Interest Rates in Borrowing

When you’re borrowing money, the interest rate is the price a lender charges for your use of their money.

The interest rate a lender charge is based on several factors, such as:

1. What is the prime interest rate is
2. The borrower’s credit rating
3. The loan type
4. The lender’s perception of the risk they’re taking

Let’s break these factors down a bit.

1. The Prime Rate

Lenders set their interest rates based on what’s called the Federal Funds Rate. The Federal Reserve sets this rate. This is the rate that banks charge when they lend to other banks.

The prime interest rate or prime rate is the typical interest rate banks charge to the best (least risky) borrowers. In most cases, these are corporate borrowers, and few individuals will qualify. The prime rate is usually around three percent above the fed funds rate. Each bank sets its own rate. The quoted “prime rate” is an average of the prime rates that major banks charge at a given time. As of January 2023, the prime rate is 7.5%.

The prime rate is used as a basis for calculating other types of interest rates, which are often expressed as the prime rate plus a fixed percentage. For example, a variable interest rate may be the prime rate plus 5% or 5% above the prime rate during any given period.

2. The Borrower’s Qualifications

Lenders and credit card issuers base their interests on the perceived risk posed by a borrower. The riskier the transaction, the higher the interest rate will be.

Your credit score is the main tool that borrowers use to evaluate risk, and it has a direct impact on the interest rate you’ll pay. This is true whether you use mortgages, loans, credit cards, or other types of credit. The better your credit score, the better chance you have of paying lower interest rates on the money you borrow.

For example, “subprime” borrowers (credit scores from 501 to 600) paid an average interest rate of 12.93% on car loans in Jan. 2023. Borrowers with “super prime prime” credit scores (781 to 850) paid an average of 3.84%.

Lenders will also consider other factors in their risk assessment, including your education, income, employment history, and debt-to-income ratio.

3. The Loan Type

Lenders charge different interest rates for different types of loans. Secured loans, like a mortgage or car loan, often carry lower rates than unsecured loans, like personal loans or credit cards. That’s because the lender can seize the collateral that secures the loan if you don’t pay. If your loan is unsecured, the lender has fewer options.

Different loans also carry different levels of risk. Most borrowers will prioritize mortgage or car payments over credit card payments, and unsecured loans that can be discharged in bankruptcy carry more risk than secured loans.

For example, the average mortgage interest rate for a 60-month car loan in Jan. 2023 was 4.07%. The average interest rate on a new credit card was 19.07%.

Mortgage Interest Rates

Mortgage interest is a bit different from most other interest rates. A mortgage is one of the only loans that an ordinary borrower with good credit can get at below the prime rate. On Jan. 12, 2023, the prime rate is 7.25% and the average 30 year fixed mortgage rate is 6.25%.

This variance occurs for two reasons:

• Mortgages are long term loans, generally 30 years.
• Mortgages are usually sold in a secondary market, where they compete with bonds for investment buyers.

Because of these factors, mortgage rates tend to be based on bond rates and overall market conditions rather than the short-term prime rate.

Fixed and Variable Interest Rates

Loan companies offer two types of interest rates on loans: fixed rates and variable rates. A fixed interest rate on loan guarantees that you’ll be charged the same interest rate throughout the life of the loan.

If you take on a loan with a variable interest rate, the percentage of interest you’re paying on the loan can (and probably will) fluctuate over time. The interest will usually be the prime rate plus a defined “spread” above that rate.

Many variable interest rate loans offer initial interest rates that you will pay for a fixed period. This rate is usually below the prevailing rate for fixed-rate loans. However, variable rate loans don’t come with the security that fixed rate loans do. When you sign up for a variable rate loan, you’re taking a gamble that the initial lower rate will result in a lifetime of less interest paid. If interest rates go up, the variable interest rate on your loan could go up as well.

Only you can decide if this is a gamble worth taking. Consider the term of the loan: the longer the loan term, the greater the potential for interest rate fluctuations. Also, consider the terms of the variable rate. Most variable rate loans specify the frequency with which your rate can increase, a maximum amount that it can increase at one time, and a maximum rate. All of these factors affect your choice.

Annual Percentage Rates (APR)

When you borrow money or establish a revolving credit line, you may see two figures cited: the interest rate and the Annual Percentage Rate or APR. The APR will be a larger number.

The APR represents the total cost of the credit you are taking on, including the interest and any fees or other costs. If the loan has no costs other than interest, the interest rate and APR will be the same.

You might find two lenders both offering a 5% interest rate on a loan. However, the APR (which must be disclosed on loan papers) for the two loans might be different due to fees and other costs involved with the loan.

It’s important to look at the APR before you sign any loan papers. The APR can give you a more accurate picture of the total cost of the credit you’re applying for.

Interest Rates in Saving and Investing

When you’re saving or investing your money, the interest rate is the money that the bank, bond issuer, or account provider pays you for the use of your money.

If you use someone else’s money, you pay for the use of that money. When someone else uses your money, they pay you for the right to use it.

Interest on Bank Accounts

This occurs when you keep money in a savings account, money market account, certificate of deposit, or other interest-bearing accounts. That money doesn’t just sit in a vault: the bank uses it. They lend it to other people and pay you a portion of their earnings as interest.

Banks charge a higher interest rate for money they lend than the interest rates they pay to deposit account holders. The difference in the two interest rates, called the “spread”, is where the bank earns its profits.

Bond Interest

When you invest in bonds, you are lending money to the bond issuer. The bond issuer pays you interest on the money it has borrowed. Like loan interest rates, bond interest rates are higher when the borrower is perceived as a high risk.

The same distinction applies to corporate bonds. Rating services evaluate a company’s creditworthiness and assign the company a rating from AAA down to D. That rating is essentially the company’s credit score: highly rated bonds pay lower interest than low-rated “junk” bonds.

Bonds usually pay higher interest than bank accounts because you are lending the money yourself and the interest on the loan goes only to you. When a bank lends the money you have on the deposit, you share the interest paid by the borrower, and the bank generally gets a bigger cut.

Remember that stock market investments and many other investments do not pay interest at all. Actual or expected gains that come from appreciation in asset value are not interest and should not be treated as interest.

Annual Percentage Yield

The term APY (Annual Percentage Yield, sometimes called AER or Annual Effective Rate) is essentially the same concept as APR, except applied to savings and investments. The APY describes the actual yield of an investment or interest-bearing account after any fees are deducted. Just as the APR is usually higher than the cited interest rate, the APY is typically lower than the cited interest rate.

It’s important to ask for or look at a contract’s APY before committing to an investment.

Simple Interest

Most installment loans charge what is called simple interest. Your interest payment for a given month is simply calculated from your current loan balance.

The interest rate on a fixed loan stays the same. The balance that the rate is applied to will change as you pay the loan off. Each time you make a payment, your loan balance goes down. Your interest payment each month is calculated on the basis of your current balance, so your monthly interest payment will go down as your balance gets smaller. This process is called amortization.

For Example: If you take out a car loan for $15,000 at a simple 4% interest rate for a two-year loan period, your payment will remain at $651.37 over the life of the loan.

Let’s calculate.

You can (roughly) calculate your interest for that first year by doing some simple math.

$15,000 x .04 / 12 =  $50 in interest per month

It’s important to note that you will only pay $50 of interest the first month you have the loan. That interest amount will go down each month because your loan balance will go down each month.

Here’s an amortization schedule on the fictitious two-year loan that can show you what I mean.

Notice that as payments are made each month, the amount of money going toward reducing the actual (principal) balance of the loan increases. Conversely, the amount of interest you pay decreases.

So, for the two-year term auto loan example above, you can figure out the first month’s interest by calculating $15,000 x .04 ($600) / 365 (roughly $1.64) x 31 = $50.96. 

If it were a 30-day month, the interest you pay during that first month would only be $49.32. And if you made your payments with less or more time between payments, the amount of interest you paid each month would vary as well.

Using calculations like these on simple interest loans or compounding interest investments helps you better determine what you’re actually paying (or earning). You can use our simple interest calculator to help you determine what interest on a given loan or deposit will be.

Compound Interest

Compound interest is interest paid on interest. When an account carries compound interest, the interest amount is added to the balance, and subsequent interest payments are calculated on both the balance and the cumulative interest added.

The interest is added to the balance at regular intervals. Compounding intervals may be daily, weekly, monthly, quarterly, annually, or any other interval fixed by the lender.

To calculate compound interest, you need to know three things:

1. The principal amount.
2. The interest rate.
3. The compounding interval.

The higher the rate and the shorter the compounding interval, the faster the interest will accumulate.

Compound interest can work for you if it’s being paid to you, and it can work against you if you’re paying it.

Earning Compound Interest

Most interest-bearing accounts carry compound interest. That means that you will earn interest on your interest payments as well as the balance. Let’s see how that can work.

Let’s say you have $10,000 in a fixed investment account earning a 5% return, compounded annually.

At the end of year one, you’ll have an account balance of $10,500. For year two, you’ll now earn 5% on $10,500 instead of simply your initial $10,000. This annual increase in the balance in which you earn interest can help your investment grow over time. 

Here’s what I mean. 

If you were to not earn compound interest on your $10,000 investment and simply earn your 5% for the next twenty years, you’d have doubled your money by the end of that time. 

You’d have $20,000 after 20 years. 

However, if you factor in compound interest the amount of money you’d have at the end of 20 years changes dramatically. Let’s run those numbers through the FinMasters compound interest calculator and see what we get.

As you can see, compound interest gains you an additional $6,532.98.

Now let’s look at what happens if the interest is compounded daily.

The change in compounding interval earns you almost $650 extra.

The higher the rate and the more frequent the compounding interval, the faster compound interest will accumulate…

Paying Compound Interest, or Why Credit Card Debt is So Dangerous

Compound interest can work for you if you’re earning it, but it can work against you if you’re paying it. This happens most frequently with credit card debt. Credit card debt presents unique risks, which come from the collision of four factors.

• Low minimum payments. Many cards allow you to keep your account in good standing with a relatively accessible minimum monthly payment.
• Revolving credit. Credit cards allow you to keep spending. You can add to your balance faster than you pay it off, and many users do.
• High interest rates. The average US card rate is 14.65%, and if your credit isn’t great you may be paying well over 20%
• Compound interest. Credit cards carry compound interest and the interest is usually compounded daily.

What does that mean in practice?

Summary

Knowing at least a little bit about the different types of interest rates is important. This is true both for investors and borrowers. At the bare minimum, you should understand the following terms:

• Prime interest rate – The rate offered to the best (least risky) borrowers.
• Compound interest – Interest that incorporates previous interest payments into the calculations.
• Simple interest – Interest that is wholly based on the original sum invested or loaned.
• Annual percentage rate – The interest rate on a loan when fees are included.
• Annual percentage yield – The interest rate on a savings account or other investment after accounting for fees.
• Fixed interest – An interest rate that stays the same for the duration of a loan.
• Variable interest – An interest rate that can (and probably will) fluctuate during the time it takes to pay off a loan.

Knowing these different types of interest rates will make financial planning easier, whether you’re taking on debt, paying off debt, saving, or investing.

The post Types Of Interest Rates in Borrowing, Saving & Investing appeared first on FinMasters.

You cannot be sentenced to prison for debt: the US abolished debtors prisons in 1833. The fear of incarceration for unpaid debts persists because legal loopholes have led to people facing jail time over unpaid debts.

In this article, we will examine the surprising ways this can happen and offer guidance on how to avoid such extreme consequences.

Today, you cannot be sent to prison for a consumer debt (tax debt, alimony, and child support are another story). Despite this, some people are still finding themselves facing – and even serving – jail time for unpaid debts.

How is this possible?  Let’s take a closer look at how it happens and how you can avoid it.

Back Door Tactics To Jail Consumers For Unpaid Debts

In today’s world, you cannot go to prison for failure to pay a civil debt, such as a credit card, medical bill, or payday loan.

So how do debtors still end up in jail?

Bench Warrants And Contempt Of Court Rulings

You won’t go to jail for not paying a debt. You can be jailed for disobeying a court order or even for failure to appear in some cases. Today’s debt collectors use that opening to threaten and even impose jail time through bench warrants and contempt of court rulings. 

Bench Warrant: A warrant issued by a judge or court ordering the arrest of a person who has failed to appear in court as directed

Contempt of Court: A court order which, in the context of a trial or hearing, declares a person to have disobeyed or been disrespectful of the court’s authority.

These devices are increasingly used by debt collectors, often with the cooperation of judges, to threaten and even jail debtors.

How Debt Collectors Use Bench Warrants And Contempt Of Court Rulings To Collect Debts

Debt collectors can’t ask a court to jail a person specifically for an unpaid civil debt. They can and do use bench warrants and contempt of court orders to have borrowers arrested. Here’s how it works. 

1. A debt collection agency files a lawsuit against you seeking repayment of an unpaid debt.
2. If you fail to appear in court to defend yourself, a summary judgment may be issued against you. A judgment may be issued with no regard for the facts of the case. The collector won’t even have to prove that you owe the debt.
3. If a summary judgment is issued, you may be summoned to face post-judgment court proceedings. If you fail to appear, you may face a bench warrant or a contempt judgment.

Contempt of court is a jailable charge in many states. A judge could issue a warrant for your arrest for violating your order to appear in court. 

The problem with this process is that many debt collectors don’t even have to prove that a debtor actually owes the debt when they file suit, nor do they need to have current contact information for debtors.

Many debtors never receive a summons, either because address information is inaccurate or because the debt collectors resort to “sewer service”: deliberately failing to deliver a summons.

Some collectors schedule repeated hearings during working hours, hoping that a debtor will fail to appear.

Debt collectors file court cases over thousands of unpaid debts every year. Many of them are relatively small: never assume that a creditor won’t sue you because your debt isn’t big enough. Increasing numbers of collection cases are filed over medical debts, including debts for ambulance services[1]. Judges may set bail at the debt amount and turn the bail money over to the collector.

How To Avoid Going To Jail For Unpaid Debts

There are steps you can take to avoid going to jail for your unpaid debts.

1. Keep Track Of What You Owe And To Whom

Keeping track of what you owe and to whom you owe it is important if you want to avoid going to jail for debt. The easiest way to do this is to get your free copy of your credit report each year. 

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When you visit www.AnnualCreditReport.com they’ll give you one free copy of your credit report from each of the three major credit reporting bureaus: TransUnion, Experian, and Equifax. 

Pull your annual free credit report copies and assess them thoroughly for any unpaid or collection reports. If you find a collection report or unpaid bill, work with the collection agency or the lender to resolve the debt as soon as possible. Be sure to learn how to read a credit report, and keep an eye out for errors.

Try to work out a payment arrangement or a debt settlement if the debt is legitimate. Do your best not to avoid the debt and tempt the collection agency to file a lawsuit. 

2. Work To Keep On Top Of Current Debt Payments

If you have current debts, work hard to keep payments on those debts up to date. Do everything in your power to avoid getting behind on debt payments. 

If for some reason you can’t make a payment, call the lender immediately and explain the situation. Work out an agreement to help you get back on track. Get the agreement terms in writing for your protection. 

If you find you’re having trouble keeping up with your bills you may want to explore possible debt relief options for help. If you owe medical debts, be aware of the special rules surrounding medical debt and your options for getting help with medical debts.

3. Respond Quickly To Any Court Notices

If you do get an order to appear in court over a debt be sure to respond to the summons and attend the hearing. Although attending a court hearing can be intimidating, it will give you a chance to tell your side of the story and explain your position. 

Knowing your side of the story will give the presiding judge more information. If the judge doesn’t know your side of the story, they’ve only got the debt collector’s side of the story with which to make a decision.

As many as 70% of debt collection cases end in default judgments, mainly because defendants fail to appear^[2]. Many collection agencies assume that you won’t appear and may not be prepared to actually prosecute a case. Simply showing up and demanding documentation of your debt can be enough to get a case dismissed if the collector doesn’t have the appropriate documents ready.

By attending any court hearings you get a chance to defend yourself. You can show the judge that there is another side to the story the debt collection representative will share.

4. Get Legal Representation If You Can

If you are defending yourself against a lawsuit it’s important to get legal representation if you can. A good lawyer will know whether the lawsuit filed against you is legit, and what you can do about it. 

Know that while legal representation can be costly, there are ways to get affordable legal assistance. Reach out to an affordable attorney for advice and representation if possible. 

Having someone on your side who knows the law can make the court process much more bearable and dramatically increases your chances of a positive outcome^[3]. 

Don’t Let it Happen to You

All over the country, ordinary Americans are finding out that warrants have been issued for their arrest over debt-related cases, sometimes for cases they never knew existed. The people most likely to fall victim to these practices are often those least able to defend themselves.

This trend is an issue that requires attention on both the national and state levels. On an individual level, though, we can protect ourselves by responding proactively to any debt-related situation. Pay if you can, negotiate if you can’t. Try to deal with original creditors and avoid having accounts sent to collection agencies. If an account is in collections, try to negotiate a payment plan or settlement. If you are sued, respond at once, appear when ordered to do so, and do your best to find free or low-cost legal help. Making yourself a difficult target – and merely showing up with a lawyer may be enough to achieve that – may persuade a collector to go after someone else instead.

The best way to handle a debt lawsuit is to prevent it. If you can’t prevent it, don’t ignore it. That’s the surest route to a default judgment and potentially a warrant. It’s a hard thing to face, but defending yourself is still the best option!

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It Takes Effort

The first thing you need to know about overcoming the fear of investing is that it takes effort. If you’re risk-averse when it comes to investing, that risk aversion probably developed from some very real experiences. 

Those experiences may be financially related. Maybe you or someone you know lost big time in the stock market or in a business investment. Maybe you watched your parents struggle with money and you don’t want that to happen to you. 

So you hoard like a squirrel preparing for winter, stuffing your money in a coffee can or in a low interest paying savings account. 

Maybe your aversion to risk came from non-financially related experiences. Maybe you’ve suffered some traumas in life (like I have) and risk as a whole just doesn’t sit well with you.

Or maybe it’s multiple reasons working together.

Whatever the reasons, we’re going to talk about how you can overcome the fear of investing and start building a solid financial foundation.  

Here are some steps you can take that can help you as you learn how to overcome the fear of investing. 

1. Educate Yourself

You may be hesitant to invest because you don’t know a lot about investing. This is why it’s important to educate yourself on the risks and benefits of investing. There are several good investing books out there that are geared toward beginner investors.

One is The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham. This book shares wisdom on developing long-term investment strategies that can help shield you from substantial investing errors.

Another good book is The Little Book of Common Sense Investing by John C. Bogle, founder of Vanguard. This book focuses on growing wealth via low-cost index funds, one of my personal favorite investments.

There are a host of other books for beginner investors. The more you learn about investing as a whole, the less scary it will become.

One warning: try to stick to educational materials and avoid hype!

2. Test Your Risk Tolerance Level

Another way to help overcome your fear of investing is to test and know your risk tolerance level. Risk tolerance quizzes can help you determine what your real level of risk tolerance is.

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You can use that information to better gauge where you should be investing your money.

When I took this risk tolerance quiz from the University of Missouri, I scored a 21. The assessment was that I have a below average tolerance of risk. Knowing this about myself, I chose to make investments that fit my risk tolerance level when I took the next step.

We developed our own risk profile test that takes into consideration not only your risk tolerance but also your risk capacity. If you’re not sure why that’s important read our guide on how to calculate your risk profile before taking the test.

3. Find Investments That Align With Your Risk Level

It’s clear that although I am not completely risk averse, I am mostly risk averse. When you take a risk tolerance quiz you can use that information to your advantage.

Once you determine what your risk tolerance level is, you can go about finding investments that align with that risk tolerance level. For example, those with the lowest level of risk tolerance might choose to put most of their money in a money market account, high-yield savings account, or government bonds. 

If you’re like me and have a below average risk tolerance level you might choose to invest your money in index funds and blue chip stocks, once you’ve learned a bit about the different investment choices. 

Understanding your risk tolerance level can guide you toward investments that don’t give you reasons to be afraid.

4. Try a Stock Simulator

Many brokers offer paper trading tools and stock simulators that let you manage a mock portfolio with no actual money involved. While your real money grows in low risk investments, try out a few riskier portfolios on a simulator.

Going through the motions of trading without risking any money won’t earn you anything, but you’ll learn a lot about the mechanics of trading and stock movements. Familiarity is a great way to overcome fear.

If you lose money, it doesn’t matter: it’s not real money. Choose different investments and try again until you’re comfortable enough to try the real thing.

5. Consider Making Some Risky Investments

Another step toward overcoming the fear of investing is to consider making some risky investments. I know that may sound counterintuitive. But remember that “the journey of a thousand miles begins with the first step.”

When assessing the risk of investments you’re considering, remember that the market does fluctuate and that rising and falling values of many investments is normal. 

As you become more comfortable with that fact, you won’t panic as much if you see your mutual fund balance fluctuating. In addition, you’ll better be able to curb any temptation to panic sell if the market takes a dive.

If you choose to put some money into investments that are riskier than your usual comfort zone, remember to do three things first:

1. Do some research to determine which types of higher-risk investments you’re most comfortable with.
2. Determine the amount of money you can handle losing if the investment goes sour (“none” is not an acceptable answer).
3. Don’t panic and sell off. Hold it and see what happens.

With apps such as Betterment and Fidelity, you can buy stock and mutual fund shares in fractional amounts, often for as little as $5. That means you can tailor your “risky” investing to any budget. 

6. Know How Much Money You’re Comfortable Losing

When you know the answer to that question you can better make investing decisions. And when you’re determining that answer, try and think “big picture.”

How much money do you waste on gaming, or drive-thru runs or lattes each month or year? $500? $1,000? $2,000? When you spend that money, it’s gone. 

If you invested that same sum of money, especially in an investment that’s considered low-risk, you have the chance to get it back with a profit. Thinking in different perspectives might just help you convince yourself that some investments are indeed worth the risk.

If you can “lose” $1,000 a year on coffees, which is a sure bet, maybe you can stomach taking a 50/50 risk by putting $1,000 into a low-cost index fund.

7. Train Your Mind To Look At Fluctuating Markets As Opportunities

This is a tip that has helped me tremendously when it comes to my fear of investing.

Smart investors look at market dives as an opportunity: an opportunity to buy at a lower price than was previously available. 

Of course, making the right choices when buying low takes some education. However, making those educated choices can result in a great return on your investment. 

Back during the Great Depression real estate was selling for as low as ten cents on the dollar. Those with ample savings used the opportunity to their advantage by purchasing from home and landowners who were eager to sell, and they built great wealth in the process.

8. Run The Long-Term Numbers

Another way to calm your fear of investing could be to simply run the long-term numbers. Show yourself what investment gains can do to your net worth. 

And while the cynic in you may be thinking “Well, I’d hate to lose $240,000,” just remember: The lower risk investment you choose, the less your risk of losing money. Lower risk investments also typically have lower rates of return.

9. Invest In Hard Assets

I find that hard assets are a more comfortable way to invest, and you might find the same. Hard assets are investments like gold, land, cattle, or real estate.

While the value of hard assets fluctuate, no one can take them away from you if you’ve purchased them outright.

I’ve chosen to invest in real estate and land as a part of my investment portfolio. I can see it. I can touch it. I can walk my land and visit my property. And it’s given me a decent net worth increase over the last two years. 

If investing in hard assets feels more palatable to you, consider educating yourself in those investment arenas and putting some money into hard assets. 

Rental properties can increase in value and deliver a solid return at the same time.

Conclusion

Fear of investing is natural. Investing is risky, and anyone who isn’t worried about losing money is likely to lose a lot.

The key is to control your fear and use it to help you, rather than letting it control you. If you can turn your fear into sensible skepticism, it can help to protect you against highly risky investments driven by hype or fashion. If you’re afraid of these, that’s not a problem: you should be.

If you control and manage your fear it can help to protect you against bad investments, and you can override it when you make educated decisions that build a sensible long term investment portfolio.

There’s no denying that investing your money involves risk. And for those like me with a lower risk tolerance, that can make investing a real challenge. 

Your goal is to assess your risk tolerance, educate yourself about the different investment choices and then choose investments that are right for you. 

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Most Americans have figured out that they have some degree of control over their credit scores. If you budget carefully, pay your bills on time, and manage your finances well. It’s terrifying to think that years of hard work could be demolished by a single event that you can’t possibly prepare for, but it has happened to many people.

Let’s look at some information that provides insight into the relationship between medical bills and your credit score.

Medical Bills and Your Credit

Medical debt has unique features that affect its impact on your credit. Let’s look at a few of them.

Most Medical Providers Don’t Report to Credit Bureaus

It’s important to know that many, if not most, medical providers do not report to credit reporting agencies. They’re busy caring for patients, and their billing departments have enough to do without the added burden of compliance with the Fair Credit Reporting Act. 

That means that as long as your debt stays with the original provider, it probably won’t end up on your credit report. It will not affect your credit score.

Collection Agencies are a Different Story

If a provider cannot get you to pay a medical debt, the account will usually be sent to a collection agency. As you may suspect, collection agencies have no problem playing hardball. They will almost always report the debt to a credit reporting agency. That’s when you need to worry about having your medical bills affect your credit score. 

However, you do still have one ace in your pocket when it comes to protecting your credit from overdue medical bills. 

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Medical Debt is Not Like Other Debts

The rules on reporting medical debt changed as a result of a 2017 settlement between the three major credit reporting companies and the New York Attorney General’s office. Credit reporting agencies agreed not to list a medical debt on your credit report until it is a minimum of 180 days past due. They also remove medical debts from your credit record when they are paid, instead of waiting for seven years.

There are two primary reasons for these policy changes.

• Medical debt is often unavoidable. It typically doesn’t come from a decision to borrow or spend frivolously. It does not indicate irresponsible use of credit.
• There is often a third party involved with medical debt: insurance companies. Insurance company processing times or disputes often cause late payments.

Recent scoring models from both FICO and VantageScore also reduce the weighting that medical debt has on your credit score.

Even with those changes, medical debts in collections can harm your credit. Here’s what you can do to prevent that.

How to Keep Medical Bills from Crushing Your Credit

If you’re struggling to pay medical bills, the last thing you want to do is ignore them. That will only increase the probability of your medical bills ending up in collections and damaging your credit report. 

Try these tips for getting the bills resolved instead. 

Get Help

The first step you may want to take is to look into ways to get help paying medical bills. Double-check the bill for errors, and don’t be afraid to negotiate with the provider to reduce the debt or work out a payment plan.

Some medical providers have grant funds available or other options to help you pay your medical bills. Most are happy to give you options to get help paying your medical bills if they are available. 

Work with the Medical Provider

What if there are no options for help and you have medical bills you cannot pay? In this case it’s important to attempt to work with the medical provider. If you’re cooperating and trying to pay, the provider is much less likely to send your account to a collection agency.

Working out a plan to pay your bill can help you pay the debt off in a timely manner. 

If you are making the payments as agreed, your account will probably not go to collections or appear on your credit report.

Be Firm with Collection Agencies

Collection agencies are much more aggressive and much less understanding than healthcare providers. That’s why you should try to keep your account with the original provider. If you have medical debt in collections, there are still things you can do.

For instance, you try a settlement: ask the collection agency to accept an amount lower than the balance due as payment in full. You could add a stipulation to your deal. Ask that the collection agency not report the debt to the credit bureaus even if it takes longer than 180 days to pay. 

Keep in mind that these negotiations are usually more effective when the collection agency first contacts you. If you avoid them, tempers can flare, making negotiations less feasible.

You’ll need to be polite but insistent and firm when dealing with most collection agents. Don’t let them bully you, and know your rights. If you do work out a deal with a collection agency, be sure to get the details in writing before paying the bill. 

Make sure you can track and prove your payments. When you pay the debt off, get written confirmation from the collection agency.

What not To Do

There are two ways to pay medical debts that you should avoid using at all costs.

Don’t Use Retirement Funds

It might be tempting to withdraw retirement funds to pay your bills. That is usually a mistake.

Retirement accounts cannot be seized in a bankruptcy. Medical debts can be discharged in a bankruptcy. Your retirement accounts are an essential part of your financial future. Filing for bankruptcy is probably a better option than using your retirement assets to pay medical debts.

Remember that if you liquidate a retirement account to pay medical debt you are not only losing the money in the account, but all of the investment gains that the money could earn by the time you retire.

Don’t Use a Loan or Credit Card

Some people get a loan or use a credit card to pay off medical debt. This is generally a bad idea. Here are two important reasons why:

1. Most medical debts don’t accumulate interest. Loans do charge interest, and credit cards charge very high interest.
2. If the medical debt does end up on your credit report, it’s still better than other debts. Credit scoring models typically give medical debt a lower weight (impact) when generating credit scores.

So while it may be tempting to reduce stress caused by calls from medical providers or collection agencies by borrowing money to pay your medical bills, try to avoid it.

It’s better to make interest-free payments to a medical provider or even a collection agency than to watch interest piling up on a credit card or loan.

Don’t Panic

Medical debt can be terrifying, especially if you’ve spent years cultivating a good credit record. All of that work may seem to be going down the drain when you find yourself facing a debt that you couldn’t possibly anticipate or pay.

Don’t panic. Know the rules on medical debt. Take every opportunity to reduce your costs, and focus on working out a deal that prevents your account from going to collections. You can still escape with little or no damage!

The post Can Medical Bills Affect Your Credit Score? appeared first on FinMasters.

Using some of the strategies outlined in this article, I managed to slash over $2,000 from those bills, making a significant impact during a critical time.

Low levels of savings combined with higher deductibles, co-pays, and out-of-pocket costs mean that even Americans with insurance can easily face a financial crisis due to illness or injury. If you want to know how to get help paying your medical bills – or medical bills you might face in the future – we’ve got some solutions.  

Where To Get Help Paying Medical Bills

There are several places to look for help with your medical bills. Let’s start with government programs. 

Almost all government programs that help people with medical bills have some sort of income or other stipulation required before you can qualify. You’ll have to do some research to find the right program for you.

Government Programs That Help You Pay Medical Bills

There are several government programs that can help people pay their medical bills or qualify for reduced-price services. 

1. Medicare

Medicare is a government program that helps those getting Social Security benefits pay for their medical bills. Several groups of people may qualify for Medicare: 

• People over the age of 65
• People with medical disabilities
• Those with end-stage kidney disease

If you fit into one of these three categories, you may qualify to get payment for up to 100% of your medical bills. You can learn more about Medicare here. You will not be eligible for Medicare benefits unless you have paid Medicare taxes for at least ten years.

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2. Medicaid

Medicaid is the government’s answer to health care needs for adults who don’t qualify for Medicare. Each U.S. state has different eligibility rules.

If you qualify you could have up to 100% of your medical bills covered. Your income and several other factors will determine your eligibility for Medicaid coverage. The criteria vary from state to state, so you’ll need to check your state’s rules to see if you qualify. 

3. Children’s Health Insurance Program (CHIP)

Medicaid partners with the CHIP program to pay for the medical bills of children whose parents cannot afford insurance coverage or who are not offered medical insurance through their employer.

As with Medicaid, CHIP eligibility requirements vary by state. If you qualify, you may be eligible for free or low-cost medical care for your children. Learn more about CHIP here.  

Non-Governmental Agencies That Help With Medical Bills

Private non-profit organizations may be able to assist you with paying medical bills. It’s important to check the qualification lists and fine print on the program websites to be sure you’re eligible before applying. 

1. RIP Medical Debt

RIP Medical Debt runs a program that forgives medical debt for needy people groups such as veterans, the elderly, the poor, and even for middle-class families struggling with medical debt. 

When donors contribute to this non-profit charitable organization, RIP Medical Debt uses the funds to buy patients’ medical debt from clinics and hospitals for pennies on the dollar. The hospital or clinic then considers the debt paid in full. Instead of selling debt to a collection agency, the hospital sells it to RIP Medical Debt.

The RIP Medical Debt website states that recipients of debt forgiveness through their program have no adverse tax or other consequences. 

2. Patient Advocate Foundation (PAF)

The Patient Advocate Foundation helps patients who are fighting to pay medical bills. PAF helps people locate sources of copay assistance and financial aid to pay medical bills. The grants to help pay these bills have eligibility and availability requirements that vary frequently. See the PAF website to see if you qualify for available help. 

PAF may also be able to help you understand your bill, spot errors, and negotiate a better price from your healthcare provider.

3. PAN Foundation

The PAN Foundation was created in 2004 with the purpose of helping underinsured people with life-threatening, chronic, and rare diseases get the care they need. 

To find out if you qualify, you’ll need to fill out an online application and answer questions. If you’re accepted into the program, you’ll get financial help with your medical bills for a full year. 

The PAN Foundation offers help such as copay and coinsurance help, financial assistance for transportation to and from medical appointments, and health insurance premium assistance. 

4. HealthWell Foundation

The HealthWell Foundation assists people with chronic or life-altering medical conditions. They help patients with costs such as prescription copays, treatment costs, health insurance premium and copay costs, and more. 

The organization offers funds to both new patients and returning patients. See the foundation website in order to apply for a grant or learn more about the programs it offers. 

5. National Organization For Rare Disorders

The National Organization For Rare Disorders (NORD) provides financial assistance for life-saving or life-sustaining medical needs to help patients that cannot afford the cost themselves.

There are a variety of disease and financial criteria that must be met in order to qualify for financial assistance through NORD. Grant award levels vary for each program, and same-day approval for applicants is common.  

6. Leukemia & Lymphoma Society

The Leukemia & Lymphoma Society offers a number of financial assistance options for those suffering from leukemia and lymphoma. Financial aid options include one-time grants of $100 or more, transportation grants, copay assistance, and other types of financial aid. 

Call the organization at 1-877-557-2672 or visit their website via the link above to get more information about the types of financial aid they offer as well as the process for application. Note that some programs may have limited availability. 

7. Good Days

Good Days provides financial assistance to people suffering from a range of life-altering diseases. Some of the diseases they pay medical bills for include:

• Various cancers
• Eye conditions such as Retinal Disease and Macular Disease
• Hepatitis C
• Multiple Sclerosis

The diseases covered can change at any given time based on available funding. Read the eligibility criteria before applying online as there are income and other guidelines. 

8. RxHope

RxHope is an organization that works with pharmaceutical companies to help patients get reduced-price or free prescription drugs. The amount of assistance provided is based on the guidelines set by the pharmaceutical company for the specific drug. 

You will have to meet income guidelines to qualify for this program. The patient can start the application process, but you will need assistance from your physician, another medical worker, or your social worker in order to complete your application.  

9. NeedyMeds

NeedyMeds is a comprehensive website that shares information on a variety of organizations that can help you pay your medical bills. With NeedyMeds, you don’t fill out an application as you do with other sites. Instead, NeedyMeds helps you search for help paying your medical bills, prescription costs, and medical transportation costs. You can search the site by disease, by prescription drug name, and more.

See the NeedyMeds website for more information about specific organizations that may be able to help you pay your medical bills.  

Other Ways To Get Help Paying Medical Bills

If you’ve exhausted all other resources and still need to get help paying medical bills, consider one of these options. 

1. Verify Your Bill

Be sure to check all of your bills carefully and verify correct coding with your insurance company.

You may have been billed for a service you didn’t even receive, or a service may have been coded incorrectly when submitted to the insurance company.

2. Obtain A Patient Advocate

Patient advocates exist to help patients and/or caregivers work with medical professionals and organizations to ensure they’re getting the care they deserve. A patient advocate’s duties can include helping the patient verify that all medical bills are accurate, helping to negotiate with providers, and helping the patient or caregiver find ways to pay those medical bills.

There are free patient advocates that work on behalf of the government or for non-profit agencies such as the Patient Advocate Foundation mentioned above.

You can also hire for-profit patient advocates to help you understand your bill and negotiate with providers.

Be sure to review the advocate’s cost carefully before deciding to hire one.

3. File An Appeal Or Request An External Review

If you believe that your insurance company has treated you unfairly, you have the option to file an appeal.

An appeal letter should contain information about why you feel a claim was handled improperly and supporting documentation to prove your claims. You can file an appeal on your own or ask a patient advocate to help you.

In many states you can also request an independent external review of how your claim was handled. Your state’s Attorney General’s office can provide more information on how to request an external review.

If your state doesn’t have an external review process for handling insurance claims, you can contact the Department of Health and Human Services at the federal level.

4. Ask The Hospital Or Clinic About Financial Assistance

This is the technique I used to get a $2,000 bill from my local hospital completely forgiven. I called the billing department to ask about financial assistance. After completing the hospital’s payment assistance application, I found that I was qualified to have the bill completely covered.

According to the IRS, all non-profit hospitals must have some type of financial assistance program in place^[5]. The qualifications for that assistance can vary, but they must offer something.  

Note that many for-profit hospitals also have financial assistance programs in place, and some clinics may as well. It never hurts to ask the billing department you’re working with about financial assistance.

5. Negotiate 

Many people treat a medical bill as a fixed sum, like most other bills. That’s a mistake. Insurance companies negotiate all the time, and you can too. Check the costs of your procedures against the healthcare bluebook and ask for discounts on anything that seems out of the ordinary. Ask for the same rates insurance companies get. Don’t just accept the charges as a given.

If you can’t work the price down, try to negotiate an installment plan. Many hospitals are willing to set up terms, and as long as you make regular payments they are unlikely to sell your debt to a collection agency.

Conclusion

American medical care is extremely expensive, and even those with insurance may face costs far beyond what they are able to pay. If you’re struggling with medical bills, it never hurts to explore options like those listed above. Don’t panic when you see your bill for the first time. Help is out there, and you can find it.

The post 17 Ways to Get Help Paying Medical Bills in 2023 appeared first on FinMasters.

The Rise Of Long Term Auto Loans

According to the recent Experian State of the Auto Finance Market report^[1] (3rd quarter of 2020), over 80% of those who purchased vehicles that quarter used some type of financing. The average auto loan term among all but the Super Prime buyer category (those with the highest credit scores) increased to over 70 months. Nearly 30% of buyers took on loan terms from 73-84 months. A small percentage of borrowers (just over 1%) took on car loans with terms of 85 months or longer. 

What is driving consumers to take on auto loans that have terms of seven, eight, and nine years? The short answer is “money”. 

Why Have Long Term Auto Loans Become So Popular?

It’s a bit of a paradox, actually.

• Consumers choose longer term auto loans primarily so they can have more affordable payments.
• Lenders are happy with that because longer loan terms mean higher interest and more profit for them.
• Dealerships are happy because they can sell more expensive cars.

Which group is really coming out ahead financially in this partnership?

Long term auto loans have perceived benefits to both the auto industry and to consumers.

The auto industry sees long term auto loans as a way to encourage consumers to buy a more expensive vehicle than they might with a shorter term loan. That means more money in the pockets of car dealers and financing companies. 

Consumers see long term auto loans as a way to have a newer vehicle or a vehicle with more features than they might otherwise be able to afford. 

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Financial Implications Of Long Term Auto Loans

Long term auto loans make fancier cars seem more affordable, but that appeal comes with some drawbacks. Let’s look at some of them.

Car Values Drop Faster Than Loan Balances

Cars depreciate fast. The average automobile loses 7% of its value the moment it leaves the dealership, close to 20% of its value in the first year you own it, and 60% of its value in the first 5 years^[3].

If you take on a long term car loan, especially with no down payment or low down payment, you will almost certainly owe more than your car is worth for much of the loan’s lifetime. This is called having negative equity, being underwater, or being upside down on your car loan, and it has potentially serious consequences.

• Theft or accident can be a big problem. If your car is stolen or wrecked, your insurance will only pay the value of the car. You may have to take on additional insurance or face the possibility of having to cover the balance of the loan yourself in a worst-case scenario.
• If you want to sell your car you’ll have to add money to pay off the loan balance.
• If you trade your car in on a new one the difference between the car’s value and the loan balance will be rolled into your new loan, making the new car even more expensive.

You may never notice being underwater on your car loan, except for the cost of the extra insurance that you may choose to buy.

If your car is wrecked or stolen, or if you need to sell it, being underwater can suddenly become a serious problem.

If you are already in this situation, here are some tips and strategies for getting out of an upside down car loan.

You’re Paying More In Interest

Long term auto loans cost you more. Let’s revisit the $60,000 car loan we talked about above. 

If you took that $3,000 and invested it at an annual ROI of 5%, you’d have over $4,000 after that seven years. That’s a big difference. 

Your Auto Loan Will Outlast The Car’s Warranty

Most new cars come with a three-year “bumper to bumper warranty” covering most of the car’s systems. The engine and transmission will be covered by a longer powertrain warranty. If you take out a long-term car loan there’s a good chance that your warranty will expire long before your loan is paid. Your car may need significant repairs before the loan is paid.

That means you could end up paying both your loan payment and payments for expensive repairs at some point. That scenario could be quite taxing on your pocketbook.

You May Be Tempted to Buy More Car Than You Can Afford

Long-term car loans are a great tool for salespeople. If they see a customer ogling an expensive sports car, luxury sedan, or SUV, they can make an offer. They’ll pitch a monthly payment that can make that dream car sound much more affordable than it really is.

Any time a salesperson quotes a monthly payment instead of a total price, stop and think. Take a close look at what’s not being said. Calculate the total cost of what you’re getting into and ask yourself whether you need it and whether you can afford it. It’s fun to drive a nice car, but it’s also fun to have money in your pocket.

Our Auto Loan Calculator will help you estimate your monthly payment and the total costs of your loan.

Alternatives To Long Term Auto Loans

A long term loan is probably not your only option. Here are some suggestions to consider. 

Buy An Older Car And Pay Cash

I started paying cash for cars about five years ago and haven’t looked back. Paying cash means I have to buy older cars, but it’s worth it, at least for me. The financial nerd in me enjoys a bit of a high when I hand over a wad of cash for a car purchase and drive away free of the burden of car payments. 

It can take some extra time to find “the one” when you are shopping for quality older used cars. With the right research and the right connections, you can attract sellers who take excellent care of their cars, own them for several years and then sell and get a new one.

Imagine the money you can save each month if you don’t have a car payment. Imagine what you could do with that money: pay off credit card balances or student loan debt, build an emergency fund, save for a down payment on a home, and so much more.

Purchase A Less Expensive Car

You also have the option of purchasing a less expensive car; one that will provide you with affordable payments and a shorter term loan. Many car experts advise not taking on any loan longer than 60 months^[4]. That means choosing a car that provides affordable payments on a 60 month term.

You may not be able to get your “dream” car with this strategy, but spending less money could leave you with more financial security. You may find that an entry-level or used car is completely adequate for your needs.

Lease A Car

If you really need a car with a bit of bling (for example, if your job requires entertaining high-end clients) there’s always the option to lease. 

Leasing is often frowned upon for many reasons (it’s basically akin to renting and you can pay huge out-of-pocket costs if you go over mileage limits), but it can be a good alternative to carrying a car loan for seven or eight years, holding negative equity, and racking up huge interest payments.

Are long term auto loans worth it? The choice is yours, of course. But in the name of financial security and peace of mind, it’s wise to at least consider the alternatives and avoid long term auto loans if you can. It may be tempting to get grab your dream car at an affordable monthly payment, but it’s usually not a good idea from a financial perspective.

The post Are Long Term Auto Loans Worth It? appeared first on FinMasters.

What Is Debt Consolidation?

Any process that combines several debts into one can be considered debt consolidation. There are several common ways to do this, which we’ll discuss below.

There are two main advantages to consolidating your debts.

1. Consolidating your debt can make your financial life simpler. You may be making several payments on several debts, often on different schedules. If you’re not organized, you could easily miss a payment, which can hammer your credit and leave you paying extra fees. Consolidation makes it easier for you to organize your payment schedule by combining several debts into one payment. 

2. Consolidating your debts can save you money. If the combined debt carries a lower interest rate than the debts it replaces, you’ll pay less interest than you were paying before. You may also be able to pay off your loan faster because less interest will accumulate.

Debt consolidation is not a magic trick. You’ll still have the same amount of debt that you had before. Debt consolidation is designed to save you money via lower interest rates and help you organize your debts, and simplify your payment schedule. It will not make debts go away.

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How to Consolidate Debts

There are four main ways to consolidate debt. Each has advantages and disadvantages. You’ll have to decide which method is best for you…

Debt Consolidation Loans

A debt consolidation loan is a personal loan used to consolidate debt. You’ll take out a loan, use it to pay off your debts, and then pay the new loan. These loans may be unsecured or secured by personal property such as a car, a boat, or another financial account. They usually have terms of three to five years.

Interest rates on debt consolidation loans rates vary based on the lender, your credit score, and the collateral you are using. A secured loan will usually have a lower interest rate than an unsecured loan, but you’ll risk losing the collateral if you can’t pay the loan.

You’ll have to compare the cost of your new loan to the cost of paying off your existing balances. Work out the total costs and make sure you’re saving enough to make the deal worth it. If your credit is good or your loan is secured, you can probably get an interest rate well below the rates you are paying on credit card balances. Be sure to consider any fees that come with the loan: many loans have origination fees or other fees.

Debt consolidation loans are usually used to consolidate credit card balances. That’s because interest rates on credit card balances are very high, and it’s usually possible to get a loan at a significantly lower rate. If you wish to consolidate installment loans, it may be hard to get a better rate unless your credit has improved dramatically since you got the loans you want to consolidate.

You may get offers for consolidation loans in the mail, especially if you have several credit card balances. If you’re considering one of these offers, read the fine print carefully. There may be hidden fees or other unfavorable terms.

A debt consolidation loan can be a good option if your credit is good enough to qualify you for a low interest rate. If your credit is poor and you don’t have collateral that you’re willing to risk, you may not be able to get an interest rate low enough to be worth the effort.

Use our online Debt Consolidation Calculator to compare the cost of a consolidation loan to the cost of paying off your existing balances.

Balance Transfer Credit Cards

Another option is to transfer your debts to a credit card with a lower interest rate. Many credit card issuers offer balance transfer cards specifically designed for the consolidation of other credit card balances. These cards usually come with a zero-interest or low-interest promotional period.

To consolidate debt with a balance transfer card, you apply for the card, and if you’re approved, you transfer your other balances onto it. If you pay those balances off before the promotional period expires, all the money you pay will go toward the principal. That can save you a substantial amount on interest.

If you don’t pay off the balances before the promotional period ends, you’ll be right back to high interest payments.

You’ll need to have good credit in order to qualify for the best balance transfer credit cards and get approved for the best terms. Some balance transfer credit cards come with annual fees and balance transfer fees. You’ll have to do the math and determine whether you’re coming out ahead. Most credit card issuers will not allow you to transfer balances from their own cards, so you’ll have to use a different company than you’re using now.

If you do transfer your debt to a credit card with a balance transfer promotion, do your very best to pay the balance off before the promotion period ends. If you don’t pay the card off in time, you could end up paying high interest rates on the remaining balances.

HELOC Or Home Equity Loan

HELOC stands for Home Equity Line of Credit. Obtaining a HELOC or home equity term loan is another option for consolidating your debt. These loan products use your home as collateral for the loan. You’ll need to have equity in your home in order to qualify for them.

Home equity loans and lines of credit typically have very low interest rates, which is an attractive feature for people who want to use them to consolidate debt.  The downside is that if you default on a home equity loan or line of credit, you could lose your home. For that reason, it’s important to borrow wisely when using these types of loans for debt consolidation or anything else.

Be sure to make all of your payments on time, and consider working to pay the loan off early if you can.

Cash Out Refinance

A cash out refinance refinances the entirety of your mortgage balance then adds additional money. You’ll take those additional funds as cash at the loan closing and use them to pay off your debt. 

The benefit of this type of move is that you’ll only have one payment; your mortgage payment. And since mortgage interest rates are attractively low, you’ll then be paying a very low interest rate on your credit card debt.

However, if you structure your refinance to a long term, such as 30 years and don’t pay the loan off early, you’re effectively stretching your credit card payoffs to 30-year terms. That could leave you paying more interest in the long run despite the lower rate.

Mortgage refinances typically come with closing costs such as origination fees and filing fees. The fees could outweigh the benefit of the refinance. A good mortgage loan representative will be able to help you determine if the math makes sense for you to get a cash-out refinance mortgage loan.

You’ll have to meet credit score guidelines as well as equity guidelines to qualify for a cash-out refinance mortgage loan. Check with a reputable lender for details.

Debt Consolidation May Not Be Right for You

If you qualify for debt consolidation, it could be your best bet for long-term debt reduction. You’ll be paying your debts in full, so your credit should not be adversely affected as long as you make your payments on time.

Debt consolidation won’t work for everyone. If you don’t have good credit, you may not qualify for a debt consolidation loan or a balance transfer card. You won’t be able to use a HELOC, cash out refinance, or home equity loan if you don’t own a home.

If debt consolidation isn’t right for you, you have other debt relief options. You could consider credit counseling, debt management plans, debt settlement, and even bankruptcy. None of these methods is right for everyone, and all of them have drawbacks, but one could be right for you.

The Key to Success

All of these methods have one thing in common: None of them will work if you run up more debt before your old debts are paid off.

Before you consolidate your debts, take a close look at the habits that created those debts in the first place. You’ll have to change those habits if you want consolidation to succeed. Set up a budget, follow it, and minimize credit card spending. Consolidating your credit card debts won’t help if you pile up new credit card balances!

If you don’t make healthy changes to your spending patterns after obtaining a debt consolidation loan, you could end up paying more on your consolidation loan and paying off more credit card balances as well. Debt consolidation can help you get your debts under control. If you want to keep your debts under control, you’ll have to take control of your finances and spend less than you earn!

The post What Is Debt Consolidation and How to Consolidate Debts appeared first on FinMasters.

Once you’ve made it through the bankruptcy process, it’s time to start rebuilding your financial life. We’ll share some things you need to know about how bankruptcy affects your credit and how you can get back on your feet and start anew.

Start By Knowing Your Credit Score

Some bankruptcy attorneys paint a blissful picture of life after bankruptcy: no more bills, no more calls and letters from collection agencies, and a fresh start for you and your finances. Some of that may be true, but negotiating bankruptcy proceedings and rebuilding your credit afterward is no walk in the park.

Bankruptcy can eliminate unsecured debts, but it will not wipe your credit clean.

A Chapter 7 bankruptcy filing stays on your credit report for ten years from the filing date.
A Chapter 13 bankruptcy filing stays on your credit report for seven years after the filing date.
Learn more about how long will items stay on your credit report.

Chapter 7 bankruptcy means your discharged debts can’t be collected, but each discharged debt will remain on your credit report for years to come. A Chapter 13 bankruptcy is a bit less damaging to your credit score because you will still be making payments on some debts, but it will still leave a hefty negative mark for years to come.

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Get Your “Rock Bottom” Credit Score

Your credit score will make a fast track to “rock bottom” after you file for bankruptcy. You need to know what “rock bottom” looks like so you have a starting point to help you begin the rebuilding process.

You’ll want to ensure you wait long enough after you file before you pull your credit report and see what your post-bankruptcy credit score is.

If you’ve filed for a Chapter 7 bankruptcy, wait 120 days after you receive your discharge letter before checking your credit score. That will ensure that your credit report has absorbed the full effect of the bankruptcy filing.

Chapter 13 bankruptcies don’t get listed as discharged until the reorganization period is finished. Since this process could take up to five years, you can check your credit score 120 days after the bankruptcy is filed to get your bottom line credit score.

Once you know where your credit score is standing, you can begin the credit rebuilding process.

Explore all the ways you can get your credit report and credit score free of charge: Where to Get Your Free Credit Report

Learn Your Lessons

The first step toward rebuilding your financial life is to understand what led you to bankruptcy in the first place. If your bankruptcy was caused by job loss or an unexpected medical event, there may not be much you can do to avoid a repeat. In many cases, though, bankruptcy is caused by a pattern of spending and borrowing.

If your bankruptcy was caused by overdependence on credit cards, excessive spending, or other financial behavior issues, you’ll have to address those from day 1 of your post-bankruptcy life. You’ll need to make a budget, follow it, and understand what you did wrong and how you can change it.

Seek professional advice if you need it. You’ll receive credit counseling as part of the bankruptcy process, but there’s no shame in going back for more.

Begin The Credit Rebuilding Process

Rebuilding your financial life after bankruptcy is possible, but it takes time and consistent effort. Here are some steps you can take to start the rebuilding process.

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Budget Wisely And Make Payments Promptly

The first step in rebuilding your credit after bankruptcy is to take control of your finances. Create and use a monthly budget. Include a line item for savings on each budget.

Use our simple Budget Calculator to quickly see where your money is going each month.

Pay all financial obligations promptly. Pay your mortgage or rent on time. If you have debts that weren’t included in a bankruptcy, like student loans, make your payments on time.

Some collection agencies and creditors will harass you for payment even after your bankruptcy filing is complete. Know your rights. You are no longer obligated to pay a debt discharged in your bankruptcy. Report them to the Consumer Financial Protection Bureau if the unwarranted harassment continues.

Beware Of High Interest Loan Offers

Loan companies spend a lot of money on obtaining bankruptcy information. They know they can get away with charging high interest rates to consumers that have recently filed for bankruptcy.

These lenders may say they are doing you a favor by giving you a loan because of your bankruptcy history. Don’t fall for that line. You are an attractive risk to a lot of lenders because you can’t file for bankruptcy again for several years. That’s why they are approaching you with offers.

If you absolutely need a loan with a high interest rate, you may have to take it. It’s still generally better to pay cash for what you need or wait until you’re further out from your bankruptcy filing before considering borrowing.

High interest loans can be a fast track back to financial crisis, and that’s not what you need!

Get A Secured Credit Card

One way to start rebuilding your credit is to open a secured credit card. You’ll keep a certain amount on deposit at the bank issuing the card. Your credit limit will be equal to your deposit.

People are rarely denied secured credit cards because there’s no risk of default to the lender. This is because they’ve got your savings balance to offset any default of payment on the credit card balance.

Once you get your secured credit card, use it monthly and pay it off promptly. Paying your balance in full every month will keep you free of interest payments and help you build your credit.

If you don’t trust yourself to carry a card, put some small payments you’d make anyway (like a Netflix subscription or your internet bill) on the card, set up an automatic payment from your checking account, and put the card aside. The bills will be paid on time, and the payments will help you build a positive payment record.

Many credit card issuers will let you convert your secured card to an unsecured card if you establish a good payment history. It’s a great first step back into the world of credit.

Get A Credit Builder Loan

A credit builder loan is another way to rebuild your credit after bankruptcy. Companies like Self offer credit builder loans to those needing to build or rebuild their credit.

The loan proceeds from your approved loan go into a Certificate of Deposit that earns interest. You make affordable monthly payments on the loan, and the loan company reports your payments to credit bureaus. After you pay the loan, you have access to the funds plus any interest you’ve earned.

Credit builder loans come with fees and interest.

They may be worth the cost if the loan helps you rebuild your credit score. You’ll also have access to a lump sum of money when you pay the loan. That can help you meet other financial goals.

Maintain A Steady Job and Residence History

Another important part of rebuilding your financial life after bankruptcy is maintaining a steady job and residence history. Avoid changing residences or jobs as much as possible.

After you file bankruptcy, creditors are looking for stability. Keeping the same residence and working for the same company will help. If you have a better job offer, take it, but avoid skipping from job to job.

What to Expect In The First Years After Bankruptcy

You may be wondering what to expect in those first years after your bankruptcy filing is complete. Will you be able to get credit at all? Here are some guidelines that may help.

Getting A Mortgage After Bankruptcy

You probably won’t be able to get a new mortgage or refinance your current mortgage right after bankruptcy. That’s due to strict post-bankruptcy lending rules by mortgage guarantors such as Fannie Mae and Freddie Mac.

You may have to wait as long as four years after a Chapter 7 filing dismissal to get a conventional mortgage loan. FHA and VA loans have shorter waiting periods of two years from dismissal or discharge.

Chapter 13 bankruptcy filers will have to wait two years from discharge and four years from dismissal before getting a Fannie Mae or Freddie Mac loan. Other stipulations may apply as well.

Katie Strom, Minneapolis-based mortgage lending representative for Edina Realty Mortgage, has some tips for those coming out of bankruptcy and wanting to get a home mortgage loan.

Now is the time to really focus on ensuring you change your financial reputation among creditors. Take the two or four-year waiting period and use it to show things are different.

Build up a healthy savings account balance. Budget wisely each month and save any extra income. Keep debt levels going forward to a minimum.

Show that you’re taking efforts to ensure that the events that led up to the bankruptcy won’t occur again.

Katie Strom, Edina Realty Mortgage

Getting approved for a home loan after bankruptcy will take time and effort, but it can be done. Ms. Strom’s advice is a good place to start.

Buying A Car After Bankruptcy

If you’re looking to get a car loan after filing for bankruptcy, you can expect to wait at least 6 months. Many auto loan companies will attempt to charge you a high interest rate on a post-bankruptcy auto loan, sometimes 20 percent or higher.

If you really need a car, you may have no choice but to think carefully about what you need.

You can avoid paying astronomically high loan rates after bankruptcy. Shop around for the best deals and keep a close eye on your post-bankruptcy credit rating. A cosigner with a solid credit history can get you better terms. Be sure that both you and the cosigner understand the risks and responsibilities.

Better yet, save up and pay cash for a reliable and affordable used car.

Use our Auto Loan Calculator to estimate your monthly payments and the total cost of the loan.

Getting A Credit Card After Bankruptcy

Getting a credit card after bankruptcy will usually be easier than getting an auto or mortgage loan. You may be able to get a secured credit card almost immediately and an unsecured credit card after six months or so.

Getting and using a credit card can help you to rebuild your credit, but only if you use the card wisely and pay off the balance in full every month. If credit card debt was part of what led you to bankruptcy in the first place, you’ll want to be sure you don’t repeat those mistakes!

Summary

Rebuilding your financial reputation after bankruptcy is possible, but it will take time and effort. You’ll need to understand how you can build credit and how to avoid mistakes that may have helped lead you to bankruptcy. Most of all you’ll need some patience. Credit isn’t built overnight, and you’ll have to expect that it will take some time. Many post-bankruptcy restrictions seem inconvenient. They are actually there to protect you from extending yourself too much too soon and getting back into trouble.

If you take advantage of the fresh start that bankruptcy offers and focus on building a new and more sustainable financial life, your bankruptcy could be the start of a new and better financial life!

The post Life After Bankruptcy: How to Rebuild Your Credit and Your Finances appeared first on FinMasters.

You’ve probably seen reports and heard rumors about the falling savings rates of American citizens. Are Americans really that bad at saving money? Let’s look at how Americans are building their savings and how we can do better.

American Savings Rates: A History

Here’s a  snapshot of American personal savings rate averages since the 1960s. 

Source: Bureau of Economic Analysis, NIPA Tables

As you can see, the savings rates of Americans fluctuate during the years, as you’d expect. The overall trend is still toward lower rates of personal savings.

US Personal Saving Rate 1929-2019

Go to the full page to view the chart.

Source: Bureau of Economic Analysis, NIPA Tables

One exception to that rule was an astronomically high monthly savings rate when news of the coronavirus COVID-19 broke. In April of 2020, Americans reported saving a whopping average of 33.6 percent of their income. It seems Americans had a lucid moment when they realized the importance of saving money. That rate has since steadily declined and was down to 14.3 percent in September of 2020. Even at 14.3 percent Americans are saving often double or more what they have been saving in the past thirty years.

American Savings Compared to Other Developed Countries

How does the American savings rate stand up against the savings rates of similar countries? Let’s take a look. Here are some recent savings rates (between 2016 and 2020) of other developed countries compared to the United States.

*Total, % of household disposable income OECD Most recent reported data. Source: OECD (2020), Household savings (indicator). https://data.oecd.org/hha/household-savings.htm (Accessed on 07 December 2020)

As you can see, America ranks far below almost every other country mentioned here. Many other countries have savings rates that are double or more of what Americans are saving.

Are #Americans Bad at Saving #Money?

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What factors cause the dismal savings rates of Americans?

Why Are Americans So Bad at Saving Money?

A recent study by the Financial Health Network^[1] found that 70 percent of Americans were struggling financially in some way, even in November of 2019 when the USA was graced with record low unemployment rates and a booming economy.

Another survey in that same article found that nearly 20 percent of Americans making between $30,000 and $100,000 per year spent more than they earned. That is probably an understandable statistic for those earning on the lower end of that spectrum. Housing prices are high and so are other costs. That doesn’t fully explain why even people at the higher end of that spectrum routinely spend more than they earn.

There are several factors that could account for low savings rates among higher-income Americans.

Borrowing Money is Easy

It’s very easy to get a loan or credit card. Banks, loan companies, and credit card companies advertise everywhere from Facebook pages to television to direct mail. Even if you’ve got a credit history marked with late payments and too much debt, you can probably get another loan or credit card. You might have to pay a higher interest rate, but many people find it worth it if they can spend now and pay for it later.

Keeping up with the Joneses

There’s a saying that defines those who want to have all of the same (or better) possessions that their neighbors have: Keeping up with the Joneses. Television and the internet constantly advertise the next biggest thing, whether it’s designer clothing, the newest car, or the latest vacation hot spot. That’s what good marketing is all about, and that type of marketing can make it tough for people to say “no” to spending money.

The Cashless Society

There’s another reason Americans struggle to save money: The cashless society. Americans pay for nearly everything with a debit or credit card and that can affect their spending.

Studies have shown that people are willing to spend up to 83% more when using a credit card to pay for their purchase^[2]. If you don’t believe it, try this experiment. Spend a few weeks paying for everything you can by cash. Take cash out of your checking account and see if you can notice the difference in how it feels when that cash leaves your hand. See if spending cash feels different than swiping a debit or credit card.

Most people find that it’s much tougher to let go of cash than it is to swipe a debit or credit card on a machine. Purchases made with a debit or credit card just don’t feel like spending real money.

Purchases made with plastic do spend real money. We’re not just spending more on purchases, either. People who don’t pay their cards off in full every month are also paying interest on their credit card balances, often at rates as high as 20% or more. 

How Can Americans Save More Money?

So how can Americans catch up to other countries and increase their savings rates? Here are some ideas.

• Make a Budget and Stick to It. Decide what you have to spend on concrete expenses and what you need to spend on fluid expenses such as groceries. Determine what you’re willing to spend on each item, and stick to your budget.

Making a budget just got easier! Use our online Budget Calculator to work out how much money you have coming in and what you’re spending it on.

• Include a Savings Line Item in Your Budget. Financial experts recommend including a line item in your budget specifically for savings. In other words, treat your savings like a bill, and pay yourself first.

• Start Using Cash. Use cash to pay for daily expenses. Cash will feel different as it leaves your hands, and that different feeling might encourage you to spend less and save more.

• Think About Your Financial Goals. Take the time to think about your financial goals. Do those nickel and dime expenditures that shatter your savings rate really bring joy to your life? Are they worth it? Or would it bring more value to your life to spend less, save more, and get out of debt? Only you can decide the answer to that question, but it’s a question worth considering.

• Save More by Earning More Income. Another way for Americans to increase their savings rates is to earn more money. Sign up for overtime hours at work. Pick up a second job. Start a side hustle like mowing lawns, pet sitting, or cleaning houses.

Changing your habits to save more money might not be easy for you, but it is possible. Follow the tips above to help pad your savings account and get more control over your money.

It’s clear that American savings rates are far below those of other countries, and lower than American savings rates once were. Not everyone is in a position to save more, but with a bit of planning, most of us could.

Saving comes down to earning more, spending less, and taking good care of any money you have left after your essential spending. It’s not always easy, but with discipline and work it’s usually possible.

The post Are Americans Bad at Saving Money? appeared first on FinMasters.

We’re breaking this list of side hustle jobs for those in small towns into four categories: Freelancing jobs, labor jobs, gigs you can work from home, and online jobs. Any of these ideas could be a good fit for you!

Freelancing Jobs

Here are some ideas for those wanting to start a freelancing business in a small town or rural area.

1. Be a Local Guide

Many rural areas and small towns are popular getaways for residents from nearby cities. If you know a lot about your small town or rural area, consider becoming a guide for visitors to the area. You can help people plan vacations or day trips in the area, share information about lodging, and direct people to local sightseeing destinations. You can give ideas for sports and leisure activities and direct visitors to the best local dining opportunities. Advertise your local guide services and pricing on social media sites such as Facebook.

2. Retail Arbitrage

Retail arbitrage is the practice of buying something at a low price and then selling it for a profit. Garage sales and “curb alerts” – discarded items left by the road – are common sights in rural areas and small towns. Small town and rural residents don’t seem as concerned with making a buck as they are with decluttering their homes and farms.

If you know what items are worth and you’re willing to put some effort into cleaning them up, you can find some great deals on household and farming items and much more. Reselling them at a reasonable price can generate significant money. This is particularly true in areas where old homes harbor stocks of “junk” that can include valuable antiques!

3. Rideshare Driver or Grocery Deliverer

Small town and rural area residents need rideshare and delivery services just like everybody else. Sometimes the need is even greater than it is in the cities: many rural areas have limited public transportation, and residents without cars may need help to get essential goods and services. Whether it’s a drive to a bigger town to get groceries or a ride to a big city airport, you can sign up with companies like Lyft to help fill that need. You can also sign up with a service like Instacart or Shipt and deliver groceries to local residents.

4. Take Up Local Photography

Rural areas and small towns make for great settings for photographs. If you’ve got a good camera – or a phone with a decent camera – why not try your hand at photography?

You can sell your pictures to local or county newspapers or upload them to stock photo sites such as Shutterstock. When you do that, website owners can buy the rights to use your photo, and sites like Shutterstock will pay you a commission.

Side Hustles and Gig Jobs for People Living in Small Towns and Rural Areas

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Make passive income renting unused space. Turn your garage, shed, driveway, attic, closet, or any storage space into cash. List Your Space →

Labor Jobs

Many small towns and rural areas have serious labor shortages as younger residents leave to look for opportunities in the cities. Older residents and residents who don’t have the physical ability to perform labor jobs on their own often need help in several areas.

While numerous of these may appear to be side hustles for men exclusively – due to their physical demands, there remains a substantial variety of options available that are equally suitable and rewarding for women.

Here are some possibilities.

5. Farm Hand Help

Farm owners often look for farmhands to help complete farm chores. As a farm hand, you might find yourself feeding livestock, cleaning up barns or shoveling manure. It’s not an easy job, but you’ll be enjoying nature, working with animals, and building your physical fitness.

6. Snow Plowing

Rural homes often have long driveways, and if you have a truck and a plow, you can make serious money in winter weather by plowing driveways and private roads. Advertise on Craigslist or similar sites, via hand-delivered flyers or by word of mouth.

7. Pet Care

Just like city folks, rural residents often need help with pet care, whether it be farm animals or indoor pets. Advertise your services on Craigslist or Facebook for pet care for rural residents who simply need daily help walking or caring for pets and who are going on vacation or a business trip. You can also try specialized sites like Rover or Wag!, although the demand might be limited in your area.

Dog Sitting With Rover: How I Make $1000 a Month (and How You Can Too)

8. House/Garage/Pole Barn Cleaning/Organization

Are you good at cleaning or organizing rooms, homes, and/or outbuildings? Small town residents like help with cleaning and organization, just like city residents.

Cleaning or organizing homes on large lots and with extra outbuildings can rake in some serious cash.

9. Yard Work

Residents with smaller town lots and larger rural lots often look for help with yard work like mowing lawns and raking leaves. Advertise your services via local newspapers, personally delivered flyers or mail postcards.

10. Painting Jobs

Lots of rural and small town residents need painting services. Painting doesn’t take a lot of training other than the need to be detailed and neat. You could offer your services to paint items such as mailboxes, propane tanks, houses, garages, barns, wood fences, and other items.

Make sure you prepare the painted surface properly and use the right type of paint for the job. Find instructions on how to properly paint surfaces on YouTube or on home improvement websites. Practice around your own house first until you’re comfortable offering your skills to others.

Advertise your services by handing out flyers or by visiting residents that look like they might benefit from your painting services.

Gigs You Can Work From Home

Are you looking for some side hustle income you can earn right from your own home? Try out these ideas.

11. Selling Home-Grown Veggies

People love buying local produce – especially if it’s organic. If you like gardening and have access to some land, as many rural residents do, raising high-value crops can earn you some money. Try your hand at selling vegetables and herbs at the end of your driveway, at the local farmer’s market, or in a local park or business parking lot.

Some ideas for veggies and herbs that sell well in this manner include:

• Tomatoes
• Cucumbers
• Corn
• Basil
• Cilantro
• Parsley
• Peppers
• Green onions

Many of these veggies and herbs can be grown with minimal space using pots and shelves.

12. Raising/Selling Chickens and Eggs

Most small towns and rural areas allow residents to keep chickens. If you’re up for the work, you can raise chickens and sell eggs or keep a rooster in your bunch and sell chicks. Advertise in local papers and on local buy/sell sites like Craigslist.

Find some additional income in this area by making and selling chicken coops. Chicken coops can be easy to make with a little practice.

13. Selling Farm-Themed Crafts

Farm-themed crafts seem to always be in vogue. I have one friend who is so backed up with orders for her farm-themed crafts that she’s got work for the next six months. 

Some ideas for farm-themed crafts include hanging signs, serving trays, picture frames, and ladder racks. Or you could refurbish old furniture to have a weathered or farm look.

Online Jobs

And there are always online jobs to do from home, too, no matter if you live in a rural area, a small town, or a big city. Would any of these ideas work for you?

14. Virtual Assistant

A virtual assistant helps business owners and blog/website owners manage their business life. Virtual assistants do many types of work, for example:

• Managing and posting on social media accounts
• Data entry
• Proofreading
• Coordinating appointments
• Handling customer service calls
• Writing newsletters
• Managing staff

Each virtual assistant job comes with different responsibilities. You can work as a virtual assistant for a company that allows you to work from home and hires you as an employee, or you can run your own virtual assistant business. Find work on job sites such as Upwork or Indeed.

If you’re looking for work as a virtual assistant, stay alert for scams. Never use your personal bank account for professional services or agree to deposit checks and send money anywhere. Don’t upload personal identifying information. Read up on common scams targeting virtual assistants.

15. Data Entry or Transcription Work

Another way to make money online from your rural area home is to do data entry or transcription work. Data entry workers simply enter information into a computer program.

General transcriptionists transcribe audio text onto a computer document. General transcriptionists and data entry workers typically don’t need training. However, having fast and accurate typing skills does help.

If you want to earn a higher wage, you can train to be a medical or legal transcriptionist. Search online for “data entry jobs from home” or “transcription jobs from home” to find available openings.

Data entry and transcription could be excellent side hustles for introverts as they demand minimal direct interaction with other people.

16. Tutoring

Tutoring is another side hustle you can do from home. Some tutoring companies require a teaching or other degree, while others do not.

You can teach English as a second language or teach other subjects such as math or science. And you can teach students of any age, from Kindergarten up through adults. Some companies that hire tutors to work online from home include:

• VIPKid
• Course Hero
• Tutor.com

See individual tutoring websites for requirements and available openings.

Interested in teaching English with VIPKid? Teacher Michael shares everything you need to know to start teaching English online: Teaching English With VIPKid: How to Earn Full Time Pay Without Ever Changing Out of Your PJ’s

Summary

There are dozens of possibilities for side hustles and gig jobs for people living in small towns and rural areas. Find the side hustle that’s right for you by making a list of your talents and interests.

Then take that list and decipher how you can use your talents and interests to help others and earn money in the process.

The post 15+ Side Hustles for People Living in Rural Areas or Small Towns appeared first on FinMasters.