. a lower interest rate)
  • Renting an apartment and how much of a deposit you’ll pay
  • Opening a cell phone line
  • Setting up utilities

DOES DEBT RELIEF AFFECT YOUR CREDIT?

Certain types of debt relief options can affect your credit in both the short and long term, but the impact can often be temporary. Depending on the type of debt relief you choose, your program may show up on your credit report for several years. For many, eliminating debt is more important than a temporary dip in their credit score. Living without crippling debt could actually help you make better financial decisions that improve your credit for the future.

HOW DOES DEBT RELIEF AFFECT YOUR CREDIT LONG-TERM?

Many debt relief options can help your credit score in the long run. Once you get out of debt, your aim should be to make smart financial decisions to help you avoid falling back into debt. You’ll also probably see a score increase as you decrease the amount of credit you’re using. By continuing to use credit wisely and making your payments on time, chances are you’ll see your credit score improve over time.

HOW TO IMPROVE YOUR CREDIT

Building a good credit score takes time. The two best ways to impr ove your credit are to make your payments on time and to avoid using all of your available credit (ex. not maxing out credit cards). 

Use these strategies to increase your credit score:

  • Pay Bills on Time: Paying your bills in a timely fashion shows lenders you’re reliable. Those who miss payments, or make late payments often, will see that lack of reliability reflected on their credit score.
  • Keep Balances Low: Try to pay down your credit card balances (or lines of credit) to make sure you have plenty of credit available. The amount of credit you’re using versus the amount you have available plays a major factor in your score.
  • Don’t Open New Accounts: Try to avoid taking on new credit. Every time you apply for a new account, there’s a hard inquiry on your credit. Too many hard inquiries in a short time span can have a negative effect on your score.
  • Don’t Close Unused Accounts: Even if you never use your old credit card, it’s a good idea to keep it open. The length of time you’ve had an open account can help increase your score.

Monitor Your Credit: Keep an eye on your credit report for inaccuracies or fraudulent activity. Report anything out of place right away so you’re not paying for someone else’s mistake.

Do You Know What Lenders Look for?

/in , /by

You probably think your credit score is the main thing that lenders and creditors use to decide whether to give you a loan. But they use other tools to measure your creditworthiness and whether you’ll have a tough time repaying a new debt.

Keeping your credit in top shape involves more than making your payments each month. Even if you make minimum required payments, your credit score may not be optimal.

Definition of ‘Credit’

Credit is a contractual agreement in which a borrower receives something of value now (usually money) and agrees to repay the lender at some date in the future, generally with interest.1

What do Lenders Look at to Make a Loan?

Lenders look at things like your debt-to-income ratio (DTI), credit utilization, and total amount of debt on your credit profile.

Debt-to-Income Ratio

Lenders use the DTI ratio to see if you have enough income available to pay your debts. You know you are suffering from a high debt-to-income ratio if, once you pay your fixed expenses (like housing, other loans, and utilities), there is very little left over at the end of each month. The higher the DTI, the less likely you will be able to repay the requested loan and so the less likely you will be approved.

Credit Utilization

How much of your available credit do you actually use? Do you borrow the maximum on your credit cards each month? A high credit utilization rate will negatively impact your credit score.

Total Amount of Debt

If the total volume of debt on your credit profile is too high, you can be denied credit even if you’ve got a good history of making debt payments. You might be making the minimum payments on all that debt, but paying off your debt in full could take decades. In short, you could use some help with your credit card debt.

A Good Credit Profile

What does a good credit profile look like? A profile capable of taking on a loan has a low debt-to-income ratio, has credit utilization rates under 30%, and carries very little debt. A good credit profile also shows some savings, whether in the form of savings accounts, retirement plans, stocks and bonds, or some other liquid asset. And of course, that profile will have an excellent history of making payments to lenders and creditors on time every month.

The trick to understanding your credit worthiness is to remember that all of these components are interdependent. High credit utilization rates hurt your credit score. A high debt-to-income ratio prevents you from having the money left over each month to pay down new debt . High total debt amounts drive up the minimum payments you need to make, and most of those payment will only cover interest without significantly lowering the principal you owe.

This credit trap could keep you in debt (even if you stopped using credit cards today) for the next 14 to 27 years. For the vast majority of that time you will not have the ability to get new credit because you will not have the capacity to pay it back. So even making on-time payments every month won’t help your credit worthiness or your financial future.

If you need help with your credit card debt, and want to learn how to save money, get in touch with one of our consultants at 1-888-910-8411

Who Should Contribute to a 401(K)?

/in , /by

Wondering “Is a 401(k) right for me”? The simple answer is that it’s a great retirement option for almost everyone, including those in need of debt relief or credit repair.

For some of us, retirement seems a very long way off. But with people living longer and Social Security’s future in question, you may need to save more than you realize. And the earlier you start investing, the more time your investments have to grow.

A 401(k) plan is one of the most popular ways to save for retirement. You should consider contributing to one even if you’re looking at debt relief options or need to pay off credit cards.

Sponsored by your employer, a 401(k) lets you invest a percentage of your paycheck (you decide how much, currently up to $18,500/year if you’re under 50). The money you invest isn’t subject to income tax right away, so every dollar you contribute lowers your tax bill that year. Think of your contributions as saving and investing some of your income that would otherwise be earmarked for taxes.

Any earnings you make on the money held in a 401(k) grows tax-deferred. This means those earnings are not taxed until you withdraw them. Meanwhile, tax-deferred growth gives you the opportunity to build substantial retirement funds over the long term (depending upon how your investments perform).

When you actually withdraw money in retirement, that is when you will pay the income tax. The hope is that you’ll be in a lower tax bracket then because you won’t be earning as much.

Should you need the money before retirement age, you can withdraw it but will need to pay the income taxes that year plus a penalty.

Your employer will offer an array of stocks, bonds, and other investment options in the 401(k) plan. Then you choose how to invest, based on your financial goals and future plans. As your goals and plans change, you can change your investment choices.

If your employer offers a 401(k) contribution match, you should (at the minimum) contribute enough to take advantage of the full match. It’s “free money” you are being offered as part of your overall benefits package. As an example, your company might match 50 cents per every dollar you contribute up to 6% of your total salary. So if you invest 6% of your salary, your employer would match 3%, meaning you’d end up with 9% of your salary in your account but only need to contribute 6%. The company may have a rule that, if you don’t stay with them for a determined number of years, you will forfeit some of the matching dollars.

Many 401(k) plans offer the ability to borrow against your vested balance. The interest you’re paying will go to your retirement account, instead of to a bank or other lender.

Remember, you’re never too young to get started saving for retirement and a 401(k) is one great vehicle to do it.

For more information about 401(k) plans, you can visit https://www.irs.gov/retirement-plans/401k-plans.

5 Factors That Impact Your FICO Credit Score

Borrowing Options

/in /by

Because every credit card and loan option has its pros and cons, it is important to understand which options work best for you. Frequently, loan applications are organized in such a way that all you have to do is fill in the blanks associated with the different loan options. Perhaps the reason for this is the commonality of purpose and the multitude of people applying for credit cards or specific types of loans such as home mortgages and auto loans.

Credit Cards

Credit cards are convenient for purchasing items of necessity. And, when respected and used properly, credit cards make life so much easier. Nevertheless, if you abuse the use of a credit card, it can lead to a debt snowball and cause years of financial hardship and angst – possibly even credit counseling services or bankruptcy.

When selecting a credit card, there are many different options available. However, the two most important components of any credit card are its annual fees and interest rate. Credit card issuers determine the following:

  • The annual percentage rate (APR)
  • The grace period until a payment is considered late
  • The financial calculation for determining the outstanding balance
  • Annual fees and other charges
  • The minimum monthly payment

The above components are the governing factors that determine how much your credit card will actually cost you. So, let’s define them in more detail.

APR

For many people, understanding the annual percentage rate (APR) is a daunting task. The simplest explanation is this: the APR defines what your borrowing cost will be on any outstanding balance over a period of 12 months.

When you examine the APR on credit cards, you will see a few common variables; there is an “introductory” APR rate, a standard APR on your purchases, an attractive APR for balance transfers, and potentially, a higher APR for “cash advances.” A credit card interest calculator can help you determine what amount of payment to expect based on your anticipated use.

Grace Period

Credit card issuers have learned that almost everyone from time to time require a few extra days to make a payment. Establishing a grace period provides a little breathing room for credit card users so that payments can be made after the due date without penalty should life get a little challenging. Without a grace period, if payment is not made by the due date, a late charge may be assessed. Additionally, many credit cards offer the opportunity to pay in full without incurring any finance charges. Finance charges can be assessed from the “time of purchase” if only the minimum payment or less is made.

Fees

Some credit card companies don’t charge annual fees for using their cards. Many do, however, so it’s important to find out how much the annual fee is to avoid future surprises. Most credit cards impose a late fee whenever, taking into account the grace period, the user does not pay at least the minimum amount and does not pay on time. What’s more, if the credit card company has attached a maximum limit on the available credit and you exceed that limit, you may pay an extra fee. Remember, all fees are in addition to the APR.

Non-collateralized Personal Loans

In today’s economy, the ability to qualify for a personal loan (also known as a “signature loan”) is reserved for those with an excellent loan payment history and a high credit score. The reward for maintaining an unblemished credit record is being able to secure a non-collateralized personal loan.

The best advice when pursuing a non-collateralized loan is to apply only after deciding on a lender. If you apply to several lenders at once, each will run a credit check to obtain a credit score. Too many credit score requests in a short period of time can negatively affect your score – something you want to avoid if possible. Remember, your credit score is the key to your borrowing future, so try to avoid any activity that might negatively affect it.

Sometimes lenders may “take a chance” on a borrower with a tarnished credit history and low credit score. If you are given a “second chance” take the opportunity to repair your credit and demonstrate to lenders that you are a responsible borrower – even though you may not receive the best interest rate.

Mortgages and Home Equity Loans

The American dream for many people is to own their own home. But for many, qualifying for a home mortgage isn’t a simple process. Once you’re approved and you’ve closed on the mortgage and moved into your new home, your mortgage will probably represent the largest payment you’ll have to make on a monthly basis.

With this in mind, you’ll want to educate yourself about the different types of mortgage loans available and choose the one that most closely fits your financial needs.

Mortgages are usually financed over a period of 15 to 30 years. Predicting how mortgage interest rates will fluctuate from year to year is impossible. If you’re nervous about the possibility of interest rates rising to a point where you might not be able to meet your financial obligations, you should probably consider a fixed rate mortgage rather than an adjustable rate mortgage (ARM). But if increasing interest rates over a period of time will not adversely affect your budget, then you may be better served with an ARM. What’s more, with an ARM, if interest rates decrease over a period of time, you may see your monthly mortgage payment reduced.

Refinancing Your Mortgage

Assuming you’ve built equity in your home, a mortgage refinance is often considered for a variety of personal and financial reasons. For most homeowners, the primary objective of refinancing one’s mortgage is generally to improve upon one of the mortgage’s key components; either significantly lowering the interest rate, changing from a variable (ARM) to a fixed interest rate, or changing the length (term) of your mortgage. Many times, a homeowner is simply looking to reduce their monthly mortgage payment with the hope of applying the extra disposal income towards debt consolidation, other financial obligations or their savings.

The above refinancing options reflect sound financial reasoning and accomplish goals that can put you in a better long-term position as a homeowner. However, if you are refinancing to access some or all of your equity (“cashing-out” is the industry’s term), exercise caution so you don’t risk losing the money in speculative investments or frivolous expenditures. If the real estate market turns against you and you have no equity remaining in your home, your property will be considered “underwater” which means your home no longer offers you any value.

Auto Loans

Most people don’t write a check when purchasing a car, they finance the transaction with a car loan. This is where you have several options. You can arrange financing through your own bank or credit union, or have the auto dealer arrange the financing for you.

If you choose to have the dealer work out the financing, you should make certain that you’re aware of the financing costs. Sometimes people are so enthusiastic about getting a new car they completely forget their financial obligations.

Car dealers have access to financing that may be more favorable than what you’re able to secure on your own. There are “0% financing” deals, but these offers may be restricted to those buying a specific model car or may only be for individuals with exceptionally high credit scores.

If you don’t qualify for this kind of an arrangement, your interest rate might be higher, and you may be faced with certain fees if you’re late with a payment.

For more information when it comes to personal loan options or debt relief programs, call 1-888-910-8411 today for a free, no obligation assessment with one of our experienced consultants.

Managing the Cost of Living in Retirement

/in , /by

Given our current economic conditions, inflation and cost of living increases don’t appear to be much of a threat. In fact, today we’re witnessing deflation in the price of oil and other commodities. However, history tells us that it’s unlikely inflation is dead, and when planning for retirement, ignoring the effects of inflation or other cost-ofliving expenses can be disastrous.

While Social Security and most government pensions are generally tied to some type of inflation-related cost-ofliving adjustment, many other investments are not. So proactively managing your various retirement income sources makes good sense.

Consider Investment Alternatives

Early on during your retirement planning, a significant portion of your portfolio was probably invested in stocks, which most likely earned returns in excess of inflation over time. While it may be tempting to move away from equities following market losses, doing so could impact your ability to stay ahead of inflation. Nonetheless, it’s wise to diversify your investments among various asset classes based upon your risk tolerance, income needs, and age.

Make Sound Pension Decisions

If you’re covered by a pension plan, you might be entitled to choose whether to receive monthly payments during your lifetime, or a lump-sum-payment. Either option has merit based upon your personal financial needs.

Most private pension plans don’t offer cost of living increases. So, if you choose to receive monthly payouts, your monthly payments will lose value in real terms due to inflation. Conversely, most public pensions do have a costof-living feature, although there is no guarantee that future increases will keep pace with inflation.

If available, taking a lump-sum distribution and rolling it over into an IRA can be a good strategy – although any investment carries financial risks. This approach also assumes that you’re comfortable managing and investing this money, or that you have a financial advisor that can help you.

Collecting Social Security

You’re eligible to begin collecting Social Security benefits at age 62 – although taking benefits at that age will reduce your monthly payments. By waiting until your full retirement age, your monthly benefit will be 33% higher. Wait until age 70, and your monthly payment will grow an additional 35%. The increases are also prorated from year to year so if you began collecting benefits at age 64, your benefit would be higher than at age 62. Additionally, waiting longer to collect will also increase your cost of living.

Manage Fixed Expenses

Try to enter retirement with as good a debt to income ratio as possible. If you aren’t using a significant portion of your income to pay a mortgage, car payment or credit card debts, you’ll have more flexibility when dealing with cost-of-living increases and inflation. If you’re someone who could use some debt relief, it’s a smart idea to consider debt relief programs and figure out how to get out of debt before you retire.

Health-Care Costs

Although Medicare is available when you turn age 65, it doesn’t cover all healthcare related costs, and the cost of healthcare during retirement is often cited as an expenditure that becomes increasingly difficult to manage over time. In fact, in recent years’ healthcare costs have increased at a rate greater than the rate of inflation. Consider researching supplemental policies and prescription coverage to help with non-covered expenditures.

Minimize Withdrawals

To help counter inflation, you would conceivably need to withdraw larger and larger amounts from your retirement account just to maintain the same purchasing power. Overall, try to keep withdrawals to a minimum. Conventional wisdom in the financial planning world says that 4% can generally be withdrawn each year—but that is only a rule of thumb. In truth, you will need to manage and potentially adjust your annual withdrawals based upon factors such as inflation and investment returns.

The Bottom Line

As the cost-of-living inches up during retirement – and chances are it will – you may need to look for ways to reduce your living expenses. In the end, properly managing your investments and spending will go a long way towards ensuring a financially secure retirement.And if you think you could benefit from credit card help or a debt relief program, including debt settlement, you can contact one of our Consultants at 1-888-910-8411 . We can provide you with a solution that is custom designed for you.

Fixed Vs. Variable Rate Loans

/in , /by

Calculating your loan payments & Secured vs Unsecured Loans

When it comes to interest rates, they are either fixed or variable. Both have their advantages and disadvantages. Typically, installment loans use a fixed interest rate because the repayment amount and schedule are fixed. However, revolving loans more often than not are accompanied by a variable interest rate.

Let’s review an example of a fixed rate loan:

  • Installment loan amount: $25,000
  • Fixed interest rate: 6%
  • Length of loan: 5 years/60 months
  • Monthly payment: $483.32

The best part of the above example is that it is clearly stated. You can determine whether the monthly payment fits your budget. If the payment exceeds your budget, you can possibly adjust the equation by lowering the amount you borrow or lengthening the time of repayment. A loan payoff calculator is a great tool in determining your monthly payment.

If you were to use the same example above but changed the interest rate on a monthly basis, either increasing or decreasing it (a variable rate), you could end up paying less – or unfortunately, paying more. Depending on your comfort zone, one might be more appealing than the other. Those borrowers who are “risk averse” want to know that their payments are “fixed” and that regardless of what happens in the speculative interest rate market, the monthly payment won’t change for the life of their loan.

Examining the various options with your lender may help you to better visualize the loan program that is best for you. After all, being a responsible borrower will only benefit you for many years to come.

Lenders Like Secure Loans

Lending has an element of risk. So, whenever loans can be made and collateralized with an asset, lenders feel more secure. However, many loans are unsecured. For example, when you charge something on a credit card, there is an absence of collateral that a lender can put a lien on should you default. The better your debt to income ratio, the more favorable interest rate you’re likely to get.

Secured Versus Unsecured Loans

Whenever banks or lenders approve a loan, lending institutions like to have as much security as possible. They want to know that if a loan is not repaid they have a “Plan B” to fall back on. Collateral security is achieved by attaching a loan obligation to an asset so that in the event a loan defaults, the lending institution can seek repayment by liquidating the collateralized asset. Both installment loans and revolving loans can be secured should the lender make this a requirement.

An automobile loan and a home mortgage are perfect examples of secured loans. Failure to repay the auto loan means that Plan B takes effect in the form of a repossession.

Default on your mortgage payment, and a foreclosure on your home may ensue. Responsible borrowers use every means at their disposal to make certain that a default never occurs.

And the fact that lenders frequently charge higher interest rates on unsecured versus secure loans is no accident because their measure of risk is increased when there is no possibility of relying on Plan B.

For more information when it comes to personal loans, call 1-888-910-8411 today for a free, no obligation assessment with one of our experienced Consultants.

Financial Institutions – Friends or Foe

/0 Comments/in , /by

Regardless of our age, we’ve heard, read, or even seen movies about The Great Depression, which began in 1929 and continued until the late 1930’s. And although The Great Depression had its origins in the United States, it was global in nature—causing a severe worldwide economic downturn. Unemployment, for example, rose above 30% in some countries.

When the Great Depression began, people with investments in the stock market lost nearly everything, sending some into bankruptcy. By 1933, bank depositors saw $140 billion disappear due to bank failures. Not until the FDIC (Federal Deposit Insurance Corporation) was created in 1933, which guaranteed the safety of a depositor’s accounts in member banks for up to $250,0000, did the average consumer have any assurance (or in this case, insurance) that money deposited in a bank would be there when they wanted to withdraw it for personal use.

Following the Great Depression, an entire generation of people had little or no faith in banks. There was a growing skepticism that banks didn’t exist for the average person and that they operated under the notion that the consumer was there to serve them – not to fund them. And unfortunately, there’s certainly some truth to this.

Many years have passed since the Great Depression and new laws like the Fair Debt Collection Practices Act have helped to protect consumers—on both the lending and borrowing side. Despite this, banks and other publicly owned financial institutions are (still) in the business of maximizing profits because they have a responsibility to their shareholders to do so.

Finance companies are (really) not your friend

The financial industry (e.g., banks, credit card companies, and finance companies) are institutions that you need to have faith in. Most of us need a loan every now and again to purchase a car, home, or consolidate debt. We need a credit card for unplanned necessities. But be aware that these institutions only want your hard-earned cash and are willing to spend an incredible amount of time, effort, and money developing ways to separate you from it. If you are not careful, you’ll soon find yourself looking for debt relief options. It’s no wonder that the average indebted household carries over $15,000 in credit card debt.

The marketing strategies employed by many financial institutions push all of the emotional consumer buttons when selling their “products.” You’ve heard or seen it before. The pitch is usually: “you owe it to yourself, take your family on that long-deserved vacation, “zero percent interest, or no interest for 12 months.” How about the catchy slogans: “what’s in your wallet,” “it pays to Discover,” or “don’t leave home without it”? Essentially, these institutions want you to feel good about borrowing and using their money because it leads to paying interest and fees—which is how they make their money.

Sadly, many consumers continue to borrow more than they probably should and eventually need credit counseling and repair, credit card help or even debt settlement services. Before they realize it, their wallets are being drained by overdraft protection, late payment fees and even increases in their interest rate. People who make the mistake of doing business with a pay day loan, cash advance, or title loan operation, could end up paying as much as 300% in interest! Talk about the need for a debt relief program.

One of our Founding Fathers, Thomas Jefferson, had something to say about the banking institution:

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

That warning is just as appropriate today as it was over 200 years ago.

Here are two words that every borrowing consumer should always live by:

Caveat Emptor, which means “buyer beware.”

If some of these practices have left you wondering how to get out of debt, you can contact one of our Consultants at 1-888-910-8411.