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How Student Loan Debt Can Derail Your Future

Carrie Kirby — Wed, 25 Jul 2018 08:00:10 +0000

Mike Meru thought he was making a good investment when he borrowed $600,000 to train as an orthodontist. But at age 37, he now owes $1 million — and despite making regular payments, he owes more every single month. In 25 years, his debt will total $2 million.

While seven-figure student debts are still not something you see every day (in a story about Meru, The Wall Street Journal reported that about 100 people are in this boat nationwide), hefty loans are more and more common. Five percent of student loan borrowers now owe more than $100,000, and 170,000 students nationwide owe more than a quarter million in federal loans alone, according to The Brookings Institution.

Student loan consultant Travis Hornsby, whose average client owes $280,000, says he has worked with several grads with debts around the million-dollar mark — almost exclusively specialist doctors and dentists.

"They make a lot of money, but not enough to cover that level of debt service," Hornsby wrote in an article for Business Insider.

If you are contemplating borrowing heavily for college, keep in mind these cautionary tales of how student loan debt can totally derail your life. (See also: 6 Questions to Ask Before Taking Out Student Loans)

1. You may not have the freedom to follow your passion

After getting her bachelor's degree and spending a year teaching English abroad, Amber Williamson was applying to graduate schools. At 24, she hadn't yet decided on a career, but she knew her $60,000 in student loan debt limited her choices to only fields that could offer adequate income to make the payments.

"I'm doing everything right, but still being penalized for something I've been told to do," she told MarketWatch.

Williamson is not alone. American Student Assistance found that 53 percent of survey respondents named student loan debt as a top factor in their career choices. Borrowers are often left with little choice but to pursue careers they have no real interest in, purely in search of a paycheck that can help offset their student loan payments. (See also: 15 Ways to Pay Back Student Loans Faster)

2. You may have to move back in with your parents

More than one in three millennials live with Mom and Dad, a phenomenon that's increased markedly in recent years. The Federal Reserve found that 30 percent of that increase was due to the changing debt loads of young adults, including student loan debt. (See also: 6 Money Moves to Make When You Move Back Home With Your Parents)

3. If you hate your career, you might not be able to escape

Natalie Bacon and Liz Stapleton don't know each other, but they have one big thing in common: They borrowed buckets of money to get law degrees, only to find out that they hated practicing law. After graduation, Bacon was shocked to realize that interest accruing while she was in school had already ballooned her debt to $200,000.

"I was really irritated and frustrated with the amount of debt I had. I felt like someone should've told me what it really meant, or I should've had a class on it, or something," she wrote on her blog.

Stapleton found herself in a similar boat. According to her blog, Less Debt More Wine, Stapleton currently owes $258,000.

Both women took the bold step of quitting their law careers, managing, perhaps ironically, to build careers instead in financial advising and writing about managing their debt. But many other lawyers and doctors remain trapped by their debt in careers that they hate.

4. You will end up paying much more than what you borrowed

During her undergraduate and graduate studies, Becca of Surviving Student Loans knew she was going to have at least $90,000 in debt — but she didn't think through how the constantly accruing interest would affect that total. For the first three years after graduate school, she made her minimum payments every month. Now, she owes $124,000; about a quarter of that is interest.

"In my head, the debt I took out was going to be my total debt. Boy was I wrong," she wrote on her blog.

Looking back, Becca doesn't regret getting her degrees, but she does regret that she lost paid credits several times when she transferred schools. She also wishes she'd put some of the money she'd earned working part-time in school toward her debt, even though it wasn't required. She's currently budgeting aggressively and trying to earn money on the side so she can put as much of her $50,000 salary toward debt repayment as possible. (See also: This Is How Student Loan Interest Works)

5. You might not be able to buy a home

Federal Reserve researchers noticed that as homeownership in the United States declined during the financial crisis, young people were especially impacted.

"... Increases in student loan debt might be a key factor pushing homeownership rates down in recent years through effects on borrowers' ability to qualify for a mortgage and their desire to take on more debt. Corroborating this claim, recent surveys have found that many young individuals view student loan debt as a major impediment to home buying," the researchers wrote.

They crunched the numbers and found that there is something to this: Every 10 percent increase in student loan debt is correlated with a 1 to 2 percentage point drop in homeownership in the first five years after school.

A joint study by American Student Assistance and the National Association of Realtors found that 83 percent of millennials who don't own homes blame student debt for their inability to buy. These millennials expected their debt to delay their first home purchase by an average of seven years.

6. It could prevent you from getting married or starting a family

One in five former students puts off marriage due to student loan debt, and nearly one in three postpones starting a family for that reason, American Student Assistance reports.

Some who go ahead and marry a person with a huge student debt load later admit regretting it. One respondent to a BuzzFeed query complained that his wife's student loan debt was ruining their lives. (See also: How a New Marriage Can Survive Student Loan Debt)

7. It might delay your retirement

Another American Student Assistance survey found that 62 percent of respondents put off saving for retirement due to student loan debt. Worse, the same report says that the number of people over age 65 who have student debt — some for their children's education, but mostly for their own — increased by a whopping 977 percent between 2005 and 2015.

One scary thing about owing student loan debt in retirement years: It can lead you to lose your Social Security check. According to the ASA report, more than 173,000 Social Security recipients had their Social Security payments garnished in 2015 for this reason. (See also: How to Keep Student Loans From Wrecking Your Retirement)

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Surefire Ways to Maintain a Good Credit Score in Retirement

Dan Rafter — Thu, 29 Mar 2018 09:00:06 +0000

You're nearing retirement. Once you hit this milestone, you won't have any reason to worry about your credit score, right? Not exactly.

Maybe you expect to have your auto loan and mortgage paid off by the time you hit retirement. Maybe you don't even expect to apply for any new credit cards once you leave the working world. But what you plan is often far different from what actually happens.

What if you haven't paid off your mortgage by retirement and you want to refinance your existing loan to one with a lower mortgage payment? You'll need a good credit score. What if your car breaks down and you need to buy a new one? If you want to finance the purchase of a new car, you'll need a solid credit score to qualify for an auto loan.

There's good news here, though: Keeping your credit score high during your retirement years doesn't have to be difficult. You just need to remain diligent about paying your bills on time and using your credit wisely. Here are some ways you can do that.

1. Keep using credit

You might decide after retirement to live an all-cash lifestyle. This makes a certain amount of sense: You're on a fixed income, and you certainly don't want to run up debt on your credit cards. Paying for everything in cash will prevent that from happening.

But if you don't use credit, your credit score will start to suffer. You build a strong credit score by using credit wisely. If you don't use it at all, how can you prove you remain a good credit risk after leaving the working world?

This can be especially difficult in retirement. If you don't have a mortgage or auto payment anymore, you won't be making as many monthly payments to boost your credit score. So, it's a best practice to keep using your credit card regularly to make some purchases. But only charge what you can afford to pay off in full each month. When your credit card bill is due, pay off your entire balance, and do so on time. This way, you demonstrate good credit skills while also avoiding credit card debt. (See also: Why Your Credit Score Matters in Retirement)

2. Don't close credit card accounts you don't use

After retirement, you might not use as many credit cards as you did while working. You might even consider closing those credit card accounts that you no longer use. Resist this urge, though.

A good chunk of your credit score depends on how much credit you are using. This is known as your credit utilization ratio. The more of your available credit you are using, the worse it is for your credit score. If you close an open credit card account, even one you no longer use, you will immediately increase your credit utilization ratio.

Let's say you have three credit cards, each with a limit of $5,000. That means you have $15,000 in total available credit. Now let's say you owe $3,000 in credit card debt. You have a credit utilization ratio of 20 percent ($3,000 divided by $15,000), which is considered good — lenders typically like to see this number under 30 percent. If you close one of your cards, you will automatically lower your total available credit to $10,000. Now, owing $3,000 out of $10,000 just bumped your credit utilization ratio up to 30 percent, all without you spending a cent.

You don't have to use the credit cards that have been sitting untouched in your wallet. But you shouldn't close those accounts, either. (See also: How to Close a Credit Card Without Dinging Your Credit Score)

3. Be careful when co-signing

It's natural once you hit retirement to want to help your children or grandchildren financially. But be careful when one of your relatives asks you to co-sign on an auto or mortgage loan.

Young adults often have limited credit histories and it can be difficult for them to qualify for financing. They often turn to co-signers — usually a parent — for help. Lenders are more likely to approve their loan requests if someone with a longer, more established credit history is signing up for the loan, too.

There's a huge problem with co-signing. If the person you're helping doesn't pay the bill, those late payments go on your credit reports. You are now equally responsible for this new debt. And if your relative defaults on the loan? You'll be the one on the hook.

Co-sign with caution. It is very rarely an advisable move, and can land your credit score in hot water. (See also: When Should You Co-Sign a Loan?)

4. Check your credit reports

You might not think much about your credit in retirement, but you should still check your three credit reports once every year.

You can do this for free at AnnualCreditReport.com. Make sure to order copies of each of your three credit reports — from Experian, Equifax, and TransUnion — as each might have slightly different information.

Check the reports for any mistakes. Maybe a report lists that you missed an auto payment last year and you know you haven't. Correct the mistake by notifying the offending credit bureau. You can do this through email. A mistake on your credit report can cause your credit score to plummet.

It's also a good habit to monitor your reports for accounts you did not open. If something looks suspicious, you may have a case of identity fraud on your hands. (See also: How to Read a Credit Report)

5. Keep paying those bills on time

The last step to keeping your score high during retirement might be the most important: Keep paying your bills on time each month.

Of course, this is good advice for anyone trying to maintain a good credit score. A single missed payment on a credit card account, mortgage loan, auto loan, or student loan can cause your credit score to fall by as many as 100 points. So even after you leave the working world, keep making those payments on time. (See also: 3 Ways Retirees Can Build Credit)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Benefit From Rising Interest Rates

Rachel Slifka — Wed, 21 Mar 2018 09:30:19 +0000

Interest rates went up three times in 2017, and they are under consideration to be increased yet again within the next couple of months. As interest rates continue to rise, what does that mean for you as a borrower?

While rising interest rates means it costs more for you to borrow, it also can work in your favor. Here are a few examples of how The Federal Reserve hikes can benefit you financially.

1. Throw more into savings

Savings accounts and certificates of deposit have been at historically low interest rates in the past few years. While a hike in federal interest rates won't make you rich, it can give you a slight boost in your savings power, for no extra work. (See also: Best Online Savings Accounts)

As interest rates increase, now is a great time to start socking extra money away into savings accounts and CDs. While putting extra money into savings might not result in as much interest earned from other saving avenues, such as retirement accounts or other investments, you can use the higher interest rates as an incentive to boost your savings or emergency fund contributions.

2. Take advantage of still low interest rates

During the financial crisis of 2007, the credit bubble burst, causing lending to come to a near halt. The Federal Reserve drove interest rates to the floor, and eventually pulled lenders back from the brink.

Higher interest rates today may make it more expensive for borrowers than over the past several years, but rates are still near historic lows. While it's important to use caution when borrowing money, now might be the time to strike if you've been on the fence about making a big purchase, such as buying a home.

3. Get more bang for your buck abroad

Traveling abroad can be expensive enough in its own right. But as federal interest rates rise, it could very likely strengthen the U.S. dollar.

A stronger dollar means Americans can travel abroad and get a better exchange rate than usual. Thanks to exchange rates working in your favor, you can splurge a little bit more (or save more) than you had maybe originally budgeted for.

4. Pay off consumer debt

The interest rates on your debt will rise if the Fed continues to increase rates. This means you will be required to pay even more interest on your debt, owing more money overall.

You can lessen the blow by prioritizing your debt repayment now. The sooner you pay off debt at a lower interest rate, the more money you will save. Use the threat of increasing rates to get your debt paid off as soon as possible.

Credit card debt is especially susceptible to climbing interest rates. Credit card debt has its own high interest rate, so any additional increase from the Federal Reserve will only cost you more. Avoid paying extra interest by prioritizing debt repayment today. (See also: The Fastest Method to Eliminate Credit Card Debt)

5. Consider refinancing

If you've been considering refinancing your home or auto loan, you may want to do it before the Fed considers another increase. In addition, if you bought your home at a higher interest rate and have not yet considered refinancing, you may not be getting the best deal available.

Even if federal interest rates don't change again, you may still find it advantageous to refinance your mortgage or auto loan to a better rate. (See also: 4 Smart Ways to Lower Your Monthly Mortgage Payment)

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This article is from Rachel Slifka of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Liabilities That Will Ruin Your Net Worth

Tim Lemke — Thu, 15 Mar 2018 09:30:17 +0000

If you're passionate about personal finance, you know about the importance of building net worth. This means accumulating things that will grow in value, while reducing your liabilities. A person with no debt, a home that they own free and clear, and a sizable retirement account likely has a high net worth. A person with thousands of dollars in credit card debt, a burdensome mortgage, and no cash savings has a low or even negative net worth.

Building net worth is about accumulating money and assets, but it's also about reducing liabilities. In short, it's about making sure debt isn't hurting your ability to achieve your financial goals. Here are some big liabilities that can hurt your chances to build a high net worth. (See also: 6 Money Moves to Make If Your Net Worth Is Negative)

1. Credit card debt

Credit cards can be poison to those looking to generate wealth. Interest rates on credit cards are so high that it rarely makes sense to carry a heavy balance on them. The average household with credit card debt owes more than $15,000 on their cards. It's no wonder Americans are, in general, fairly lousy at building net worth.

Having a lot of credit card debt can hurt your credit score, thus making it more expensive to borrow for mortgages and auto loans. This leads to a nasty spiral that virtually guarantees your liabilities will be larger than your assets. If you have credit card debt, start paying it off as soon as possible. Aggressively reduce your expenses, learn to invest rather than spend, and get out from under the pressure of those crippling cards. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

2. Car loans

Many people live with car payments as a permanent part of their lives. Financing the purchase of a vehicle is a common practice, but is also an easy way to add to your liabilities while adding very little to your net worth (cars almost always decline in value).

Vehicles aren't cheap, but if you can avoid making car payments over the course of several years, you'll be better off financially. Work to save toward the purchase of a vehicle so payments are minimal or nonexistent. Resist the urge to purchase a new car until the one you have is no longer viable. Avoiding several hundred dollars a month in car payments will free up cash to invest and accumulate assets rather than see your net worth stagnate. (See also: Cutting Your Car Payment Is Easier Than You Think)

3. Unpaid taxes

Yeah, taxes are a pain. No one really feels like paying them. But if you don't pay them, they turn into liabilities that can grow as a result of penalties and fines. Failure-to-file penalties only add to your tax bill, and keep increasing the longer you avoid paying.

If you are employed, most of your taxes are taken from your paycheck, but you still may find that you owe some money on your tax return. Self-employed people must be extra diligent to ensure they are paying taxes on any income they receive. It's also important to make sure you are paying proper real estate taxes on your home, as well as taxes for income gained from your investments. (See also: 8 Tax Return Mistakes Even Smart People Make)

4. Medical bills

There will come a time when you or a family member gets hurt or injured. The expense of hospital stays, surgeries, or ongoing care can be devastating. It's driven many families into bankruptcy and can crush any attempts to boost your net worth.

It may not be possible to avoid medical emergencies, but you can protect yourself by being properly insured. If your employer subsidizes the cost of health insurance, take advantage. If you are self-employed, seek to find a reasonably priced plan through a state or federal health exchange. Insurance isn't always cheap, but it will prevent you from taking on costly medical bills that destroy your financial well-being. (See also: How to Handle a Massive Medical Bill)

5. Student loan debt

We often view student loans as investments in our financial future because an education can help us earn more in our career. But until they are paid off, student loans are only liabilities. If you are still in school, you have some time before you have to start making payments; but once you graduate, those loans can become awfully burdensome. Heavy student loans can force you to take on additional debt just to make ends meet, in turn sinking your net worth even further.

To avoid this, it's important for you and your family to save as much money for college as possible in advance. Take cost and value into consideration when making your college choice, and think about getting a job while in school to help pay for tuition. This may require some tough choices, but avoiding student loan debt will help you get on track for building your net worth much sooner. (See also: 6 Questions to Ask Before Taking Out Student Loans)

6. Your mortgage

Owning a home can be a great way to build your net worth, but that may not be the case if you have a bad mortgage. If your payments are so high that you are unable to save money and invest, it's preventing you from boosting your net worth in other ways.

Borrowing money to buy a home is perfectly normal and has helped countless people get on the path to financial freedom. But it's important to have a mortgage that helps you more than hurts you. Put as much money down as you can so the loan itself is not too large. Get a loan with a low, fixed interest rate with a relatively short term (30-year mortgages are OK, 15-year mortgages are even better).

When you begin paying off your mortgage, you may not be paying off much of the principal of the loan at first. But soon, you'll be making a good dent and building real equity. And that's the path to building net worth. (See also: 8 Signs You're Paying Too Much for Your Mortgage)

7. Home equity loans

It's not uncommon for people to borrow money from the equity of their home to pay for major expenses. There are a variety of reasons why this may make sense. But it's important to be careful when doing this. When you are borrowing from your home equity, you are essentially turning an asset — the equity of your home — into a liability. In essence, you are taking away something that adds to your net worth.

In the long run, borrowing from home equity can help build wealth if you make the right financial choices. For example, you could use money from the equity of your home to make repairs or expand the home, thus boosting its value. And when interest rates are low and market returns are high, it may make sense to borrow for major purchases and use your available cash to invest instead. Just be sure to weigh the risks and rewards before borrowing heavily against the equity in your home. (See also: 4 Smartest Ways to Use a Home-Equity Loan)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Questions to Ask Before Applying for a HELOC

Dan Rafter — Tue, 16 Jan 2018 09:30:10 +0000

You've paid enough on your mortgage to build a solid amount of equity in your home. Now you want to tap into it; maybe you want to use the money to pay off high-interest credit card debt, help fund a child's college education, or take on a major kitchen remodel.

You have two choices when it comes to using that equity: a home-equity loan or a home equity line of credit. These are two very different options, but many homeowners prefer the flexibility that comes with a home equity line of credit — better known as a HELOC — instead of the lump-sum payment they get with a home-equity loan. (See also: Home Equity Loan or HELOC: Which Is Right for You?)

But before you apply for a HELOC, make sure you answer a few key questions.

1. Do you know how a HELOC is different?

Equity is the key to both home-equity loans and HELOCs. Say your home is worth $250,000 and you owe $180,000 on your mortgage. You have $70,000 worth of equity.

Your lender might approve you for a home-equity loan of $50,000. You'd receive that money in a lump sum. You'd pay it back each month, with interest, just like you do with your primary mortgage.

A HELOC works differently. It acts more like a credit card, with your credit limit based on your home equity. If you have that same $70,000 of equity in your home, a lender might approve you for a HELOC of $60,000.

Instead of getting a lump-sum payment, you'd get that $60,000 in the form of a line of credit, and only pay back what you borrow. If you used $30,000 to remodel a kitchen, you'd only pay back that $30,000, with interest. If you used the full $60,000, you'd have to pay that amount back.

2. Do you mind a bit of uncertainty?

Another difference between home-equity loans and HELOCs is that the former come with fixed interest rates, while lines of credit usually have variable interest rates. This means that your initial interest rate will usually be lower than what you'd get with a home-equity loan.

But that initial rate will change over the life of your loan. It could — and usually will — climb depending on what economic indexes your rate is tied to. For instance, if your HELOC is tied to the Fed's prime rate, it will adjust every time the Federal Reserve adjusts this rate. Most HELOCs adjust either on a monthly basis or a quarterly one, rising or falling depending on the index to which it is tied.

Home-equity loans come with initial higher rates, but these rates are fixed, meaning that they won't rise — or fall — over time.

Are you OK with a bit of uncertainty when it comes to rates? If so, you could save significant money on interest with those low initial interest rates that come with a HELOC. You will have to take the risk that these low rates could one day rise higher than the fixed rate that you might pay on a home-equity loan.

3. How much flexibility do you need?

Home-equity loans are generally better for homeowners who need cash for a one-time event, such as paying for a child's college tuition. But HELOCs often work better when homeowners aren't quite sure how much money they'll need over time.

Say you're remodeling your kitchen, but you're not sure exactly how much that project will cost. You take out a $40,000 HELOC. If your remodel only costs $25,000, all you withdraw on that line of credit is $25,000, and that's all you have to pay back.

One of the main advantages of HELOCs is this flexibility: You only have to borrow what you need. And you don't have to know before applying for this line of credit exactly what that amount will be.

4. Can you pay it back?

Taking out a HELOC seems like an easy way to get quick access to a new line of credit. But before you take out a HELOC, make sure that you can pay back what you borrow.

Unlike a credit card, a HELOC is secured debt, which means that your creditor can take something from you if you fail to pay back what you borrow. In the case of a HELOC, the money you borrow is secured by your home. If you fail to pay back the money you borrow, your lender could begin foreclosure proceedings against you.

5. Are you spending your money wisely?

There are good and bad reasons to take out a HELOC. Paying off high-interest credit card debt is usually a smart decision because the rates on a HELOC are much lower. But homeowners do need to be careful: Again, not paying back a HELOC could result in a lost home. Creditors can't take your home if you don't pay your credit card debt on time.

Paying for major home improvements is also a good investment … usually. But tapping your equity might be a waste if you are making an improvement that won't add much value to your home. Generally, improvements such as updated kitchens and bathrooms, master-bedroom additions, and siding and roofing replacements will add value to your home. Adding a home office or in-ground swimming pool might not.

But maybe you don't plan on selling your home, and you simply want to add something that will boost your enjoyment of it. In that case, using a HELOC for home improvements that won't necessarily result in a big payoff can make sense.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Smartest Ways to Use a Home-Equity Loan

Dan Rafter — Fri, 05 Jan 2018 09:30:10 +0000

Building equity that you can tap into for a loan is often touted as one of the main benefits of owning a home. This loan can be used to pay for everything from major home improvements to a child's college education.

But the truth is that there are good ways and bad ways to use your home's equity. There's also a big risk in doing so: Home equity loans are secured by your home. If you default on your payments, your lender can, as a last resort, take your home. That can't happen with unsecured debt such as a personal loan or credit card debt. (See also: Home Equity Loan or HELOC: Which Is Right for You?)

How should you use a home-equity loan? These are some of the best ways.

1. Fund a major home improvement

Homeowners have long used home equity loans to fund big home improvements such as kitchen remodels or master suite additions. And they can be a smart use of your home equity dollars. Just don't expect a complete return on your investment if you plan on using these improvements to help sell your home.

While a newly renovated kitchen or updated master suite can make your home more attractive to potential buyers, and could help you sell your home faster, don't expect a dollar-for-dollar increase in your sales price. If you spent $15,000 on a new kitchen, that renovation likely won't boost your home's final sales price by $15,000. Buyers will still pay what your home is worth in today's market, no matter how much you improve it.

But if you are using your renovations either for your own enjoyment or to increase the number of buyers who will be interested in your home, using a home-equity loan makes sense. Remember, though, if you plan to sell your home before you pay off your loan or line of credit, you'll have to use the profits from your home sale to not only pay off your primary mortgage, but also your loan. That will eat into the money you take away from your sale.

2. Pay off high-interest credit card debt

Borrowing from your home equity comes with far lower interest rates than credit card debt. While credit card interest rates can reach 20 percent or more, home equity loans have rates that typically fall somewhere between 4 and 5 percent, depending on the terms. It makes financial sense to take out one of the lower-rate loans and use the money to pay off credit cards.

There are caveats, though. Credit card debt is unsecured debt. If you can't afford to make your monthly payments, you won't lose your home because of it. The same isn't true of home equity loans. If you can't afford your monthly payments with these loans, you could lose your home. So only take out a home-equity loan for credit card debt if you're absolutely sure you can afford the monthly payments.

Taking out a home-equity loan doesn't make sense, either, if your credit card debt isn't that high. If your credit card debt is manageable, instead of taking out a loan, pay a bit extra each month to reduce that debt over time. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

3. A child's college education

A home-equity loan can help you pay for a child's college education. And it might be a more attractive option for parents than taking out a private loan or a federal PLUS student loan that could come with high interest rates.

Be careful, though: You don't want to sacrifice your own retirement to fund your child's college education. If taking out a loan to help your children pay tuition will make it impossible for you to save enough for your own retirement, don't take out any loan, including a home-equity loan. Your children do have options for paying for college, from taking out their own student loans to attending more affordable universities.

Your priority should be to save for your retirement. If you're on track for this and can afford to help, a home-equity loan can be a smart way to do that. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

4. Use it to invest

If you've always wanted to invest more in the stock market, a home-equity loan can help. Say you borrow money from your equity at an interest rate of 4.25 percent, and you use these dollars to invest. If your investment yields a conservative return of 8 percent, you'll have made a solid chunk of money.

Of course, there are risks. There is never any guarantee that your investment will increase in value, and you could even realize a loss. But if you are willing to take on this risk, and you can afford a possible loss, then investing home equity dollars into the market could make you wealthier.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Surefire Signs You Have Too Much Debt

Denise Hill — Mon, 18 Dec 2017 09:00:06 +0000

Dave Ramsey once said, "Debt is dumb, cash is king." Truer words have never been spoken.

According to data from the U.S. Federal Reserve, the average amount of credit card debt per U.S. household is over $16,000. And even though debt and consumerism are the American way, staying up at night worrying about money doesn’t have to be the norm.

The ability to make the minimum payments on all your debts each month doesn’t constitute financial stability. Your credit card bills may not be keeping you up at night yet, but if you analyze your financial situation, you may find that you are closer to the edge than you think.

Here are a few warning signs that you have way too much debt:

1. Your debt-to-income ratio is too high

A long-standing rule of thumb says that monthly debt payments (excluding your mortgage) should not exceed 20 percent of your monthly net income. And while rules of thumb are a great gauge, don’t count on this one to be the final word concerning your relationship with debt.

The 20 percent rule is an overarching starting point for evaluating your debt, but it doesn’t consider your total financial picture or your level of income. For example, if your net income is $5,000 a month and you pay little or no rent, $1,000 in monthly consumer debt is manageable. However, if you only earn $2,000 monthly, pay $800 in rent, and have to shell out $400 for credit card debt — you are in trouble.

A better approach is to keep your debt-to-income ratio as low as possible. To stay out of the danger zone, financial experts believe that being at or under 15 percent is considered “safe,” between 15 and 20 percent is “at risk,” and above 20 percent is when sirens are blaring.

2. You can't afford living expenses without a credit card or loan

The dangerous trend of charging day-to-day expenses is becoming increasingly common.

A study conducted by NerdWallet found that household income has grown by 20 percent in the past 10 years, while the largest and most common expenses for most people — medical care, food, and housing — have outpaced income growth.

This is the primary reason why debt reduction is a must. It costs more to simply survive today than it has in times past.

Using credit for standard living expenses, such as gas and groceries, and not paying it off each month is a sign that you are headed for trouble. It could mean that your living expenses exceed your income or that you are living a lifestyle you can’t afford. Financial experts agree that you should only use credit cards to handle the day-to-day if you are paying the balance in full every month. (See also: Should You Pay Your Bills With a Credit Card?)

3. You keep dipping into your savings

Repeatedly dipping into long-term savings to make ends meet or pay for unexpected expenses (car maintenance, traffic tickets, doctor's visits, etc.) indicates that you may have an issue with liquidity and savings. You also probably don’t have enough money to truly handle a financial emergency.

Another good rule of thumb as it relates to savings is that you should have at least three to six months' worth of living expenses in an emergency fund. What constitutes an emergency are things such as a job loss or an unexpected medical expense. Your car note should not be paid from your emergency fund.

If you keep using your emergency stash for every unbudgeted expense, that is a red flag. You need to re-evaluate your budget and spending. You may need to find cheaper housing or transportation and cut some of the little things that nibble away at your budget such as shopping, eating out, and going to the movies. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

4. You can’t pay your credit card balances in full each month

The goal with credit cards should be to pay them off every month. When you only make the minimum monthly payments, most of the money is eaten up by interest and very little goes to paying the principal. Carrying a balance from month to month is costing you.

For example, let's say you owe $5,000 on a card at 17 percent interest with a minimum monthly payment of $100. If you can’t afford to pay more than the minimum, you could be paying that bill for 27 years. And the icing on the cake? Over the lifetime of the debt, you would have paid double the original amount because of interest charges.

If you can’t pay your credit card in full each month, at least pay more than the minimum while keeping the balance as low as possible. You should never carry a balance of more than 30 percent of your credit limit on any one card or in total. (See also: The Fastest Method to Eliminate Credit Card Debt)

5. You have to rob Peter to pay Paul

If you are constantly missing payments, paying things late, or using one credit card to pay another, you are on a high-speed train to financial disaster. Things will only get worse from here if you don’t make some adjustments — quick.

When you use your credit card to pay on other forms of consumer debt — especially other credit cards — you spend more money due to fees you incur. Most credit card, mortgage, and education lenders don’t allow you to pay them directly using a credit card. You have to go through a third-party service or get a cash advance in order to pay with your card, and both of those options come with hefty fees.

The deeper you get into debt, the faster it mounts. If you find yourself in a situation where you are drowning in credit card balances, you need to take action.

Step back, evaluate your situation, and make a plan. The first step is developing a realistic budget and eliminating unnecessary spending. You’ve got to be brutal and savagely cut the things you don’t need.

The next step is to devise a debt elimination plan. This may require you to contact your lenders to renegotiate repayment terms, and you may have to find a way to increase your income. A few options for generating extra income include selling stuff you don’t need or can’t afford, getting a side gig, or even downsizing. The point here is to regroup and take control of your debt instead of allowing it to control you. (See also: 7 Easy First Steps to Paying Off Debt)

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This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Family Money Matters Your Kids Don't Need to Know

Tim Lemke — Wed, 25 Oct 2017 08:00:07 +0000

When you have kids, there will come a time when you want to teach them about money. Some basic personal finance lessons can go a long way toward helping your children understand things like spending, saving, and even investing.

But there are many things about your family's finances that your children don't need to know right away, even if they are curious. Information about your family's income, debt, and spending can be confusing and even troubling to younger kids. And kids are prone to share this information when it's best to keep it private.

Older teenagers may benefit from learning more about your financial situation as they approach an age when they will be earning money and making purchases on their own. But for younger children, especially, it may be best to keep the following financial information close to your vest. (See also: 4 Parenting Mistakes to Avoid When Teaching Kids About Money)

1. Your income

Your kids don't need to know how much money you make. All they need to know is that you love them and will care for them. Younger kids, in particular, have no real sense of the value of money anyway. You could tell them you earn $100 a year and they would think you are rich.

Children also have a habit of blabbing, and you never want to find your children bragging to other kids — or even worse, their parents — about how much money you earn. Your kids will be better off learning that happiness and financial security have less to do with your income and more to do with what you do with money when you have it. This means teaching them about saving, about being charitable to others, and about being appreciative of what you have.

2. Which parent earns more

It's common for one parent to earn more than the other. This is especially true if one parent chooses to stop working or works part-time to raise a family. Children should generally be left oblivious to which spouse is higher earning because salaries don't represent a person's full contribution to the family.

If one parent stops working, it may mean they are taking on a greater share of household responsibilities. And it's also important to note that many of our more important professions are not particularly high paying. A schoolteacher may bring in less money than their banker spouse, but is likely to work just as hard. Rather than share details with your child about which spouse earns more, simply explain to them the value of all work, and give them an appreciation of the broad, non-monetary contributions needed to keep a household going.

3. Your retirement balance

Let's say you've been saving aggressively for retirement and have several hundred thousands of dollars saved. Now, let's say you just told your daughter she can't have ice cream because it costs too much. A child, if she was aware of your retirement savings, might find this baffling. It's hard for young people to grasp that you may have a large amount in savings but are still pinching pennies.

Your retirement savings and overall net worth is not something that should be shared too widely. A child who finds out his dad has hundreds of thousands of dollars in the bank may be motivated to brag, and that's not good. So it's best to keep information about your retirement plan to yourself.

4. Your debts

Debt can be a major source of family stress, but it's a stress that only parents should carry. Your worries about how you'll pay off that credit card bill or how you'll make those car payments are your worries, not your kids'. There may be instances when you need to be honest with your children if there is money trouble, and older children may benefit from lessons in money management, credit, and the cost of borrowing. But as long as you are able to provide and care for your kids, they are best left unaware of your financial debt burden.

5. The price of your home

The cost of your house is public information, but that doesn't mean you need to broadcast it to your kids. The only thing that kids need to know about housing is that they have a roof over their head. What you paid for your house should, to the best of your ability, be kept between the buyer, seller, and real estate agent.

Additionally, it's best not to share too much detail about mortgage debt. If they ever get a hint that you are struggling to make mortgage payments, that will only lead to anxiety.

6. What you inherit

If a relative passes away and leaves some assets to you, the specifics of that inheritance should be kept as private as possible. This is especially true if the inheritance is quite large. If a child learns of a sizable windfall and shares that information with others, that can lead to jealous family members or friends, and could even make you a target for thieves and scammers.

Sometimes, certain family members receive less than others, or are cut out of the will altogether. This can result in family strife that children should not be concerned about.

For older children, it is OK to explain to them how inheritances work, as they may take comfort in believing you'll leave them something when you pass. And there will be a time when you need to tell older children about their own inheritance so they have an idea of what they may have to manage.

7. The cost of gifts

Kids have a way of believing that the most expensive item is always the best. They'll reject something if they believe you got it at a deep discount or (gasp!) second-hand. So parents may be best served by not indicating how much they spent on that video game system or that baseball bat. By hiding the cost of items you buy for your kids, they may be more inclined to evaluate the gift on its merits.

8. Child support payments and alimony

If you and your spouse have divorced, you may be on the hook for child support payments, alimony, or both. These costs are usually determined by courts and can be a major source of tension between parents. The children are best left unaware of these details and any drama or conflict surrounding them. It may be comforting to a child if they are aware that support payments are being made, but sharing specific dollar figures can be problematic.

9. In some cases, the cost of college

This is a tricky one. If your child will end up paying for their own college education, he or she will obviously need to know what they'll be on the hook for. And if you are paying for all or part of college, they will be well served to know how much of a financial commitment you are making toward their education. (It will comfort them to know you are saving as much as possible.) But this information should not come to them immediately. A child's first priority should be to stay in school and get good grades. A young high schooler does not need to be burdened with the stress of whether they need to get scholarships or whether they'll be on the hook for student loans later.

It's also important to understand that final college costs can vary from family to family, depending on scholarships and financial aid. A wealthy family might pay the full price to send their child to an Ivy League school, while a low-income family may pay next to nothing. This family financial information is really nobody's business, so it's important to be judicious in what you share with your child.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Credit Challenged? How Alternative Credit Data Can Help Those With Little or No Credit

Yasmin Ghahremani — Tue, 10 Oct 2017 09:00:06 +0000

If you've got no credit file, or a very thin one, you know how hard it can be to get a credit card or loan. Without a credit record, you can't get a credit score, and lenders can't easily judge how much of a credit risk you are.

Don't give up. Lenders are slowly beginning to consider other kinds of information when making credit decisions. That may help you get approved for credit, even without a traditional credit score. But it's important to also understand how this so-called alternative data is used, and the implications for your privacy.

What is alternative data?

Traditional credit data relies on information about how you've used credit or debt in the past. It is compiled by the three major credit bureaus: Equifax, Experian, and TransUnion. That data is then used by the major scoring companies, FICO and VantageScore, to build your credit scores. (See also: How to Read a Credit Report)

Maybe you haven't had experience with credit, or you had a negative experience that doesn't tell the whole story of how you would behave now with a new loan. Alternative data providers look at how reliably you've paid rent, utility bills, or rent-to-own agreements. They dig up nonpayment information, too.

For instance, LexisNexis Risk Solutions gathers publicly available documents that show your professional licenses, evidence of college attendance, ownership of assets such as a home or boat, felony convictions, and your address stability. "Address stability is the concept that if you're living in the same address for a period of time, you're more stable than if you're bouncing around four times a year," says Ankush Tewari, senior director of credit risk assessment at LexisNexis Risk Solutions. "Multiple client studies have shown that people who move frequently are riskier than people who have a stable address history."

LexisNexis Risk Solutions says the data it collects all has some proven ability to predict creditworthiness. By adding this sort of data to regular credit bureau data, it can help score about 40 million consumers who don't have a regular credit score. The company has paired with FICO and credit bureau Equifax to create an alternative credit score called the FICO Score XD. It's only for people whose credit files are so thin they can't get a regular credit score, and it relies on payment data from a consumer's utility, phone, and other bills.

According to FICO, the new score should allow lenders to score more than half of all previously unscorable applicants. It's found that more than a third of those people turn out to have a FICO Score XD of at least 620, the cutoff point many lenders use for even considering a credit application. That means more people should be getting approved for credit. The trouble is, the product is so new, FICO has not revealed how many lenders are using it.

TransUnion has had a similar scoring model called CreditVision Link since 2015, which incorporates a trended look at traditional credit data (how you've performed over time) with non-credit-related data collected from consumers' banking accounts, payday lending histories, and property, deed, and tax records. TransUnion told The New York Times that about 100 companies — primarily auto lenders and online lenders, but also an increasing number of credit card issuers — are using or testing the score. They're usually able to approve about 20 percent more applicants than they could before.

How alternative data can help you

The driving force behind the use of alternative data is lenders' desire to reach new customers who are creditworthy but can't show it through traditional means. "Lenders tell us, 'We don't need help declining more people. We need help growing our business but without increasing our credit risk,'" says LexisNexis's Tewari.

That should mean good news for consumers who have been responsible with their finances but who haven't had a chance to build credit or have stumbled along the way. Alternative data may help increase your chances of being approved for a loan or credit card. "It allows consumers to show that, while they may not be in a position to get a mortgage or a car payment, or they have no desire to get a credit card, they are still taking care of everyday financial responsibilities," says Kim Cole, community engagement manager for Navicore Solutions, a nonprofit credit counseling agency in Manalapin, New Jersey.

A new company called FS Card is using alternative data to offer a credit card called Build Card to people who would otherwise have been rejected for a credit card. Build Card's target market is consumers with credit scores of 620 or below, meaning their credit is considered subprime. In the past, the only kind of card these consumers probably would have been able to get is a secured card, which requires a deposit of several hundred dollars upfront.

Build Card asks applicants to agree to let the company use alternative data to assess their risk. In addition to traditional credit data, Build Card looks at payday loan information to determine whether an applicant is creditworthy. "We're looking for an inflection point that shows the consumer has changed and is able to take on regular credit," says Marla Blow, CEO of FS Card. Typically this means they've been able to close out a payday loan. "We're looking at the top 15–20 percent of payday loan users," she says.

If the applicant is approved, they'll be given a regular credit card — no security deposit required. Granted, there is a $53 upfront fee, APRs are 25–29 percent, and the initial credit limit is only $500. But it's a step up from a payday loan. And if you do well with the initial credit limit, you can eventually have it increased to $750.

Concerns about privacy and transparency

One of the biggest concerns with alternative data is that people don't know it's being collected and used. Not everyone wants their financial history and other information rounded up and made available to financial institutions. And, as with any organization that collects personal information, there is always the chance that a data breach could happen. It's one thing if information that was already publicly available is stolen, but it may be more worrisome if you've voluntarily shared payment information that then gets disclosed in a breach.

Beyond privacy and security, there are concerns about transparency. If you don't know what information lenders might look at when they're making lending decisions, you can't shape your behavior appropriately. For instance, maybe if you knew that bank overdrafts not only cost you money, but could also cause a lender to frown on your credit card application someday, you would be even more careful about not overdrawing. That's why some consumer advocates say you should first be asked whether you want to opt in to the collection and use of this sort of data.

Consumer groups also worry about the accessibility of information that's being collected. "People need to have access to data collected about them," says Linda Sherry, director of national priorities at Consumer Action. "They need to be able to verify that it's accurate and to put notes on it to say what's happened in their life to justify why these things are happening to them."

You already have those rights when it comes to data on your traditional credit report. The Fair Credit Reporting Act (FCRA) gives you the right to access your credit reports and if you find an error, it says the credit bureau must investigate and so must the bank or credit card issuer who furnished the data. The FCRA also requires creditors and employers to notify you if they've rejected you based on information in your credit report. That way, you can check the information and dispute it if it's incorrect.

LexisNexis says you also have those same rights with the alternative data it collects. If you are, say, turned down for a loan because you've got a lien or judgment, you should be notified of that and given the chance to dispute any inaccuracies in the reporting. "Alternative data must be compliant with the FCRA, which requires consumers have access to data that's used in credit decisions," says Tewari, who adds that his company allows consumers unlimited free access to the data it has on file. You can request it at any time, and as many times as you like. "They have the ability to review it and correct it if there's an error," he says.

What you can do

While data collectors and lenders are in the driver's seat when it comes to the use of alternative data, there are still some things you can do to build your credit.

1. Pay all of your bills on time

This is always important, but even more so in times when companies are collecting information about how you pay all kinds of bills. Keeping on top of payments could help you build credit that you'll need in the future. Avoid overdrafts on your checking account, too, as this is a costly behavior that could also mar your alternative credit profile.

2. Check your traditional credit report and dispute any errors

"If someone has been denied by the big lenders, that's a wake-up call that they need to go into their credit report, figure out why they're being denied, clean up the credit report as much as they can, and get back on track with a good credit history," says Consumer Action's Sherry. "That's the best way to show yourself as someone that lenders will trust."

3. Get a secured card

This is the traditional way to go, and it works. Save up $300, use it as a deposit on a secured credit card, get a $300 credit line, then only make a small purchase with it a few times a year. At the end of a year — maybe sooner — you should have built enough credit to get a regular credit card. (See also: The Best Secured Credit Cards)

4. Ask your lender to look at FICO Score XD

Since this scoring model is fairly new, you likely won't see any immediate results if you request a lender review it. Banks have to pay to get access to this scoring model. But eventually if lenders see enough demand from consumers, they will begin to adopt it. It certainly can't hurt to ask.

5. Consider providing your own alternative data

If you're applying for a loan, it may help to present letters of good standing from your landlord, utility providers, or other monthly services that you pay on time.

6. Don't worry — yet — about modifying your behavior to fit the FICO Score XD model

For instance, if you really need to change addresses for the second time in a year, don't hold back just because it might affect your alternative credit score. A whole host of factors goes into most lenders' credit decisions, so no one factor is given too much weight.

7. Monitor your alternative credit record

This is not as easy as monitoring your traditional credit record, but if you're interested you can find out who's collecting your financial details by consulting the Consumer Financial Protection Bureau's list of 42 consumer reporting companies. You'll have to check with each company's website to find out how to get your free annual report.

8. Correct mistakes if they arise

If you get a note that you've been denied credit due to a piece of alternative data, ask who furnished the information, and make sure it's accurate. You have the same right to dispute errors in alternative data as you do with traditional information on your credit report.

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This article is from Yasmin Ghahremani of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Ways to Save Loads of Money Using Credit Cards

Jason Steele — Wed, 15 Feb 2017 10:30:23 +0000

For many people, credit cards are simply a payment method. But savvy users take advantage of the additional benefits and services that only credit cards offer. A credit card may give you cash back, free travel, insurance, and other services worth hundreds or even thousands of dollars a year. Check out some of the most significant ways you can save money by paying with credit cards. (See also: 4 Reasons You Should Always Use Your Credit Card to Pay)

1. Get an Interest-Free Loan for a Large Purchase

If you can't afford something, it's always best to either forgo it or save up for it before making the purchase. In some cases, however, you don't have the option of waiting. Your refrigerator dies just when you need a new transmission, or your dentist orders a root canal, stat. If you are disciplined, you can swing free financing on that fridge or dental work by getting a credit card with a promotional 0% APR on purchases. These cards allow you to make new charges and carry a balance with no interest for an introductory period — in some cases, as long as 21 months. After that, your purchases will be subject to the card's standard interest rate. As long as you make your payments on time and clear your balance within the intro period, you'll stay out of debt. (See also: The Difference Between Store Credit Offers and 0% Credit Cards)

2. Get a Break From Interest on Debt

Sometimes bad decisions in the past continue to haunt us. Interest that continues to accrue on current debt makes it even harder to make up for those bad decisions. Once you've decided to put your financial life back in order and create a debt repayment plan, one of the best tools you can use to help pay off debt faster is a balance transfer to a card offering an intro 0% APR. These offers allow you to take a break from your interest charges so that you can devote 100% of your monthly payments toward paying down the principle. These interest-free offers can last up to 21 months, giving you the time you need to finally pay off your debt. (See also: When to Do a Balance Transfer)

3. Earn Cash Back

Are you diligent about paying off your credit card bill each month? If so, getting a cash back card is a no brainer. You can get a card that gives a flat rate percentage for all purchases, allowing you to get unlimited cash back. Or you can get a card with a higher return for the category that you spend the most in. For example, certain cards offer big cash back rewards for groceries. There's no reason you shouldn't get rewarded on your everyday expenses.

4. Get Free Travel

You can score hundreds of dollars worth of free travel by using a travel rewards credit card that gives you points or miles every time you use the card — again, assuming you clear your credit card balance every month. There are different types of travel rewards cards. Some allow you to use rewards to get a statement credit for any type of travel purchase you make on the card. Others let you transfer points to airline or hotel loyalty programs so you can claim award flights and stays. Many offer valuable sign-up bonuses that can get you free flights fast, and money-saving travel perks such as free checked bags and even exclusive airport lounge access. The best travel rewards card for you depends on your travel preferences and habits. Need more advice? Check out our favorite travel rewards cards.

5. Use Free Travel Insurance

Credit cards can be essential when you are traveling not just for their security and convenience, but because they include important insurance. For instance, you can decline your rental car company's expensive optional insurance and use your credit card's collision damage waiver policy instead. Some credit cards also have coverage that reimburses you for additional expenses in the event that your trip is delayed or canceled, your luggage is lost, or you're hurt while traveling. Just be sure to check with your card issuer to find out which policies your card has, and what they cover. (See also: 6 Types of Travel Insurance Your Credit Card Includes)

6. Protect Your Purchases

Many credit cards come with valuable purchase protection policies that repair or replace your purchase if it's damaged or stolen, typically within 30–90 days of when you buy the item. In addition, most cards offer extended warranty programs that add up to two years to your manufacturer's warranty. That can save you a bundle on expensive service plans. (See also: How Free Extended Warranties Work on Credit Cards)

Some cards even offer return protection policies, meaning they'll accept your return if the store won't. You'll need to ask to make the return within 90 days of purchase, but that's still longer than many stores allow for refunds.

All this is included as long as you pay for the purchase with a card that offers these features. (See also: 14 Awesome Credit Card Perks You Didn't Know About)

7. Get a Price Match

Not only can your credit card protect your purchases from theft or damage, it may also provide price matching services. If the price goes down on a purchase you made (within a specified amount of time), your card may reimburse you for the difference. Different cards have different policies, but usually you don't have to do anything more than submit a claim. Sometimes the card will even track prices for you and automatically issue you a credit for the price difference. (See also: Citi Credit Cards and Benefits)

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This article is from Jason Steele of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Sources of Fast Cash Besides Your 401K

Carrie Kirby — Wed, 02 Nov 2016 10:00:10 +0000

You're in the middle of a remodeling project, and due to unforeseen circumstances, your money runs out early. You can't live with a half-completed kitchen, but you can't pay for it to be finished right now. And while you have plenty of equity in your home and a healthy retirement account, there's nothing in the bank.

Once you've decided to take out a loan, what is the best source of funds? Are 401K loans or borrowing against home equity ever a good idea?

"The best option is of course is your parents," says financial planner Bob Goldman. But if you can't tap the bank of mom and dad for an interest-free loan, your other best options are probably a cash-out refinance, a secondary mortgage, a home equity line of credit, or a 401K loan. Deciding which one to use requires some number crunching and a hard look at your personal situation, including your job security, your repayment timeline, and your will power.

Cash-Out Refinance

Mortgage interest rates are at historic lows, making now a good time to think about refinancing. When you refinance your home, you are replacing your current loan with a brand-new one, preferably at a better interest rate. Depending on how much equity you have in your home, you may have the option of borrowing cash at the time of the refinance — so that once all the paperwork is done, you'll have a lump sum in your bank account, which you will pay back as part of your regular mortgage payments.

Cash-Out Refinance Pros

A cash-out refinance has a lot going for it.

1. Low Rate

A mortgage often offers the lowest interest rate you can get, outside of promotional offers. And because rates are near historic lows, a lot of people feel that locking in a low rate now for a long loan term is a good call.

2. Low Payments

Because the payback period will be long — generally 30 years — a cash-out refi can ease the month-to-month strain of repayment, especially if you are able to lower the interest rate. If you are paying, say, 5% interest on your mortgage and you are able to refinance to 3.77%, you could add $50,000 to your loan principal while only adding about $100 a month to your payment.

3. No Surprises

As long as you take out a fixed-rate mortgage, you know what your payment will be for the life of the loan.

4. Tax Benefit

The interest you pay on your refinanced mortgage will be tax deductible. According to this mortgage tax savings calculator, if you add $50,000 to a $200,000 mortgage, you could save about $10,000 in taxes over the life of the loan, more or less depending on your tax bracket and the interest rate.

Cash-Out Refinance Cons

As great as a cash-out refinance is, it's not free money.

1. Risk

Your home is on the line. For most people, your house is your biggest asset, and putting it even at slight risk isn't a decision to take lightly. Far too many homeowners ended up losing their homes during the financial crisis when they overborrowed against their homes' value.

2. Fees

You have to pay closing costs, which average about $1,800 on a $200,000 loan.

3. Qualifying

You need good credit, especially for the best rates.

4. Starting Over

One thing people often overlook when refinancing, Goldman says, is that taking out a new 30-year loan pushes out the date when you'll be done paying off your mortgage. "You reset the clock on your mortgage," Goldman says. "You're back to Day One, where you're paying mostly interest."

What's the Total Cost of a Cash-Out Refinance?

Getting $50,000 this way would cost a typical borrower about $30,000 in interest and fees over the course of 30 years at current interest rates. I calculated this using a mortgage calculator to compare the lifetime cost of borrowing $200,000 versus $250,000, keeping in mind that getting cash out usually increases your interest rate by about ⅛ percent. I added $2,000 in closing costs and subtracted $10,000 in tax savings.

Home Equity Loan

A home-equity loan is so much like a mortgage that it's also known as a "second mortgage." The only difference between this and a cash-out refinance is that instead of replacing your original mortgage with a new one, you're adding a second loan also using your home as collateral. But everything else — the fact that you're taking a fixed amount of money, usually at a set rate, and paying it back over time — remains the same.

Home Equity Loan Pros

A second mortgage is a lot like a cash out refi, but with some wrinkles.

1. Simplicity

If you have a great mortgage rate on your home and don't want to change it, this is a way to borrow money while leaving your original mortgage untouched.

2. Shorter Time

If you have a 30-year mortgage but only want to borrow money for five to 15 years, you can do that with a home-equity loan.

3. Tax Benefit

Like a regular mortgage, your interest is usually tax deductible.

Home Equity Loan Cons

You'll need to be sure you understand the downsides of this kind of loan.

1. Interest Rate

Data from Bankrate shows home equity loans averaging at least a percentage point higher than mortgage rates.

2. Qualifying

You need good credit, especially for the best rates.

What's the Total Cost of a home-equity loan?

About $11,000 in interest and fees to borrow $50,000 for 10 years.

If you borrow $50,000 for 10 years through a second mortgage, you would pay about $13,000 interest over the life of the loan. Closing costs would be similar to a mortgage refinance, about $2,000. During that time, the mortgage interest deduction could save you about $4,000 in taxes.

Home Equity Line of Credit

Like a home-equity loan, a Home Equity Line of Credit (HELOC) is a secondary loan that piggybacks on your original loan. As with both types of loans discussed above, your home is still the collateral. The big difference is that while you can get cash out of a first or second mortgage only once, a HELOC is a revolving credit line, meaning that you don't need to know upfront exactly how much you'll need over the life of the loan. You can borrow $10,000 this month for a new furnace, and then $5,000 another month for landscaping.

HELOC Pros

The key advantage of a HELOC is its flexibility, but there are others to consider, too.

1. Borrowing Flexibility

Experts recommend these loans for ongoing expenses such as college tuition, rather than a home repair that you might pay for in a lump sum. If you do a refinance and then realize you'll need to borrow more money, you would need to pay closing costs all over again and might not be able to lock in the same rate.

2. Tax Benefit

Like the above loans, the interest paid on a HELOC is usually tax deductible.

3. Payment Flexibility

Your loan may allow you to pay interest-only for a certain amount of time.

HELOC Cons

As with the other home loans discussed, a HELOC carries some costs.

1. Risk

Like both the above loans, your home is on the line.

2. Rate Uncertainty

Since HELOCs often have variable interest rates, and rates are currently at historic lows, they will probably rise in the future. By law, how much the rates go up is capped — the lender must tell you the maximum potential rate when you take out the loan. The average HELOC rate at the moment is similar to home equity rates, or around a point above 30-year-mortgage rates.

3. Balloon Payments

Many HELOCs start out requiring only interest payments, then expect the borrower to pay the whole principal at the end. If you can't, Goldman said, you'll probably end up refinancing the debt into a much longer, more expensive loan.

4. Temptation

As with credit cards, having a line of credit to draw on can encourage overspending. "It's one thing to be on a diet when the refrigerator is empty. It's another thing to be on a diet when the freezer is full of ice cream," Goldman said. "You'll have this money available to you, so it will require a great deal of discipline to manage it."

5. Qualifying

You need good credit to qualify, especially for the best rates.

6. Fees

You may or may not have to pay closing costs, and may be charged ongoing fees such as annual maintenance fees and transaction fees.

What's the Total Cost of a HELOC?

Rough estimate: $9,500. It's more difficult to predict the lifetime cost of a HELOC if the rate is adjustable and the amount you owe on it varies, but this adjustable mortgage calculator figures that with steady, modest interest increases, a 10-year, $50,000 HELOC could cost $14,000 in interest. Fees vary, but if your bank charges a $50 annual fee, that adds $500 to the cost. Subtract an estimated $5,000 in tax savings.

Borrowing From Your 401K

If you have a 401K retirement account through your employer, you might have the option of "borrowing" from its balance. This is not a true loan, since the money in your 401K already belongs to you. In reality, what you're doing is getting an exemption from early withdrawal penalties and taxation, as long as you promise to put the money back and pay yourself an interest rate — generally one to two percentage points above the prime rate.

Despite all those articles out there warning you to avoid borrowing from your 401K, Goldman says this can be a good option if conditions are right.

"If I had my choice, I would definitely borrow from a 401K," he said. Although neither borrowing against your home or borrowing against your retirement are without risk, at least if you fail to pay back your 401K loan, you're not out on the street.

401K Loan Pros

This type of loan may be the easiest of all to get — it's your money, after all!

1. Qualifying

You don't need good credit to qualify for a good rate, making this an attractive option for folks who wouldn't qualify for a regular loan.

2. Risk

If you fail to pay it back, it won't affect your credit score or send collection agents after you. You also don't risk having your home repossessed.

3. No Bank

You pay the interest to yourself, which is sort of like not paying interest at all.

401K Loan Cons

There are not too many downsides to borrowing from your 401K — but there's a big one you should think very carefully about.

1. Risk to Your Retirement Savings

Failure to pay back this loan could cause great harm to your retirement account. For instance, if your employment ends for any reason, the loan becomes due immediately. If you can't pay it, it's converted to a distribution, which means that you pay taxes and (if you are under age 59 ½, a 10% penalty). So you're basically stuck at your job while you have a 401K loan out; you might end up turning down a new job offer if you don't have the cash to pay the loan. Worse, if you get fired and can't pay it, you could be out of a lot of money in addition to having no job.

2. Double Taxation

The disadvantage that people often don't consider with 401K loans is that while you filled your account with pretax dollars, you repay the loan with post-tax dollars — but you'll have to pay tax again on the money when you eventually withdraw it in retirement. How much you can get: While home loans let you borrow a percentage of your home equity, 401K loans are capped at $50,000 or half your balance, whichever is less.

What's the Total Cost of Borrowing From Your 401K?

It would vary greatly depending on how close you are to retirement and how well the market does during your loan. Using this calculator, I came up with an estimated cost of $25,000 in lost investment and tax benefits to borrow $50,000 for five years. That assumes your retirement account would have $10,246 less in it at the time of retirement, and that you lost out on $15,000 worth of tax benefits.

Bottom Line

By these calculations, home equity loans tend to be less costly than mortgage refis or 401K loans. You should run the numbers using your own circumstances before making that determination for yourself.

Cost is not the only thing to consider when deciding how to borrow. There's also the degree of risk involved, and the amount of time you have to pay the money back. Again, personal circumstances will dictate your choice: If you only need the money for a short time, for instance, until your stock options vest next year, a 401K loan might be the best choice. If you can't afford to pay the loan off in the near-term, the refinance gives you the most time.

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Stop Student Loans From Ruining Your Life

Matt Bell — Tue, 11 Oct 2016 09:30:21 +0000

Student loans have become a huge problem. According to an analysis of government data from Edvisors, some 70% of recent college grads have education debt, and the total amount borrowed works out to an average of more than $37,000 per borrower. So burdensome is this debt that more than 40% of borrowers are behind on their payments or have stopped making them altogether, according to the U.S. Education Department.

What can you do to avoid that fate? Here are four ideas — two geared toward families of high school students who haven't taken out student loans yet, and two aimed at college students who have borrowed.

Before You Borrow

Of course, the best way to keep student loans from ruining your life is to avoid borrowing in the first place. Here are two steps that can help.

1. Get Clear About What You're Going to Study

One reason why college costs so much for so many students is that so few graduate in four years. According to "Four-Year Myth," a report from Complete College America, the four-year graduation rate at public universities ranges from 19% to 36%. Some who fail to graduate in four years drop out, others flunk out, but many others end up with extended stays on campus because they change majors.

College is a very expensive place to "find yourself." It's far better to enter school with as much clarity as possible about what you want to study.

For high school juniors and seniors, there are numerous online assessments designed to help connect their skills, interests, and temperament to a number of possible careers. Some to consider include:

Knowing what you want to study can help you avoid the five or six-year college plan and its associated costs.

2. Take a Gap Year

Taking a year off in between high school and college has been a popular practice in Europe for many years and is rapidly growing in popularity in the U.S. So much so that there is now a gap year association as well as consulting organizations that help families (for a fee) determine whether a gap year makes sense for their children, and if so, how to best structure the gap year. Some schools will accept students and then allow them to defer enrollment for a year. The University of North Carolina even offers a global gap year fellowship.

A gap year can be used to earn money for college or explore career interests. Either way, it can help lessen the need for loans. (See also: 8 Money Moves Students Should Make During a Gap Year)

After You Borrow

If you have already taken out loans to pay for college, here are two practical steps for minimizing the burden of such borrowing.

3. Create a Post-College Budget

Numerous surveys have found that students with education loans have little idea what they've gotten themselves into.

A recent survey by Lendedu, a company that helps students refinance their education loans, found less than 10% of student borrowers understood how long it would take to pay off their loans or what interest rate they were being charged. Less than 30% understood that if they fail to repay on time, the government could garnish their wages or withhold their tax refunds.

A couple of years ago, a study by the Brookings Institute found that among first-year students who had students loans, 17% said they didn't realize they even had loans.

If you're going to borrow, you need to know that you owe, what you owe, and what it's going to take to repay. One of the best reality checks is to calculate the monthly cost of your loan payment while you're still in school. Then create a detailed post-college budget using a monthly Cash Flow Plan form.

Creating a budget that includes student loan payments may motivate you to avoid taking on more debt. At very least, it'll help you understand how much you can afford for housing and other expenses after you graduate and may persuade you to avoid taking on other debts, such as a car loan.

4. Prioritize Accelerated Repayment

Under a standard loan contract, a student loan is to be paid off in 10 years. But you don't have to take that long, and the sooner you can be done with debt, the better. Especially since there are no penalties for paying off a student loan early, commit now putting your debt on an accelerated payoff schedule.

The monthly cost calculator mentioned above enables you to run some what-if scenarios based on adding different amounts on top of your required payments. Seeing how much more quickly you could be out of debt may motivate you to live well beneath your means after graduating in order to prioritize accelerated debt repayment.

Today, the burden of student loans is causing many young people to delay getting married, put off starting a family, and give up on buying a home. But it doesn't have to be that way for you.

Whether you're a high-school student who's just thinking about college financing options or a college student who has already taken on debt, these simple steps should help you keep student loans from taking over your life.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Times Cash Is Not King

Tim Lemke — Thu, 15 Sep 2016 09:00:05 +0000

It's often said that using cash can be a powerful way to control spending and avoid debt. But cash can be highly overrated. It doesn't grow much in value, it's annoying to carry, and it's hard to track.

Here are some times when cash is not all it's cracked up to be.

1. When Interest Rates Are Historically Low

It makes sense to build up an emergency fund of three to six months' worth of living expenses. But when interest rates are super low, like they have been in recent years, any additional cash isn't going to do much for you. Why sit on a pile of cash earning a paltry interest rate and merely racing against inflation, when you can invest and earn a much healthier return? Even billionaire investors like Warren Buffett agree. In a 2014 letter to Berkshire Hathaway shareholders, he wrote that over the long term, cash is actually a riskier investment than stocks, due to the potential of inflation wiping away any gains.

2. When a Company Has Too Much of It On Hand

A company with cash is not necessarily a bad thing, but investors can get ornery when there's too much. If you're a shareholder, you want to see that cash returned to you in the form of a dividend, used for acquisitions or stock buybacks, or reinvested to grow the company's businesses. Apple, which consistently has more than $100 billion in cash on hand, began issuing dividends after facing criticism from investors.

3. When You Want to Track Each Dollar You Spend

For those looking to curb spending and stay out of debt, using cash can be the way to go, as you can only spend what you have in your wallet. The downside, however, is that it's harder to keep meticulous records of everything you've purchased. A big part of money management is understanding your spending patterns, and it's easier to track purchases when you use a credit or debit card and receive statements, either online or on paper. Using cards also makes it easier to use online tools like Mint.com, which can categorize your spending and help you create budgets. Unless you are very conscientious about saving receipts or writing down each purchase, using cash won't help you understand your spending habits.

4. When You Are Traveling

There are some advantages to using cash when on a trip. Cash can be used to tip cabdrivers and bellhops, and is handy for when you shop or eat at places that do not take credit cards. Using cash in a foreign country can also help you avoid fees on debit and credit cards, and it's good to have some for an emergency. But cash is not replaceable. If you lose your wallet with hundreds of dollars in it, you're usually up a creek. And using cash won't get you any reward points on things like hotels, rental cars, or restaurants. Additionally, if you are traveling to multiple foreign countries, it's annoying to accumulate sums of foreign currency that you'll have to exchange back once you get home.

5. When You Loan Someone Money

Cash doesn't leave a record. That's great if you're Walter White and need to launder some money. But if someone borrows money from you, it's best to write a check, or use an electronic transfer that leaves a record. You may be unable to collect a debt if you have no proof that you lent someone money in the first place.

6. When You Get Paid

There may come a time in your life when someone offers to pay you "under the table." This means that the employer is simply giving you cash for work without consideration of paying taxes. In theory, you can make more money if an employer doesn't pay payroll taxes, but it's also illegal in most cases.

When you are paid in cash, you lose out on certain protections and benefits. You have no access to retirement benefits, for example. There's no record of your employment, which means you'd be unable to collect unemployment benefits if you lose your job. A person paid in cash would also not be eligible for disability or workers' compensation benefits. And if they're not paying payroll and other taxes, it can be illegal, which we entirely urge you to avoid.

7. When You Are the IRS or Law Enforcement

According to The Wall Street Journal, the use of cash to evade taxes costs the federal government about $500 billion in revenue annually. Cash, the newspaper notes, helps facilitate "racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism." Cash is super for those who are up to no good, but a nightmare for those looking to catch the bad guys.

8. When You Can Use an App

I was out to dinner with friends recently and we needed to split the check. Some of us had no cash. Some did, but only in big bills. It was a nightmare. Luckily, we were able to settle things by using smartphone apps that allow you to transfer money with little more than an email address. Apps such as PayPal and Venmo prevent the need to carry lots of cash, and can even prevent you from stiffing your friends with too much of a dinner bill.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?

Dan Rafter — Thu, 16 Jun 2016 09:30:21 +0000

You know you need an emergency fund, that pool of savings that you can dip into to cover the costs of replacing everything from a burst water heater to your car's blown transmission. But does it ever make sense to use a Roth IRA as that emergency fund?

The short answer? It might. If you're careful about your withdrawals.

You usually think about Roth IRAs as retirement vehicles. But with a Roth IRA, you can also withdraw from your contributions at any time without penalty, even if you are younger than 59 ½. That's because you've already paid taxes on your contributions.

No Penalties From Contribution Withdrawals

Because of this quirk, a Roth IRA can work as an emergency fund and retirement fund at the same time. You make your yearly deposits — for 2016, you can contribute a maximum of $5,500 every year into a Roth IRA (unless you are 50 or older, in which case you can contribute a maximum of $6,500 a year) — and watch that money grow as you near retirement. But if an expensive emergency comes up, you can withdraw the funds you need, as long as what you are withdrawing is coming from the money you contributed to your Roth IRA, and not from the dollars that those contributions have earned.

You'll Pay for Earnings Withdrawals

In other words, withdrawing your contributions is never penalized. Withdrawing from your Roth IRA's earnings, though, will leave you with a penalty and a tax hit. If you withdraw the money that your Roth IRA has earned before you hit the age of 59 ½ — aside from a few special circumstances — you'll not only pay taxes on those dollars, you'll also have to pay a penalty of 10% of whatever you withdraw.

Say you withdraw $2,000 worth of earnings on your Roth IRA before you turn 59 ½. Not only will you have to pay taxes on that money, you'll also have to pay a penalty of $200.

Fortunately, it's not easy to withdraw your earnings too early. You'll have to request the withdrawal from your brokerage, mutual fund, or bank. These financial institutions will know if your withdrawal request is high enough to cut into your earnings. If this does happen, it's best to find an alternative source of funds, unless you are not bothered by the idea of paying extra taxes or an additional penalty.

The Annual Cap Means You Can't Pay It Back

There is another disadvantage to using a Roth IRA as an emergency fund. Say you withdraw $2,500 to buy a new furnace. You can still only contribute your maximum to your Roth IRA each year.

If you can only contribute $5,500 each year, you can't make up for that $2,500 withdrawal by contributing $7,000 instead. This could slow the pace of your retirement savings.

You'll also need to be careful with your investments if you plan on using your Roth IRA as an emergency fund. You should place your money in safer, more conservative investment vehicles such as CDs and bonds. That way, the odds are greater that more of your money will be available in case of a financial emergency.

Whether you use a Roth IRA, a traditional savings account, or some other savings vehicle as your emergency fund, one factor doesn't change: You need to build and maintain that fund. How much money you need in your emergency fund varies, but most financial experts recommend that you have at least six months of daily living expenses saved up. More, of course, is even better.

Have you ever pulled money from a Roth IRA to cover an emergency? Would You?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Ways Life is Wonderful When You're Debt-Free

Mikey Rox — Tue, 19 Apr 2016 10:30:10 +0000

Some people think debt is the norm rather than the exception. To each his own. Just know that this type of mindset can become dangerous, especially if you develop the habit of financing anything and everything.

Credit cards and other loans can put what you want within financial reach, but a life without debt can be rewarding. Here are six ways life is frickin' awesome when you're not burdened by a negative net worth.

1. You Have the Freedom to Work Less

The more debt you have, the more you have to work to keep up with monthly payments. Whether it's a house payment, a car payment, or credit cards, debt holds your freedom hostage and keeps you stuck in a career or job you don't like. Think of how great life could be if you had fewer bills. Rather than working a 40- or 50-hour week, you might get by working only 20 or 30 hours a week. With fewer financial pressures, you can quit a high-stress job and find satisfying work, although you might earn less.

2. You Can Retire While You're Still Young

Even if you know the importance of early retirement planning, debt can limit how much you stash for the future. Eliminating needless debt and reducing monthly expenses frees up disposable cash, allowing you to grow your retirement account faster. A sizable account might be the difference between working into your 60s and retiring young while you're still healthy and energetic. And that's not even considering how good the "everybody envies me" factor is gonna feel.

3. You Can Finally Have a "Real" Savings Account

Not only can debt-free living boost your retirement account, there's also an opportunity to grow your personal fund. Imagine what you could do with a "real" savings account. I'm not talking about $500 or $1,000, but rather tens of thousands of dollars. This is money that can be used for an emergency, home improvements, investments, or a good time. You can take a much-needed (and deserved; do you, boo!) vacation or deal with home repairs without relying on a credit card.

If you're struggling to build your personal account, be honest and consider whether your lack of savings has anything to do with debt payments eating up your extra cash. If you could eliminate $1,000 a month in debt payments (between credit cards, student loans, and automobile loans), you could save $12,000 in just one year.

4. You Will Become a Smarter Spender

I've learned something from my own experience with debt: It is easier to accumulate new debt when I already have debt. Whenever I have a zero balance on my credit card, I'm more cautious and conscious of how I spend my money and use the card. I'll second-guess or rethink the smallest purchases. It doesn't matter if it's only $5 or $10, I'll wait until I have cash to avoid using the card. But the moment I give in and use the card, I stop second-guessing myself and I continue using the card.

I've had debt discussions with others and found that some people feel the same. Maybe it's just our experiences, or maybe there's a connection between existing debt and new debt. Either way, getting rid of debt can make you more aware of your spending habits. Debt elimination can be a long process. Reflecting on the effort it took to become debt free (and the benefits) is motivation to remain debt free.

5. You Will Experience Less Financial Anxiety

Debt keeps you enslaved to a bank. And sometimes, the amount you owe can heighten your anxiety level. This might be the case if payments stretch your budget beyond a comfortable limit. If you get into hot water, you could lie awake worrying about late payments, a damaged credit score, or collection calls. On the other hand, when you live within your means and don't rely on financing, you enjoy an inner calm and better financial security. When you own your stuff outright, you don't have to worry about anybody taking your items, unless, of course, you fail to pay taxes on your home or car. Then, well, you better hide.

6. You Don't Have to Pay to Borrow

One of the best things about avoiding debt is that you avoid interest. Interest is the cost of borrowing, and most banks charge some form of interest when you take out a loan or use a credit card. The longer you carry the balance, the more interest you pay, which can add up to hundreds or thousands of dollars depending on the amount financed.

Borrowers with superb credit may qualify for 0% financing for furniture, credit cards, or automobiles. But these promotions are short-lived and only beneficial if you pay off the balance during the introductory rate period. If not, interest kicks in. In the case of financing furniture, if you miss a payment or don't pay off the balance during the promotion period, you could end up paying retroactive interest. All this equates to extra money you're spending for which you have nothing to show. A fool's game, for sure. (See also: When to Use a 0% Balance Transfer to Pay Off Credit Card Debt)

What would you do if you were debt free? Travel? Retire? Throw the party to end all parties? Let's talk about it in the comments below.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: