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Revolving, Installment and Open Accounts: What to Know About the Three Types of Credit

Not all credit is created equal. The credit bureaus, along with each of their scoring models, all take into consideration the types of credit accounts in a portfolio. While credit mix only accounts for 10 to 20 percent of a credit score, it’s important to familiarize yourself with the three basic types of credit accounts and understand how to manage them properly.

The Three Types of Credit Accounts

Revolving

Credit cards are the most common type of revolving credit accounts. Credit is extended to you on a revolving basis, up until the maximum amount. Once you make your payment — minimum or otherwise — the remaining balance will be rolled over into the next month, subject to finance charges.

Installment

Mortgages, auto loans, student loans and personal loans are considered installment loans because you are required to pay a fixed sum each month until the loan is paid off. The monthly payment is based on such factors as total amount borrowed, the time period of the loan and the agreed-upon interest rate. Of course, you are free to pay more than the installment amount each month, which can accelerate the term and may trigger prepayment penalties.

Open

This type is not usually considered a credit account, but it very much is. An open credit account would be one taken out with a utility, cable TV, internet provider or a mobile provider. While not considered credit in a traditional sense, the service provider is expecting you to pay your bill each month, and some providers may run a credit check before initiating service. Open accounts do not usually charge interest — though they might for any unpaid balances — and can appear on credit reports if the service provider reports late payments. 

Why a Mix of Credit Types Is Important

Having a mix of credit account types and paying them off as per your borrower agreements can help demonstrate responsibility to different types of lenders. Banks and financial services companies may consider you less of a credit risk because you’re demonstrating an ability to successfully manage different types of credit and the payment terms associated with them. Indeed, opening and maintaining different kinds of credit, such as a credit card and an auto loan, can help build a credit score. 

However, because credit mix only accounts for about 10 percent of a credit score, it’s not a good idea to open a new type of credit line simply in hopes of boosting a credit score.

Raising Your Credit Score

Because each credit agency calculates its own credit score using its own models, differences between reports can produce vastly different credit scores. Most borrowers seek the highest score possible, of course, and one that is consistent. The ability to view, understand and manage your credit is key to putting yourself in the strongest position when applying for a mortgage.  Borrowers should consider utilizing a credit monitoring company that tracks movement in scores and provides helpful suggestions for actions to increase your score. Such a tool can help individuals understand the dynamics of credit and the impact of credit behaviors on their overall score.

Sources:

Fico – What Does Credit Mix Mean? 

TIME – What are the 3 Types of Credit?

Experian – How the Right Mix of Credit Can Boost Your Credit Score

The post Revolving, Installment and Open Accounts: What to Know About the Three Types of Credit appeared first on SmartCredit Blog.

from SmartCredit Blog https://blog.smartcredit.com/2021/07/12/three-types-of-credit/ source https://smartcredit1.tumblr.com/post/656546328260853760

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5 Alternative Ways to Build Up Your Credit Score

Is there a more sophisticated way to build up your credit score beyond paying off accumulated debts every month? Perhaps you need to accelerate the improvement of your credit score to qualify for a personal loan or mortgage. Or you might only have a little leeway to play with, depending on your current financial situation. Although you can’t ‘game’ the credit scoring algorithm as such, you should find that these five strategies help you achieve your best possible score. 

Make (Your) Credit History

Your credit history, the personal chronicle of how often you make loan and credit repayments on time over a period of time, is the single most significant factor in determining your credit score. Yet 62 million Americans don’t have enough credit history on their report to even generate a score. This is called having a ‘Thin File,’ and it means you’re essentially paying the penalty for never having applied for credit. 

To build your credit history, start early with manageable borrowing on credit cards, for example, and always repay on time. If you can build up a history across a mix of loans, such as car financing, store cards and student loans, you will receive a further boost. You don’t even have to carry a balance on your accounts to increase your credit score, so you can build your credit history without overstretching yourself financially. 

Check for Mistakes

You only get one free credit report a year from each of the big three credit agencies, which means you can be some way behind the actual credit scores that most lenders use. Even more worryingly, your score might not just be out of date. As many as 26% of consumers in the U.S. have at least one error in their credit report. This could be a negligible error, such as a spelling mistake, but for one in five consumers, the error is significant enough to affect their risk profile negatively. That’s why it’s essential to take a proactive approach and check your report early and often for any errors. 

Keep your Credit Utilization Low

If you are consistently nudging the upper limits of your credit utilization, your credit score can either languish or decrease. Aim to follow the 30% rule instead, paying off your higher balances and interest rates first, paying twice a month if possible, and avoiding minimum payments until your credit utilization is no more than around a third of your available limit. It works the other way too. If you’re a customer who regularly pays on time, you may be able to lower your utilization rate by getting the issuer to raise your credit limit. 

Tip: Sometimes, the payment due date you see on your credit card statement is actually later than the date the issuer reports to the credit bureaus. That means that even if you pay off your balance, it is too late to affect your score. The solution? Find out what day the issuer reports, and pay before that date. 

Request Soft Searches for New Credit

Every time you apply for a new loan, the lender will make a search on your credit report. Since ‘hard’ inquiries temporarily impact your credit score, ask the lender to make a ‘soft’ search if possible. A soft search will reveal your current debt, existing loans, and payment history to the lender, but it is only visible on your report to you. A hard search goes into more forensic detail, and it does leave a trace on your report. Typically, hard searches are only necessary when you have agreed to a loan or sign up to a new contract. If the purpose is just to scout out the options, request a soft search only. 

Monitor Joint Accounts

If you’re wondering how joint checking accounts affect your credit score, bear in mind that regular deposits into (and debits from) a joint account have no impact. Once there are missed payments or unpaid debts on a joint mortgage or loan, however, your credit score could be affected. That’s why it’s important to engage joint account holders in your quest to build your credit score, or close any joint commitments where the other signatory is likely to put your score at risk. Note that being married to someone or sharing the same address does not make you joint account holders. The term applies only to co-signatories of a loan. 

It’s important to emphasize that there’s no quick fix when it comes to achieving your best credit score. Rather, the focus should be on developing the habits and skills that yield results. Need help? You’ll find the tools you need to track, build and master your credit score here. 

Sources:

Money Advice Service – Next How to improve your credit score

Which? – How to improve your credit score

Forbes – 3 Ways To Improve Your Credit Score As An Entrepreneur

United Financial Credit Union – Looking to Improve Your Credit Score? Follow These 7 Tips

Investopedia – How to Improve Your Credit Score

Forbes – How To Improve Your Credit Score – Forbes Advisor

The post 5 Alternative Ways to Build Up Your Credit Score appeared first on SmartCredit Blog.

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SmartCredit® Action Buttons: A Big Leap Forward for Consumers

Here’s something most Americans probably don’t know. Up until the FICO® score was created in 1989, people couldn’t actually see their credit score much less do anything to change it. Even worse, they were often denied credit because there was no unbiased standard for evaluating them fairly. Which meant creditors could refuse loans based on someone’s character or even their appearance.

Thankfully, the FICO score removed bias from the equation and only focuses on your ability to repay a loan. However, it still doesn’t make it any easier to dispute errors on your credit report. Written disputes and phone calls with long hold times to Credit Reporting Agencies (e.g. Experian, Transunion, Equifax) can be time consuming and frustrating.

Of course, knowledge is the most powerful tool you have to overcome these roadblocks. In addition to the solutions covered in this blog, resources like badcredit.org help you better understand how credit works. This includes useful insights on the history of credit scores.

The Impacts of COVID-19

Not surprisingly, the pandemic has only worsened the challenge of disputing errors. With growing jobless rates and economic insecurity, more people than ever are reporting mistakes on their credit reports. In fact, between September and February of 2021 alone, consumers lodged over 13,000 complaints saying that their disputes were not addressed within 30 days. That compares to just 2,000 similar complaints in 2019, a whopping 550 percent increase All of which compounds the anxiety a lot of people already feel about their credit score.

But You’re More Than Just a Number Right?

Cliches aside, we all know there’s a person behind each credit score, but it doesn’t necessarily feel that way when you apply for a loan.No matter how hard you try to get around it, your fate is decided by the creditor, and your score plays a huge role in their decision. If only you could take action in a fast and efficient way…

Push-Button Power Is the SmartCredit® Way

Most of us associate pushing buttons with immediate or fast results.It’s something you can actually do with your finger, a satisfying experience.SmartCredit® gives you that ability. The Action buttons on SmartCredit.com help you send communication directly to your creditors to:

Fix errors on your credit

Request goodwill corrections

Charge off debts

And report/remove ID Theft

And contacting your creditors directly is what makes our Action buttons so powerful. This completely bypasses the need to contact or deal with the CRAs (e.g. Experian, Equifax and Transunion), and going straight to your creditor(s) is often a much faster and more effective way to get issues resolved. They’re also required by law to contact all three CRAs, so going directly to the creditor can resolve issues on all three of your credit reports.

That’s because all creditors are bound under the Fair Credit Reporting Act by the same rules as the CRAs. So, just as disputes to CRAs must be resolved in 30 days, the same goes for disputes directly to creditors. 2 This approach also helps you avoid the pitfalls of dealing directly with CRAs. For example, CRAs often reject or ignore disputes on technical grounds, but a direct dispute with a creditor prevents that from happening.

Additional Advantages of Our Direct Approach

Processing a Dispute is Faster with Action buttons Snail mailing disputes to a CRA can be time-consuming, and you must pay for postage. Once they process your information, they then communicate with the creditor which can take up to two weeks. Key Takeaway: our Action buttons eliminate the middleman (CRA) so you can deal directly with the creditor. This saves you time and hopefully money too, because it’s all done online on your end and no postage is needed.

A Single Dispute to a Creditor Simplifies the Process

The problem with writing to three different CRAs? It can result in three different interpretations of your disputes, which means conflicting information is sent to the creditor. Not to mention that each CRA processes disputes at different times, so the creditor may get requests at different times. 

Key Takeaway: our Action buttons help you send a single dispute to each creditor, so you avoid the confusion and inaccuracy.

Permanent Results

Anytime a CRA makes a change, there’s always the risk the creditor will undo that change in their next report to that CRA. EXAMPLE: you’re confident your payment a few months ago wasn’t late, but the creditor still reports that it is. You mail the CRA a dispute letter proving you made the payment on time. The CRA then removes the late payment, but here’s the catch: the creditor never fixes their records, so the late payment reappears in their next monthly report to the CRA. Key Takeaway: who needs to get stuck in this non-virtuous cycle? Communicating directly to the creditor with Actions buttons fixes the problem directly at the source.

Always Stay Informed

Like anything that impacts your life in a big way, it’s best to keep a close eye on your credit score and financial activities. SmartCredit® not only can help you add points to your credit score fast, but also provides a clear picture of your most important information.

Our ScoreTracker shows your:  

Credit Score: based on your latest TransUnion credit report.

Auto Score: over 90% of all Auto lenders require this when considering you for a loan.

Insurance Score: may be used when you apply for any type of insurance.

Hiring Risk Index: increasingly used by employers as part of their hiring/screening process.

Plus, our Money Manager gives you full visibility of your financial and investment accounts in one convenient place:

Stay informed with sites that bring together the web’s top finance experts, who inform and educate users to make better credit decisions and create a brighter financial future. 

It’s Only Getting Better

Thankfully, we’ve come a long way since the FICO score was created, but people also need tools that put them in charge. After all, your credit score can actually change your life, for better or worse. WithSmartCredit® you can take command of your credit and finances with the push of a button. We even offer a personalized plan in our ScoreMaster® feature to help meet your future goals. It’s a big leap forward for consumers, and we’re just getting started!

Sources:

1 ConsumerReports.org, 2021

2 FTC.org, 2021

The post SmartCredit® Action Buttons: A Big Leap Forward for Consumers appeared first on SmartCredit Blog.

from SmartCredit Blog https://blog.smartcredit.com/2021/06/30/smartcredit-action-buttons-a-big-leap-forward-for-consumers/ source https://smartcredit1.tumblr.com/post/655459163095302144

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What to Do If You Are a Victim of Identity Theft

Fraud and identity theft are at an all-time high, thanks to the pandemic. Fraud linked to the COVID pandemic has cost Americans $382 million, according to the Federal Trade Commission. As of March 2021, more than 217,000 people had filed a coronavirus-related fraud report with the agency since January 2020, according to federal data. 

Criminals continue to prey upon vulnerable employees stuck at home, many of whom use unsecured devices and apps and can’t rely on an IT department for help. When they receive a legitimate-sounding offer for help getting another stimulus check or government relief, unsuspecting users might unknowingly hand over their credentials to cybercriminals. The Consumer Financial Protection Bureau fielded 542,300 complaints in 2020, a 54% increase over 2019.

What should you do if you find yourself the victim of identity theft? If you believe that you have become a victim of identity theft, there are several steps you can take right away.

1. Call the Companies Where You Know Fraud Has Occurred

Call the fraud department of the bank or credit card company immediately and let them know that your identity has been compromised. Do not email them or use digital channels, such as the website chatbot or the company’s Facebook Page — call and request to be connected to the fraud department immediately. 

You can ask them to close or freeze the accounts, or send you a new card with a new number, depending on their policy. They will also most likely prompt you to change your login names, passwords, PIN numbers or other forms of authentication for these accounts.

2. Place a Fraud Alert and Request Copies of Your Credit Reports

According to the Federal Trade Commission’s IdentityTheft.gov website, you are able to place a free, one-year fraud alert on your credit reports by contacting just one of the three credit bureaus — the one bureau you contact must contact the other two. 

Experian.com/help 888-EXPERIAN (888-397-3742)

TransUnion.com/credit-help 888-909-8872

Equifax.com/personal/credit-report-services 800-685-1111

Fraud alerts make it harder for someone to open new accounts in your name. By having an alert on your report, a lender or any other business must verify your identity before it can issue new credit in your name. Fraud alerts can be renewed after one year. 

3. Report Identity Theft to the Federal Trade Commission

Complete the online form with as many details as you possibly can. You can also call 1-877-438-4338. 

4. File a Report with Your Local Police Department

While local law enforcement officials cannot help you if you were the victim of identity theft online or overseas, they can help you if you were the victim of identity theft locally. Proof of local identity theft can help with an arrest, or aid in assembling evidence for a case.

Contact your local police department and file a formal police report. Provide your FTC Identity Theft Report, proof of your identity and address and proof of the theft (bills, notices). 

5. Strengthen Your Overall IT Security

Though the bank or credit card company may have had you change your login credentials, you should also consider changing the passwords for your devices, apps, and even your WiFi router. 

If you don’t have it already, upgrade your security measures by installing two-factor authentication, so that more than just a password is required to enter your accounts. This can be a fingerprint (or other biometric modality), temporary PIN number, or a number generated by a third-party authenticator app  that grants you access — in addition to a password.

6. Scan Your Accounts for Unauthorized Activity

Though you already contacted the bank or credit card company where the fraud originally occurred, scan your other accounts to determine if there has been any unusual activity. This can be especially helpful if you use the same username and password across multiple accounts (which, as a habit, is not advisable).

Check for unusual activity even in non-financial accounts, such as online retailers and even mobile food delivery apps in which you have credit or debit card credentials stored. Compromise or misuse can occur in the most unlikely of places.

Sources:

IdentityTheft.gov – What To Do Right Away

US News – What To Do If Your Identity Is Stolen

CNBC.com – Covid-related fraud has cost Americans $382 million

The post What to Do If You Are a Victim of Identity Theft appeared first on SmartCredit Blog.

from SmartCredit Blog https://blog.smartcredit.com/2021/06/30/what-to-do-if-you-are-a-victim-of-identity-theft/ source https://smartcredit1.tumblr.com/post/655451631327019008

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Is Credit Monitoring Worth the Cost?

Only a third of Americans typically check their credit scores each year, but it’s important to know yours even if you’re not currently planning to apply for a loan, mortgage or credit card. That’s because your credit report is of interest to more than just lenders. Fraudsters and identity thieves thrive on dormant or unattended credit reports. Find out why credit monitoring is worth the cost, and how to get the most out of this valuable service. 

How Credit Monitoring Works

The task of compiling credit reports falls to three agencies only in the U.S. — TransUnion, Equifax and Experian. Every time you apply for a mortgage, personal loan, credit card, store card or car loan, the lender will request your credit score from one or all of these bureaus. You are entitled to one free credit report from these agencies per year, giving you an annual snapshot of any changes in your credit score or soft and hard inquiries on your report. 

For a more in-depth overview of your credit score, there’s the option of using a credit monitoring service such as SmartCredit, which usually carries a monthly fee. The advantage is that you gain more insight into the factors that contribute to your credit score and will be alerted to any changes in your profile —  notably, hard searches by lenders could impact your score. Credit monitoring is worth the cost if you want to take a more proactive approach to achieving your best possible credit score. 

Are Free Credit Monitoring Services Enough?

Alongside the annual report from the three main credit bureaus, you can also find free credit monitoring services online. While few of us would quibble with a free service, that doesn’t mean there’s nothing to lose. For a start, free credit monitoring services won’t usually pull data from all three credit bureaus, leaving you with an incomplete picture. More importantly, these services offer limited identity theft protection. The stark reality is that fraudsters are relentless and persistent, and they can slip easily undetected through anything but the most robust defences. 

The Value-Added Services to Look Out for in Credit Monitoring

An annual credit report will tell you where you are now, but achieving your best possible credit score starts with learning more about your patterns and behavior. The best credit monitoring services provide insightful tools to help you manage your money, as well as actionable advice on developing sound financial behavior. They also offer the full picture. 

With SmartCredit monitoring, you have access to a complete 3B report and scores. Fraud protection is another powerful feature. While no credit monitoring service can prevent fraud, SmartCredit’s $1 million ID Fraud Insurance benefit limits your exposure if the worst were to happen. 

Key Benefits of Credit Monitoring 

Given that 14.4 million Americans were victims of identity fraud in 2018, there’s a compelling reason to go onto the offensive against fraudsters. With regular, thorough credit monitoring, you can block access to your credit report if your identity has been compromised and stop unauthorized credit checks through a credit freeze. Sometimes, it doesn’t even need a malicious attack to impact your credit score. According to the Federal Trade commission, some 25 percent of consumers identified errors in their credit reports. The time to discover errors in your report is not when you are applying for an important loan or mortgage. 

With regular credit monitoring, you can better manage your score and pursue sound financial planning. SmartCredit offers an industry-leading suite of credit monitoring services to help give you full transparency and control over your credit report. To find out more, start here. 

Sources

Forbes – Credit Monitoring: Is It Worth Paying for? Investopedia – The 5 Best Credit Monitoring Services of 2021 Fox Business – Is it worth paying for credit monitoring? CBC – Keeping private information private: Are credit monitoring systems worth the cost?

The post Is Credit Monitoring Worth the Cost? appeared first on SmartCredit Blog.

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Missed House Payments and Evictions: How Do They Affect Credit Scores?

Many households across the nation continue to face economic uncertainty, so what are the short and long-term effects of missing a rent or mortgage payment? Can an eviction or a missed mortgage payment affect a credit score?

Factors That Contribute to a Credit Score

Let’s first have a look at the factors that contribute to a credit score. While there are dozens of credit models and several different scoring methods used by lenders, the following five factors have become generally accepted as the main drivers affecting a credit score, regardless from which bureau the score was generated:

Payment history. This is the most important component of a credit score, as it is the strongest measure of the likelihood that the borrower will repay a debt. 

Credit utilization. Also known as the debt-to-available-credit ratio, credit utilization is how much of a total credit limit a borrower uses. Typically, this should be kept between 10 and 30 percent in order to stay in good standing. 

Credit history. This is how long credit accounts have been open. In general, the longer the consumer has had accounts open — and in good standing — the better.

Credit mix. A lesser — and lesser-known — factor contributing to a credit score is credit mix, which measures the diversity of credit accounts. Credit scores take into consideration the various types of accounts like car loans, credit cards, student loans, mortgages or other credit products. 

New credit. This measures the number of new credit accounts that have recently been opened, in addition to any hard inquiries lenders make when borrowers apply for credit. While not as important a contributor to a credit score as payment and credit history, too many inquiries indicate an increased risk.

How an Eviction Affects a Credit Score

Eviction can result from several reasons, such as failure to pay rent or violation of the terms of a lease, such as damaging the property or subleasing without approval. While an eviction might not directly show up on a credit report or background check, eviction-related information can. For example, if the landlord uses the courts to evict you by obtaining a judgment against you, the judgment is a matter of public record and can appear in some background checks.

While a background check is not a credit report, an eviction can affect a credit score if your landlord sends any unpaid rent to a collection agency, which will show up on a credit report and will lower a credit score. Like most other types of negative information, the eviction can stay on your credit report for up to seven years. If the statute of limitations for unpaid judgments is more than seven years in your state, the eviction can be reported up until the statute of limitations runs out.

How a Missed Mortgage Payment Affects a Credit Score

A late mortgage payment typically doesn’t affect a credit score until it’s 30 days past due. Logically, a 30-day late payment will have a lesser impact than will a 60-day or 90-day late payment, all other factors held equal. As with any adverse behaviors related to credit, such as a bankruptcy or maxing out a credit card, late payments matter less as they age. For example, a late payment from a few months ago will have a greater impact than a single late payment from five years ago.

 A late mortgage payment affects those with stellar credit more so than those with lower scores. Simply put, the higher your credit score is before you miss a payment, the more dramatically your credit score will be affected than if your score were just average or poor when the missed payment occurred. Of course, before missing a mortgage payment, it’s best to call your lender and negotiate a short-term solution. In fact, missing a mortgage payment might not have any adverse impact on a credit score at all. Thanks to CARES Act, most mortgage borrowers are legally entitled to a mortgage forbearance for up to 12 months during the COVID-19 pandemic.

Credit Simulations and Credit Modeling

Because each credit agency calculates its own credit score using its own models, differences between reports can produce vastly different credit scores. Most borrowers seek the highest score possible, of course, and one that is consistent. The ability to view, understand and manage your credit is key to putting yourself in the strongest position when applying for loans. 

Borrowers should consider utilizing a tracking tool, such as SmartCredit, that provides monitoring of credit scores and helpful suggestions for actions to increase your score. Such a tool can help individuals understand the dynamics of credit and the impact of open and closed credit accounts on their overall score. 

Sources

The Balance – What Is an Eviction and How Does It Impact Your Credit? The Ascent – What Happens to Your Credit Score if You Miss a Mortgage Payment?

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What Credit Score Do I Need for a Personal Loan?

If you’re looking to meet additional expenses or expand into new ventures and don’t want to rely on credit cards, one option is to apply for a personal loan. One of the criteria that lenders will take into account is your credit score. Find out what credit score is needed for a personal loan, what else to bear in mind and whether it’s the right choice, depending on your circumstances. 

What You’ll Need to Apply for a Personal Loan

Getting your documents in order before approaching lenders makes for a smoother process and should help you identify the most appropriate lender for your situation. You’ll need the following:

Personal loan checklist

Proof of identity and address, such as social security card, utility bills, etc. 

Proof of income. Lenders will usually impose minimum income requirements for loans, so get together your tax returns, pay stubs and bank statements to establish your regular income and current borrowing picture. 

Credit report. These are scored on a scale of 300 to 850 from the three main credit reporting agencies. Each agency might deliver a different score since they may weigh the various elements that contribute to the credit score differently. 

Monitoring your credit score with a so-called “soft inquiry” will not negatively impact your score, but once a potential lender makes a hard inquiry bear in mind that this can lower your score temporarily. 

What Credit Score You Need to Obtain a Personal Loan

Lenders look at a variety of factors in assessing your risk as a borrower, one of which is the credit score, but also including your age, payment history and current level of debt. As a benchmark, you’ll need a score of 600 or more to qualify for a personal loan, but that is by no means set in stone. 

For a secured personal loan, you could qualify with a lower credit score if you are able to offer higher collateral, for example, or provide a co-signatory to guarantee the loan. Under the Truth in Lending Act, a lender must inform you of the repayment amounts, due dates, APR, late penalties and so on before you take out the loan, so the process is transparent and you can make a rational decision on the relative risks and benefits of borrowing. 

How Your Credit Score Influences the Terms of a Personal Loan

If you are able to achieve your best possible credit score above the 600-point benchmark, you should have access to the most generous Annual Percentage Rates (APR) and repayment terms. The options vary on a sliding scale with your credit score. At the lower end of the spectrum, you may still qualify for a personal loan, but you will not be able to take your pick of lenders. The APR might be higher and you may be required to provide more collateral to guarantee the loan. 

Advantages of a Personal Loan

If you can find a personal loan proposal that fits your current budget and future repayment timeline, the interest rate will usually be lower than borrowing on credit cards. Personal loan interest rates can be as low as 3.49 percent if you have a high credit score, but can go above 29.99 percent for a borrower with a much lower score. The national average is an interest rate of 9.63 percent. 

Compared to other forms of borrowing, personal loans offer the advantage of a fixed rate for the term of the loan and a clear repayment schedule. That can make for easier debt consolidation, especially if you choose to transfer the remaining balance to a 0 percent credit card. This is only a prudent strategy, however, if you are able to pay off the balance before the end of the grace period and do not make any extra payments or withdrawals with the card. 

When a Personal Loan Is Not the Best Option

Applying for a personal loan is a less attractive option if your debt to income ratio is already near or above 36 percent. This is the nominal benchmark above which most lenders would see additional borrowing as a risk. Neither does it make much financial sense to take a personal loan for an amount that you already hold in savings or could borrow from friends and family. Watch out for fees too. Lenders can charge up to 8 percent of the overall loan amount to process the application and run credit checks.

With the suite of tools from SmartCredit, you can stay on top of your credit score and give yourself the best chance of securing the widest range of options on personal loans. To find out more, start here. 

Sources:

Forbes – 5 Personal Loan Requirements To Know Before Applying CNBC – 10 Questions to Ask Before Applying for a Personal Loan U.S. Gov – Credit Issues

The post What Credit Score Do I Need for a Personal Loan? appeared first on SmartCredit Blog.

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The 6 Best Financial Moves You Can Make in Your 30s

Financial planning can look a lot different in your 30s than in your 20s. If you’re approaching your 30s, chances are that by now you’ve already learned a thing or two about financial management. Though it’s never too early to start planning for your financial future — and it’s never too late to start a new career path, either — by the time you’re in your 30s, you should begin making even smarter financial moves. We’re here to help get you started on the right foot.

1. Build Your Credit

The first piece of financial advice for your 30s, if you haven’t done so already,  is to build your credit. Building your credit can take several years, especially if you’ve had some financial setbacks or struggles in your 20s. Having solid credit will open up more financial opportunities for you, like purchasing a house or getting lower interest on a loan to start a business. Credit can be used in multiple advantageous ways — all you need to do is get your credit score up. Credit monitoring tools like SmartCredit can help create a plan to achieve your best possible score, all in one easy app. But here are some basic principles:

Get rid of debt

Your 30s is a good time to start getting rid of the debts you have. While there are some “good debts” — having a mortgage or car payments — start to tackle credit card debt if you have it. Not only will this put more cash in your pocket every month, take the burden of debt off your shoulders and lower your debt-to-income ratio, but it will, at the very least, boost your credit. 

Utilize promotions and offers

Taking out more credit cards wouldn’t exactly be great financial advice for your 30s. However, if you are receiving promotions for 0% balance transfers for a new credit card for up to 18 months, or you’re given the offer to consolidate your debt with a lower interest rate, you might want to take advantage of these opportunities. 

Refinance

Interest rates are at an all-time-low right now, and your 30s could be a good time to refinance if you already have a student loan, car loan or mortgage. Of course, you should always read the fine print and make sure you’re getting a good deal and not a bad one. All things considered, this could save you some money in the long run. 

2. Think About Your Budget, Always

At this point in your life — even if you’re still in school or thinking about what career you want to pursue — you should at least have an idea of what type of life you want to lead. Do you want to travel often or do you want to buy a house (or both?). Do you want to have kids someday or are you not even ready to make that decision yet? Do you want to have a collection of nice luxury cars or a minimalist life? 

Whatever it is that feels right for you (and yes, this can change still as you get older), you should be aware of what type of budget you need to have — both on a regular, everyday basis and for the near or far future. A budget can certainly change as you earn more money and/or your preferences change, but adults in their 30s who are wise with their finances will always pay attention to their budget. 

Downsize and consider what’s important

Some people spend their whole 20s accumulating a lot of stuff and reach their 30s only to be asked by their parents to move out any childhood items from their home. It may not seem like a smart move financially to get rid of things that you spent money on. But, this can actually help you be more mindful about “stuff” and spending in your future. 

3. Have a Reliable Emergency/Savings Account 

These days, many financial experts are advising people to invest their money instead of letting it sit in their bank accounts. While this is valuable advice to some extent, you have to at least have a reliable emergency fund/savings account before investing the rest (if that’s your choice). 

This fund should have anywhere between three months and six months of living expenses, to get you through hard times if you lose your job or have a sudden medical emergency (though, you could have that separate, too). Always replenish this account if you have to tap into it, because even if you’re in a salaried position by the time you’re in your 30s, you never know what can happen. You wouldn’t have to start back at square one when it’s time to start really building a financial foundation for your future.

4. Invest Your Money

These days, everyone is talking about investing, investing, investing. If you’ve just managed to create a nest egg for yourself, it may feel scary to take that money out and invest it. But once you feel secure enough with an emergency fund/savings account, then you can begin to look towards investments and assets for your future. 

Real estate

Historically, real estate has always been a popular and reliable investment choice. As homes typically appreciate in value, buying one in your 30s means that by the time you’re in your 60s, you’ll have something to either live in or sell for, hopefully, much more than you paid for it. If you plan on doing this, then you will need some investment money that will go towards your down payment, closing costs and other costs associated with home ownership. Talk to a loan officer to see what your options are.

Retirement funds

Not all, but many employers will have you registered with a 401(k) or similar pension plan. Start paying into this, especially if your employer is going to match it. Additionally (or, if you don’t have that option), you can open up a Roth IRA account and add up to $6,000 a year. There are many benefits to putting money into a Roth IRA, and the sooner you start paying into it, the better prepared you’ll be financially for your retirement. 

Stock market

Another financial move in your 30s is to begin investing in the stock market. There’s so much information out there about how to go about this, as well as apps like Robinhood and Acorns that can help you easily learn the ins and outs of investing in stocks. Just do so with caution — if you’re not experienced, you don’t want to end up losing a lot of your money.

Your future children or your children’s future

Whether you already have children or you’re planning on having children in the future, your 30s could be a good time to start saving for them. From baby expenses to summer camp fees to a college fund, savings for children will look different for everyone, and there’s no right or wrong way to go about it. Just do what makes sense for you.

5. Prioritize and Revisit Insurance Policies

By the time you reach your 30s, chances are you’re already paying insurance for several things in your life. But, now could be a good time to start thinking about things like a life insurance policy for yourself as well as your partner. It could also be a good time to see if you can start getting better rates on your other insurance policies, too. Usually, being in your 30s can look good in the eyes of insurance companies (assuming you’ve given them no reason to up your rate).

6. Meet With a Financial Advisor

If you’re serious about making smart financial moves in your 30s, then you can consider meeting with a financial advisor. A financial advisor can sit down with you and help you come up with financial goals for your 30s and your future, assess your finances, and help you make the best choices to help you reach those goals. A financial advisor can also invest your money if you trust them to do so. 

Sources:

WellsFargo – Saving for an emergency

Forbes – 15 Best Investment Apps

CNBC – Here’s why you should buy life insurance when you are young

The post The 6 Best Financial Moves You Can Make in Your 30s appeared first on SmartCredit Blog.

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Pay Off Debt Faster With These Simple Monthly Budget Tips

Trying to figure out how to pay off debt faster? The interwebs will likely offer you countless budgeting tips that may or may not work for you — budgeting tips that suggest you stop buying your daily coffee or going out to eat, ever. Know that budgeting doesn’t mean you have to give up all the things you enjoy, and if you’re trying to pay off debt, there is a whole range of simple strategies you can use to accomplish your goals. Let’s take a look at these monthly budget tips.

1. Get an Overview of Your Expenses

The first step to creating a monthly budget in order to pay off debt is to start by getting an overview of your expenses. Write down your fixed costs and your variable costs. You can’t create a budget and start paying off debt until you first see where your money is going every month. 

Use spreadsheets (or whatever system works for you)

A good way to visualize your expenses is to use spreadsheets or a money book. You can categorize expenses broadly by separating fixed costs and variable costs, and can break it up further with more specifics like housing, food, transportation, credit card bills, rent, etc. With this strategy, you can easily see what debts you have that need to be paid off. 

Track your expenses

It’s not just enough to write down estimated expenses. If you want to pay off debt, you’ll also need to track your expenses on an ongoing basis. Tracking expenses can fill up a lot of your headspace, so it might be a good idea to use a tracker — or use your credit or debit card’s spending tracker — to see where your money is going.

2. Cut Costs

Spreadsheet or not, whatever strategy it is that you use to outline and track your expenses, eventually you’ll be able take a look to see where you can begin to cut costs. Are you spending a little more on food every month or going out? This is a good opportunity to see where you can reduce some costs on something realistic, and where you can just make some minor adjustments. It’s also a good way to evaluate your needs and wants. 

3. Set Goals for Paying Off Your Debt

Creating a simple monthly budget to pay off debt requires you to understand what your debt is in the first place. When you look at your monthly expenses and track your daily spending, you’ll see what type of debts you’re paying as well. Take a good hard look. What debts are most important for you to get rid of? What debt should you get rid of first? Are there any that you don’t mind having because the interest and payments are low?

Think about what’s highest and what has the highest interest rate. You can also tackle something small and easy to get rid of. 

Consolidate what you can

A good way to create a budget for paying off debt is to first consolidate the debt that you can. Consolidating debt not only makes your life easier with one payment instead of multiple payments, it can also lower your interest rate. This makes it easier to pay off debt overtime, too. 

Take advantage of a 0% balance transfer

If your credit is OK, you might receive offers for 0% balance transfer promotions if you open up a credit card. It may seem counterproductive to open up another account when you might be trying to pay off other credit card debt. But this can be a great way to start getting that debt down quicker, minimizing interest and paying off the principal. 

4. Start Paying Off Your Debt

Once you understand what you have to pay and have done everything you can to minimize the debts you have through consolidations while cutting down other costs, now is the time to allocate how you dedicate income to various debts.

Set deadlines

To start your budget planning, set deadlines for when you want to pay off your debts. By knowing how much disposable income you have each month after your fixed expenses and altering your variable costs, you’ll know how much you have to put towards your debts to pay them off by a certain time.

For example, let’s say you do a 0% interest balance transfer and you have 18 months to pay off that debt (assuming you’ve put some thought to this before doing the transfer). You’ll want to divide your debt by 18 to see how much you have to pay per month to get rid of it. Of course, you can/should use this strategy even if you don’t move around/consolidate your debt before starting your self-payment plan. 

Think of a deadline for each of your debts and figure out how to get there with some simple math. This will help you stay on track, with a light to look forward to at the end of the tunnel.

Setup automatic payments

Another easy way to create a simple monthly budget for paying off debt is to set up automatic payments from your bank account. This way, you know your bills are getting paid no matter what, and you don’t have to worry about forgetting a payment and then incurring late fees, getting further from the goal. Just be sure to line up your automatic payments with the due dates on your bills as well as when your money is coming in. 

Overpay when you can

In addition to figuring out the math on what you owe to minimize your debt by a certain time and setting up automatic payment to do that, you can also overpay when you can. Don’t dip into your extra cash too much, as you’ll always want to have a cushion to avoid more debt in the event of an emergency. But, if you’re able to, make those extra payments!

5. Stop Accumulating More Debt

Budget all set? Great. You’re learning how to pay off debt. Follow these tips every month, and you’ll be on your way to paying off your debts in no time. But, if you want to stay on this disciplined path, you’ll also have to be careful to not accumulate more debt. It may seem like a no-brainer, but during this time, avoid taking out more debts or spending money on anything that will make it harder for you to accomplish your goal. 

Sources:

Freshbooks – What is Fixed Cost vs Variable Cost?

Experian – Which Debts Should I Pay Off First?

The post Pay Off Debt Faster With These Simple Monthly Budget Tips appeared first on SmartCredit Blog.

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The What, Why and How of Teaching Children About Credit Reports

A popular viral Facebook post asks parents if schools should teach kids financial literacy. It’s a good question. The fact is that few schools teach kids basic facts about credit — simple things like how to get a credit report, how to improve their credit scores, or even why credit scores matter. It’s also a topic that resonates deeply. Teaching your children about credit — along with simple steps that will help them start adulthood with good credit scores — is one of the best ways to provide them with the tools to live their best lives.

How Do You Explain Credit to a Child?

The very idea of trying to explain how credit works to a child can seem overwhelming. Finance companies invested a lot in making the whole process of borrowing money mysterious, to the point the government established the Consumer Financial Protection Bureau to help consumers understand and use credit cards, loans and other financial instruments. The CFPB has devoted an entire section of their website — Money As You Grow —  to helping parents explain credit and finances to their kids. It’s chock full of developmentally appropriate tips, activities, and advice for parents and caregivers.  

Preschoolers

At this age, kids are still learning about money in general. Mac Gardner, a Certified Financial Planner who wrote The Four Money Bears, a book about money for kids, talks about teaching kids the four things you can do with money — spend it, save it, invest it, or give it away. He told CNBC, “If every child could understand from an early age what their options are with money, then 15 years from now, they might make different choices. Conversations about credit don’t always have to be about dollars and cents. This is an excellent time to talk about other money management skills, like savings, self-control and making decisions.

When you pay with a credit card, say something like, “When I pay for something with my credit card, the store tells the credit card company how much I’m spending. At the end of the month, the company sends me a bill and I pay it all at once.” 

Help them understand that you are spending money when you pay with credit by talking about how many dollars, nickels, dimes, and quarters you just spent with your card.

Model good borrowing behavior. You might, for example, borrow five dollars from a friend, tell them when you’ll pay it back, then follow up by paying it back on time, explaining what you’re doing to your preschooler.

School-Age Children

At this age, kids are old enough to understand the concept of borrowing and ready to learn about some of the finer points on how to make smart money decisions. This is a good time to start explaining the cost of borrowing, as well as when and why you might choose to borrow money rather than saving for something you want. 

Explain that when you use your credit card, you are borrowing money you will have to repay. 

Introduce the concept of interest as paying someone for the privilege of using their money for a little while. 

Have conversations about the ads you see on television, in newspapers, and in other places, with special offers, and discuss how you decide if it’s a fair offer.

Help them set up a budget to save for something they want. 

Teenagers and Young Adults

By the time they reach their teens, your kids are ready to start making some of their own financial decisions. You can help them make sound decisions and prepare for getting their first credit card at age 18 in several ways.

Set up a prepaid debit card for them and use it for their allowance, if you give one. Show them how to monitor their spending and how to use any money management tools provided — balance notifications, for example.

Add them as an authorized user on one of your credit accounts. Going over the billing statement together each month gives you opportunities to teach them more about how borrowing works..

Have more in-depth conversations about credit and loans as you review student loans, car loans, and other credit decisions they may have to make soon.

When Should You Teach Children About Credit Reports?

There’s no “right age” to talk to your kids about credit reports, as long as the information you provide is developmentally appropriate. Just as you can fit teaching about credit cards into everyday conversation, you can use teachable moments to mention credit reports. With younger children, you can simply say that when you want to borrow money, the lender will ask for a credit report, which tells them if you are good at paying your bills on time. 

By the time kids are in their teens, though, they should be ready to learn more about the nitty-gritty details. Before they get their first credit card, they should understand the consequences of a poor credit report, and the rewards of a high credit score. Historically, credit card and loan companies use your credit report to determine whether they’ll lend to you and what interest rate they’ll charge. More and more, though, your credit report can decide whether or not you get that job you want or the apartment you have your heart set on. 

One easy way to explain credit reports to a teen is to go over your credit report with them. While you can request your credit report from each of the three major credit reporting companies each year, some credit monitoring companies make it easy to get — and understand — your credit reports. Here’s how to get your credit report, along with more information about what’s in it, and how it’s generated. 

How Do You Build Your Child’s Credit History?

Children under 18 generally do not have a credit history, which means they start their credit journey with a disadvantage. There are some things you can do to give your child a boost when they’re ready to apply for their first credit card, apartment, or car loan. 

Request your child’s credit report to make sure they’re starting with a clean slate. 

If everything is OK, add your child as an authorized user on one of your credit accounts as soon as they are old enough. You carry the risk — it’s your credit that will be dinged if the bill isn’t paid on time — but the credit card’s history may report to the child’s credit profile.

Co-sign a loan or lease for them. You can use your good credit to help your 16- or 17-year-old secure a used car loan or lease an apartment.

Help them save for — or set up for them — a secured credit card as soon as they turn 18. The right secured credit card will report on-time payments, balance and other important information to all three credit bureaus.

Help them comparison shop for the best student credit card, which are specially designed for young adults with little or no credit history.

Can Someone Use a Child’s Social Security Card for Credit?

The simple answer is no — it’s illegal, but that doesn’t mean it doesn’t happen. According to the CFPB, about 2.5% of U.S. households with a child under 18 have experienced child identity fraud. A child may also have a credit report if they have a name similar to an adult or because they’re an authorized user or joint account holder on an adult’s account. If your child has a credit history with mistakes on it, or you suspect identity theft, you should dispute the information. Here’s how and when to dispute credit reports.

What Can You Do When Your Child Uses Your Credit Card?

What if your child uses your credit card without your permission, though? If your child is not an authorized user, you can take steps to not only have the charges reversed and prevent the credit card company from reporting late payments while you dispute the charges.

Contact the merchant, who may have a policy allowing purchases to be canceled within a certain time frame.

Notify the credit card issuer as soon as possible about the fraudulent activity. The Fair Credit Billing Act requires credit card companies to promptly respond to consumer billing complaints and promptly investigate them. It also prohibits them from filing adverse reports with the credit bureaus until the investigation is complete. If you find the disputed charges on your credit report, you can request that the credit bureaus investigate and remove those items from your report.

File a report with the FTC. 

Teaching your kids about building and maintaining good credit is one of the most important things you can do to start them off on a concrete financial path as adults. By equipping them with the right tools and knowledge, you’ll be preparing them to build and live their best lives.

The post The What, Why and How of Teaching Children About Credit Reports appeared first on SmartCredit Blog.

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How Credit Monitoring Services Can Help When Purchasing a Home

Purchasing a home is usually the largest financial decision of one’s lifetime. It’s complicated, time-consuming and requires a substantial financial outlay. Of course, an essential part of the homebuying process is obtaining a mortgage. Indeed, much of the decision-making surrounding which home to make an offer on revolves around the monthly payment: how much will it be and can I afford it? 

This is usually the most burning question future homeowners ask themselves. However, the mortgage payment is tied to a rate, which is connected to the borrower’s credit score. Let’s look at why it’s important to have the strongest possible credit when purchasing a home.

Why is it important to have good credit when purchasing a home?

Simply put, those with good credit have more options when purchasing a home. A stronger credit history reassures lenders of the borrower’s ability to pay and as such, the lender rewards the borrower with the lowest rates and the most attractive terms. A lower mortgage rate means a lower monthly payment than borrowers with weaker credit would pay. (Of course, the monthly payment also includes taxes, insurance, HOA fees and other costs.)

More housing options could mean a larger home, a home in a different neighborhood, or a home with amenities not considered initially at the onset of the homebuying process. Learning how to check your credit scores to understand a more in-depth picture of your financial obligations is an essential step to improving credit and obtaining the best mortgage rate possible.

How does your credit affect your buying power when purchasing a home? 

To illustrate the buying power of good credit, let’s see how a 100-point difference in credit scores affects one borrower’s mortgage payment.

A borrower puts 20% down on a $300,000 home and applies for a 30-year fixed-rate loan of $240,000. With a strong credit score of 780, the borrower might obtain a 4% interest rate (this is an example, rates vary based on the current market). The monthly payment would amount to about $1,164 a month, not including taxes, insurance or homeowners association fees.

If this same borrower’s score dropped by about 100 points to between 680-699, the mortgage rate might increase to about 4.5%. At that interest rate, the monthly payment would increase to $1,216, an extra $62 a month, or $744 per year.

While this might not seem significant at first, added up over the years, it amounts to a lot. In this example, a 100-point-drop has the borrower paying an additional $25,300 over 30 years. This amount of savings could be spent making improvements to the home, such as renovating the kitchen, increasing the home’s value over the long run. 

As such, credit monitoring for a home loan is imperative to ensure that you have the highest possible score when you are ready to begin shopping for a mortgage.

How does good credit help buy a house? 

Besides obtaining the most favorable rates from lenders, good credit can also save borrowers valuable time in the homebuying process. Instead of haggling with different lenders, or undergoing delays because your loan representative needs to “speak to their manager,” the process is more streamlined because your good credit quickly gets you the best possible rate.

Additionally, if you’re looking to purchase in a hot market, where prices keep increasing, perhaps even by the day, having a strong pre qualification letter with strong credit will help make your offer more competitive. Not only will you reduce your risk of losing out on a hot property, but you’ll save money by not having to pay more interest.

How can I raise my credit score? 

Because each credit agency calculates its own credit score using its own models, differences between reports can produce vastly different credit scores. Most borrowers seek the highest score possible, of course, and one that is consistent. The ability to view, understand and manage your credit is key to putting yourself in the strongest position when applying for a mortgage. 

Borrowers should consider utilizing a credit monitoring company that tracks movement in scores and provides helpful suggestions for actions to increase your score. Such a tool can help individuals understand the dynamics of credit and the impact of open and closed credit accounts on their overall score. 

The post How Credit Monitoring Services Can Help When Purchasing a Home appeared first on SmartCredit Blog.

from SmartCredit Blog https://blog.smartcredit.com/2021/04/30/credi-monitoring-for-home-loan/ source https://smartcredit1.tumblr.com/post/649868573431529472

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Savings for College: 4 Strategies to Consider

While education might be priceless, it isn’t free. According to data reported to U.S. News, the average college tuition for the 2019-2020 school year ranged from $41,426 (for private colleges) to $11,260 (for state colleges). These figures do not include room and board, in addition to other expenses, such as books, computers and travel, which can significantly increase the total amount needed to attend college.

Few parents have an extra $40,000+ on hand, so how can families today start saving for their children’s college fund? Or, if they’ve already begun saving, what additional strategies can they put in place to make that fund grow even faster?

529 Plans

Named after the section of the Internal Revenue Code that governs it, a 529 plan, also known as a “qualified tuition plan,” offers families a tax-advantaged way to save for education costs. 

There are two types of 529 plans: educational savings plans and prepaid tuition plans. Educational savings plans, which are sponsored by states, allow families to open an investment account on behalf of their child, who can then use the money for not only tuition and fees but also room and board and other qualifying higher-education expenses at any college or university recognized by the Department of Education. 

While the money can usually only be invested in mutual funds and exchange-traded funds, the underlying benefit is the tax savings, which vary according to state and plan. Generally, families contribute after-tax money to the 529 plan and the earnings grow tax-free. 

A great benefit of a 529 plan is that families are not limited to their state’s plan — they can contribute to a 529 plan in any state that offers one. Further, a 529 plan can be used for schooling in another state. For example, if you live in Florida, you can contribute to a Texas 529 plan and use the funds for a college in California. Families can do their research to find the best plan that works for them, including the particular tax advantages.

The other type of 529 plan, the prepaid tuition plan, as its name implies, is simply a way to prepay tuition and fees at a college at current prices. This locks prices in early, potentially saving families thousands of dollars. Usually offered by public institutions, the downside of this strategy, however, is the unknown — whether or not the child will want to attend the chosen university and has the academic achievements to be accepted. 

Coverdell Education Savings Account

Another investment vehicle for college savings is a Coverdell Education Savings Account (ESA), which allows families to set up a savings account for someone under the age of 18 to pay for qualified education expenses. 

The advantage of the Coverdell ESA is the breadth of asset classes available to the account holder. In a 529 plan, funds can generally only be invested in mutual funds and exchange-traded funds. However, in the Coverdell ESA, the investor can select stocks, bonds and a variety of different asset classes. 

While both college savings plan types allow assets to grow tax-free, contributions to a Coverdell ESA are not tax-deductible. Further, it’s important to note that the Coverdell ESA plan is only available to people who make less than an adjusted annual gross income of $110,000 for an individual, or $220,000 for a married couple filing jointly. Also, the annual contribution limits to a Coverdell ESA are low: only $2,000 per year per beneficiary. 

Traditional or Roth IRA

Families often tap existing investment and retirement accounts to pay for their child’s education. Traditional and Roth IRAs are no exception, and can be used to fund college tuition and expenses.

Investors contribute after-tax dollars with a Roth IRA, but do not pay taxes on the money when they withdraw it. If you’re over age 59½, you can withdraw money for any reason, including funding your child’s college expenses. There are usually penalties for withdrawing funds before age 59 and a half, but if you’ve had and contributed to the account for at least five years, you can still take out earnings to pay for qualified higher education expenses without paying the 10% penalty.

Like the Roth IRA, the traditional IRA also waives the 10% penalty for withdrawals used for qualified higher education expenses before age 59 and a half, but you do have to pay income tax on the withdrawals. 

It’s also important to understand the contribution limits for both types of IRA accounts: for 2021, if you’re under age 50, it’s $6,000 per year and if you’re age 50 or older, it’s $7,000 per year, which includes a $1,000 catch-up contribution.

UGMA and UTMA Accounts

As another investment vehicle for college savings, families can open a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account on behalf of a beneficiary under 18. Though not specifically created as a college savings account, the assets in these accounts will transfer to the minor when he or she becomes an adult (at age 18 or 21, depending on the state). 

The benefit of this account type is flexibility: there are no contribution or asset class limits, and the child may use the funds not necessarily on qualified education expenses at a traditional college or university. A downside is that there are no guaranteed tax benefits. 

Final considerations

While it’s never too late to start saving money for a child’s education, the earlier a family starts, the more of a chance the money has to grow. It’s also important to know that different types of accounts vary with respect to contribution limits, tax advantages, withdrawal penalties and permissible asset classes. You want the funds to grow, but there might be upside limits and downside risks.

Also, if you do apply for financial aid, keep in mind that the funds in these accounts will be counted as assets, and may affect eligibility.

Before you launch a college savings plan for your kids, it’s important to have other financial ducks in a row. For one, you should pay off high credit card balances or other high-interest debt, and ensure that your credit scores are at the highest level possible. This is for planning purposes, in the event that your child needs to apply for student loans and needs you to co-sign. You would not want poor or even fair credit to have an impact on a lending decision. 

References:

https://money.usnews.com/money/personal-finance/articles/ways-to-save-for-your-childs-college-education

https://www.fool.com/retirement/2018/06/18/3-smart-ways-to-save-for-your-childrens-college-co.aspx

https://www.sofi.com/learn/content/how-to-save-for-childs-college-tuition/

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

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Budgeting for Kids: Do They Need a Savings Account?

Opening up a kids savings account for your children and teaching them how to budget can help ensure success for your children’s financial future and hopefully stability for your own retirement as well.

Most parents would say that they’d want their children to have a better life than they did. And whether or not you grew up in a financially stable home or an unstable one, there’s no reason to not give your kids the tools, resources and knowledge to ensure they’re prepared to make good financial decisions for their own future.

Open a Kids Savings Account

The first step in helping your kids learn to budget is to open a kids savings account. Keep in mind that this does not have to be a bank account that only you put money into (a custodial or joint account); they can add funds to it themselves as well as they earn money from chores or receive gifts from family members. Best of all, you can open the savings account at any age.

For instance, let’s say that you give your children money on their birthday or as an allowance. Even from a young age, you can teach them to put a certain percentage of their earnings into their savings account. Once they get older and start working — whether it’s getting money from doing chores or a job outside the home — encourage them to continue to put money into their savings. If you have the means to do so, you can also add incentive by agreeing to add to match some of their deposits. 

Though some parents may use this savings account to help with their child’s education expenses, you can also simply use it to teach them the benefits of a savings account for their own gratification. For example, if your child wants to purchase something for themselves, remind them that they need to put the money into their savings account to help save up for it.

Add your kids as an authorized user on a credit card

In addition to opening a kids savings account for your child, you can also, when they get a little older, add them as an authorized user on your credit card. This is a great way to start helping them build credit while teaching them the discipline that must come with paying off bills on time and before interest accrues. 

Of course, you using the credit card and paying off your bills on time will then also help start building credit early, setting them up for a strong financial future. It’s all the more reason to ensure your credit score is strong before you attach your child to it. (Learn how SmartCredit can help you create a plan for achieving your best possible score.)

Involve Your Children in (Some) Finances

The best way to teach budgeting for kids is to involve them in your own household financial planning in a way that’s appropriate for their age. While they don’t need to know every detail, you can sit down as a family once a month and create a list of necessary expenses and bills that need to be paid, based on what your child can understand. 

For example, if you know the groceries will cost $100 a week, then explain to your child that you’ll put aside $100. Then, when you take them to the grocery store, let them help you shop so that they can learn how you manage to stay within that budget. Not only is this a great way to directly teach your child budgeting, it also helps to sharpen their math skills. 

Help Children Create Their Own Budget

Your children having some involvement in household finances is great for budgeting, but more importantly, your child needs to know how to manage their own budget. This starts with organization. 

Sit down together and show your kids your budgeting system, and then help them create their very own budget.

Have a dialogue about what will work best for them.

Remember: just because your system works for you, doesn’t necessarily mean that it will work for your child. Be open-minded and hear their ideas.

Learn About Financial Literacy Together

While some parents might think they know everything there is to know about financial literacy, let’s admit that there is always more to learn or things that we wish we had done better or sooner. Though you can share a bulk of what you’ve learned with your children, it definitely doesn’t hurt to learn about financial literacy together. 

Visit the library

A trip to the library or bookstore is a great way to not only bond with your children, but to make the experience of learning about financial literacy fun. Libraries also sometimes have education programs that could be meaningful, too. 

Share and download budgeting apps

There are countless budgeting apps out there. Share these apps with each other, and utilize their budgeting tools and data to help aid in your planning. You never know what you can learn from these apps and from each other!

Watch YouTube videos

Screen time might not be great for kids in excess, but watching some videos in moderation can be beneficial. YouTube has plenty of channels about personal finance, like Make It by CNBC, which offers a glimpse into millennial finances. 

Don’t Be Afraid to Say “No”

One of the best things you can do as a parent to teach budgeting for kids is to be confident saying “no” to your children. Many children — especially those who go to school or have ever seen an advertisement — will likely ask their parents at some point to buy them something, whether it be a toy, a snack or an electronic device.

Teach needs vs. wants

Though it’s not that easy to say “no” to your child (and, of course, it’s OK to provide them with “wants” every once in a while), getting in the habit of teaching them they can’t always have what they want will help your children ultimately make better buying decisions for themselves.

Whenever you talk about money or making a purchase, ask your child if it’s a need or a want. A simple trip to the grocery store can teach this, and explaining to them that you sometimes purchase “wants” in addition to “needs” can be turned into a different lesson; for example, how much should you spend on “wants”?

References:

https://www.usbank.com/financialiq/manage-your-household/personal-finance/tips-for-parents-opening-bank-account-for-kids.html#:~:text=Minor%20children%20by%20law%20can,until%20the%20child%20turns%2018.

https://www.bankofamerica.com/deposits/savings/child-savings-accounts/

https://www.youtube.com/channel/UCH5_L3ytGbBziX0CLuYdQ1Q

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How Does the Mortgage Process Work?

The vast majority of home buyers purchase their dream home with financing, and that means applying for a mortgage. Don’t believe everything you’ve been warned about, however. The loan application process is more user-friendly, automated and transparent than many property novices are aware. Here are the key steps to address, and tips for getting ahead of the paperwork. 

Is Pre-Qualification Essential?

Beware of the distinction between pre-qualification for a loan and pre-approval. They are not the same, and you may decide to skip pre-qualification altogether. Pre-qualification is simply a perfunctory, non-binding review of your financials by a financial advisor or lender. It’s informal and not based on any third-party credit reports, so it carries little weight with sellers. It may be useful, however, if you are coming to the mortgage approval process with no knowledge whatsoever of your eligibility and want to confirm that you’re at least in the right ballpark before proceeding. 

Pre-Approval Establishes Your Budget

Pre-approval, on the other hand, involves a more robust process for establishing your mortgage eligibility. In this case, the lender will formally examine your financials to see if you meet the lending criteria. You’ll receive a clear picture of how much you can borrow, thus what price range you can search within. During the pre-approval process, the lender will look at the following:

Pre-approval benchmarks

Credit Report. Your credit score represents a key component of the approval process, but don’t believe the myth that you need a perfect credit score. FHA loans, for example, typically offer a lower threshold. 

Income. You’ll need to show two years of W-2 statements and pay stubs. 

Assets. Get together your bank statements and other statements for any investments or additional income. 

The lender will also establish your Debt-to-Income Ratio, calculated according to your income in relation to your expenses and existing debt burden. It’s a myth that you can’t get a mortgage if you’re already carrying debt. Many homebuyers, particularly millennials, have years of student loan debt to repay. As long as your debts do not exceed 36% of your income (the maximum ceiling is 43%), you should be within the acceptable range for a mortgage. (Pull your credit report with SmartCredit, and take advantage of easy Action buttons that let you ask questions, resolve errors and make a plan to achieve your best score).

Once pre-approval is complete, the mortgage lender will establish the loan amount you can qualify for. Realistically, you should have your pre-approval in place and ready to go before you start approaching sellers. 

Begin House Hunting

Let the fun begin. With your pre-approval locked in, start searching properties listed within your price range. Bear in mind, however, that many online listings show prices that differ from the seller’s actual asking price. Now is the time to engage the services of a realtor. Not only can they offer a powerful negotiating resource, but they can also mine their network and local knowledge for listings that may not even be on the open market. 

Found It? Make an Offer

Making a formal offer to the seller is a great landmark to reach, but there’s still a ways to go. Any sale will be based on so-called contingencies, which are the conditions that must be fulfilled in order to complete the transaction. These involve appraisal by the mortgage lender, home inspection and mortgage approval for the buyer. This is also the moment to make your down payment, which will be placed in escrow. You might have heard that a 20% downpayment is the minimum, but that is not always true. With an FHA loan, for example, you can put down as little as 3.5%. 

Applying for a Mortgage

The paperwork now begins in earnest. You’ll have assembled many of the documents required at pre-approval, but otherwise this is the moment to collect a stack of personal, professional and property records to apply for a mortgage. You’ll need the following:

Mortgage application dossier

Employment records and pay stubs, going back at least two years.

Bank statements, pension statements and social security records.

Statements for any savings, investments, assets or other sources of revenue.

Statements for any car loans, credit cards or other debts and borrowing.

While you’re busying yourself with these, your realtor will be assembling the property file for full details on the property size, taxes, HOA fees and so on. These are usually available in court and public records. 

Once all documents are submitted to the lender, you must receive a Loan Estimate within three days. This will detail the terms of the loan, including interest rate, closing costs, monthly payments and any penalties that apply for early repayment. For your part, you then have ten days in which to issue an Intent to Proceed (agree) or reject the offer and keep searching. 

Loan Processing and Underwriting

The documents you and your realtor have submitted to the lender now pass onto the verification stage. There is not much for you to do other than wait while your lender confirms your credit report, title report and mortgage appraisal. In some cases, the appraisal amount (the mortgage lender’s valuation of the property) is less than the seller’s asking price. If this happens, you can pay the difference, renegotiate with the seller or walk away from the deal. 

The final step is for all documents to pass to the Underwriter. This figure is the gatekeeper for the loan approval. Based on their assessment of the loan estimate, borrower file and property file, they will approve or reject the mortgage application. If there are any red flags in your credit report or borrower file, such as delinquent payments or insufficient proof of income/assets, they may request a written explanation or further proof. Try to anticipate these from the outset so that you have the documents ready. 

Closing Time

Assuming the Underwriter has approved the mortgage application, your file will be sent to the appointed attorney, who will, in turn, summon you to a closing ceremony of sorts. This requires your signature (and thorough review) of a substantial pile of documents, as well as payment of the closing costs, which cover settlement fees and any prepayments for homeowners insurance, mortgage insurance or taxes. Although closing costs can be included in the overall loan, this may not always be the case, so budget for up to 5% of the property purchase price. 

With the deal inked and the property title transferred, you will emerge from closing with a Promissory Note (your IOU to the mortgage lender), Closing Disclosure and the Deed of Trust. And of course, you will be the owner of a new property. 

References:

https://www.bankofamerica.com/mortgage/learn/guide-to-the-mortgage-loan-process/

https://www.forbes.com/sites/taramastroeni/2020/03/25/heres-how-the-mortgage-process-works-from-start-to-finish/?sh=f66695144e94

https://loans.usnews.com/articles/complete-timeline-of-the-mortgage-process

https://www.forbes.com/sites/taramastroeni/2018/11/27/6-common-mortgage-myths-debunked/?sh=6b9d003a49e0

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When and Why It Makes Sense to Refinance Your Home

With mortgage rates hovering at record lows, many homeowners find themselves asking the question: should I refinance my home? There are indeed several factors to consider and of course, no two situations are alike. You can perform this analysis yourself, or work with your personal banker or mortgage consultant to decide what works best for you.

Reasons to Refinance

Refinancing a mortgage means replacing — really, paying off — an existing loan with a new one. Let’s have a look at a few reasons why it makes sense to refinance a home.

To secure a lower interest rate

This is clearly the best reason to refinance: lower interest rates generally mean lower monthly payments, and who wouldn’t welcome that? Refinancing is usually a good idea if you can reduce your interest rate by at least 2%. However, many lenders say a reduction of even 1% can lead to savings that would justify a refinance.

Besides lower monthly payments, the other hidden benefit of a refi is the ability of the homeowner to increase the rate at which they build equity in their home.  For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $200,000 home has a principal and interest payment of $1,136. That same loan at 2.8% reduces the monthly payment dramatically to $822 — paying less in interest and more of the principal.

To shorten the loan’s term

Another reason to refinance is to shorten the term of the loan. This helps build equity faster, with or without a dramatic increase in the monthly payment. Using the previous example of the $200,000 home, converting the 30-year fixed-rate mortgage with an interest rate of 5.5% to a 15-year fixed-rate mortgage with an interest rate of 2.4%  increases the monthly payments from $1,136 to $1,324, a difference of $188. A monthly increase such as this can be seen by some homeowners as a cost-effective way of paying off their homes much faster than they could have with a higher rate.

To convert between ARM to fixed-rate, or vice-versa

Many homeowners start off with an adjustable-rate mortgage (ARM) because they often start out offering lower rates — and lower payments — than fixed-rate mortgages. 

However, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. As such, homeowners can benefit from converting an ARM to one that is fixed-rate, in order to take advantage of lower interest rates and prevent surprises along the way.

On the flip side, when interest rates are falling, those in a fixed-term mortgage can benefit by converting their mortgage to an ARM. This works best for homeowners who do not plan to stay in their homes for more than a few years. 

To access equity or refinance debt

Many homeowners refinance their mortgages because the money they save each month can be used to cover other major expenses, such as remodeling or renovation. 

This is usually justified because remodeling adds incremental value to the home. Further, the cost of capital — the lower interest rate — would be less than that of another source they’d need to tap for financing. 

Reasons Not to Refinance

While it might seem that there exists a sufficient number of reasons to refinance a mortgage in a low interest rate environment, there are a few considerations homeowners need to take before speeding ahead with a refi. Let’s have a look at a few of these.

Closing costs 

A mortgage refinancing is not without its costs. As with the initial mortgage, refinancing requires that the homeowner pay closing costs that cover the charges for title insurance, attorney’s fees, an appraisal, taxes and transfer fees, among others. 

These refinancing costs, which can be between 3% and 6% of the loan’s principal, can be the same or even higher than those paid for the initial mortgage. They might even take years to recoup. As such, these “hidden” costs need to be considered and factored into the new monthly payment. Indeed, the new payment may not necessarily be more attractive.

How long you plan to stay in your home

Related to closing costs, if you do not plan on staying in your home for more than a few more years, then a refi might not make sense. Homeowners need to figure out the optimal “break-even” point when closing costs will be paid off and they can enjoy the monthly savings from a reduced monthly payment.

Poor credit

It’s important to note that just because there might be historically low interest rates available, a new mortgage is not guaranteed at that low rate for every homeowner who applies for a refi. In fact, those with below-average or poor credit may not be able to take advantage of new, lower rates, and will not be able to enjoy a dramatic decrease in monthly mortgage payments. 

If this is the case, it makes sense for homeowners in this situation to pay down debt, including making extra mortgage payments, in order to improve a credit score before considering refinancing their mortgage. Learn more about how SmartCredit can help you achieve your best score and set yourself up for more financial success. 

References:

https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/

https://www.investopedia.com/ask/answers/09/refinancing-mortgage.asp

https://www.cnn.com/2020/12/03/success/mortgage-rates-record-low-freddie-mac/index.html

https://www.wellsfargo.com/mortgage/rates/

https://lcef.org/calculators/MortgageApr.html

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How Different Types of Bank Accounts Affects Your Credit Score

Most people know that opening a new credit card account or applying for a mortgage affects their credit score. But did you know that, while it’s rare and situational, opening and closing other accounts — like checking and savings accounts — can also impact your credit score?

Once you know how different types of accounts affect your credit score, you can take smart steps to properly open and close accounts for the best possible impact on your credit score. A little knowledge can help you take charge of your credit and lead you down a path toward financial well-being. 

Checking Accounts and Credit Scores

When you go to open a new checking or savings account, your financial institution may look at your credit report, but typically it makes only a soft inquiry, and the effect on your credit score is nil. Other times, but not as often, your bank may make a hard inquiry, which can negatively affect your score, but usually not by more than five points. 

While most people need a checking account to manage their everyday financial affairs, it has little to do with their credit score. Routine actions such as making deposits, writing checks, withdrawing funds and transferring money do not get reported to the credit bureaus, nor do they affect your credit score. Even overdrafts don’t impact your score, provided you pay the overdraft fees and take care of any negative balance before the bank takes action.

Closing a checking or savings account doesn’t affect your score either, as long as you don’t have any outstanding issues. It can only hurt your score if you close the account with overdrafts or negative balances, so you should bring your checking and savings accounts into good standing first before closing them. Credit scores are mainly based on borrowing activity, serious delinquencies and public records. So, in most cases, you can confidently open and close bank accounts without fear of doing damage to your credit score.

Credit Cards and Your Score

You can safely open one or two credit accounts without hurting your credit score, as long as you use them responsibly. When you first open a new credit card account, your credit score can take a 1% to 2% hit. Even though the credit inquiry that gets generated when you apply for a new credit card account will stay on your credit report for two years, most credit scoring models will factor it into your score for roughly only the first three to six months. Assuming you continue to use your credit card accounts as per usual, you can expect to see your score return to where it was relatively quickly. It makes good fiscal sense to monitor the movement of your credit score up and down the entire time with easy-to-use tools on your smartphone or computer.

A large portion of your credit score is based on your debt-to-credit ratio, or how much total debt you have compared with how much total credit you have available. Ideally this is 30% or less; lower is better. When you open a new credit card or two, your total credit increases, and if you don’t start charging a lot on your new credit cards, your total debt stays the same, so your debt-to-credit ratio decreases, which in turn helps boost your credit score.

Closing a Credit Account

Canceling or closing credit card accounts can be a little trickier. You should know the potential consequences first before deciding to close an account. For example, consider how long you’ve held a card. The length of your credit history is a factor in calculating your credit score, so if you hold only a few cards and get rid of your oldest one, your credit score could be reduced as a result. 

You shouldn’t close an account to try to erase negative information related to that account. Closing a credit card account that you’ve missed payments on won’t improve your score. Your history with that card stays on your credit report for years, even after it’s canceled. Finally closing your credit card could increase your debt-to-credit ratio by reducing your available credit portion of the calculation. So you’ll want to think about how many other cards you have, your total debt, and total available credit left on the remaining cards before closing accounts.

Mortgages: More Help Than Hindrance

When you first take out a mortgage, your credit score may dip temporarily until you prove you can make the payments. This can take about six months. Make on-time mortgage and other bill payments every month to bring your score back up. You may not want to apply for any other credit during this time. 

Knowing the ideal time to apply for any additional loans and how that can affect your credit score is possible with SmartCredit’s suite of tools that that teach you all about your score before you apply. It shows you how your score moves when you pay or you spend, and how to add points to your credit score faster. 

When it comes to paying off your mortgage, it won’t affect your credit score much. The action will stay on your credit report for about 10 years as a closed account in good standing. In that period of time you likely will have continued to help your credit score by making other on-time payments on car loans and other loans, so the effect of paying off the mortgage should not negatively influence your score.

Be a Credit Score Warrior

You don’t have to idly sit by, watching your credit score tick up and down. And you don’t need to enlist the help of a professional advisor to act on your credit score. Instead you can be proactive and take charge yourself. There are several resources out there to help you keep an eye on things. For example, SmartCredit’s ScoreTracker, ScoreBuilder* and ScoreMaster tools can help you learn all about your credit score and create a plan to resolve any inaccuracies. Becoming your own credit score warrior is an advantage when it comes to improving your overall financial well-being.

*This feature unlocks if you have negative credit data.

References:

https://www.cnbc.com/select/how-bank-accounts-impact-credit/

https://www.investopedia.com/ask/answers/040715/how-does-your-checking-account-affect-your-credit-score.asp https://www.investopedia.com/articles/personal-finance/031215/how-mortgages-affect-credit-scores.asp

https://www.thebalance.com/does-closing-a-bank-account-affect-credit-score-4159898 https://www.thebalance.com/credit-cards-you-should-never-close-960970

https://www.discover.com/credit-cards/resources/opening-a-credit-card/

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A Brokerage Account vs. an IRA: What to Know

While they both hold financial assets, a brokerage account and an IRA (Individual Retirement Account) are two different types of accounts. The main difference between the two is that an IRA is an account used for the purpose of accumulating assets for use in retirement. Several tax advantages exist for the IRA that do not for a traditional brokerage account. Let’s look at these two different account types in further detail, so you can decide what’s best for you.

The Pros of a Brokerage Account

Below are the reasons and benefits of opening and maintaining a traditional brokerage account.

No contribution limits

There’s no threshold or limit associated with a brokerage account. The 2020 and 2021 IRA contribution limits are $6,000 for individuals under 50 and $7,000 for those 50 and older. 

Freedom to withdraw

You can withdraw your money from a brokerage account at any time and for any reason.

Trading on margin permitted

You can trade on margin, or borrowed money, in a brokerage account. For more experienced investors, margin privileges are a welcome asset. Trading on margin is not allowed in an IRA because the IRS prohibits the use of IRA funds as collateral.

Broader range of asset classes and investment vehicles

There are some investment vehicles  available in a traditional brokerage account that are generally not offered in an IRA. Options, for example, are usually not offered for IRAs. 

The Cons of a Brokerage Account

The biggest disadvantage with a traditional brokerage account is that there are no special tax advantages that are available in an IRA. Regular brokerage account holders need to pay taxes on all earnings in the account, including both short and long-term capital gains and dividends. 

When an investment is sold at a profit, capital gains taxes must be paid. The IRS considers two types of capital gains — long-term and short-term. Long-term capital gains are defined as profits on investments held for over a year; short-term capital gains are profits on investments held for a year or less and are taxed as ordinary income.

The Pros of an IRA

As mentioned earlier, the main difference between the two types of accounts — and the main reason incentivizing people to open an IRA — is the tax-advantage. The two main types of IRAs are Traditional and Roth; the differences between the two lie in how the accounts are taxed. 

Traditional IRAs are tax-deferred investment accounts. For those who qualify, traditional IRA contributions are tax-deductible in the year they are made. Further, investments in the account grow on a tax-deferred basis: investors need not worry about paying capital gains or dividend taxes on the investments in the IRA. 

Roth IRAs are after-tax accounts. There is no annual tax deduction allowed for Roth IRA contributions; however, as with the Traditional IRA, investments grow without capital gains or dividend taxes, and any qualified Roth IRA withdrawals are 100% tax-free.

The Cons of an IRA

Perhaps the biggest downside of an IRA lies in the contribution limits: $6,000 for individuals under 50 and $7,000 for those 50 and older. 

The other main issue with an IRA is access to funds. While in a traditional brokerage an investor can make withdrawals whenever she pleases, withdrawals from traditional IRAs are considered taxable income. For example, if you withdraw $10,000 from a traditional IRA this year, the IRS would consider that income and you have to pay taxes on that. 

In addition to any taxes that might be owed on a withdrawal, there are other fees owed. Investors who are not at least 59 ½ years old or otherwise qualified for an exception need to pay a 10% early-withdrawal penalty to the IRS.

For more sophisticated, active investors, an IRA might seem like a humdrum investment account. For those seeking a safe® haven to grow their retirement savings, an IRA might be just what the doctor ordered. Some people maintain both types of accounts. Consult with a financial advisor and weigh your options wisely.

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